Yes, you made a similar comment in the other thread, so i'll repeat my response herein but explain in a little more detail why i think this is a bit of a red herring.
The fundamental flaw with your underlying assumption - namely, that low R&D capitalisation is indicative of GTK under-investing in its product - is that the election as to whether to expense or capitalise R&D is significantly open to the interpretation of management & auditors. The corollary of this wide discretion is that you have to look at the aggregate of what's going through both the P&L & cash flow statement to get a better understanding of what's transpiring.
There are some software businesses that take what i personally think is the correct & conservative view - namely, that it's nigh on impossible to know whether there'll be any measurable, long-term economic benefit derived from any one particular software R&D exercise - and thus choose to expense 100% of their development expense. I owned OCL for a while (sold out too soon, unfortunately) - never capitalises a dime of product R&D as a matter of policy (something OCL management loudly & proudly proclaim in their investor communications) and the underlying business is flying. I currently own RUL - it typically expenses >90% of software R&D, and that business' software is pretty widely acknowledged as being leading-edge in some of its niches, and it is generating record financial results (and accelerating). I'm sure there are dozens more examples of very successful software businesses with strong product suites that capitalise little to none of their software R&D, i just happen to know those two off the top of my head as i own or have owned them personally.
Conversely, some software businesses take a slightly more aggressive view and choose to capitalise a material part of their software R&D. GTK is in this camp, as are plenty of other businesses. As i said before and as the table below shows, when you look at GTK's total software R&D (i.e. the P&L + cash flow statement) - being the bolded line below - there's no evidence of product under-investment; to the contrary, GTK is already doing what you're imploring them to do, i.e. spend more on software R&D:
2016
2017
2018
2019
R&D (P&L only)
$2,567
$4,209
$7,500
$8,400
R&D % total OpEx base
7.1%
8.2%
10.2%
9.7%
R&D (intangibles purchase)
$165
$920
$3,916
$5,653
Total R&D (P&L + capitalized)
$2,732
$5,129
$11,416
$14,053
Total R&D (P&L + capitalized) as % revenue
5.2%
6.8%
10.9%
12.6%
Given the wide discretion the accounting standards offer on this point, my personal view - which is the opposite of yours - is that it's false science to look at the software business' cash flow statement (i.e. the investing line item) and draw hard conclusions as to whether they're investing enough in their product suite. You have to look at the aggregate of what's going through the P&L & cash flow statement.
As to why GTK's capitalised R&D spend is trending down this year (from $5m to $1m, as per yesterday's updated guidance) - i suspect the 'answer' is, the ~$9.5m capitalised R&D over 2018-19 related primarily to three new bolt-on products (market connector, meter data services, and assurance reporting) that GTK completed and is releasing to market in FY20. Refer to p11 of their FY19 results presentation.
I think your focus on this issue inadvertently raises an interesting point on GTK's updated guidance, which is: how does FY20's total (i.e. P&L + cash flow) R&D spend compare to FY19? All else equal (i.e. assuming GTK spends ~$14m on R&D, as they did in FY19 per the above table), going from $5m capitalisation to $1m capitalisation would be a straight $4m drag to EBITDA guidance - this is obviously quite material in the context of a business whose EBITDA has gone from $25m to a midpoint guided $10m. I'll ask this question of management and revert to the extent they respond.
As to your second point (i.e. lack of non-recurring revenue): even with SaaS sales (c.f. on-premise), GTK charges a non-recurring setup fee - it's less than what utilities are charged for on-premise sales, but it's still a big number. The read-through from yesterday's update is that GTK were projecting about $10m setup (non-recurring) revenue in FY20 primarily from implementing EoN, who signed as a customer on 26/3/18. Given GTK is now laying off the staff it brought on over FY18-FY19 largely to implement EoN, there's clearly material uncertainty as to whether EoN will ever follow through with this implementation.
GTK Price at posting:
$2.27 Sentiment: Buy Disclosure: Held
