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Q-Free ASA
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Welcome to Q-Free's Presentation of First Quarter 2019 Results. My name is Håkon Volldal. I'm the CEO; and with me today, I have Tor Eirik Knutsen, our CFO.If you look at the highlights from the first quarter, we booked NOK 223 million in revenues. That's up 9% all organic growth driven by 25% increase in our non-tolling businesses. Tolling was flat. EBITDA in the quarter was NOK 9 million. We're not pleased with that. It's down from NOK 60 million in the first quarter 2018 due to customer product mix effects that we will comment on a bit later. The result was also positively impacted by IFRS 16 with NOK 5 million. What we are very happy with is the order intake in the quarter. So despite no really big order happening in the first quarter, we booked NOK 298 million in order intake, which is up 47% versus the first quarter in 2018. And actually, this is the sixth quarter, sixth consecutive quarter, with a book-to-bill ratio above 1 and quarter-on-quarter growth. So the momentum in our order intake is very strong. Hence, also the order backlog increased. It's up 16% versus 1 year ago to almost NOK 1.2 billion. And as a consequence of the good order intake in previous quarters and a strong backlog, we have now booked NOK 734 million in 2019 revenues already, of which NOK 211 million were secured for the second quarter at the end of the first. And this is actually 29% above what we have secured for 2018 at the end of the first quarter last year.If we look at some more details, revenue is up 9%. This was driven by good order intake in previous quarters. Where you can see there's a big drop is on the gross margin side, and this is due to product and customer mix effects, in particular in tolling. OpEx was stable. But due to the gross margin effect, we booked NOK 9 million in EBITDA versus NOK 16 million 1 year ago.If we look at the different business areas, we have 5 segments. We have tolling, parking, infomobility, urban, inter-urban. Starting with the largest segments, tolling. In tolling, revenues were flat. Europe was down. Last year, we had high deliveries to Slovenia also in the first quarter 2018. Denmark partly compensated for that, but overall we were down in Europe. And in Americas, we were up due to project deliveries in Chile and increased tolling revenues in the U.S.EBITDA, down by NOK 14 million. Unfavorable customer mix and prices were tags. We have different prices with different customers. There are different competitive situations in different markets. And in the first quarter, we got big volumes from markets with low prices.Is it okay, now? Okay. So on the tolling side, revenues were flat. EBITDA, down due to unfavorable customer mix and prices were tags. Again, as I said, we have different prices in different markets, and in the first quarter, prices were impacted by high volumes due to markets with lower margins. We also have lower margins on ongoing project deliveries. Last year, we had -- we were in the final stages of delivering the Slovenia project. That's where we typically high margins on a project. In the first quarter this year, we are in the early phases of project deliveries in Denmark. And also bearing in mind that in the first half of 2018, order intake was slow. We have secured some contracts in order to cover costs, and some of these contracts have lower margins than we expect to have going forward on new contracts. So we struggled a little bit with margins right now based on previously signed contracts.Also in tolling, significant order increase. Book-to-bill way above 1. We have a ferry contract that we signed in Norway for NOK 50 million. We signed a tolling project in Australia and we have also several smaller products service contracts. So we're happy with the order intake. The margin on some of the newer contracts that we have won is significantly better than the margin on the contracts we deliver at the moment.Parking has been a business area where we have booked big losses in previous years. We have restructured that particular segment. We divested our operations in Malta last year. And despite that, revenues are up. We had a good start in the U.S. selling parking guidance solutions, so revenues almost up 80%. As a consequence of the higher revenues and cost improvements, we are now down to minus 1 in EBITDA in the segments, and we expect to break even during the year based on increased sales.We had a good order intake in the month, NOK 29 million contract in the U.S.. However, NOK 20 million in pass-through revenues with low margins. So that's something we need to be transparent about. And we will probably book high revenues in the second and third quarter in parking, but some of that will be third-party pass-through revenues, meaning electrical installation work and things like that. Customers sometimes require us to take the full responsibility for the delivery and then we apply of course a margin on that but there's a limit as to how high a margin you can have on that work. And rather than saying no to the contracts, we take the full responsibility. And this is partly a change from how it has worked historically where customers have contracted in several third-party providers, now they want one sole contractor.Infomobility had a good start. Revenues up driven by strong performance in particular in the U.K, so up NOK 5 million. EBITDA also strong in the quarter due to the revenue growth and also some ALPR sales. The license plate recognition technology has a high margin and that, of course, impacts EBITDA positively. And we also see continued growth in order intake year-over-year.In the Urban segment, revenues were up. Last year, we had some delivery issues based on shortage of components. So first quarter was good in that respect, but this quarter does not reflect the true earnings potential in the segment. Like last year, we had predominantly hardware deliveries, and profitability is very much driven by software. So we expect software contracts to be signed and delivered in the coming quarters. So EBITDA, low in the quarter, better than last year, but not on the level that we expect going forward. We have good order intake in the segment and a very good pipeline of opportunities, in particular for software. So it's the software part that will drive this segment going forward.Inter-urban, relatively flat revenues, partly down. It's due to phasing of revenues in the U.S. and also in Slovenia where we have a small inter-urban operation. Slovenia is of course not related to the truck tolling part but to monitoring of the highway infrastructure in Slovenia. EBITDA expected to increase in coming quarters. Several new contracts that we expect to sign both renewals of existing contracts because this is a sticky business. Customers have invested in big software systems, and it's difficult to swap these systems out. So we expect to renew some of our key contracts and also to sign new contracts in the coming quarters.If we look at segment profitability, it's in line with what we have seen in past quarters with the exception of urban. And again, that's related to the revenue mix, the software side. And also on the tolling side, margin is lower than last year based on customer and revenue mix. So we're doing better in parking. Inter-urban, infomobility, okay. Urban is something we expect to improve going forward and also tolling. However, that might take a little bit more time.Would you do the financial, Tor Eirik?
Financial update. 9% revenue growth in the quarter, very pleased with that, in line with our plans and what we have guided on in terms of growth. Most of the growth this quarter was driven from America. We actually had 45% revenue growth in the America region. And as Håkon said, 25% growth from the non-tolling business, so we're very pleased with that.EBITDA is down due to gross margin reductions. And I would rather spend some time explaining how gross margin in Q-Free actually is driven, and by that we have prepared a slide showing a little bit the gross margin drivers in Q-Free to basically to educate everybody following us on why can we have a margin drop of 10% from one quarter to a quarter. So to understand Q-Free, I think, first of all, when I see Q-Free and the margins, I distinguish and I divide the business into 3 actually. You have the tolling and the inter-urban business where you basically deliver quite a lot of revenues on your fixed cost base. One of the first things we did when I joined Q-Free was to freeze a little bit our cost base. Instead of moving the cost from fixed up to COGS when you deliver a project, we decided that all employees in Q-Free is in the OpEx. So when you have a project in tolling where you, for example, deliver a software, you generate a lot of revenue based on your fixed cost base, and as such, you have no cost of goods sold and very limited contractor cost. And the same is actually also in inter-urban where a lot of our fixed cost base is generating revenues. For example, in inter-urban, we have fixed cost base of NOK 80 million. Those NOK 80 million generate a lot of revenues. So you when you have a drop in revenues, that affects the gross margin in urban more or less immediately or the gross contribution.So if you look at urban, as Håkon says, software is really the main driver there in terms of margin improvement. We also have done a lot of cost engineering on our controllers, so when we see a margin improvement this quarter, it's mainly because we have managed to reduce cost on our hardware base.In the parking and infomobility, this is products -- and your fixed cost base is fixed, quite fixed and you have a typical normal marginal cost when you sell. So in parking, the only thing differentiating there is the amount of external contractors you use when you deliver a project, and that can differ from project-to-project.So if you look at tolling, for example, this quarter versus last quarter our service and operations are stable, good, decent margins. On the product sales, this quarter, we have, as Håkon said, an unfavorable customer mix. And on the project sales, we have a significant, I would say, difference in terms of which revenues is reflected this quarter versus last quarter. Last quarter, most of the revenues we generated in Slovenia was writing of software where we basically have 100% gross margin from a P&L point of view. This quarter, we are delivering the Great Belt Bridge, some projects in Spain, some projects in Norway where we will actually install gantries. And then as such, we have a lot of hardware and we also use quite a lot of external contractors. For example, in Denmark, a market which is new for us, we don't have a set assets, revenues are the same, but we have a totally different cost base. And the fixed costs unfortunately are the same. So it's all about how you utilize that. And as he says, the gross margin driver in tolling, there's a quite huge amount of nature of project. And what you're dealing with and discussing today in Q-Free is now based on this and, as you know, have a much stronger backlog. We can actually afford to think a little bit about which projects are we going to put our efforts on and which projects are we not going to put our effort on based on Q-Free's strengths and weaknesses in our business model. So I think going forward now, we are thinking a lot on these drivers. And going forward, it's very important for us to focus on projects and mixes which generates sound, good profit for us.Of course, order intake, as Håkon has mentioned, is very sound and good, NOK 300 million in the quarter, it's 47% up from last quarter. If you look in the tolling, this quarter is dominated by Norway and APMEA regions where we historically have struggled a little bit over last couple of years. So -- and we also have a mix in tolling now which is quite satisfactory with projects, yes, quite well distributed all over the world.Håkon will come back to the backlog and tell what that means in terms of the 2019 revenues. I can also say we have a quite good visibility for the third quarter already secured. Cash flow-wise, we are down NOK 27 million free cash flow this quarter. Of course, when you have only NOK 3 million EBITDA, adjusted for IFRS and you have a CapEx which is normal and the working capital effect is basically related to the [indiscernible] close down, so we accrued for that in the fourth quarter, and now in the first quarter, we have to pay out severances and cleanup the businesses down there. So that's why the working capital is negative. And then as we are exposed to foreign currencies, we have some currency effects on the working capital, et cetera, which goes into the currency and finance box.We have NOK 147 million in available cash going into 2Q. Balance sheet-wise, not a lot of changes. Just want to make a note of the IFRS 16, and that affects the other noncurrent assets with around NOK 60 million. Besides that, there's not a lot of changes. And if you look at our NIMD, it's stable around NOK 150 million. It's been there for the last year. And it's worth mentioning that, of course, during that period, we have acquired some Intelight shares and we have done some cleanup in the portfolio, so the company has generated cash. It's not just that we are earning with one hand and spending it with the next. So I think, Håkon, you're going to give the outlook.
Okay. So outlook. We have some financial goals that we have communicated. We've said that we want to generate at least 10% organic revenue growth. That means we need a book-to-bill on the order intake side above 1.1 to support that goal. So these 2 goals are related. On the profitability side, we target double-digit EBITDA margins, ideally higher, but that depends on the product mix. If we sell a lot of software in a given year or a given period, that -- EBITDA margin could be significantly higher. If we don't, then it will be below 10%. So there will be fluctuations in the profitability, the EBITDA margin in the coming quarters as we've seen in the past based on revenue mix. It's impossible during a 3-month period to generate or to book and deliver exactly X number of software contracts or X million NOK in software revenues. That's very difficult given our size and segments.But what we see and which we like is, of course, the momentum we have on the revenue side. We have been quite good at managing our cost base. Our OpEx base is at the same level as it was a couple of years ago despite revenues gone up. So we intend to control cost, and we need increased revenues to generate operational leverage and better margins and also to compensate for some fluctuations in margins on the tolling side.What we had last year at the end of the first quarter was revenues of NOK 204 million that we've taken to P&L in the first quarter, and then we have secured an additional NOK 364 million for the remaining quarters. That meant at the end of March last year, we knew we would be able to deliver NOK 568 million provided no leakage or slippage.On top of what we had in the order backlog, we generated NOK 320 million on that, and we ended up with NOK 888 million. In the first quarter this year, NOK 223 million, 9% increase, and our backlog for the coming 3 quarters is NOK 511 million. So that means already we have secured revenues of NOK 734 million. I'm not going to give a specific guidance on what will happen in the coming 3 quarters, but if we book the same amount as we did in the 3 last quarters last year this year, then we end up with roughly NOK 1.050 billion. If we do better and we have growth in the coming quarters, we will be closer to NOK 1.1 billion, or even above that. So you can do the math. But at least at the moment, we're 29% above last year. And that's -- gives us comfort around the fact that we will deliver increased revenues in the coming quarters and that will help also our margins.Will this continue? We are quite happy and pleased with the opportunity pipeline. I think when we look back to 2017 and the first part of 2018, we had solid EBITDA margins. Everybody was pleased with that. But we were not happy necessarily with the order intake, so they asked me can you do something with the order intake. Yes, we could. We have done that. Some of the contracts we won or that we took had a lower margin than we targeted, and that's also part of the reason why we see the drop in gross margin especially on the tolling side. But if you look at the opportunity pipeline, it's stronger than ever. We had NOK 300 million in the first quarter. In the second quarter, there are a number of projects and tenders that we expect to be awarded worth roughly NOK 600 million. Third quarter, we're talking NOK 1 billion. And in the fourth quarter, NOK 600 million. And bear in mind that there opportunities that pop up along the way. So by now, we are looking at a total order pipeline of NOK 2.5 billion. I'm not saying we will win all of that. But an order intake in excess of NOK 1 billion and a book-to-bill of clearly above 1.1 is within reach definitely for 2019. There are numerous opportunities. What we list here are projects that we're well positioned to win. So we expect the momentum on the order intake side to continue. That gives us comfort around revenues, and ultimately with higher revenues, as long as we manage our cost base, we will get margin improvement. We can already now with confidence say that the second quarter will be better in terms of EBITDA performance than the first quarter.The third and fourth quarter, too early to judge. But based on the revenue side, we expect also the second half to be better than the first half.So in terms of visibility on the order intake side, it's better than ever. The mix will decide how big EBITDA improvement will be. But bear in mind that a lot of the contracts are actually software contracts with high margin. And if we can win and deliver those, you will see the same effect as you saw in the second quarter last year with very high margins.Now also want to share with you at the end some of the things we are working on. It's not just numbers and Excel spreadsheets or PowerPoint in this case. There's also actually real work going on in Q-Free. Last week, we were on the national news in Norway for piloting so-called geofencing solutions, which means you have, in this case, we equipped a hybrid vehicle with some technology that would allow us to detect whether this hybrid vehicle was running on its electric engine or its diesel engine. And when you do that, you can basically set up a virtual zone. And when this hybrid vehicle enters this virtual zone, which could be a low emission zone, you can tell the driver to switch to electric mode, or you can actually override the vehicle and automatically set it to electric mode. That means you can do a lot with this geofencing technology. You can also control speed, speed limits close to, let's say, schools during school hours. You can override the vehicle and automatically lower the speed or at least you can inform the driver and let the driver and know that you need to slow down. You can also use this for future tolling applications because this is a zone-based system where you can have, let's say, different zones around the country and you can charge drivers based on distance. So this is a concept for mileage-based road usage charging, which politicians love to talk about these days. But they struggle to find a technical solution. We have technology that you can actually use for this future applications. We installed our outdoor parking sensor in the U.S. First commercial installation is now in the ground in California. We expect more of these projects to happen. We integrated our cycle and pedestrian counting technology on our hub technology, which is the same platform we use for parking. So whether it's this sensor or bicycle and pedestrian detection sensor, you use the same software behind to basically analyze and report data.With data-connected vehicle test with Tesla, again, what you see on the screen is the usual Tesla dashboard, and what we can do is that we can feed information to the screen. You can send it from the Traffic Management Control Center. You can send it from a traffic signal. So a traffic signal that is red then will turn to green can -- you will see that on the dashboard, that in 5 seconds the red light will turn to green. So we're already playing with connected vehicles and what will in the future be autonomous vehicles or automated vehicles.The same we're doing on the traffic intersection side in the U.S. Q-Free is a company with the most intersections prepared for connected vehicles. That means you can send a binary signal from the traffic light to the vehicle, to tell the vehicle whether it's red or green. You don't need to rely on camera technology to detect it to get the binary signal. And you also get the signal phasing and timing information, which means, over time, the vehicle can adapt that speed in order to maximize throughput through the intersection. It will stop and prevent you from going if it's red. It will adjust the speed to allow you to pass through the intersection without getting to a complete stop.And in Thailand, we're working on some new innovations on the tolling side. We have developed technology that will allow operators to use 1 lane both for electronic tolling and manual tolling. So these are some of the things we're working on. Of course, we're doing more than that. But I think especially on the connected vehicle side and also on the geofencing side, it's important to let you know that we are investing time, money and resources into the future. It's not only about what we're doing today, but it's also about creating opportunities in the years ahead. I feel that we have a good momentum in terms of developing new solid business ideas for Q-Free on top of what we've done historically. Then Q&A.
I have 3 questions for you at this time. The first one is you briefly touched upon it, on the backlog, I guess when you secured backlog some years ago, I guess you didn't expect to deliver those margins today. So can you just briefly touch upon the dynamic between the backlog and EBITDA margin and how you kind of think on those 2, i.e., is there a risk that Q1 '19 will happen again basically is what I'm asking. The second one is, was 2018 a normal year in terms of have you booked revenues for 2018 as of Q1 last year compared to this year [ so long as ] you compare apples with apples? And then third one is related to what you talk about Q2 with better margins, can you say how much better? Can you say it's in line with your guidance? Is it above or below? And what are kind of the key drivers for improved margin in Q2?
There's so many questions that I've almost forgotten them. The first one was related to?
Backlog and margins.
And margins?
Yes.
So the backlog is a mix of different things. There are very high almost 100% gross margin contracts in there. And there are lower-margin, let's call it, projects with a lot of third-party content. So there's a mix in there. I think in general, it's on the tolling side. I think what we are delivering at the moment is not representable for what you will see going forward. We expect margins on future deliveries to be higher than what we see at the moment. So it's what I would call a temporary downturn in terms of project profitability.
But can you see that on -- if you go back in your [ backlog ] and you secured the backlog that you've delivered on in Q1 today, can you see that there's a difference on the margin back then compared to what backlog you secured today?
I can say that the projects we delivered now, we knew had a low margin when we took them because that was a period where the book-to-bill was 0.5. So we needed to secure revenues in order to basically cover OpEx. So some of that effect you see in this quarter.
I will comment on. If you go to 2017, you look at the first quarter there, that's also a start-up of Slovenia. So we had one big project and we started very conservatively. You have a lot of contingencies, so when you book the revenues, you are kind of careful revenue recognition in the beginning, and then you get confirms that project will happen as planned and you dare to improve the margins and remove contingencies. So that's why I will say last year was probably, from a project revenue point of view, too high. Now we have a much broader mix of projects that are -- and going forward, you will see projects in different stages much more hedged, diversified portfolio. So in Q1 though we have taken a very careful approach on Denmark, and we have some projects in Chile which is also in early phase. So if you look into the projects we currently have, they are -- they will be much better in the backlog we have going forward in terms of margins. But we also expect to sign in new projects that will -- so the mix of projects will, yes, reduce the overall gross margin in tolling.
If you go to the back to first quarter 2017, the margin is actually not that different from what we had this quarter. So last year was probably too good, and this year, it's too low compared to what we expect.Also, when you take projects, sometimes, there's a high margin on the initial system delivery and a lower margin on service and maintenance. And in other cases, you have a low margin on the initial delivery and higher margin on service and delivery. It depends on the contract structure and some of the tactical bidding around that. So I would say, I wouldn't extrapolate tolling margins into eternity based on Q1 2019.
And the second one was regarding -- was 2018 in terms of what you booked year-to-date as of Q1 in last year a normal year in terms of 2019? So we can compare apples with apples from the slide you showed at the end there?
Yes, and I think that was also a little bit a problem in 2018 that we knew that unless we could speed up the order intake, 2019 would be slow. So again, we took a couple of contracts with lower margins because that would cover cost, and then the extra profit will have to come from the higher-margin contracts that you typically win in our bread-and-butter business, the NOK 10 million, NOK 15 million, NOK 20 million high-margin software contracts that we're waiting for. Q1 had nothing. That's atypical. So that answers also your third question. I will not give specific guidance on what we expect in the coming quarters. I think I said it, the second quarter will be much better than the first quarter. I think second half will be better than the first half. That's as far as we would like to go. We also don't have perfect visibility on the high-margin contracts. But I will be very surprised not to see them happening because we have, have them in 2017. We have them in 2018. More of them in 2018 than in '17. We expect more of them in 2019 than in '18. But in Q1, we had nothing. So we already know that we had a couple of signs that we can take to P&L in the second quarter and that will help the profitability.
A quick question related to Jakarta. Will there be any negative effects from Jakarta in the second quarter and onwards for 2019?
I don't expect that. We accrued quite significant amount in the fourth quarter, so what we did now in the first quarter was basically to pay that. And I can say that when I monitor the payments done according to - compared with the provision, we are quite in line and probably have some headroom for some risk. So -- but we are in Jakarta and Indonesia, and we're dealing with government and tax authorities. So -- but as we have made so much losses over the years, I would not expect them to come and claim us to pay taxes. But you never know in Indonesia. That's why I'm a little bit -- have to take some reservations.
On the connected cars, European Union has come for this ITS-G5 standard. I understand that that's a bit further down the road in terms of implementation, but can you say anything about Q-Free's opportunities in that space with regards to that technology?
Yes, so we've had people from our side participating in a lot of work that has basically recommended European Union to go for this G5 standard. Of course, there's some confusion around 5G and G5. I think our perspective is that if we want something to happen now and in the short-to-midterm, you need to go with G5 and we have technology developed for that purpose. So the technology that I commented on related to the Tesla motors test we did in Norway, the geofencing test is all based on hardware and software. That is in accordance with G5. Over time, I think 5G will replace G5. But again, we're talking several years, and then there's no standard. And probably if we think about telecoms, they promised us the world with 3G and we have to wait for 4G. So maybe we have to wait for 6G, and nobody knows what 6G is yet. So I think it will take some time, and that's a good window of opportunities for companies like Q-Free to put out G5 technology. So we have onboard units and roadside station that you can use in order to communicate infrastructure-to-vehicle, vehicle-to- vehicle and vehicle-to-infrastructure. So X-to-X.
There was one question regarding the share and the visibility of the company in the equity market. You have not attended any of these conferences, for instance, with D&B. Are we going to do that in the future?
Yes, we participate some conferences. We have one coming up later this year. But again, how many conferences we participate in and the relevance we need to look into. That we can do more on the IR side probably, yes, you can always do that. And then the question is how do you balance your time and how do you create the most value for shareholders.
There's also a good idea from, they say a very friendly guy, on the side here, if you want to be part of the ESG wave going on these days, you could change the background color of your logo to green. What do you think about that?
It will cost a lot of money to implement a green logo. We said that we will be cost-conscious. So I don't know. I think we'll stick to red.
You have 5 divisions and some of them are a little bit small. At the same time, you're chasing contracts all over the globe, not necessarily all over the globe but quite many countries. Are Q-Free big enough or do you have the necessary size to be profitable in all divisions the way the organization is today?
I think the complexity of the business is something we have worked on for at least the last 3 years to bring it down, so we have pulled out of several markets: Brazil, Serbia, Malta, South Africa, Indonesia. We have closed down a couple of business areas: homeland security, parking revenue management. There will always be considerations around do we have the optimal portfolio mix, and I will not leave out the opportunity that we might make changes to the portfolio. It might be that we decide to strengthen certain parts and exit other parts. But I don't think, I don't think -- it depends also on the business model. You can be extremely big and have no, no profits. You can be small and do really good profit. Our ALPR business is very small. It's extremely profitable. It's just software sales. So it really depends all on the business model inside each of these businesses. But I think as a general rule, we have worked and we'll continue to work in order to reduce complexity in the business.Do we have questions online?
Yes, it is. Given that Q1 revenue growth in parking, the increased order backlog in parking and the new products in parking, would it be fair to say that parking should reach full year positive EBITDA in 2019 based on an assumption about increased revenue? Also, what is the profitability on the new parking solutions for Q-Free relative to group margins?
So we've said that we expect parking to breakeven during 2019, I think we are not that far away in Q1. I don't want to make any promises that parking will be EBITDA positive in 2019, but it will be significantly better than in 2018. And of course, unless we can turn parking into profits, there's no point doing it. So -- we have to give it some time. The revenue increase of 80% in the first quarter, we don't expect 80% in each and every quarter going forward. And also some of that revenue is low margin, as I said, pass-through revenue. So I think our ambition is to get close to breakeven for the year. But then we've done a good job, and then profit will start to come in 2020 because it is a scale business. If we look at the new sensor, if we sell that with the software contracts, we bundle it with the software contract as we do it, it will be margin-accretive on group level.
The profitability goal, the above 10% EBITDA margin goal, it's difficult to assess with IFRS 16 adoption. Can you therefore say something about the operating cash flow, free cash flow goal for 2019 on an assumption that you don't undertake major new working capital-heavy projects?
That's a technically very difficult question to answer.
If you do the math, our target is 10% EBITDA. We have a 3% to 3.5% CapEx, so then you're at 7%, 6.5%- 7%. Then it's all about how [ you deal and ] manage your working capital. And our working capital at the moment is around 16%-17%, fluctuates a little bit. But given that range, Q-Free should be able to generate plus/minus 5% free cash on the revenue base. But the biggest risk there is the working cap. Our finance costs, we have currency effect, et cetera, et cetera. but our finance costs are stable and quite, quite easy to predict.
The reason we cannot be more specific when it comes to this is that it also depends on where we get new contracts. In some markets, you get paid upon signing the contract, so you get some working capital funding. Typically 10% of the contract value you get in order to have some working capital. In other markets, you have to fund everything yourself. And on some contracts, there are easy milestones initially with big payments. In other contracts you get almost everything when you have the FAT or SAT when have delivered it when it's actually approved by the customer. So the cash flow on the projects vary a lot between the different segments but also within the different segments depending on which customer you're dealing with and which market you operate in. So the working capital part is difficult to handle because there will always be fluctuations in that. It is hard to sort of within specific quarters to pinpoint what will it be. On an annual level it's much easier. As Tor Eirik said, it's usually around 15%-16% of revenues. So as we grow, we need more working capital also.
The annual IFRS 16 effect on EBITDA is around NOK 20 million. That was part of my calculation here when I came to around 5% free cash. Of course, that affect if it hits our finance line. It's not the CapEx. It's a finance costs, appears as a finance costs in our cash flow statements.
You explained a low profitability on tolling due to sales of low gross margin DSRC tags. But while tags have a low gross margin, the sales of tags should require very little OpEx to sell. Shouldn't therefore sales of tags be accretive to the EBITDA margin while dilutive to gross margin?
Yes, but some of that OpEx we have, we invest in R&D and new activities, so that margin from tags is needed to cover the fixed cost base. My salary, Board salaries, all the fixed expenses Q-Free, we need the contribution from tags in order to do that. And what we're saying is that, that contribution from tags sale in the first quarter 2019 was lower than the contribution in 2018. So yes, it had a negative impact on gross margin, but it also goes straight to the bottom line because the fixed cost is the same. So it can't be accretive.
In January, Q-Free terminated discussions about strategic alternatives for the company. Is Q-Free still working with strategic alternatives for the company?
Not proactively.
That's all from the web.
Okay. Then thank you. Thanks for attending.