Q3 2022 Quarterhill Inc Earnings Call
Thank you.
[music].
Good morning, and welcome to <unk> Q3 fiscal 2022 financial results Conference call.
On this morning's call we have Brad kit.
CEO and Shawn clients Chief Financial Officer.
At this time all participants are in.
Listen only mode. Following managements presentation, we will conduct a question and answer session.
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Earlier this morning, <unk> issued a news release announcing its financial results for the three years.
And nine months period ended September 32.
2022.
This news release, along with the company's MD&A and financial statements will be available on <unk> website and will be filed on SEDAR.
Certain matters discussed during today's conference call or answers that maybe given to questions could constitute forward looking statements.
Results could differ materially from those anticipated.
Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on SEDAR.
During the conference call at Cortez Hills for to adjust.
Adjusted EBIDTA.
It does not have any standardized meaning prescribed by <unk>.
Yes, please refer to the Companys Q3, 2020, twos management's discussion and analysts for full cautionary.
Please go ahead.
The use of forward looking statements and non <unk> measures.
Finally, please note that Austin Nashville information provided is in Canadian dollars unless otherwise.
Specified.
Now I'll turn the meeting over to Mr. <unk>. Please go ahead Sir.
Thank you very much.
Thanks.
Yes.
Okay.
That's quite a quite a bit drove good morning, everyone. Thank you for joining us on today's call in terms of the agenda for today I'll start with a look at the business highlights for Q3, followed by wireline after which Jon will take a look at the key financial results then we'll open it up for questions.
The primary story of the quarter was the operational improvement in the Ics business. This was driven by the pickup in implementation activity, which led to 8% sequential revenue growth from Q2 is also produced $1 9 billion of adjusted EBITDA up from negative $4 5 million in Q2.
Year over year Ics revenue. It grew significantly as Q3 2021 included just one month of BTC operations. Following the acquisition by quarter Hill on September one 2021.
Ics backlog remains high at $551 million, that's over $770 million Canadian and we continue to have a strong balance sheet underpinning our operations with cash and equivalents of $76 million and working capital of more than $110 million.
Looking more closely at the Ics business.
We have seven implementations underway at PTC.
A strong period for new business wins in 2021 and 2022.
In fact in just the past 12 months alone, we have announced more than $235 million in new business in the Ics segment. Since 2021, we have closed over a $5 billion in total contract value.
Implementation progress improved in Q3 from Q2, so we do continue to see some delays with certain projects. The reasons are similar to those we discussed on our Q2 call labor scarcity timely access to materials <unk> shifting customer priorities are the most common.
Also sometimes our work is dependent on task being completed by other parties may be encountering similar labor or supply chain delays, which then pushes back our work.
That said the environment the environment is showing signs of improvement in these areas and we continue to work to mitigate the impacts from inflation and tight labor markets.
We are optimistic broader trends will continue in a favorable direction and we are expecting and planning for a stronger 2023 in terms of revenue and margins.
New opportunities are being added DTC DTC sales pipeline and in total it remains well into the one billions and value as.
As we spoke about last quarter, New contract awards in 2022 have been slower to materialize throughout the industry.
Right that we want our share of new business in 2022, including the announcement in Q3 of Alameda County, California's intense intent to award ECC a contract for electronic toll systems integration.
Today. This is past the purchase space and we are now in the final stages of negotiating the contract, which we'll announce upon completion.
In 2023, we plan to increase our bidding activity over 2020 to delay further foundation for future growth, we have a history of strong win rates differentiated technology, and we consistently get the highest technical scores in the bids we pursue.
As we've mentioned previously recognized both supply chain and labor cost, we're aligning our proposals and our pricing to reflect the realities.
<unk> performed well in Q3, which is one of its two seasonally strong quarters <unk> had its share of wins in the quarter, including a $13 $8 million contract in New York State.
Just last week <unk> announced two contracts for both its E screening entire anomaly classification solutions.
These are follow on contracts in Nebraska, and South Dakota, expanding the company's footprint in those states.
Most solutions provide waste stations with advanced notice of information for commercial vehicles that are traveling on the state highways.
Increase the efficiency of vehicle processing, the state improve safety for drivers and enhanced productivity for motor carriers.
Further from an environmental perspective by improving the efficiency of inspection use of these systems, often result in reduced delay and idling and therefore lower vehicle emissions.
R&D is also encountered some supply chain disruptions wage of materials inflation in the quarter.
The results reflect minor project delays along with some higher cost. However, it's managing through these factors in is experiencing improvements in the supply chain.
Alrighty Europe continues to build its sales pipeline and we're starting to see some larger opportunities there along with opportunities to sell certain of their recently acquired products here in North America.
Sure.
As we've said previously we continue to work towards integrating our Ics businesses.
All of this process is to focus on revenue cost technological and operational synergies, while maintaining our growth mode at both businesses.
On the cost front by the end of 2023, we believe the integration efforts will generate annual run rate savings of approximately $3 million.
Consolidated support functions from PTC and <unk> into a single corporate entity.
This will provide greater efficiency and effectiveness from these functions, while enabling the operating units to focus on sales and delivery.
This will occur in step function fashion during 2023 as initiatives and new processes are implemented.
On the M&A front, we continue to manage our M&A pipeline, while focusing primarily on our ongoing implementations and the significant organic growth opportunities in our sales pipeline. We are in the enviable position of having considerable resources to pursue M&A, but we will continue to be patient and disciplined buyers looking to pay a reasonable valuations for companies.
Both good operational and financial profiles.
Turning now to our outlook for the Ics business for.
For Q4, we look to see some modest improvement in revenue from Q3, but inflationary pressures, we will have some impact unrelated growth for adjusted EBITDA, We see a stronger picture emerging for 2023 with revenue growth and adjusted EBITDA margin expansion supporting this outlook, we have a solid base of contracted revenue for 2023, a significant sales <unk>.
<unk> for any customer wins and the potential for change orders and expansions from our existing customers.
2022, and 2023 are both broadly characterized by implementations and towards the end of 2023. Some of the southern implementations will begin to transition to the maintenance and operation space with the remainder expected to convert to the maintenance phase in 2024.
As we've said before revenue from projects in the maintenance and operation space is higher margin and implement implementation base revenue. So the Ics margin profile should improve as these transitions occur given.
Given this we maintain our view that we can achieve an adjusted EBITDA margin of 15% for that segment in two to three years' time.
This will be achieved through revenue expansion, a greater percentage of higher margin revenues as projects move into the operations phase and through cost savings.
Looking at our licensing business Winelands results in Q3 reflect the variability in the patent licensing business model when viewed over a longer time horizon. The business has a track record for generating strong cash flows and it's very positive results year to date in 2020 to further reinforce that track record subsea.
Subsequent to quarter end Violet and signed a license agreement with micron, which will be reflected in its Q4 results.
The strategic review for Wiley continues to make progress and follow the customary steps in such a process. We're obviously very limited in what we can say at this time and we will update shareholders accordingly as material developments occur.
Closing, we have an exciting opportunity in front of us today, and we are well positioned to execute on our growth plan.
<unk> industry <unk> are significant and recession resistant as projects tend to be long term in nature, and therefore less prone to cyclical effects with solutions like tolling often viewed as a useful tool in helping governments pull out of a recessionary period.
Have a significant organic sales pipeline and Ics, we have significant revenue backlog, providing stability and visibility into future periods. We have a leadership team and our board experiencing Ics and M&A and we have a strong balance sheet to support organic and M&A growth.
With a significant contract wins, we have completed in the past several years with our differentiated technology. The progress we're seeing in certain of our implementation projects and the New project awards that are on the horizon, We believe that our IHS model for revenue growth and margin expansion remains firmly in place.
Our long term smart infrastructure projects with stable customers, an important public policy objectives designed to deliver a valuable set of services and outcomes literally for decades.
Now I will turn it over to John to discuss the financials.
Thank you Brad good morning, everyone.
I'll start with revenue and take a look at key consolidated numbers as well as some select results from our Ics and licensing segments.
Consolidated Q3 revenue was up 17%. This was driven primarily by the addition of the DTC business, which as Brian mentioned, we acquired in September 2020.
Contracted backlog at the end of Q3 as Bret mentioned was $581 million U S. This includes only base term and renewals.
But with no change order order enhancement projects, which often can be counted on for substantial additional revenue overtime.
<unk> revenue at 4% to $42 2 million was up 8% sequentially from Q2, and 69% from Q3 2021, which included only one month of contribution from ATC.
Q3 revenue improved sequentially over Q2 of this year and based on scheduled implementation activities and sales order book. So far this quarter. We believe Q4 will generally continue on trend along the lines of our discussion last quarter.
While some delays persist in both implementations and new contract awards and our tolling business.
Brent mentioned of our projects are by and large progressing towards completion and.
And new project opportunities that we hope might bolster our 2022 revenues remain viable.
Prospective to contribute to next year's prospects for growth.
While we continue to migrate our projects beyond their implementation phases through 2023, our next year's plan will be predicated on methodically higher revenues.
From both our base projects and higher margin tangential opportunities that combined can be expected in ics to lend themselves to improving margins and overall profitability.
So gross margin for Q3, 2022 was 21% compared to 42% in Q3 last year.
Which benefited from unusually strong licensing activity that bias up the comparable.
Likewise year to date gross income was higher in the same period last year.
Due to accept the exceptionally first the exceptionally strong first quarter performance this year in our licensing business.
As I just mentioned, we generally look for the Ips gross margins to continue to improve modestly over the course of the next year or so as revenue ramps for implementation activities.
This of course with the prospect of even higher margins heading into 2024 once our current wave of implementations are handed over to operations, where we target margins that are materially higher yet as a reminder, we generally think about gross margins for projects in the implementation phase.
Between 10 and 15%.
Rising to between 30% and 50% during the operations and changeover phases.
This step up in gross margin, which is embedded in our fee schedules under our long term contracts is the profitability lever that gives us confidence in our targeted 15% adjusted EBITDA margin target for Etfs in the future over time.
Operating expenses for Q3, 2022 were up year over year in absolute terms due to last year's EPC acquisition, and inflationary pressures impacting labor and certain services and supplies.
Standing these labor pressures, we still think as Brett mentioned $3 million of integration savings are achievable. Once we conclude our current programs of system and organizational efforts in early 2020.
Three and.
And we expect to provide more specifics around our cost savings initiatives. When we're back laying out our 2023 plan in our next call.
Consolidated adjusted EBITDA was negative $2 7 million in Q3.
But of course still positive a robust $67 million year to date bolstered by a very strong licensing activity in the first quarter of the year.
Q3, adjusted EBITDA for the Ics segment was $1 9 million a significant sequential increase from the negative $4 5 million in Q2 of this year, which reflected a recording of a loss on a singular project.
And marks a step in the trend, we mentioned last quarter toward double digit EBITDA margins as we execute on our current implementation portfolio and reload our stable of projects and what we expect to be a very busy midyear in 2023.
That said for Etfs.
We do see next year shaping up as a year of measured EBITDA improvement main stayed by projects that we already have under contract with upside coming from the potential for enhancement and change order work.
To capitalize on the opportunity we plan to continue to maintain a strong cash and liquidity position.
Cash used in operations was $26 9 million for Q3, which included a $14 $6 million settlement payout from our ongoing vizio arbitration.
Year to date cash from operations was $41 3 million.
Cash cash equivalents short term investments were $76 million at quarter end compared to $72 6 million last year.
In addition, we also had $7 million and restricted short term investments at the end of Q3.
Working capital was $112 8 million up from $105 million last year.
Lastly quarter Hill paid off $28 million of debt in Q3, bringing to $35 3 million the amount of debt is paid down this year from the <unk> acquisition.
As a result of these paydowns senior debt outstanding stood at $30 2 million at quarter end down from $62 million last year.
Consistent with prior quarters, we continued our dividend payments in Q3 and on November nine the board of directors declared a dividend of one at one quarter cents per share to be payable on January 19 2023.
<unk> to shareholders of record on December nine 2022.
In closing Q3 saw sequential improvement in the Ips business, returning to profitability notwithstanding slower than planned ramp and its implementation portfolio and notwithstanding a nagging inflationary and labor backdrop.
Although we don't expect the cost and labor climate to be resolved overnight.
We do continue to feel good about our ability to shepherd, our early stage projects into their higher margin cash flow phase in 2024 to capitalize on our opportunity set.
Potential high margin enhancement awards next year.
And compete successfully for new long term projects, leveraging our excellent technical and operational reputation in the tolling and commercial vehicle enforcement space.
All the while progressing toward an attractive double digit EBITDA margin as we move through the next year or so.
That concludes my remarks, and I'll turn the call back over to the operator.
Thank you. So we have a first question you asked online.
From Raymond James.
Go ahead, Matt.
Hey, guys.
My first questions will be on the wheel and.
<unk> process could you give us some update on the on the on the sell process.
Good morning.
For for joining into question.
Yes, as we noted the.
The process is continuing.
The direction, but.
Unfortunately, given the stay.
Ages that we're at there's not a lot more that we can say about it at this time.
Gotcha. Thank you I'll pass it on.
Sorry, I wish we could.
Okay No worries.
Next question is coming from Gavin Fairweather from coal Mac.
Started on <unk> and some of the bottlenecks that you're seeing on the implementation side I am curious, whether those are coming from kind of the clients themselves getting hardware or labor and weather.
Those factors were generally kind of improving in Q3 relative to what you saw in Q2.
Yes, good morning Gavin.
Yes, great question.
And Youre exactly right.
The nature of the delays that we've seen this year have come from multiple directions in the ones you listed are actually.
Really the most common on the ramp up of <unk>.
Signed business. So the work that we've already signed that's in backlog.
It's been a blend of things.
Some of it around customer priorities the priorities can shift in that that can be related to.
Physical construction and some issues that may be having there, which could then have to have an impact on us and we've also had in various programs both the DTC in IRT.
The issues around labor scarcity and potential.
Particular.
And then also some supply chain impacts affecting the materials that we need at a given point in time.
It can be.
Especially impactful in these these implementation basis, especially with the roadside deals where there is a fair amount of equipment.
Involved in it.
And those implementations. So there are a range of range of items like that that can impact the timing and the ramp.
There is also that the other side that we've talked about on the new.
New business Thats still ensign and then some of the delays around those those decisions as well actually can you or can.
Be some similarities to in that the agencies themselves and getting rfps out.
It can be impacted by upstream projects, either technical or our physical that theyre dealing with.
The good news is that we are seeing improvement we saw improvement in Q3 and the ramp.
The <unk> business and the work that we're doing on the current implementation program. So we're seeing improvement there and I think both both R&D and DTC.
Getting better and better at managing the labor scarcity, finding finding better talent getting folks in.
<unk> got different sources in order to meet those needs and then also managing the supply chain cultivating alternative sources.
And getting some additional redundancy and resiliency built into those supply chain. So I think that those improvements you saw some in Q3 and we expect to continue to see those into Q4 and on into 2023 as well.
That's very helpful. And then just on the macro environment, you kind of discussed your expectation that.
Your Ips segment should be fairly resilient I'm curious if that statement applies equally to IRT and EDC in and maybe we can just discuss.
The <unk> backlog and pipeline and momentum that youre seeing in that business, which it doesn't have the big phosphate projects that we've talked about on the UTC side, but curious for an update there.
Yes, another great question and.
Yes.
A lot to be excited about with the <unk> business as well I do believe that both are are generally a recession resistant.
R&D has performed well through units in China, a 40 year history and its performed well through through prior recessionary environments, you do have because both.
<unk> provides services to public sector public sector itself tends to be less.
Recession proof, if you will and there can be that countercyclical effect, where $1 are actually released by the government in order to to help offset we already had some of that stimulus you could call. It in the formula by an infrastructure Bill, which already is moving money into the into the states U S States for things.
Why for high priority projects like safety, and sustainability solutions, which which we address NRT is benefiting from.
So we.
Yes.
Our strong position in both companies relative to to recessionary pressures.
<unk> business. They are long term contracts and so you don't tend to get that fluctuation. So we see good.
On on both both both organizations is even as we look into a tougher market broadly.
Did that did I get to the whole.
Yes.
That was great and then maybe just on kind of M&A deal landscape, obviously using the public comps.
Coming under some multiple compression here given what's going on in the market.
Curious if that is kind of filtering through into the private market side is your Corp. Dev team is looking at potential additions to your platform there.
Yes.
We are continuing to see deal flow and I will say the private valuations continue to be uneven I think that some are.
Better recognized in the broader fundamentals in the market and the valuations getting a bit better and others that we've seen haven't been continuing.
Continuing to engage with with opportunities that we think could be interesting for us.
And.
Yes.
That we think can bring the technology, our operational capabilities and also can provide enhanced.
Enhancements in the way of the financial returns as well.
But we're continuing to be selective and due to some valuations, which we believe are too high we have disengaged from a number of different processes as well I think our focus on M&A at this point again as I had mentioned our primary focus really is around the.
Implementations, we have and just a tremendous amount of organic opportunities, but we do believe that that.
Tactical M&A tuck in type businesses that support those organic objectives.
Interesting, we'll continue to look at them.
That's great and then just lastly for me on wireline, obviously, it's hard to pinpoint.
The timing of a conclusion to your view.
Looking at this quarter kind of a minimal production quarter I know it is volatile quarter to quarter, but maybe you can just give us a sense of the underlying level of activity around license negotiations in any kind of upcoming trials just to give us a sense of the level of kind of underlying activity within that business.
Yes.
The business continues to perform well.
Not only Q1 as illustrated but even this recent agreement that.
That was announced with micron.
There's over 20 programs in flight with with Wilen.
As we speak and so the business continues to perform well one thing that I believe we've mentioned before is and I.
I referred to it in.
In my comments is that if you look at widening overtime performs extremely well the average over the past five years in terms of EBITDA has nearly $30 million Canadian dollars and so.
A very strong team that we have with <unk>.
It's over 4500.
Assets that they've got focused on these <unk> programs continue to.
To perform well and so we're excited about what <unk> doing what it's whether it's achieving in the market and again youll see youll see some more of those results here in Q4.
And those things contributed obviously to the into the nature of the of the strategic review as well and I guess, one thing I Should've mentioned after the first call too is that.
Yes.
These sorts of processes, they have varying timelines, depending on the nature of the asset involved.
In the case of Wildland is as you might imagine the diligence there.
Going to be on the longer end of that spectrum, given the nature of the business and the underlying assets in.
But the the perspective buyers are interested parties would need to understand so.
Hopefully that helps explain the overall timeline.
Understood. Thanks, so much I appreciate the answers to my questions.
Alright, Thank you Kevin.
There are no further questions. Please please proceed sir.
So is there another question that you can close the client you can close the call now that there is no further questions go ahead, okay, alright very good. Thank you.
Everyone for participating this morning I appreciate the questions and look forward to continued engagement with everyone going forward again, we're we're pleased.
Pleased with the with where things are headed and excited about the future. So thank you all have a good day.
No.
Good luck on a busy season this time of year. Thanks, so much.
Ladies and gentlemen that concludes the conference call for today, we thank you for participating and ask that you. Please disconnect your lines.