One of the more reliable patterns in small and mid cap investing is that the market does not always punish the part of a result that deserves to be punished. Sometimes it punishes the whole business for the misbehaviour of a small piece of it. And sometimes, in its hurry to be decisive, it marks down the higher quality part of a company at exactly the moment that part is getting better.

Gentrack Group (ASX: GTK) is, in my view, in the middle of one of those moments.

The stock peaked at around $12 in late 2024. On 5 May 2026, after the company cut its FY26 revenue and EBITDA guidance, it fell 34% in a single session. By the following day it was trading near $2.88. The half year result on 18 May confirmed the picture management had flagged: revenue down slightly, EBITDA down sharply, profit down 29%, two acquisitions announced and a buyback foreshadowed.

The market read the print, drew a line through the project revenue miss and the Kraken competitive headlines, and concluded that Gentrack was a broken growth story. From a roughly $12 peak to under $3 in eighteen months, that is the kind of share price action that usually requires a thesis-level break.

I am not convinced one has occurred. I think the market is conflating a project revenue air pocket with a recurring revenue problem, and treating a deliberate margin investment phase as if it were a margin collapse. There are risks here, and I will get to them. But the gap between the share price reaction and what the underlying business is doing looks, to me, like the kind of gap that long term investors get paid to think about clearly.

The business behind the share price

Before working through the result, it is worth setting out what Gentrack actually is, because the share price action has obscured the underlying transformation.

GTK is a specialist software and services provider to utilities and retailers in energy and water markets, with a separate airports software business called Veovo. Over the past five-plus years, this is a business that has gone from declining revenues and negative EBITDA to a growth company with roughly NZ$230m in revenue and a revenue CAGR of around 18% across that period. That is not a marginal turnaround. That is the kind of operational repositioning that usually earns a permanent re-rating.

The re-rating happened. It then unwound. The question is whether the underlying transformation has unwound with it, or whether the share price has simply travelled further than the business has.

Management remains bullish on the long term opportunity and on their ability to scale, but they have been candid about recent execution and timing setbacks. That candour matters, because the alternative, in a market like this one, is for management to overpromise on FY27 and then disappoint again. The decision to refuse FY27 guidance on the H1 call was the right one, even if it cost them a clean narrative.

What actually happened in the result

Group revenue for the half was NZ$110.1m, down 1.7% on the prior period. EBITDA excluding acquisition costs was NZ$7.9m, down from NZ$13.0m. Statutory net profit was NZ$5.1m, down from NZ$7.2m.

Those are the numbers that made the headlines. They are not the numbers that matter most.

Recurring revenue grew 12% to NZ$85.3m. The Utilities segment grew recurring revenue 9% to NZ$73.3m. The cash balance sits at NZ$73.2m with no external debt (prior to acquisitions announced). That is not the balance sheet of a company in distress.

The FY26 revenue guide of NZ$229m to NZ$238m sits below the prior implied range of around NZ$250m. The shortfall is almost entirely in non-recurring project revenue, which by definition is lumpy, lower quality and lower margin. Recurring revenue is guided to grow more than 10% for the full year to around NZ$174m.

That distinction is central here. The downgrade is not “the business is shrinking.” The downgrade is “the lower quality part of the revenue mix is smaller this year while the higher quality part is bigger.”

You can argue that a miss is a miss, and at one level you would be right. The market does not always wait for nuance. But for a long term investor trying to value a software business, the composition of revenue matters more than the headline number, because recurring revenue is what justifies a software multiple in the first place.

The first thing the market is missing: the mix is improving

If you strip Gentrack’s H1 result back to its underlying engine, recurring revenue accelerated. It now represents around 77% of group revenue, up meaningfully on the prior period. That is the direction every utility software investor wants to see.

Existing customer revenue, what most software businesses call net revenue retention, remains a major contributor. Historically a large share of half year recurring revenue has come from the installed base through upgrades, expansions and regulatory work, and that continues to be the case. The installed base is not leaking. It is being monetised more deeply.

The reason this matters is that recurring software revenue at scale is what eventually drives margin. The reason FY26 EBITDA is guided so low, between NZ$13.5m and NZ$20m excluding acquisition costs, is not that the business has lost pricing power. It is that management has chosen to keep investing in g2.0 product development, international expansion and now two bolt-on acquisitions while project revenue is in an air pocket. The implied FY26 EBITDA margin of around 6 to 8% looks bad against a market that had been modelling closer to 14%. But the gap is investment, not deterioration.

The risk, of course, is that the market starts valuing Gentrack on current earnings rather than on what those earnings could look like in 18-24 months. That is exactly what has happened. The stock now trades on roughly 18 to 19 times trailing earnings against a software sector at 38 times. That is not a software multiple. That is a “we no longer believe the recurring revenue story” multiple.

If recurring revenue continues to grow at 10% plus and EBITDA margins normalise back toward mid-teens as project revenue returns and g2.0 reduces customer onboarding costs, the FY26 print will look in hindsight like a transition cost rather than a structural break. That is the central question for long term holders, and it is a question about software unit economics, not about whether Gentrack can survive.

The second thing the market is missing: the pipeline story is more nuanced than the headlines suggest

This is where the market reaction looks most lopsided to me.

Gentrack’s near term outlook is dominated by a pipeline of roughly ten meaningful new customer opportunities across Europe and Asia Pacific, covering around 30 million meter points ($400m revenue opportunity).

Two of the most advanced “preferred” opportunities slipped during the half, and both are central to understanding what went wrong and, more importantly, what did not.

The first slipped after a paid scoping process increased the complexity and price of the deal. That is a frustrating outcome, but it is also a normal one. Paid scoping exists precisely so that both sides discover the true shape of a project before committing, and walking away from a deal that has grown out of its original economics is the correct behaviour for a software vendor that wants to protect margin. A vendor that signed everything regardless of scope would be the bigger problem.

The second slipped in the UK because of buyer ownership dynamics, specifically the Ovo and Kaluza situation, which altered the procurement outcome. When the customer’s own ownership and platform strategy is in flux, the vendor decision moves with it. That is not a Gentrack execution failure. That is the buyer’s corporate situation interrupting a process that was otherwise progressing.

Neither of these slippages reflects a lost competitive bid. Neither reflects a loss to Kraken. Neither reflects a Gentrack product or pricing problem. Both were judged by management to be largely outside their control, and based on what is publicly knowable, that judgement looks fair.

Management has shifted the expected close window for parts of the pipeline by three months and is now emphasising steadier, demonstrable progress rather than firm dated commitments. That is the right approach. The sales priority articulated on the call is straightforward: win deals, shorten sales cycles, and be the last vendor standing in competitive processes. Those are the metrics investors should be looking for over the next 9 months.

The third thing the market is missing: Kraken is a real competitor on one front, not on all of them

The competitive piece deserves to be taken seriously. Octopus Energy-owned Kraken has won Red Energy in Australia, a customer with around 600,000 customers and over 1m meter points that had been on a legacy Gentrack platform for more than a decade. It also won Meridian in New Zealand. Octopus is planning to spin Kraken out as an independent entity in mid 2026 at a reported valuation of around GBP10bn, which means Kraken has every incentive to win more deals, more aggressively, in developed markets.

Losing Red Energy is not a small thing. Pretending otherwise would be dishonest analysis. But Kraken’s natural hunting ground is large, English-speaking, deregulated energy retail markets where its parent has credibility. Gentrack’s strategic response has been to point its growth at exactly the markets where Kraken has less of a foothold and less of a structural advantage. The half year result included Utilities go-lives with Genesis Energy and ACEN Energy, and the signing of Pennon Water Services as a first major UK water utility customer. Kraken does not compete meaningfully in water, and water utility software is a deep, sticky, regulatory-heavy market that suits the Gentrack model well.

The Veovo airports business has been almost entirely ignored in the post-result commentary, and it deserves more attention. Veovo grew revenue 2.9% in the half, won NavCanada and what management described as a Tier-1 Asian airport, and expanded into Saudi Arabian airports and Melbourne. The pending acquisition of Dubai Technology Partners for NZ$17m, deepens Veovo’s Middle East footprint and adds AI-centric capability to the platform. That is not a business in retreat. Kraken does not compete in airports at all.

Capital allocation is telling you something

The Factor acquisition, closed on 15 May for NZ$24m up front with a NZ$10m earn-out tied to annual recurring revenue growth of around NZ$17m within three years, is the more strategically interesting of the two recent deals.

Gentrack did not buy Factor because it was cheap. It bought Factor because it secured a validated, fast-to-market AI pricing product and a working go-to-market motion, instead of waiting eighteen months or more to build an equivalent capability internally. Factor brings existing customers in Australia and the UK, a high-gross-margin recurring revenue model, and significant cross-sell potential into Gentrack’s installed base of more than sixty utility customers.

The intent is for Factor to function as a beachhead, accelerating market penetration while preserving clear product provenance between Factor and the g2 platform. It can be sold standalone or bundled within g2, with same day deployment and no upfront implementation project required. For a business whose biggest growth friction has been long implementation cycles, that is meaningful.

Combined with Dubai Technology Partners, Gentrack has just deployed around NZ$41m of cash, before earn-outs, on two strategic acquisitions in three weeks. The board has also announced an intention to undertake an on market buyback of up to NZ$20m, around 5% of shares on issue, over the next twelve months.

The risks worth taking seriously

A good thesis is worth more when the risks are acknowledged honestly.

The first and most uncomfortable one is the December insider sale. CEO Gary Miles sold around 752,000 shares on market at roughly NZ$9.00 in early December, which represented around 23% of his direct holding. That was about five months before a guidance reset. Insider sales are noisy signals, and there are plenty of legitimate reasons for them, but selling that quantity that close to a downgrade is the sort of thing that requires the next two or three results to be clean before the market gives management the benefit of the doubt again.

Second, the pipeline could continue to slip. Management has tried to set FY26 guidance so that it does not depend on winning deals from the new customer pipeline. That is a sensible approach after this sort of reset. But the medium term revenue target of more than 15% CAGR does depend on closing three to four of the ten or so pipeline opportunities through to March 2027. If close rates slip further, the medium term story slips with them.

Third, the FY27 picture is genuinely unclear. The CFO was asked directly about FY27 cost base and revenue trajectory on the analyst call and was, fairly, unwilling to commit. That uncertainty is part of why the stock is where it is.

Fourth, Kraken could continue to win. Two trans-Tasman wins do not make a trend, but five would. The market will be watching every major utility software contract for the next twelve months, and another high profile loss would be taken hard.

Fifth, the integration of Factor and Dubai Technology Partners has to actually work. Two acquisitions in three weeks is a lot for a business this size, and integration risk is real, particularly where the case for the deal rests on cross-sell into the existing base.

What to watch from here

Management’s stated priorities give investors a clear scorecard. The first is sales execution. Converting pipeline momentum into closed deals, ideally three to four meaningful new customer wins through to March 2027, is the single most important signal. Investors should be looking for steady, demonstrable progress rather than dated commitments.

The second is aggressive application of AI across product development, delivery automation and migration tooling, with the explicit goal of shortening implementation times and lowering project risk. If the company can compress the implementation cycle that has historically dragged on conversion, the close rate and the revenue per customer should both move in the right direction.

The third is bringing g2 and new AI-enabled capabilities, including Factor’s pricing intelligence, to the existing installed base to drive upgrades and higher wallet share. The installed base is sticky, large and underserved relative to what the platform can now do. This is the lowest risk growth lever in the business.

Disciplined post-merger integration of Factor and Dubai Technology Partners is the fourth, and any further inorganic activity should be judged against whether it materially accelerates scale and customer reach. Management has signalled that further M&A would only be pursued on that basis, which is the right discipline at this point in the cycle.

For long term investors, the question is not whether Gentrack has had a bad six months. It clearly has. The question is whether the recurring revenue engine, which is now growing at 10% plus, can keep compounding while implementation cycles shorten, the international pipeline converts at something close to the stated rate, and the cost base normalises.

If the answer is yes, then a stock trading at roughly half the software sector multiple, with no debt, a meaningful cash balance, an active buyback, two recent strategic acquisitions and a board behaving as if the price is wrong, is exactly the kind of setup small cap investors are supposed to be looking for.

If the answer is no, and the Kraken competitive pressure is the start of a broader unwinding of the customer base, then the multiple compression has further to run.

The lesson is not to be heroic. The lesson is to think clearly about which piece of the business is actually being marked down.

TAMIM Takeaway

The market has done what the market often does after a guidance reset: thrown out the higher quality part of the business along with the lower quality part. Gentrack’s recurring revenue is accelerating, the installed base is contributing strongly, two large pipeline slippages were largely outside management control, the balance sheet is intact, and capital allocation looks deliberately countercyclical with two strategic acquisitions and a buyback.

The risks are real, particularly around the CEO sale, pipeline conversion and continued competitive pressure in the retail energy market. But the gap between a 10% plus recurring revenue grower with a clean balance sheet and a software business that is genuinely broken is the gap long term investors are usually paid to think about carefully.

The next 6-12 months will tell us a great deal. The current price is, in my view, pricing in the worst version of the story.

Disclaimer: Gentrack Group (ASX: GTK) is held in TAMIM portfolios as at the date of article publication. Holdings can change substantially at any time.