Q2 2024 Quarterhill Inc Earnings Call

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Operator: Q2 2024 Financial Results Conference Call. On this morning's call, we have Chuck Myers, CEO, and Kyle Chriest, Chief Financial Officer. At this time, all participants are in listen-only mode. Following management's presentation, we will conduct a question and answer session during which analysts are invited to ask questions. To ask a question, please press star one on your touchtone phone to register. Should you require any assistance during the call, please press star zero.

Speaker Change: Good morning and welcome to Quarterhill's Q2 2024 Financial Results Conference Call. On this morning's call, we have Chuck Myers, CEO and Kyle Chriest, Chief Financial Officer. At this time, all participants are in listen-only mode.

Speaker Change: Following management's presentation, we will conduct a question and answer session, during which analysts are invited to ask questions.

Speaker Change: To ask a question, please press star 1 on your touchtone phone to register. Should you require any assistance during the call, please press star 0.

Unknown Executive: Earlier this morning, Quarterhill issued a news release announcing its financial results for the three and six months ended June 30th, 2024. This news release, along with the company's MD&A and financial statements, are available on Quarterhill's website and CDER Plus. Certain matters discussed during today's conference call are answers that may be given to questions that constitute forward-looking statements. However, actual results could differ greatly from those anticipated.

Speaker Change: Earlier this morning, Quarterhill issued a news release announcing its financial results for the three and six months ended June 30th, 2024.

Speaker Change: This news release, along with the company's NDNA and financial statements, are available on Quarterhill's website and CDERplus.

Speaker Change: Certain matters discussed during today's conference call are answers that may be given to questions that could constitute forelooking statements.

Speaker Change: Actual results could differ mentally 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 CIDR+.

Unknown Executive: Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on CDER Plus. During this conference call, Quarterhill will refer to adjusted EBDA, which does not have any standardized meaning prescribed by IFRS.

Speaker Change: During this conference call, Quarterhill will refer to adjusted

Unknown Executive: Please refer to the company's Q2 2024 MDNA for full cautionary notes regarding the use of forward-looking statements and non-IFRS measures. Finally, please note that financial information provided is now in U.S. dollars unless otherwise specified. I will now turn the meeting over to Mr. Myers. Please go ahead, sir.

Speaker Change: EBEDA, adjusted EBEDA, does not have any standardized meaning prescribed by IFRS. Please refer to the company's Q2 2024 MDNA for full continuity notes regarding the use of forward-looking statements and non-IFRS measures.

Speaker Change: Finally, please note that financial information provided is now in U.S. dollars, unless otherwise specified.

Speaker Change: I will now turn the meeting over to Mr. Myers. Please go ahead, sir.

Charles Myers: Good morning, everyone. And thank you for joining us on today's call. In terms of the agenda today, I'll discuss the results for the quarter, after which Kyle will take a look at the key financial results. Then, after Kyle, I will open it up for questions.

Speaker Change: Hello, I'm Kyle Chriest, I'm John Gillberry, I'm John Gillberry,

John Gillberry: Good morning, everyone, and thank you for joining us on today's call. In terms of the agenda today, I'll discuss the results for the quarter, after which Kyle will take a look at the key financial results.

Charles Myers: Q2 summary. Overall, we're pleased with the Q2 results, which were in line with our expectations and showed progress on our goals to drive top line growth, increase adjusted EBITDA margin, and improve cash flow. Revenue was $41.5 million, up 7.5% from Q2 last year. Adjusted EBITDA was $1.7 million, down from $2.9 million in Q2 last year but up from $200,000 in Q1. Cash from operations in Q2 was $802,000, compared to cash used in operations of $6.9 million in Q2 last year.

Speaker Change: After Kyle, we'll open it up for questions.

Speaker Change: Q2 summary. Overall, we're pleased with the Q2 results, which were in line with our expectations and showed progress on our goals to drive top-line growth, increase adjusted EBITDA margin and improve cash flow.

Kyle Chriest: Revenue was $41.5 million, up 7.5% from Q2 last year. Adjusted EBITDA was $1.7 million, down from $2.9 in Q2 last year, but up from $200,000 in Q1.

Kyle Chriest: Cash from operations in Q2 was $802,000 compared to cash used in operations of $6.9 million in Q2 last year.

Charles Myers: This obviously is a big swing year over year and reflects a lot of the work we've done in the past year to strengthen program management, integrate operations, and manage expenses. In fact, this was the first quarter of positive cash from operations for Quarterhill in two years. Our substantial revenue backlog at the quarter end was $500 million, which gives us good revenue visibility for the remainder of 2024 and into subsequent years. Kyle will take a look at these numbers in more detail in his... Q2 business unit review and Q2 are two business units tolling enforcement executed on their ongoing projects as well as closed new and follow-on businesses and advanced other opportunities through sales.

Kyle Chriest: This obviously is a big swing year over year and reflects a lot of the work we've done in the past year to strengthen program management, integrate operations, and manage expenses. In fact, this was the first quarter of positive cash from operations for Quarterhill in two years.

Kyle Chriest: Our substantial revenue backlog at the quarter end was $500 million, which gives us good revenue visibility for the remainder of 2024 and into subsequent years. Kyle will take a look at these numbers in more details in his section.

Kyle Chriest: Q2 Business Unit Review. In Q2, our two business units, Tolling and Enforcement, executed on their ongoing projects as well as closed new and follow-on businesses and advanced other opportunities through the sales pipeline.

Charles Myers: On the tolling side, we made progress on several sections of highway with CTRMA in Texas, as our activity under that contract continues to grow. We've also seen progress with E-470 and OCTA in Orange County, as those projects move toward acceptance and operations. We remain active in our bidding activity with a focus on both follow-on business and landing new customers. Regarding new customers, we expect to have a couple of bids in by the end of the year, subject to delays in the bidding process that can occur at the customer.

Speaker Change: On the tolling side, we made progress on several sections of highway with CTRMA in Texas as our activity under that contract continues to grow. We've also seen progress with E-470 and OCTA in Orange County as those projects move towards acceptance and operations respectively.

Speaker Change: We remain active with our bidding activity, with a focus on both follow-on business and landing new customers. Regarding new customers, we expect to have a couple of bids in by the end of the year, subject to delays in the bidding process that can occur at the customer end.

Charles Myers: In addition to the work we've done internally to enhance our bidding process over the year, we think that the addition of Red Fox has strengthened our value process. We announced the acquisition of Red Fox during Q1, and the transaction closed during Q2. As a reminder, Red Fox is a profitable and growing provider of automated vehicle detection and classification software to the tolling industry, but we also believe that applications to our enforcement business as well.

Speaker Change: In addition to the work we've done internally to enhance our bidding process over the year, we think that the addition of Red Fox has strengthened our value proposition.

Speaker Change: We announced the acquisition of Red Fox during Q1 and the transaction closed Q2. As a reminder, Red Fox is a profitable and growing provider of automated vehicle detection and classification software to the tolling industry.

Charles Myers: AVDC is responsible for the detection, classification, and tracking of a vehicle as it enters and exits tolling. In Q2, Red Fox was recognized for its technical prowess, winning two King's Awards for Enterprise, one for innovation and the other for excellence in international trade. The King's Awards are considered very prestigious in the UK, with King Charles himself involved in the recognition of the winner.

Speaker Change: but we also believe with applications to our enforcement business as well. AVDC is responsible for the detection classification and tracking of a vehicle as it enters and exits tolling facility.

Speaker Change: In Q2, Red Fox was recognized for its technical prowess, winning two King's Awards for Enterprise, one for innovation and the other in excellence in international trade.

Speaker Change: The King's Awards are considered very prestigious in the UK, with King Charles himself involved in the recognition of the winners.

Charles Myers: The awards recognize outstanding achievement by UK businesses in categories such as innovation, international trade, and sustainable development, and they've been honoring companies this way since 1965. We're obviously very pleased with the acquisition and to have them as part of the Quarterhill team. As mentioned, we are already working to integrate their quantum software into our bids, and we see the potential to integrate it with both of our tolling and enforcement units. Our enforcement unit delivered solid results in Q2, with this being one of the seasonally strong quarters. The business continues to generate steady and reliable performance with plenty of follow-on renewal and new customers. These include new agreements in North and South Dakota, New York, California, and Idaho.

Speaker Change: The awards recognize outstanding achievement by UK businesses in categories such as innovation, international trade, sustainable development, and they've been honoring companies this way since 1965.

Speaker Change: We're obviously very pleased with the acquisition and to have them as part of the Quarterhill team. As mentioned, we are already working to integrate their quantum software into our bids and we see the potential to integrate it with both of our tolling enforcement units.

Speaker Change: Our enforcement unit delivered solid results in Q2, with this being one of the seasonally strong quarters. The business continues to generate steady and reliable performance with plenty of follow-on renewal and new customer contracts.

Speaker Change: These include new agreements in North and South Dakota, New York, California, and Idaho. Subsequent to quarter end, we announced two international deals, one in South Korea and one in Thailand.

Charles Myers: Subsequent to quarter end, we announced two international deals, one in South Korea and one in Thailand. Of note, our contract in North Dakota was for our artificial intelligence vehicle classification system used for traffic monitoring. This involves the use of AI video automatic traffic recorders or ATRS, the Count and Class Flight Vehicles, which is essential for highway planning, design, and maintenance. As you know from our previous calls, AI and machine learning applications in ITS are an area of great interest for us going forward, and I'll touch on that shortly. Strategy.

Speaker Change: Of note, our contract in North Dakota was for our artificial intelligence vehicle classification system used for traffic monitoring.

Speaker Change: This involves the use of AI Video Automatic Traffic Recorders, or ATRS, that count and classify vehicles, which is essential for highway planning, design, maintenance, and management.

Speaker Change: As you know from our previous calls, AI and machine learning applications and in ITS are an area of great interest for us going forward. And I'll touch on that shortly.

Charles Myers: Our three-year plan remains focused on leveraging improvements we've made in the past year to our project management and contract bidding process to grow tolling and enforcement. At the same time, we're looking at three areas where we can strengthen those existing operations while expanding our capabilities and market reach. The first is to leverage our existing footprint and our safety and enforcement expertise in Europe to pursue tolling opportunities. On our last call, I spoke about our participation at the Inter-Traffic Show in Amsterdam, which took place during Q2, and is one of the premier events for the ITS industry.

Speaker Change: Strategy. Our three-year plan remains focused on leveraging improvements we've made in the past year to our project management and contract bidding process to grow our tolling and enforcement unit.

Speaker Change: At the same time, we're looking at three areas where we can strengthen those existing operations while expanding our capabilities and market reach.

Speaker Change: The first is to leverage our existing footprint and our safety and enforcement expertise in Europe to pursue tolling opportunities.

Speaker Change: On our last call, I spoke about our participation at the Inter-Traffic Show in Amsterdam, which took place during Q2, and is one of the premier events for the ITS industry.

Charles Myers: The show gave us an opportunity to advance discussions with customers, prospects, and partners on a broad number of tolling enforcement opportunities throughout Europe, with the addition of Red Fox enhancing our potential. The second area of focus is on software development to support tolling enforcement businesses, as well as our penetration into other verticals. The addition of Red Fox and their quantum solution helps us to advance our goals there in the long term.

Speaker Change: The show gave us an opportunity to advance discussions with customers, prospects, and partners on a broad number of tolling enforcement opportunities throughout Europe with the addition of Red Fox enhancing our potential on this front.

Speaker Change: The second area of focus is on software development to support tolling enforcement businesses, as well as our penetration into other verticals.

Charles Myers: We will continue with our buy and build approach to expanding our suite of applications. AI and machine learning will play an important role in the development of our technology roadmap, as will our focus on visual technology and data mining and analysis. We're already active in, as I just mentioned with the North Dakota wind, and ultimately, these applications will provide a natural lead into our third area of focus, which is logistics.

Speaker Change: The addition of Red Fox and their quantum solution helps us to advance our goals there in long term. We will continue with our buy and build approach to expanding our suite of applications.

Speaker Change: AI and machine learning will play an important role in development of our technology roadmap, as will our focus on visual technology and data mining and analytics. We're already active on this front.

Speaker Change: As I just mentioned with the North Dakota wind.

Speaker Change: And ultimately, these applications will provide a natural lead-in to our third area of focus, which is logistics.

Charles Myers: We've had a big development on the AI machine learning front with the addition of our newest board member, which I'll discuss. On the logistics side, we have a project underway that is going well, and we expect to see the mandate with this customer expand this year while simultaneously building out our sales pipeline. We're in the early stages of our go-to-market strategy here, but we believe the addressable market is significant and that developing these solutions is complementary to our existing verticals, Integration and Right Size.

Speaker Change: We've had a big development on the AI machine learning front with the addition of our newest board member, which I'll discuss in a moment.

Speaker Change: On the logistics side, we have a project underway that is going well and we expect to see the mandate with this customer to expand this year while simultaneously build out our sales pipeline.

Speaker Change: We're in the early stages of our go-to-market strategy here, but we believe the addressable market is significant and that developing these solutions is complementary to our existing verticals.

Charles Myers: A big part of our positive transformation in the last year has been the integration and streamlining of our ITS business, and this work continues, especially on the technology side. As part of our ongoing efforts to drive efficiencies, we announced restructuring with our Q1 results that was effective in Q2. While we have reduced headcount in certain areas of the business where we believe growth will not be impacted, we also continue to strategically add to the team, in particular expanding our sales team and adding select senior resources to help drive the execution of our three-year plan. Finally, during the quarter, we launched a unified branding campaign throughout the business and unveiled our new look at the inner traffic show.

Speaker Change: Integration and right sizing. A big part of our positive transformation in the last year has been the integration and streamlining of our ITS business. And this work continues, especially on the technology side.

Speaker Change: As part of our ongoing efforts to drive efficiencies, we announced restructuring with our Q1 results that was effective in Q2. While we have reduced headcount in certain areas of the business,

Speaker Change: where we believe growth will not be impacted, we also continue to strategically add to the team, in particular, expanding our sales team and adding select senior resources to help drive the execution on our three-year plan.

Charles Myers: As I mentioned earlier, the branding brings together our entire portfolio of subsidiaries under the Quarterhill name, with an overhaul of our customer-facing messaging and a board member in keeping with the themes of AI and organizational change. We also announced today that Vaneet Khosla has joined the Quarterhill board effective immediately. Vaneet is the Chief Technology Officer at the Washington Post, where he leads their engineering team and is the driving force behind their technology vision and innovation strategy.

Speaker Change: Finally, during the quarter, we launched a unified branding campaign throughout the business and unveiled our new look at the inter-traffic show, as I mentioned earlier. The branding brings together our entire portfolio of subsidiaries under the Quarterhill name with an overhaul of our customer-facing messaging and a new website.

Speaker Change: A board member in keeping with the themes of AI and organizational change. We also announced today that Vaneet Khosla has joined the Quarterhill board effective immediate.

Speaker Change: Benit is the Chief Technology Officer at the Washington Post where he's leading their engineering team and is driving force behind their technology vision and innovation strategy.

Charles Myers: Benitez is a pioneering researcher and a leading voice in AI, machine learning, and cloud computing and has driven significant advancements in these fields. He joined the post in 2023 and brings an extensive track record as an innovator and executive at some of the world's largest companies. Prior to joining Google, Vinit was at Uber for five years, where he was responsible for the development of their map routing engine, which optimized routes and timing.

Speaker Change: Benita is a pioneering researcher and a leading voice in AI, machine learning and cloud computing and has driven significant advancements in these fields.

Speaker Change: He joined the Post in 2023 and brings an extensive track record as an innovator and executive at some of the world's largest companies.

Charles Myers: Before Uber, he was at Apple for more than eight years. At Apple, he built the core framework for Siri's AI engine. He was an AI engineer at Siri when it was acquired by Apple in 2010. Those of you that have followed the Quarterhill name for some time may recall that our previously owned business, Yland, acquired the original Siri patents in 2016. Beneat played a key role in the development of the technology behind those patents.

Speaker Change: Prior to the post, Vinit was at Uber for five years, where he was responsible for the development of their map routing engine, which optimized routes and timing. Before Uber, he was at Apple for more than eight years.

Vineet: At Apple, he built the core framework for Siri's AI engine. He was an AI engineer at Siri when it was acquired by Apple in 2010.

Speaker Change: Those of you that have followed the Quarterhill name for some time may recall that our previously owned business, Yland, acquired the original Siri patents in 2016. The NEAP played a key role in the development of the technology behind those patents.

Charles Myers: Finally, hearing the Masters in Artificial Intelligence from the University of Georgia in 2005, so he's not a newcomer to this growing industry. Overall, we're very pleased to have the nit join the board and look forward to him playing a role in the development of our product road map and our push to expand the software side of them, especially with assault rape.

Speaker Change: Finally, he earned a Master's in Artificial Intelligence from the University of Georgia in 2005, so he's not a newcomer to this growing industry.

Speaker Change: Overall, we're very pleased to have Vinit join the board and look forward to him playing a role in the development of our product roadmap and our push to expand the software side of our business, especially with AI and machine learning.

Charles Myers: Outlook. Looking forward, our goal is to drive growth for revenue, adjusted EBITDA, and capital in 2024 and beyond. We look to achieve this by capitalizing on the progress in our large tolling projects, the steady growth from our enforcement business, the expansion of our technology software footprint, and the opportunity to expand into new markets and borders. Over time, this will result in the company generating reliable cash and building a strong balance sheet capable of supporting both our organic and equisitive grocery business.

Speaker Change: Outlook. Looking forward, our goal is to drive growth for revenue. Adjusted EBITDA and capital in 2024 and beyond.

Speaker Change: We look to achieve this by capitalizing on the progress in our large tolling projects, the steady growth from our enforcement business, the expansion of our technology software footprint, and the opportunity to expand into new markets and verticals.

Speaker Change: Over time, this will result in the company generating reliable cash and building a strong balance sheet capable of supporting both organic and acquisitive growth strategies.

Charles Myers: In closing, we're making progress in improving our financial results, enhancing our software solutions, and optimizing our costs. We have a great team at Quarterhill, excellent ITS assets, strong customer relationships, and a significant revenue backlog. We're very well set to be a number one or number two player in the industry, and simply put, that is our goal. With that, I'll turn it over to Kyle.

Speaker Change: In closing, we are making progress in improving our financial results, enhancing our software solutions, and optimizing our cost structure.

Speaker Change: We have a great team at Quarterhill, excellent ITS assets, strong customer relationships, and a significant revenue backlog. We're very well set to be number one, number two player in the industry, and simply put, that is our goal. With that, I'll turn it over to Kyle. Kyle?

Kyle Chriest: Thank you, Chuck, and good morning, everyone. Before we get into the financials, please note that the discussion pertaining to the 2023 financials reflects only the results of our ITS business. Wyland's financial results for the three and six months into June 30, 2023 are reflected in the discontinued operation line items in our P&L and cash flow statements as that business was sold in June 2023. With that, I'll start with a look at revenue in the quarter. Q2 revenue was $41.5 million, up 7.5% from Q2 last year. Year-to-date, revenue was $76.4 million, up 14%.

Kyle Chriest: Thank you, Chuck, and good morning, everyone. Before we get into the financials, please note that the discussion pertaining to 2023 financials reflects only the results of our ITS business.

Speaker Change: Yland's financial results for the three and six months ended June 30, 2023, are reflected in the discontinued operation line items in our P&L and cash flow statements, as that business was sold in June 2023. Transcripts provided by Transcription Outsourcing, LLC.

Kyle Chriest: The increase in the two periods was due to strength in our enforcement unit, as well as improved performance from our tolling unit, which generated incremental revenues and had experienced cost overruns in the respective 2023 periods that had negatively impacted revenues. As Chuck touched on in his section, at the end of the quarter, we had a significant backlog of U.S. $500 million, providing good visibility into revenue for the rest of 2024 and the next several years.

Kyle Chriest: With that, I'll start with the look at revenue in the quarter.

Kyle Chriest: Q2 revenue was $41.5 million, up 7.5% from Q2 last year.

Kyle Chriest: Year-to-date revenue is $76.4 million, up 14%.

Kyle Chriest: The increase in the two periods was due to strength in our enforcement unit as well as improved performance from our tolling unit, which generated incremental revenues and had experienced cost overruns in the respective 2023 periods that had negatively impacted revenue.

Kyle Chriest: As Chuck touched on in his section, at the end of the quarter, we had significant backlog of U.S. $500 million, providing good visibility into revenue for the rest of 2024 and the next several years.

Kyle Chriest: Of note, a large portion of the backlog is higher-margin contracted maintenance revenue versus implementation revenue. We expect this to result in improved margins as we move through the year. However, as we said previously, for those tolling projects that have recently moved into the maintenance phase, margins tend to start out lower at the launch date and then rise over a period of a few quarters before stabilizing. Gross margin percentage in Q2 was 21% compared to 26% in Q2 last year, but up sequentially from 18% in Q1.

Chuck Myers: Of note, a large portion of the backlog is higher margin contracted maintenance revenue versus implementation revenue.

Speaker Change: We expect this to result in improved margins as we move through the year. However, as we said previously, for those tolling projects that have recently moved into the maintenance phase, margins tend to start out lower at the launch date and then rise over a period of a few quarters before stabilizing.

Kyle Chriest: Gross margin percentage in Q2 was 21% compared to 26% in Q2 last year, but up sequentially from 18% in Q1. In general, we expect gross margin percentage to continue to increase as we move through 2024.

Kyle Chriest: The year-over-year decrease in Q2 was primarily due to one tolling project that is in the maintenance phase, but experiencing a transitory period of lower-than-expected margin, which we expect to resolve in the coming quarters.

Kyle Chriest: The gross margin percentage decrease was partially offset by continued strong margin performance from our enforcement unit.

Kyle Chriest: Total operating expenses for Q2 2024 were $10.8 million compared to $10.6 million in Q2 2023. Year-to-date OPEX was $21.2 million down from $22.2 million in the same period last year.

Kyle Chriest: For the quarter, OPEX grew slightly due to higher SG&A, offset in part by lower R&D. There are some key SG&A investments we are making to grow the business, and as I said on our last call, we expect to hold SG&A cost increases for the year to under 10%. The majority of the savings from the streamlining initiative we announced in May with our Q1 results will be reflected inside cost of goods sold.

Kyle Chriest: For the quarter, OPEX grew slightly due to higher SG&A offset in part by lower R&D.

Speaker Change: There are some key SG&A investments we are making to grow the business, and as I said on our last call, we expect to hold SG&A cost increases for the year to under 10%.

Kyle Chriest: The majority of the savings from the streamlining initiative we announced in May with our Q1 results will be reflected inside cost of goods sold.

Kyle Chriest: Q2 Adjusted EBITDA was positive for the fifth quarter in a row at $1.7 million compared to $2.9 million in Q2 last year and $0.2 million in Q1 of 2024. Year-to-date adjusted EBITDA was $1.8 million compared to negative $0.9 million in the same period last year. Adjusted EBITDA has improved in the year-to-date period due to steady results from the enforcement unit and stronger revenue performance from the tooling unit. We expect adjusted EBITDA to continue to grow and for margins to improve as we move through the year. This will be driven by enforcement unit results and seasonalally stronger quarters from certain tolling projects advancing through the maintenance phase and others completing the implementation phase.

Kyle Chriest: Q2 Adjusted EBITDA was positive for the fifth quarter in a row at $1.7 million compared to $2.9 million in Q2 last year and $0.2 million in Q1 of 2024.

Kyle Chriest: Year-to-date adjusted EBITDA was $1.8 million compared to negative $0.9 million in the same period last year.

Kyle Chriest: Adjusted EBITDA has improved in the year-to-date period due to steady results from the Enforcement Unit and stronger revenue performance from the Tolling Unit.

Kyle Chriest: We expect adjusted EBITDA to continue to grow and for margins to improve as we move through the year. This will be driven by enforcement unit results and it's seasonally stronger quarters from certain tolling projects advancing through the maintenance phase and from other completing the implementation phase.

Kyle Chriest: Turning now to the balance sheet, at quarter end, we had adjusted working capital of $68.4 million compared to $78.9 million at the end of 2023. As we spoke about on our last call, following the IFRS amendment to IAS 1, we are now using adjusted working capital, which is a non-IFRS measure to highlight the strong working capital position that we have. Adjusted working capital is defined as working capital adjusted for convertible debentures and the derivative liability. As a reminder, our convertible debentures don't mature until October 30th, 2026.

Kyle Chriest: Turning now to the balance sheet.

Kyle Chriest: At quarter end, we had adjusted working capital of $68.4 million compared to $78.9 million at the end of 2023.

Speaker Change: As we spoke about on our last call, following the IFRS amendment to IAS 1, we are now using adjusted working capital, which is a non-IFRS measure to highlight the strong working capital position that we have.

Speaker Change: Adjusted working capital is defined as working capital adjusted for convertible debentures and the derivative liability. As a reminder, our convertible debentures don't mature until October 30th of 2026.

Kyle Chriest: We ended the quarter with cash and cash equivalents of $24 million, compared to $42.7 million at the end of 2023. Of note, payment for the Red Fox acquisition was made in Q2, while other uses of cash included debt repayments and interest. So, the decline in cash sequentially from Q1 was to be expected. However, on a positive note, we ended the quarter with a higher cash balance than we had forecasted due to progress billing and collecting on some of our longer standing unbilled revenue balance.

Speaker Change: We ended the quarter with cash and cash equivalents of $24 million compared to $42.7 million at the end of 2023.

Speaker Change: Of note, payment for the Red Fox acquisition was made in Q2, while other uses of cash included debt repayments and interest expense.

Speaker Change: So, the decline in cash sequentially from Q1 was to be expected. On a positive note, we ended the quarter with a higher cash balance than we had forecasted due to progress billing and collecting on some of our longer-standing unbilled revenue balances.

Kyle Chriest: Improving our cash position is a top priority and a key to our strategy. We saw progress on this front in the quarter, generating positive cash from operations of $0.8 million compared to cash used in operations in Q2 last year of $6.9 million. As Chuck mentioned, this was the first quarter in two years that Quarterhill has generated positive cash from operations. Our outlook for cash in 2024 is that we expect to generate positive cash from operations for the year and to grow the cash balance through year end.

Speaker Change: Improving our cash position is a top priority and a key to our strategy.

Speaker Change: We saw progress on this front in the quarter, generating positive cash from operations of $0.8 million compared to cash used in operations in Q2 last year of $6.9 million. As Chuck mentioned, this was the first quarter in two years that Quarterhill has generated positive cash from operations.

Chuck Myers: Our outlook for cash in 2024 is that we expect to generate positive cash from operations for the year and to grow the cash balance through year end.

Kyle Chriest: Due to the nature of our business, operating cash flows may vary significantly between periods due to changes in timing and working capital balances, namely with collections and payments. This concludes my review of the financial results, and I'll now turn the call over to the operator for Q&A.

Speaker Change: Due to the nature of our business, operating cash flows may vary significantly between periods due to changes in timing and working capital balances, namely with collections and payments.

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

Operator: Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you'd like to ask a question, please press star one. To withdraw your question, press star two. One moment, please, for your first question. Your first question comes from Graham Smith from Carmark Securities. Please go ahead.

Speaker Change: Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you'd like to ask a question, please press star one. To withdraw your question, press star two. One moment, please, for your first question.

Graham Smith: Hi guys, my first question is just on the expanding sales team or the choice hires that you're making on the sales team. Can you give a bit more color on where you're hiring specifically? That'd be great.

Speaker Change: Your first question comes from Graham Smith from Carmark Securities. Please go ahead.

Graham Smith: Hi guys, my first question is just on the expanding sales team or the choice hires that you're making on the sales team. Can you give a bit more color on where you're hiring specifically? That'd be great.

Charles Myers: The hiring is, as you probably, hi, this is Chuck, by the way. As you may have known, we've kind of significantly cut back on the sales and BD team. So we're starting to strategically hire both in the US, and we've actually made a couple hires in Europe as well.

Graham Smith: The hiring is, as you probably, hi, this is Chuck, by the way. As you may have known, we had kind of significantly cut back on the sales and BD team, so we're starting to strategically hire both in the U.S. and we've actually made a couple hires in Europe as well.

Graham Smith: That's great. Thanks. And then, just on Europe, so now you guys are hiring on in the Salesforce a little bit. Can you talk a bit more about the progress that you've made in the quarter?

Speaker Change: That's great, thanks. And then just on Europe , so now you guys are hiring in the Salesforce a little bit, can you talk a bit more of the progress that you've made in the quarter there?

Charles Myers: We continue to streamline the businesses there. As you know, we have basically four different subsidiaries over there, primarily in the enforcement space, but we're continuing to aggressively look at tolling opportunities there as well.

Speaker Change: We continue to streamline the businesses there. As you know, we have, we have basically four different subsidiaries over there and primarily in the enforcement space, but we're continuing to aggressively look at tolling opportunities.

Graham Smith: Great. And then switching to just tolling. So can you talk about some of the ramping tolling operations that are going from implementation to operations, or maybe how those are progressing?

Speaker Change: there as well.

Speaker Change: Great, and then switching to just tolling, so can you talk about some of the ramping tolling operations that are going from implementation to operations, maybe how those are progressing?

Charles Myers: Progressing quite nicely. There's still a lot of hard work to do, but I think you can see from our numbers that we're making good progress. I think we've significantly improved our relations since I got here with our customers, and that's been a primary focus of mine to wrap those up. But so far, we're pleased with the way our customer relationships are going, and we're making progress. We're almost out of the hot water with any problem contracts, and most of them are starting to convert to the maintenance phase.

Speaker Change: Progressing quite nicely where you know, there's it's still a lot of hard work to do But I think you could see by our numbers. We're making good progress. I think we've significantly improved

Speaker Change: The relations since I've got here with our customers and that's been a primary focus of mine to wrap those up. But so far, we're pleased with the way our customer relationships are going.

Speaker Change: and and we're making progress and we're we're almost out of the hot water with any problem contracts and most of them are starting to convert to the maintenance phase at this point.

Graham Smith: That's great. Thanks. And then just the last one for me.

Graham Smith: Can you maybe just talk about what the sales pipeline looks like in the second half? Are you seeing any particular strength, particular strength in one area? Or is it sort of strong across the business? Any color on that would be really helpful.

Speaker Change: That's great. Thanks. And then just the last one for me. Can you maybe just talk about what the sales pipeline looks in the second half? Are you seeing any particular strength in one area or is it sort of strong across the business? Any color on that would be really helpful.

Charles Myers: Yeah, no, I, we continue to see, you know, we have a positive pipeline going forward. Even, you know, in our, in our businesses, we see a pretty significant pipeline ahead.

Charles Myers: Yeah, no.

Speaker Change: Yeah, no, I we continue to see, you know, we have a we have a positive pipeline going forward.

Speaker Change: Even, you know, in our in our businesses, we see a pretty significant pipeline ahead. We don't see a lot of headwinds. We typically the enforcement business is better in the in the second half of the year.

Graham Smith: We don't see a lot of headwinds. Typically, the enforcement business is better in the second half of the year. And we suspect that tolling will do quite well in the second half as well.

Speaker Change: and we suspect that Tolling will do quite well in the second half as well.

Operator: All right, so I'll pass the line.

Todd Coupland: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Todd Coupland from CIBC. Please go ahead.

Speaker Change: Thanks, I'll pass the line.

Speaker Change: Great. Thank you.

Speaker Change: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Todd Coupland from CIBC. Please go ahead.

Todd Coupland: I wanted to ask about a couple things on the backlog. Are you able to give us an idea how much backlog or how much of a moderate growth plan you have already booked in? So if you think about either the second half of the year or 2025, like how much visibility do you have on your plan at this point?

Speaker Change: Good morning, everyone.

Todd Coupland: I wanted to ask about a couple things on the backlog. Are you able to give us an idea how much backlog or how much of a moderate growth plan

Speaker Change: You have already booked in backlog. So if we think if you think about either the second half of the year or 2025, like, how, how much visibility do you have to your plan at this point?

Charles Myers: Well, pretty, pretty strong. I mean, as you know, it takes a long time to win these contracts, so they tend to be very sticky.

Speaker Change: Well, pretty, pretty strong. I mean, as you know, it takes a long time to win these contracts, so they tend to be very sticky.

Todd Coupland: The enforcement business is growing nicely. And that's obviously more kind of a turn and burn business; you get orders, you book them pretty quick, and they go through. But the tolling business, the two, the combined businesses are roughly still $500 million. We've maintained our backlog. So as we add contracts, and we get add-on change orders to our contracts, we've maintained that $500 million of backlog, which I've always thought was quite impressive for a company that's doing, you know, $150 million a year.

Speaker Change: The enforcement business is growing nicely.

Speaker Change: And that's obviously more kind of a turn-and-burn business. You get orders, you book them pretty quick, and they go through. But the tolling business, the combined businesses are roughly still $500 million. We've maintained our backlog.

Speaker Change: So, as we add contracts and we get add-on change orders to our contracts, we've maintained that $500 million of backlog, which I've always thought was quite impressive for a company that's doing, you know, $150 million a year.

Todd Coupland: Yeah, and this is a little bit off point in terms of your business, but it's a macro environment, Salesforce. Mark Benioff has talked about longer lead times, smaller deals taking longer to close, etc. Can you characterize your pipeline in that context? In that context, you know, you're obviously selling to governments, not enterprises. But you know, there are macro questions because you just talk about, you know, the size of the deals and time to close deals versus, let's say, a quarter ago or six months ago. Thanks a lot.

Speaker Change: Yeah. Yeah. And, and, you know, this is a, this is a little bit off point in terms of your business, but it's, it's, it's a, it's a, I guess,

Speaker Change: Macro environment, Salesforce.

Speaker Change: Mark Benioff has talked about longer lead times, smaller deals, taking longer to close, etc.

Speaker Change: Can you characterize your pipeline in that in that context? You know, you're obviously selling to governments, not enterprises. But you know, there are macro questions because you just talk about like, you know, the size of the deals. Unknown Speaker

Speaker Change: versus, let's say, a quarter ago or six months ago. Thanks a lot.

Charles Myers: I would say we see little impact from that. You know, these are customers, well, if you take the tolling side of the business, and most of these are customers on the enforcement side, are primarily, you know, local agencies, state agencies that require this equipment to maintain the roads and the traffic. On the tolling side, our tolling agencies continue to perform very well and generate a lot of cash. And when they need the systems, they need the systems.

Speaker Change: I would say we see little impact from that.

Speaker Change: You know, these are customers, well, if you take the tolling side of the business, and most of these are customers on the enforcement side, are primarily, you know, a local agency, state agencies that require this equipment to maintain.

Speaker Change: the roads and the traffic, on the tolling side, our tolling agencies continue to perform very well and generate a lot of cash. And, when they need the systems, they need the systems. So, we, I can't say that we see any economic impact.

Charles Myers: So we can't say that we see any economic impact in delaying the systems other than the ordinary, normal course of business that, you know, state and local governments go through when they try to issue bids or tenders and protests. But I would say, unlike Salesforce, we don't we don't see experience that has that impact, and we're a fairly recession-proof business, at least at this level.

Speaker Change: in delaying the systems other than the ordinary normal normal course of business that, you know, state and local governments go through when they try to issue bids or tenders and protests. But I would say, unlike Salesforce, we don't we don't see experience that.

Speaker Change: that impact and we're fairly recession-proof business, at least at this level.

Todd Coupland: Yeah, Chuck, I was just going to sort of take it to that point. So is it a fair assumption to actually take recessionary fears off the table in this business, and it will roll regardless?

Speaker Change: Yeah, Chuck, I was just going to sort of take it to that point. So is it is it a fair assumption to actually take recessionary fears off the table and this business will roll regardless?

Charles Myers: I would think so, but I would think it would have minimal impact.

Speaker Change: I would think so. I would think it would be minimal impact. You know, you never say never, but I don't to the to the contrary, you know, this business is

Speaker Change: The agencies love this business because it's how they generate cash.

Speaker Change: It's fairly recession, at least resistant, let's put it that way.

Todd Coupland: And then just on the technology, you know, in your prepared remarks, you talked about Red Fox quite a bit. How much of a factor is that in your bids now? And maybe just talk in a little bit more detail on why it's important.

Speaker Change: And then just on the technology, you know, you you in your prepared remarks, you talked about Red Fox quite a bit.

Speaker Change: How much of a factor is that in your your bids now? And maybe just talk a little bit in a little bit more detail on why it's important.

Charles Myers: I think it's important, you know, maybe we talk about it a little too much because it's kind of got a cool name. But it's important because it's really the next generation of tolling and vehicle classification. And our focus there really is to get, in the future, as much equipment out of the roadbed as we possibly can. Because that's where our customers, you know, suffer the most problems, and they get the most wear and tear on the road.

Speaker Change: I think it's important, you know, maybe we talk about it a little too much because it's kind of got a cool name, but it's important because it's really the next generation of tolling and vehicle classification and our focus there really is to get

Speaker Change: in the future get as much equipment out of the road bed as we possibly can.

Speaker Change: because that's where our customers, you know, suffer the most problems.

Charles Myers: And if you can do all of this transaction, provide all the transaction capability out above the roadbed or on the side of the road, that's what our customers are really looking for. And I think Red Fox does a good job getting us to that point.

Speaker Change: and they get the more swear and tear on the road. And if you can do all of this transaction, provide all the transaction capability out above the roadbed or on the side of the road, that's what our customers are really looking for. And I think Red Fox does a good job.

Todd Coupland: Is it unique in the market? Just just talk about its competitiveness. Yeah, I would.

Speaker Change: getting us to that point.

Speaker Change: Is it unique in the market? Just talk about its competitive position.

Charles Myers: Yeah, I would say it's unique in the market. Most of the other ABC systems use a lot of instrumentation embedded in the roadway.

Speaker Change: Yeah, I would say it's unique in the market. Most of any of the other ABC systems use a lot of instrumentation embedded in the roadway.

Todd Coupland: That's all I had. I appreciate the color. Thanks a lot. Thanks, Ted.

John Gillberry: and John Gillberry.

John Gillberry: That's all I had. Appreciate the color. Thanks a lot. Thanks, Tuck.

Steven Li: Your next question comes from Steven Li from Raymond James. Please go ahead.

Steven Li: Thank you. Hey Chuck, Kyle. I was curious to find out if Weber was de facto a

John Gillberry: Your next question comes from Stephen Lee from Raymond James. Please go ahead.

Stephen Lee: Thank you. Hey Chuck, Kyle. I was curious to find out if Weber was a factor at all in Q2?

Steven Li: If the weather was a factor in Q2,

Speaker Change: Could you say that again, Stephen, sir? If the weather was a factor in Q2.

Charles Myers: No, no, there's we had no impact from weather in Q2. Okay.

Steven Li: Okay, all right. And then Chuck, when you speak of strong visibility in the second half, does that also mean that the quarterly revenues in the second half are going to be similar to Q2 or maybe even higher from Q2?

Speaker Change: No, no, there's we had no impact from weather in Q2.

Speaker Change: Okay. All right. And then Chuck, when you speak of strong visibility in the second half, does that also mean that the quarterly revenues in the second half is going to be similar to Q2 or maybe even up from Q2?

Kyle Chriest: You know, like Kyle, take that question.

Kyle Chriest: Yeah, with the strong visibility, we have a lot of our revenues right now that we're looking into the next two quarters finish of the year underneath our backlog. We have some projected revenues on change orders and things that would be a little less predictable due to the timing of customer awards. But the majority of our 2024 projects and projected revenue is in our sightline. We were giving prior guidance that we expect or hope to achieve close to double-digit growth year over year in total revenues, and I think we're still getting close to that and projecting that.

Speaker Change: Yeah, with the strong visibility, we have a lot of our revenues right now that we're looking into the next two quarters finish of the year underneath our backlog.

Speaker Change: We have some projected revenues on change orders and things that would be a little less predictable due to the timing of customer award, but the majority of our 2024 projects and projected revenue is in our sight line.

Speaker Change: We were giving prior guidance that we expect or hope to achieve close to double-digit growth year over year in total revenues, and I think we're still getting close to that and projecting there.

Steven Li: All right, that's perfect. Thanks.

Operator: Thanks, Steven.

Charles Myers: And there are no further questions at this time. I will turn the call back over to Mr. Myers for closing remarks.

Speaker Change: All right, that's perfect. Thanks.

Stephen Lee: Thanks, Stephen.

Speaker Change: And there are no further questions at this time. I will turn the call back over to Mr. Myers for closing remarks.

Charles Myers: Thank you, Operator. With that, I thank everybody for participating in today's call.

Speaker Change: Great.

Charles Myers: We look forward to speaking to you and keeping you informed of our progress in the coming months. As always, I want to thank the employees and all of our partners in this business. We work hard. We want to do well for our investors. We want to grow the company. I sincerely appreciate the time and effort our dedicated employees put into this business. Thank you very much.

Speaker Change: Thank you, Operator. With that, thank you everybody for participating in today's call. We look forward to speaking to you and keep you informed of our progress in the coming months. And as always, I want to thank the employees

Speaker Change: and all of our partners in this business. You know, we work hard. We wanna do well for our investors. We wanna grow the company. And I sincerely appreciate the time and an effort or, you know, our dedicated employees put into this business and so thank you very much.

Operator: Ladies and gentlemen, this concludes your conference call for today. You may now disconnect. Thank you.

Speaker Change: Ladies and gentlemen, this concludes your conference call for today. You may now disconnect. Thank you.

Todd Coupland: You know, you never say never, but I don't. On the contrary, this business is they, the agencies love this business because, you know, they needed to. It's how they generate cash. So it's fairly recession-resistant, at least. Let's put it that way.

Kyle Chriest: In general, we expect gross margin percentage to continue to increase as we move through 2024. The year-over-year decrease in Q2 was primarily due to one tooling project that is in the maintenance phase but experiencing a transitory period of lower-than-expected margin, which we expect to resolve in the coming quarter. The growth margin percentage decrease was partially offset by continued strong margin performance from our enforcement. Total operating expenses for Q2 2024 were $10.8 million compared to $10.6 million in Q2 2023. Year-to-date OPEX was $21.2 million, down from $22.2 million in the same period last year.