Thanks for sharing your observations, IT – certainly helpful. To...

Thanks for sharing your observations, IT – certainly helpful.

To your point around the difficulty in winning new customers, I have no doubt that’s true – it has to be true if you believe, as I do, that customers are very sticky / infrequently churn. These two facts are opposing sides of the same coin. Customers will rarely go through the heartburn and expense of switching out their billing IT systems unless and until they are essentially forced to (which might happen if their existing system becomes redundant or malfunctional due to regulatory change, or if there’s a change in ownership which enforces a new system). That said, the facts as relate to GTK winning customers are pretty supportive – according to public announcements regarding the “big 6” (which is now actually “big 5”), GTK won nPower in Dec 2017, EoN in March 2018 (EoN now own nPower), they’ve had Ovo (recently took over SSE, which was already an Evolve customer) as a Velocity customer for over a decade, and EDF – an existing Evolve customer prior to GTK acquiring Evolve in June 2018 – was revealed in the FY18 conference call as undergoing a pilot of GTK’s broader suite (e.g. Velocity). Among the challenger/smaller brands, GTK’s Junifer is the dominant player.

The salient point as relates to the GTK investment case, I think, is that they don’t need to win any new customers to do well – if slides 10 & 11 from their FY19 results presentation are just directionally correct (i.e. GTK underperforms its ‘forecasts’, but nevertheless continues to organically grow meters under management), GTK has years of double-digit organic revenue growth ahead of it as its existing Big 6 UK utilities customers roll out its solutions, and/or its existing Junifer challenger customers continue taking market share from the Big 6. If the real world plays out as slides 10 & 11 forecast (or even better), GTK will be a home run from here. Winning additional customers is a ‘blue sky’ / bonanza scenario, but GTK’s equity will generate nice medium-term returns if slides 10 & 11 are directionally correct, even if everything else outside of the UK utilities business does nothing except go sideways.

Regarding R&D, you need to add the R&D spend that runs through the P&L as well as what’s capitalized to get a complete picture of how much GTK is spending. If you do that, you’ll see that total R&D spend (i.e. P&L + capitalized balance) has gone from $2.6m in FY16 (~5% revenues) to $13.5m in FY19 (~12% revenues). I don’t share your concerns regarding them potentially underspending on R&D, given that: i) it’s trending up and, at 12% revenues, is quite healthy, ii) they’re active acquirers of IP (e.g. Evolve, Junifer etc.), and iii) they’re still winning and retaining customers, which suggests their product suite is good.

As regards what they’ve done in terms of moving to the cloud, they use AWS as the host and their software offering is essentially the same as what it was with on-premise perpetual licenses. GTK’s strategy here is no different to what seemingly every software business in the world which previously sold perpetual / on-premise licenses, has done or is in the process of doing – moving the revenue model to a subscription basis, which provides less upfront revenue but in return you get: i) lower risk of churn, ii) greater customer lifetime value, and iii) an ability to more easily bundle & cross-sell additional features.

Candidly, I don’t give any credence at all to your comment about GTK management having no strategy - I think you’re confusing a very volatile operating environment (which can be verified via Google in two minutes) with management missteps. They’re already attacking opportunities outside UK & Aus - the Singapore office is the beachhead for Asia (Japan deregulation represents a big medium term opportunity), and they’re clearly focusing on the US airports business (recently appointed a CEO, additional sales staff etc).

Anyway, let’s see where things stand in a year or two. We can’t both be right given we seem to have almost diametrically opposed views on GTK’s prospects!