Miles told the Herald that the incentive scheme had been proposed by Gentrack’s board and 86% of shareholders had voted in favour of it at a special meeting in October 2023.

“Shareholders in general are benefiting well from the share price appreciation,” he said. “When I joined [in 2020, with the share price at $1.20], the market cap was about $100 million, and now it’s north of a billion. So I think this allows us to attract a good, world-class team and compete globally against much richer potential packages in the private equity space.”

He said Mark Rees — the long-time Xero chief technology officer who became Gentrack CFO earlier this year — was an example of the scheme’s pull.

Miles added, “I haven’t crystallized any share proceeds into my pocket ever. So right now, it’s potentially the highest paid. It’s on paper and we need to keep performing for it to come to fruition.”

25.5% jump in revenue, dip in profit, shares surge

Investors cheered Gentrack’s full-year result, reported yesterday morning before the market opened, which saw a 25.5% surge in revenue to $213.2 million, though net profit dipped 5% to $10.5m.

Ebitda rose 1.7% to $23.6m. Without costs associated with the long-term incentive scheme, operating earnings would have increased 42% year on year, according to an investor presentation.

The maker of software for running airports and utilities saw its shares rise 22.1% to $12.33 in early afternoon trading for a market cap of $1.4b. The stock is now up 139.2% over the past 12 months, continuing its multi-year bull run. (Update: Gentrack closed up 24.4% to $12.61.)

Hurdles ‘too low’

The special shareholder meeting on October 10 last year saw a majority of shareholders vote in favour of a long-term incentive scheme, covering the 2024, 2025 and 2026 financial years, which would see up to 9.437m in new shares, or “performance rights” issued to the Gentrack executive team — including up to 2.454m for Miles as chief executive.

At the time, Gentrack shares were at $4.80. The incentive scheme would not kick in until the stock passed $5.00, with the full performance rights only awarded if it topped $10.00 — a mark hit, then maintained or exceeded, since June this year.

The stock was trading close to $8.00 before the pandemic, but plunged as low as $1.21 as its airport customers were laid low with border closures. Problems were compounded when a financial crisis hit Gentrack’s water utility customers in the UK.

Miles, who took the reins in 2020, is credited with driving the firm’s comeback.

In an October 2023 post to its members, NZSA said “Gentrack shareholders are being asked to vote on a package of long-term incentives that will see chief executive Gary Miles receive potential value representing an approximately 400% increase in value compared to the (already generous) current incentive scheme, for a corresponding 100% increase in value for shareholders”.

“The same incentive scheme is being offered to Gentrack’s executive team.

“In practice, that means the executive will pocket $94m worth of shares for an incremental market capitalisation of $624m (ie, 15%) over three years — should that be achieved, together with an earnings per share ‘gate’. This would represent total dilution for shareholders of around 8.5%. Of the potential $94m worth of shares, the CEO would receive $24.5m. That potential value is, of course, in addition to the annual short-term incentive paid (up to 100% of the CEO’s salary) and base remuneration of around $900,000 per annum.

“If sunshine and roses come to pass, the value that Gary Miles will receive will average close to $10m between now and October 2026.

“The proposed scheme will result in 8.5% maximum potential dilution (based on 101.8m shares currently issued) – creating a significant wealth transfer from shareholders to Gentrack’s executive.”

Mander says he stands by those comments today — with the addendum that the numbers above were based on the now-exceeded $10.00 target.

The earnings per share “gates” for the scheme – $0.16 in FY24, $0,19 in FY25 and $0.22 in FY26 – had been difficult for investors to judge in October 2023 given the lack of fresh profit guidance, he said.

The NZSA head added, “Back in September 2023, we thought the share price hurdle was far too low. When the Gentrack scheme was designed, the shares were at $4.80 — well up from the $1.50-odd of the Covid era. But this is still well less than the $7.80 they were at pre-pandemic.” With the LTI’s upper target of $10.00 hit in FY2024, there was diminished incentive over the next two years.

Scheme costs weigh

An earnings table released yesterday morning lists earnings per share at 9c, but Gentrack’s investor presentation says “The FY24 EPS hurdle of $0.16 has been met”.

Mander explains, “The $0.16 EPS gate excludes the accounting impact of the LTI [long-term incentive] performance rights — $7.1m in payroll tax and a $10.2m accounting charge.”

“Those are real costs to shareholders; the cost of dilution. So for shareholders, the Ebitda is only $400,000 higher than FY23, despite a $43.3m lift in revenue. Essentially, the accounts – and the ‘add-backs’ shown in the investor presentation yesterday — are telling investors that nearly all of that revenue growth is going to fund the executive performance incentive scheme.

“The company says to expect a similar cost in FY25, so as an investor you are hoping that this can actually be EPS-accretive once everything settles down in FY26 — when no doubt another scheme will be presented to shareholders for approval”.

Miles said the costs of the three-year LTI were front-loaded more than expected in FY2024 because of the unexpected velocity of Gentrack’s share price gains, which saw shares vest earlier.

The investor presentation said the company was now “amortising most of this cost over two rather than three years. Expect a similar cost in FY25 which then falls substantially to under 1% of revenue.”

Mander compared Gentrack’s executive remuneration to that of one the NZX’s largest companies.

“Fisher & Paykel Healthcare is also at the upper end of incentive awards in New Zealand, with long-term share incentives granted at 180% of base remuneration. Both companies are ‘growth’ companies, so you could reasonably expect them to have a high incentive percentage for the CEO, Lewis Gradon, relative to the base remuneration paid,” he said

“In FY2024, Gradon received performance rights worth around $3.5m at the time they were issued — compared with Gary Miles receiving around $11.8m over a three-year period [now worth potentially triple that if Gentrack holds its share price gains since the scheme was voted in]. The incentive levels are comparable in dollar terms. That is, if F&P Healthcare doubled its share price, the reward would be similar in dollar terms – but F&P Healthcare is 23 times bigger than Gentrack by market cap.”

Mander added, “The effective annual LTI awarded, related to base remuneration is close to 475% for Miles compared with 180% for Gradon.”

Miles did not want to comment on NZSA’s estimates of his remuneration.

Full details of Gentrack’s FY2024 executive remuneration will be detailed in the company’s annual report, due in December.

No FY25 guidance sticks by medium-term outlook

Gentrack offered no guidance yesterday, but said it would do so later in the financial year once it had more clarity on whether several deals in the pipeline would be signed in time to be included in the current year or slip into the next.

Gentrack said yesterday it remained confident about its mid-term guidance of growing revenue by more than a 15% compound annual growth rate and an Ebidta margin of 15-20%, after expensing all development costs.

“In FY25, we expect both utilities and Veovo to show continued revenue growth and Ebidta improvement, the extent of which will depend on when business opportunities close in the year.

Miles — one of a handful of business leaders who joined Prime Minister Christopher Luxon on a trade Mission to Malaysia in September — told a conference call that his firm had added more than 100 staff in India. He said he expected to also add staff in New Zealand, where its customers include Auckland Airport, Vector, Genesis and Mercury and it is angling for new business under the latest water reforms.

Gentrack’s airport business, Veovo operates in 23 countries and over 140 airports and is responsible for the behind-the-scenes software systems, was the firm’s fastest-growing unit in FY2024. “With almost no customer churn, continued new wins, such as wins of Manchester Airports Group and the airports of Saudi Arabia, add depth to our recurring revenue base. We expect to secure renewals, upsells and new wins from our strong pipeline in FY25,” the investor presentation said.

Miles — an American who is based in London (the UK is home to several key Gentrack water customers) said Gentrack did not have exposure to potential Trump administration tariffs. All of its US customers were airports rather than utilities.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.