Q2 2023 Quarterhill Inc Earnings Call

Good morning, and welcome to Quaker Health Q2 fiscal 2023 financial results Conference call on this mornings call we have John killed Barry.

I'm, the CEO and conquest interim Chief Financial Officer at this time, all participants are in a listen only mode. Following managements presentation. We will conduct a question and answer session during which analysts are invited to ask questions.

Ask a question. Please press star one on your touched on phone to register should you require any assistance during the call. Please press star zero.

Good morning quarter Hill issued a news release announcing its financial results for the three and six months ended June 32023.

This release, along with the company's MD&A and financial statements are available on <unk> website and on SEDAR certain matters discussed during today's conference call or answers that maybe given to questions could constitute forward looking statements actual results could differ materially from those anticipated.

Factors that could affect results are detailed in the company's annual information form and other public filings that are available on SEDAR.

During this conference call will refer to adjusted EBITDA adjusted EBITDA does not have any standardized meaning prescribed by Ifr S.

Please refer to the company's Q2, 2023, and Amgen April for cautionary notes regarding the use of forward looking statements and non <unk> measures.

Please note that all financial information provided is in Canadian dollars, unless otherwise specified I'll now turn the meeting over to Mr. Gilberto <unk>. 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 for today's call I'll start with a look at Q2 and recent highlights after which Kyle will take a look at the financial results. Then we'll open it up for questions. Please.

Please note that all discussions on quarterly and year to date financial numbers reflect just the results for our ITM business wireless financial results for Q2 and year to date periods are reflected in a discontinued operations line under on our P&L as that business was sold in the quarter.

Looking now at our headline numbers quarter Hill revenue in Q2 was $51 9 million adjusted EBITDA was $3 9 million cash and equivalents were $61 million and at quarter end and our working capital was $109 5 million Kyle will discuss each of these in some detail in his section.

Quarterly revenue and adjusted EBITDA were up significantly both year over year and sequentially due to irt's progress and ongoing tolling projects and integration and cost control initiatives.

While there is still work to do on the integration front and on our tolling projects on both fronts. We have made great strides in our Q2 reflects this progress.

IR D. Our enforcement in commercial vehicle operation unit had another strong quarter exceeding top line and margin expectations.

<unk> achieved the highest Q2 revenue in its history and generated strong adjusted EBITDA margins.

<unk> has an excellent first half of the year, adding new customers expanding relationships with existing customers and gaining traction with some of the newer solutions like tax is tire safety screening service customer wins in Q2 included contracts in Washington, D C, Indiana and Minnesota.

Broadly speaking the it industry is a healthy one with a strong profile driven by increased government funding pent up demand for infrastructure upgrades and expansion and advancements in technology.

<unk> enforcement systems improve road safety and vehicle mobility are a source of revenue for cash strapped governments and are well positioned to prosper in an environment with these favorable conditions.

With a strong first half behind US we look variety to maintain this momentum into Q3 and Q4 subject to some of the typical seasonal factors in Q4, when weather can make implementations more difficult.

At ATC, our tolling operations, we made tough decisions in the first half of the year to lay the foundation for improved financial performance through the remainder of 2023, and we saw evidence of that progress in Q2.

As mentioned on our Q1 call since assuming the see the interim CEO role in late March we have done a deep dive on the business is ongoing projects in sales pipeline and have made progress identifying and implementing solutions on some of the legacy contracts challenging that challenged us in the first half of the year.

We have 700 tolling projects in the implementation stage right now and all of these projects are moving forward can a constructive way and our customer relationships are solid.

We still expect two of our seven projects in the implementation stage to transition to the operational phase this year with the remainder to doing so in 2024.

As we've discussed in the past the shift to operations phase from implementation phase generally has a positive impact on margins as revenue generated during the operations has a gross margin percentage better than that of the implementation phase.

These are long term infrastructure projects with stable and reliable customers that are just in their early stages. These projects have the potential for expansion over their lifestyle over their lifespan and we expect they will continue to help contribute to the health of the business for many years to come.

As far as our 2023 financial outlook is concerned we said previously that we expect the Ats segment to generate positive adjusted EBITDA in 2023, and we believe we are still on track to achieve this having made great progress in Q2.

Integrating the Ats businesses remains a focus of ours and an important part of improving our financial profile. In Q2, we completed a series of cost saving initiatives that followed on the heels of the restructuring we did in Q4 last year you can see the positive impact of these efforts reflected in the lower SG&A costs, we reported in the quarter.

Our goals are to reduce expenses without impacting our ability to sell and deliver and to better integrate the teams in order to generate more cross selling and to align the technology roadmap and R&D processes.

One project that is underway now is a rebranding of the organization to reflect that we are now a pure play <unk> business and one family with both distinct and complementary business lines.

Regarding <unk>, we completed the strategic review in Q2 with the sale of the business, while retaining a minority 10% ownership position. The transaction was valued at up to $71 4 million, which included cash upfront of 48 million plus two potential earn out components that make up the remainder as mentioned we also.

We retain a 10% ownership stake, which entitles us to a pro rata share of any dividends that may that stake maybe domestic may be acquired at a later date.

The transaction provides an excellent home for a while and to prosper in a private company structure enables quarter Hill now to focus 100% of its attention and resources on the Ats growth opportunity.

We continue to make changes at the board level to reflect the evolution of the business.

In Q2, we announced the appointment of Chuck Myers to the board of Directors. Chuck was co founder of transport and is a great fit for quarter Hill, given his experience at Ics as well as his leadership and operational experience has been a CEO or board member of several public companies and has a track record for having delivered growth in several companies in the tech sector.

In addition, today, we announced the appointment of Bill Morris to the board along with the retirement of Michelle for <unk>.

Bill is a seasoned leader with extensive management managerial and board experience. He spent nearly 40 years at Accenture, where he was twice the CEO twice in the CEO role for 13 years total.

Bill retired from Accenture in 2019, and currently provides advisory service and sits on the boards of several tech companies, both private and public.

Bill brings strengths and leadership operational execution and governance and we were pleased to welcome him to the company.

At the same time I'd like to thank Michele for his commitment guidance and support as a long standing board member at quarter Hill, Michel Cofounded, Weiland, and 1992 and helped to develop the patents patented wireless inventions that became the cornerstone of some of the most important wireless technology used today.

Michelle soft quarter Hill through its three phases of existence from $19 92 until 2005 Weiland focused on wireless products based on this patent and patented inventions than in 2006 violent changes focus to licensing is patented technologies.

Finally in 2017 Weiland changed its name to quarter Hill and embarked on a diversification strategy that has led us to the pure play <unk> company that we are today.

Michel will have board observer status until the next AGM and on behalf of the entire quarter Hill team I wish him the best in all his future pursuits.

In closing this is a very exciting time for core to hill. The industry is growing at a CAGR north of 10% and the two verticals, we focus on tolling and enforcement are forecast to grow above the sector average in this favorable environment, we have two strong and increasingly integrated Ics platform businesses and HTC and <unk>.

Both have talented teams, great reputations and solid prospects for the for the for new business.

Our near term priorities to capitalize on the opportunity or one.

To drive towards go live dates on our tolling projects with two expected. This year. The remaining next next year.

To continue our focus on improved financial performance and then 2023 achieved positive adjusted EBITDA three maintain progress on <unk> integration and for hire a new CEO search is well underway and we're making good progress with it.

With that I will pass it over to Kyle for a closer look at Q2 numbers Kyle.

Thank you John and good morning, everyone.

As John mentioned Weiland was sold on June 15, and its financial results in Q2 and for the year to date period are reflected in the discontinued operations line item in our P&L and statement of cash flows.

With that I'll start by taking a look at revenue in the quarter.

Q2 revenue was $51 9 million up significantly year over year and sequentially by 32% and 35% respectively.

The increase was due to strong performance from IRT as discussed earlier by John as well as improved performance from UTC. In particular, we did not have the impacts in Q2 from tolling project overruns that we had experienced in the comparable periods, which had a significant positive effect on reported revenue.

At the end of Q2, we had backlog of more than USD $500 million, which is a good indicator of revenue visibility going forward.

Gross margin for Q2 was 26% compared to 14% in Q2 2022 similar to revenue. The primary reasons for the improvements were higher revenue with Iot, including higher margin revenue as well as the limited impact of any tolling project overruns, which had significantly impacted gross margin in <unk>.

Q2 of 2022.

Sales general and administrative SG&A expenses in Q2 were $8 2 million compared to $13 million in Q2 of 2022.

Put another way SG&A as a percentage of revenue in Q2 was 16% compared to 33% in Q2 last year.

The decrease in SG&A largely reflects savings from our restructuring and integration activity in 2023, along with our ongoing focus on driving efficiencies and controlling costs.

Q2, adjusted EBITDA was $3 9 million or seven 5% of revenue up significantly from negative $8 1 million in Q2 of last year the.

The improvement was due primarily to revenue growth and the decrease in SG&A year over year.

As well as the limited impact from tolling project overruns in Q2 compared to Q2 last year.

As John mentioned looking forward, we are targeting to achieve positive adjusted EBITDA in 2023 and based on our strong Q2 results. We have made good progress towards this goal.

Cash used in continuing operations in Q2 was $10 2 million and we ended Q2 with cash cash equivalents and short term investments of $61 million compared to $67 9 million at the end of 2022 and $51 7 million at the end of Q1 2023.

At June 32023, we had working capital of $109 5 million due to the nature of our business activities operating cash flows may vary significantly between periods due to changes in timing and working capital balances and this is something we experienced in Q2.

I'll just spend a moment here to walk you through the major sources and uses of cash in Q2 as compared to the end of Q1.

We started off the second quarter with $50 $1 million in cash.

We received gross proceeds of $48 million from the sale of wireline, which resulted in $32 million of net proceeds.

That 60 million differential is due to four factors number one cash retained within weiland as the chairman of the deal number two working capital adjustments number three funds to be received from escrow and number four transaction costs related to the sale.

<unk> also had an operational cash burn in Q2 before the sale of $3 million.

Excluding wilen other factors impacting the change in cash from the end of Q1 included the $3 million for debt repayment and final dividend repayment capital expenditures of $2 million and a cash increase from operations of $2 million less a working capital increase of $12 million.

The working capital increase is a function of both increased revenues during the period and the back end weighted nature of tooling implementation project billings.

The last consideration is FX fluctuations, which had a $3 5 million impact on cash in Q2, and which resulted from a strengthening of the Canadian dollar against the USD.

To recap we started the quarter with $50 1 million added net cash proceeds from the sale of wilen of $32 million spent $3 million in wildland presale operating cost and consumed a combined $15 million of cash in financing investing operational and working capital activity.

Including the $3 5 million impact from FX, we get to the ending cash balance of 61 million for the quarter.

Our outlook for cash over the remainder of the year is that it will stabilize and slightly declined during Q3 with an anticipated uptick in Q4, as we reach milestones and collect cash on tolling implementation projects.

Finally in Q2, we completed constructive discussions with our lead lender HSBC and announced the amended credit agreement. The amended agreement gives us covenant relief through the end of the year and additional flexibility as we execute on our growth plan.

In closing I'll Echo John's comments by saying that we have made strong progress over the past several months and setting the business on a clear path towards growth stability and margin expansion. We have built momentum this quarter and we look to sustain it as we move through the remainder of 2023 and into 'twenty 'twenty four which we believe will result in improved cash flow.

And our strengthened balance sheet.

This concludes my review of the financial results and I'll now turn the call over to the operator for Q&A.

Yes.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by one on your telephone keypad and should you wish to cancel your request. Please press the star followed later too.

Once again that is star and wanted to ask a question.

Yeah.

Yes.

Thank you and your first question comes from the line of James Smith from Cormack Securities. Please go ahead.

Hi, there I just wanted to.

Ask a quick question on that on the revenue growth the revenue growth in Ics was very impressive this quarter. What was the primary driver of that I know you cited several changes to the cost overruns.

Can we expect a similar cadence in future quarters.

If you could just give a bit more color on that.

Yes. Good morning, Thank you for the question.

A lot of the revenue growth in the quarter was driven by I would say some pent up demand and backlog in the IRT business in particular as well as us trying to.

<unk> had some of the tolling projects that we were struggling with Q4 Q1. So it's a good question to ask about the cadence for the future I do think that youre seeing sort of a more normalized.

Type of revenue number for 2023, we will have some seasonal activity without question in Q4, when we start to hit bad weather and implementations, but generally speaking I think we've we've turned the corner on that revenue line Graham.

Okay.

That's great.

It's all for me for now actually one more quick question. If we can expect sort of that increased revenue.

<unk>, driven and we've seen that those improvements in margins on the adjusted EBITDA line.

Are you guys thinking that you could expect it quite a significant adjusted EBITDA beat.

Coming out of 2023 versus just being breakeven.

Sorry, Graham you kind of broke up on me there could you. Please repeat the question.

Got it so I know you guys are targeting the adjusted EBITDA breakeven coming out of <unk>.

Positive adjusted EBITDA in 2023.

The way that revenue is growing and our margins are progressing and you've made a lot of cost improvements.

Could you guys see yourselves, making having significant adjusted EBITDA.

As opposed to the sort of positive adjusted EBITDA guidance.

Thank you guys.

Yes.

That's sort of a funny question, whether it's going to be significant or positive I think we're going to stick to our storyline here in saying that we will we are committing to trying to be positive EBITDA adjusted EBITDA.

By the end of the year and we're still tracking towards that goal.

You got to remember that we're digging we have dug ourselves out of a fairly significant hole. So the trend is good.

We're not giving any kind of significant guidance on the bottom line yet.

No. That's fair that's all for me. Thank you.

Thanks, you as you have no further questions at this time I will now turn the call over to Mr. Silberman for closing comments.

Thank you operator.

I'd just like to thank everybody for participating and listening in on today's call and.

That's it you will see you next quarter.

Thank you ladies and gentlemen.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect.

Okay.