Quarterhill Inc. Q1 2023 Earnings Call
Good morning, and welcome to Quanta Hills, Q1 fiscal 2020 financial results Conference call.
And this morning's call we have John Gilbert.
Jane CEO and John <unk>.
Chief Financial Officer.
At this time all participants are in a listen only mode.
Following the managements presentation, we will conduct a question and answer session.
During which analysts are invited to ask a question.
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Earlier this morning quite a heel issued a news release announcing its financial results for the three months period ended March 31st 2020 feet.
Its news release, along with the company's MD&A and financial statements are available in quite a Hilton website and on SEDAR.
Certain matters discussed during today's conference call or answers that may be given to questions could constitute forward looking statements.
Actual results could differ materially from those anticipated.
Risk factors that could affect results I detailed in the company's annual information form and other public filings that are available on SEDAR.
During this conference call quarter Hill will refer to adjusted EBITDA.
Adjusted EBITDA does not have any standardized meaning prescribed by ifr ads.
Please refer to the Companys Q1, 2023 M. DNA for full cautionary notes regarding the use of forward looking statements and none I F. R. S measure.
Finally, please note that all financial information provided is in Canadian dollars unless otherwise specified.
I will now turn the meeting over to Mr. Gill Berry. Please go ahead Sir.
Thank you and good morning, everyone and thank you for joining us on today's call.
In terms of the agenda I'll start with a look at Q1 consolidated and segment highlights as well as some important developments subsequent to quarter end afterwards, John cards will take a look at key financial results and then we will open it up for questions.
<unk> consolidated revenue in Q1 was $44 million consolidated adjusted EBITDA was a negative $6 9 million in cash and equivalents was $51 $7 billion at quarter end.
Revenue in the Ics segment was up slightly year over year, while the segment generated an adjusted EBITDA loss in Q1.
Within Ats <unk> had another strong quarter exceeding our top line and margin expectations. This was done in what is generally a slower seasonal period for their business.
<unk> continues to execute well.
And is adding to its backlog as recent wins in Illinois, and Indiana a test you.
<unk> is an <unk> leader, even unfortunate system solutions, such as William motion vehicle data capture tier classification.
And Red light cameras and radar and camera technology.
These types of solutions are in high demand as they improve road safety and vehicle mobility and there can be a source of revenue for cash strapped governments, who faced widening funding gaps.
Overall IRG is off to a good start in 2023, and we expect this to continue throughout the year.
At GTC, our tolling operations, we've made some progress operationally in Q1 and took necessary steps in the quarter to lay the foundation for improved financial performance throughout the remainder of 2023 and beyond.
Since assuming the interim CEO role late in March along with rescue Lewis, our new chair of the board we've done a deep dive into this business is ongoing projects and sales pipeline and we've made good progress in doing so.
As you know we have several tolling projects in the implementation stage right now and it's important to note that these projects are moving forward in a constructive way and our customer relationships are strong.
At a high level, we've had some challenges and are going.
Challenges with some of our six Oh, sorry, we've had some challenges with some of our fixed price arrangements are there contracts that didn't leave enough breathing space.
And the economy back into a period of wage and material inflation post post.
Post pandemic.
We've learned from this experience and what's the rest yourself, we've implemented processes and procedures to avoid these types of situations going forward.
To protect our P&L against any further hiccups in the near term.
Taken cost contingencies in the quarter, which John will discuss in more detail in his section.
In 2023.
Some of our tolling projects and implementation will begin to transition to the operational phase and will be.
It will be a steady reliable higher margin revenue generator for years to come.
Revenue generated in the operational phase of our project has gross margin percentages of approximately double that of the implementation phase.
First of these projects is expected to transition to operations late summer with another one expected later this year late in the year probably Q4.
These are long term infrastructure projects with stable and reliable customers that are only in their very early stages. These projects have the potential for significant expansion over the lifespan and we expect that they will contribute to the health of the business for many years to come.
As far as our 2023 financial outlook is concerned we said in our call in March that we expect the Ics segment to generate positive adjusted EBITDA in 2023 inclusive of all of corporate hills quarter corporate segment at cost.
As a reminder, in 2022 that would have resulted in an $11 5 million EBITDA loss. So we are we are expecting a significant improvement in turnaround here in 2023, and we do expect further improvements in adjusted EBITDA to take place in 2024 as well.
Integrating the Ics business remains a focus of ours and an important part of improving the financial profile of this segment.
Our goals are to reduce the expenses without impacting our ability to sell them to deliver and to better assimilate the teams in order to generate more cross selling.
Selling and align the tech roadmap and the R&D process.
Subsequent to quarter end, we completed a new series of cost savings initiatives, which will provide the company with additional savings beyond those we announced in Q4 and the Q4 restructuring.
Regarding why land and the strategic review process remains ongoing and we continue to engage with interested parties on our options to surface value.
In the meantime, it's business as usual for the team as they seek to build their pipeline and execute on their various licensing programs.
We'll continue to keep shareholders abreast of any material developments with the business and with the strategic review.
With the release of our Q1 results today, we announced a quarter here will be suspended indefinitely. The payment of dividends. This decision is based on discussion between the board and management on determining the optimal capital allocation strategy to support growth of the company.
This decision creates financial flexibility and best positions the business to generate value through our capital allocation strategy focused on supporting the growth of its Ips business.
Dividend is a legacy of the IP licensing business and dividends are not common among publicly traded companies in the sector.
<unk> and the IGF sector tend to follow a more traditional growth orientated model, which requires ongoing investment in areas such as R&D, along with organic and non organic growth initiatives.
This morning, we also announced the appointment of Chuck Myers to the board of Directors Chuck.
Chuck is a seasoned entrepreneur with CEO level experience and there's an Ips industry veteran who helped cofound transport and part of its leadership group until its sale to a private equity investor Chuck.
Chuck is a great fit for Cortez Hill, given his experience as well as leadership and operational experience. He has been a CEO .
And a board member of several public companies and has a track record for delivering growth and.
With multiple companies in the tech sector.
More than once he has been instrumental in helping companies overcome significant obstacles to realize their full potential and deliver significant growth.
In closing I want to reiterate our commitment to the <unk> business and our view is a compelling opportunity in this industry.
The industry is growing at a CAGR north of 10% and the two verticals, we focus on tolling and enforcement are growing above the sector average.
Previously spoken about multiple tailwind propelling this growth, which suggests that growth trend.
Remain in place for years to come.
And this favorable environment, we have two strong <unk> platform businesses and ATC and I are both have talented teams strong reputations in their respective fields solid revenue backdrop backlog and growing prospects for new business.
This outlook for this segment is positive for 'twenty, three and well into 2024 and beyond.
They are.
With good visibility in the near term future.
One our goals are one to improve financial performance in 2023 and achieved positive EBIT da fits for the Ips business.
Two to maintain progress on <unk> integration moving forward a shared services model and further integration regarding the technology roadmap and sales synergies.
We hire a new CEO .
A search firm has been selected and that process is well underway and for complete the wireline strategic review process and essential step for becoming a pure play Ics business.
With that I'll pass it over to John John Karnes for a closer look at the Q1 numbers.
Thank you John and good morning, everyone. Thank you John .
Morning, everyone.
As an initial matter as you may have seen in the Q1 MD&A. We filed this morning, we are no longer breaking out corporate costs in our segment note.
We have now assimilated all corporate costs, 100% into the Ics segment comprised of tolling and enforcement.
Such going forward, we will only present two columns in our segment reporting licensing nics.
This will provide a much more accurate view of the Standalone financial profile of each segment on a go forward basis and align our pub co board of directors executive and other corporate costs with our go forward focus.
Focus.
Now.
Looking at our new segment President presentation Rev.
Revenue in Q1, consolidating both the Ics and licensing segments was down year over year relative to the strong performance in licensing in Q1 last year.
Q1 revenue for the Ips segment was $38 3 million up year over year only slightly however.
Q1 revenue was negatively impacted by approximately $3 million of <unk>.
Delayed revenue recognition under our percentage of completion Rev Rec methodology.
This delay was associated with project re estimation during the quarter all of which impacts gross margin.
Separately.
We also saw $2 5 million of committed Q1, Ics revenue push out into future periods, owing to shifting timelines that are characteristic of the complex construction projects that Ics in particular engages in.
Taking these two revenue items together, we actually had visibility into Q1, Ics revenue closer to $44 million, which would have represented a more in line increase I would say 12% year over year.
Versus the slight increase reported.
Consolidated gross margin for Q1, again, Ics and licensing was 11% compared to 55% in Q1 2022 as I mentioned earlier. This is largely a reflection of the high level of licensing activity. This time last year with its associated higher margins.
Gross margin in the Ics segment was 13% as reported for Q1.
This compares to 28% in Q1 last year.
Notably however, the Q1.
Gross margin includes the negative impact of the $3 million, resulting from our Q1 project re estimations plus another $2 million of cost contingencies and projects overruns during the quarter.
These contingencies were set up as part of a thorough project review and represent management's reserve to address identified risks remaining in our ongoing roadside and back office project implementations.
Excluding the contingency and overruns Q1, <unk> gross margin would have been closer to 23% in Q1.
Moreover, we also affected the change in our SG&A reporting in Q1 that had the effect of increasing our cost of sales about 5%.
So in this regard.
Consolidated sales general and administrative expenses SG&A in Q1, 'twenty three we're about $10 7 million compared to $13 6 million in Q1 last year.
Representing a $3 million a year over year increase or progress in Etfs SG&A.
Reduction in SG&A.
This decrease in Ics SG&A as a result of a $1 $7 million re class to cost of sales, which I mentioned.
And a $1 $3 million savings realized from our integration reorganization.
With all of this factored in consolidated adjusted EBITDA was down year over year in Q1 due of course to the impact from licensing.
Q1, adjusted EBITDA for US was a $5 $2 million loss, which as a reminder is inclusive of all corporate.
Corporate costs that were previously broken out in our segment analysis.
Q1, adjusted EBITDA was impacted by the project re estimations cost contingencies and overruns that I discussed earlier.
But for these items.
<unk> segment would have been essentially breakeven on an EBITDA basis for the quarter.
In this regard as John Gilbert just mentioned looking forward, we are targeting achieving positive adjusted EBITDA for the Ips segment in 2023, including all corporate costs apples to apples with last year. This would be an improvement an improvement from a loss of around $11 5 million.
Yeah.
Turning to the balance sheet and cash cash used in operations in Q1 was $10 2 million.
Paired to $8 8 million of cash used in operations in Q1 last year.
Cash used in operations is expected to decline that is improve as we move through 2023 with cash starting to rebuild in 2024.
We ended Q.
Q1, with cash cash equivalents and short term investments of $51 7 million compared to $67 9 million at the end of 2022.
In addition, we also had $6 5 million in restricted short term investments at the end of Q1.
Factors impacting the change in cash from year end included debt scheduled repayments, the Q4 dividend and severance charges among other working capital fluctuations.
At quarter end the company was all side its ratio covenants under its credit facility.
We are currently in discussion with our lender group to negotiate a covenant relief period.
In the interim the.
The remaining $28 $4 million outstanding of our long term debt under our credit facility has been classified as a current liability.
In summary, we've made good progress in the past months to set the business on a clearer path towards a stronger operational and financial performance level.
This should become evident as we continue to move through 2023, particularly the second half of 2023.
And we expect that the momentum we gathered this year will carry us into 2024.
This concludes my comments and I'll now turn the call back to the operator for Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session.
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Thanks. So do you have a question. Please press star followed by the number one on your Touchtone side.
We have your first question coming from the line of Todd Coupland from CIBC. Please go ahead.
Okay.
Good morning, everyone.
Good morning, Scott.
Good morning, I wanted to ask.
About the outlook comments about improving revenue and operating performance.
I guess you've taken the reserves. So you feel like you provided for the losses in the contracts how much of.
The business that you expect to come in in the second half of the year to drive that higher revenue is already booked and scheduled to be delivered as we go through the year just give us some color on that thanks a lot.
I think I understand the question.
Todd, but if youre, if youre asking about the.
Revenue in the Ips segment, that's going to drive margin percentages up.
It is all in the implementation stage at this point in time and that implementation moves over to operations and maintenance, which and that is the trigger point and which margins move up significantly there is two key.
Certainly I would say date milestones as it relates to the first year that we have visibility on and one is sort of I'm going to say late summer and one is early fall next year. If that's too broad of an answer into their government answered maybe I can get John <unk> to give me a little bit more color on that.
Yeah, Thanks, Jon I might come a different angle.
I'm not sure. If this is what youre going to have but it's 100% I mean, the revenue we have in the <unk>.
Last three quarters of the year that were planning on when we say we're going to be we're targeting cash flow profitability. That's all contract committed revenue. So there is no <unk>.
New logo Theres no.
New business on top of that this is executing the projects that we have today getting them through implementation into operations and getting them into that higher margin phase of their contract life.
Yes, that's what I was asking how much flexibility I guess this is with the state.
State and municipalities would be the customer how much flexibility do they have to actually.
Take take that business over the next three quarters.
How much flexibility do they have to take that business I'm, sorry, Todd I just don't know.
So how much I understand the contracts are.
Our 100% booked you don't have to go out and win it.
Alright, why is there any flexibility in terms of how it scheduled in.
And building and you work on it with.
With the state and municipal customers yes.
Yes, if you're asking about what's the risk of slippage on our debt.
Yes, Okay. So there is a big inducement for the state.
<unk> agencies to get these.
Project implementation, because it's revenue generating for them. So there is.
Inducement for them too.
To get them live absolutely and there is and Theres actually penalties, if we don't get them live.
So we're all aligned and on the same page in terms of getting them up and running on target dates and I would tell you that.
There is no incentive.
A big disincentive for them to try to you.
<unk> pushed it back in any way shape or form.
The pressure that goes to the other direction.
Okay.
And then sort of last question I apologize if this is.
And uninformed question, but.
The cost overruns and project expenses that you took in Q1.
Does that cover your.
What you might face for the next three quarters or is it possible that some of these contracted programs also could face cost overruns.
Yes, actually that's a good question Todd what we did in the quarter.
I would say probably at a level that hasn't ever been done before.
Grubbed these projects hard and we look to find out what is the real cost of completing these projects and doing the estimation on the cost of these projects and John and John's team.
Way way way down into the weeds. So the high level answer is that we think that we've captured the cost and cost overruns to deliver these projects that we have in the implementation phase right now so I would not expect to see another.
Contingency like we took in this quarter come back up again this year I mean, we did a lot of work on this in the quarter John John do you have any color to that.
No I Echo everything that you've said what we did was went through the entire project caught up where we are at inception to date looked at estimate to complete the project where are the risks software project handing over to software acceptance testing, sometimes is where you see costs balloon, we assess that risk where we thought it might relate.
Two more hours, we built a cushion in for more hours, where we saw hardware risk on a construction project we put it in.
So this should be everything inception to date everything that we see today on the projects that we have outstanding.
Sorry last question.
Alright.
Two quick questions.
First on this.
So your adjusted breakeven roughly in the quarter.
What should margins look like.
As as you start to work through these programs over the next year or two.
Yes.
That's a fair question and I think we've indicated in the past that we feel that this industry sector.
Can deliver.
And adjusted EBITDA number.
Digits for sure and approaching sort of that mid double digit level and and I think we have.
Pretty good.
Line of sight to know how we get there Todd.
Okay.
Sure.
And then sorry last question.
I know you are looking for.
<unk> replacement can you just talk about timeline and the type of person that would make sense internal external.
Considerations that kind of thing any any additional color would be appreciated. Thanks a lot.
Yes, sure. So as I mentioned, we have engaged a search firm. They are fully engaged as a matter of fact, just yesterday I saw like the list of.
It was someplace around 20 profile.
Profile type candidates that they that they initially had kind of come back to us and said we are starting to.
We're starting to stand this down a little bit, but we've got we've got some candidates that we think would be interesting for you. We are looking for somebody who has got very very deep operational experience like in somebody who can actually work with state and local governments on these big big contracts.
Whether it's an internal or external candidate I think all of that is open most of our business even on <unk> side of it is in the U S. So Mike.
My speculation is that candidate will.
Either come from the U S or we will have to relocate to the U S. If it happens to be somebody who is not actually in the U S. But.
I am hopeful that as.
As we move through two.
Through the late summer, we'll will be on a short list of a couple of people.
I think it's moving quickly to be honest with you.
But.
As I've said before we're in no hurry to make a mistake and we do have a lot of eyes looking at this candidate process right now a lot.
Thanks, very much for the color I appreciate the answers.
Thank you.
Just a reminder, so do you have a question. Please press star followed by the number one on your Touchstone styling.
I would like to withdraw your request. Please press star followed by the number.
Please standby, while we compile the Q&A roster.
We have no further questions at this time I will turn the call over to Mr. Barry for closing comments.
Thank you and thanks, everybody, who dialed in to listen to the call. This morning.
I wanted to thank everyone, who participated in today's call and I look forward to speaking with you and keeping you abreast on our developments in the coming months coming weeks.
And just thank you for staying staying with us goodbye.
Yeah.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.
Dave and John are we still on or.
Okay.