Q-Free ASA

OSE:QFR

Earnings Call Transcript 2022-Q1

[Håkon Volldal, executive]

Good morning, everybody, and welcome to Q-Free's first quarter 2022 presentation. My name is Hakon Volldal. I am the CEO. With me today, I have the Chair of the Board, Trond Valvik; and our CFO, Trond Christensen.

I'm pleased to spend time with you sharing the first quarter results. We think it's a strong report. And it contains both for the quarter good results, but also significant improvements in order intake and other operational measures.

Before we get to the numbers, I would like to recap a little bit the Q-Free story. So bear with me for a couple of minutes while I go through the basics. Q-Free is a prime mover in intelligent traffic solutions, and we focus on creating traffic technology solutions that enable efficient, sustainable and safe transportation of goods and people. We are a company that has its roots back to 1984. We went public 20 years ago. We have offices in 15 countries around the world. We sell to more than 50 markets. We have revenues close to NOK 900 million. And last year, we had an EBITDA margin of 12%. Roughly 1/3 of sales happens in Americas, 60% in Europe and 10% in Asia Pacific, Middle East and Africa. And also, if you look at our employee base of 340 transportation professionals, 25% are located in North America and Chile, we have 65% across Europe and 10% in Australia and Thailand.

Q-Free has a history of prime mover projects from the early commercial breakthrough back in '84, '86 and 1990 in Oslo through a standard international expansion period from the early '90s to 2012. Then we acquired a lot of companies in adjacent businesses to tolling. We were a pure-play tolling company until 2012, and then we entered into other niches of the ITS market like traffic management. And then for the past 4, 5 years, we have optimized our portfolio and market presence.

We have a simple purpose based on creating solutions for efficient, safe and sustainable transportation. We address the 3 key challenges on modern mobility like congestion, accidents and pollution. And we do that through various solutions and services structured around Q-Flow, Q-Safe and Q-Clean. We operate through 2 autonomous business units. The first one is Tolling, where we have a complete solutions offering from hardware products to turnkey roadside stations to software back-office solutions and special solutions for license plate recognition. 225 employees, NOK 600 million in revenues and Europe as the most important region, but also sales in the Americas and in Asia.

Traffic Management. We focus on a single management operation. So we have traffic signal controllers and local software. We have centralized software platforms for managing systems of intersections. And then we do also freeway management software systems, the top-level software systems used for managing traffic on highways, and we provide traffic counting classification and weigh-in-motion systems. 120 employees, roughly NOK 300 million in revenues and the most important reason being Americas, although we also have sales in Europe and in Asia.

We have left a significant footprint despite our, let's say, small size compared to some of our competitors. We have an impressive list of references. I'm not going to go through all of these [ tombstones ], but we have lots of prestigious projects both in tolling and traffic management that we are very proud of and that we are recognized for globally.

Q-Free addresses a large global market. We have leading position in DSRC-based tolling globally and in traffic management in North America. We have, as I said, leading technology and unique references. We have a very skilled employee base consisting of almost 350 people. We have a clear strategic plan to exploit market opportunities, which I will share with you a bit later. And I think we have attractive financials with increasing annual recurring revenues and margins.

Now on to the first quarter. As I said, we are quite pleased with the results in the first quarter, and here's why. Revenues increased by 13% to NOK 216 million. And annualized, we now have recurring revenues of NOK 280 million, up 22% compared to last year. In the quarter, we had NOK 70 million on recurring contracts compared to NOK 57 million last year. And as you can see from the report, we have introduced ARR as our new APM. So a new KPI that we will report on and follow. And this metric is important to us. We started with a very low base, is continuously increasing. And now we are at more than 1/3 of revenues coming from recurring revenue contracts.

Profitability in the quarter. NOK 16 million. That's before a NOK 6 million provision for losses in Ukraine. So including the provision, it's NOK 10 million. But comparing to last year, it's 22% up if we exclude Ukraine. Same for EBIT, NOK 3 million versus a loss of NOK 1 million last year, again, excluding Ukraine.

Order intake was stellar in the quarter, more than NOK 0.5 billion. And I think we have to go back to the third quarter in 2016 to find a comparable number. So very pleased to see that, up 17% compared to the very strong quarter last year. So NOK 507 million in order intake. Order backlog then increased to almost NOK 1.4 billion, up 4% year-on-year. Cash flow from operations was strong, NOK 35 million positive compared to a negative cash flow last year of NOK 5 million. And our net interest-bearing debt has been significantly reduced. I think it's now NOK 123 million, and that was a mid-EBITDA ratio of 1.2 only.

Now the NOK 500 million in order intake was driven by several key contract wins in the quarter. Started with Spain, where we won contracts for roadside equipment deliveries in the northern part of Spain, valued at roughly NOK 50 million in system revenues and recurring service and maintenance revenues. Then we won several key contracts in Norway. Started with Ålesund to deliver roadside equipment for what we call the Bypakke or city packaged Ålesund. Trondheim followed and then Tromsø. And a bit later, another agreement for some sections of the E6 highway in Norway and some regional roads. All of these 4 contracts are recurring revenue contracts. Ålesund will generate more than NOK 2.5 million per year over 15 years; Trondheim will be roughly NOK 8 million per year over 15 years; Tromsø will be more than NOK 4 million over 15 years; and the fourth and final contract we signed for E6++, more than NOK 2 million over 15 years. So these are long-term contracts with a high value, and also gives Q-Free a significant increased presence in Norway. And then we ended the quarter by signing a key tag contract. I think it's one of our largest ever in Portugal for more than NOK 100 million over 3 years.

In early April, after closing the first quarter, we also announced a key contract in the U.S. Very pleased to see that we have entered into an additional agreement with one of our existing customers for a statewide ATMS in the U.S. It's an agreement that adds scope to an existing contract and includes cloud infrastructure hosting and cloud support. The initial agreement is for 15 months valued at NOK 28 million. And what I maybe did not emphasize enough in the stock exchange announcement is that this contract is highly likely to be prolonged. We have a 15-month test period provided we don't mess up but actually deliver what we have promised, which I'm confident we will do. This contract will be prolonged and generate significant revenues over the coming years. It's roughly NOK 20 million per year in value.

Another important thing is that around the world, we see that COVID-19 restrictions have been lifted, of course, not in Asia, but in Europe and the U.S. We are now back to a more normal situation, and that really helps our sales and marketing efforts. One example is Intertraffic in Amsterdam. It's the most important exhibition for traffic technology companies. It was from 29th of March to 1st of April, and Q-Free was there with a nice booth. Lots of visitors, lots of customers, and it sort of shows that we are now able to work with customers again on, let's say, new projects, new initiatives. And I think this will also help us drive sales going forward. So it's a very positive momentum on the sales and marketing side that we will benefit from going forward. And bear in mind that the NOK 500 million that we generated in the first quarter, we had not the ability to do things like this. So this will definitely help keep up momentum in the coming quarters.

I would also like to mention as a highlight that we are now live in Trondheim with our road user charging pilot. It's a pilot to test Q-Free's new road user charging on-board units and central processing unit. It's a pilot that started in April 2022, although the preparation has been going on for several months. And we do this together with the National Public Road Administration in Norway and SINTEF, a research foundation. 200 private vehicles are equipped with our new road user charging technology. These 200 private vehicles will have 400 roughly unique users.

They will participate in the tests. We will do a 3-month system verification and data collection period, and then we have the opportunity to really analyze the data collected and set kilometer or distance-based fees in order to match the existing revenues from the existing toll collection system or increase revenues. And you can also play around with the assumptions to look at different ways of differentiating the fee structure based on what kind of vehicle you're driving, when you drive, where you drive, how many people are in the car, et cetera. So it gives you numerous opportunities to basically design a distance-based road user charging system for the future.

Norway is one of the countries in the world which is first to market with this pilot, and Q-Free is leading this. So this is exciting technology that over time might replace existing tolling solutions. And I just want to give you comfort around that we, as Q-Free, address future market opportunities. We're not just stuck in the past, working with old technology. We're really driving towards the future with new solutions.

Now if we take a closer look at the financial details and look at the summary. Revenues increased by 13% year-on-year and the recurring portion increased by 22%. Gross margin was down due to revenue mix. But still, we had a higher gross contribution this year than last year. OpEx normalized was in line with last year, only 1.4% increase, but we also had a provision for Ukraine in the first quarter of NOK 6 million. And rest assured, with this provision, we had no additional exposure towards Ukraine nor do we have additional exposure towards Russia.

Our financials are clean. We're not selling anything to Russia anymore. We stopped deliveries to Russia. We don't have any ongoing projects in Ukraine. The only thing I would like to say though regarding Ukraine is that we had planned numerous projects in Ukraine in 2022. Of course, these projects cannot be carried through, so we need to reallocate resources and find other projects to work on. So in the short term, it does have sort of a negative impact on revenues, but we think we will make up for it. And then, of course, we will be more than eager to help Ukraine build up its infrastructure again once that is possible.

Reported EBIT came in at NOK 10 million, 25% down versus NOK 13 million last year. But again, adjusting for the one-offs in Ukraine, EBITDA increased by 22%. Margin, slightly up from last year. And bear in mind, first quarter is seasonally the weakest quarter in Q-Free. So 7.5% EBITDA margin in the first quarter is actually quite solid. EBIT, minus NOK 3 million after adjusting for Ukraine. Of course, without Ukraine, we would have reported a positive EBIT also.

Some more details on the revenues. As I said, revenues is up 13%, primarily due to high project activity in Tolling. Tolling accounted for 71% of quarterly revenues, Traffic Management for 29%. And Traffic Management was below normal level due to the projects in Ukraine that we had to stop due to the war.

This is a very important slide, the ARR development, annual recurring revenues. So if we annualize our recurring revenues based on quarterly reported revenues, we had NOK 229 million at the end -- or in first quarter 2021. In first quarter 2022, NOK 280 million. And we increased the recurring part, both in Tolling and in Traffic Management. So this has constantly increased, and we're now at the level NOK 280 million, represents more or close to 1/3 of Q-Free's total annual revenues. It proves that the stability and robustness of Q-Free's business model is increasing.

Moreover, this figure does not reflect all the key contracts that we spoke about a bit earlier. All the new contracts in Norway, Ålesund, Trondheim, Tromsø, Norway, and also the U.S. SaaS agreement signed in April will add to this base. So if you add all of this together, we are close to NOK 40 million in additional recurring revenues per year that we can add to this base based on these 5 contracts. And we continue to pursue contracts that will increase this ARR base going forward.

If we look at the segment revenue details. Tolling, as I said, had a strong quarter, up 28%, primarily driven by higher project activity. Product sales is still weak because of lack of microcontrollers. But as you can see, we're able to grow revenues even if supply chain situation is difficult at the moment. Traffic Management was down. Again, that's due to Ukraine. We have project deliveries in Ukraine first quarter '21, did not have them in first quarter '22, so they were down 10%. Overall, still 13% revenue growth.

If we adjust for the assets held for sale, we had a minor revenue income in the first quarter last year. Of course, the increase would have been 14%.

EBITDA. As you can see from the graph on the left-hand side, Q1 is seasonally the weakest quarter in Q-Free. We were up versus last year by 22%, but still below second, third and fourth quarter last year. And that's important. So look at the graph on the right-hand side. This shows -- the red bars show the EBITDA margin in the first quarter in these respective years. And the greenish, bluish bars show the full year EBITDA. In all years, '18, '19, '20, '21, the full year margin has been way above the first quarter margin. So when you judge the first quarter financials, it's important to bear in mind that the first quarter is seasonally weak.

Why is that? Well, it's because most of our customers start the year with a budget, and they don't want to spend everything in the first quarter. So it takes time to sort of ramp up and start the year and agree on projects and spending and place to purchase orders and complete the deliveries. That's why. Still 7.5% is among the better margins we've had in Q-Free in the first quarter. So that's why we say we are quite pleased. Relatively speaking, it's not very strong -- no, absolutely speaking, it's not very strong, but relatively, it is very strong.

Tolling had a good quarter in terms of profitability. Nominally, it increased by NOK 7 million year-on-year, also the margin increase. Traffic Management was hit by the NOK 6 million provision in Ukraine. Without that, we would have been breakeven. So it's still not satisfactory. But again, it's due to some of the projects being stopped in Ukraine and a slow start to the year in terms of project activities and more specifically, software sales.

Order intake. Extremely pleased with the order intake. After a somewhat depressed order intake in the second and third quarter of 2021, we have really rebounded. Fourth quarter was strong, almost NOK 300 million, and of course, this quarter, more than NOK 500 million and a 17% increase versus last year, which was again very good.

Also, I would like to add that we have contracts with a total value of NOK 250 million is that had been awarded to Q-Free that are not yet signed. So these have been either in writing or orally confirmed to Q-Free that we have won a tender or a contract proposal, but we're waiting for the final signature on the contract. And then in some cases, the period between awards and contract signing is just days. In other cases, it's months based on the bureaucracy and processes around contract signing. So we're waiting for this NOK 250 million to be announced.

If you compare this to what I said in the previous quarter, I said NOK 300 million. And of course, some of those contracts have been announced but we've had new contracts that we are waiting for. And in April, NOK 28 million out of this NOK 250 million were signed. That was a SaaS contract in the U.S.

Order intake. Tolling represented almost 90% and Traffic Management only 11%. Traffic Management will increase its share of order intake in the coming quarters. We have a strong pipeline. And again, in -- just last week, we announced the SaaS contract, NOK 28 million which, of course, will be included in our second quarter order intake for Traffic Management.

On the back of NOK 507 million in order intake, our order backlog increased to almost NOK 1.4 billion. After reducing the order backlog from first quarter last year to the fourth quarter, we made a significant jump up to NOK 1.4 billion again. So we have a very solid backlog. And also, you should know that frame contracts with no committed minimum volumes are not included in the backlog, and we have plenty of those frame agreements which, in most cases, generate revenues. We don't know just how much yet.

The delivery schedule, second quarter, based on this will be strong. NOK 232 million already scheduled for delivery in the second quarter, NOK 150 million in the third quarter and then NOK 1 billion for the period after the third quarter. Not only in the fourth quarter, but in the fourth quarter and the period after.

If you had asked us, let's say, 2 years ago, we would have been quite confident that these numbers would match more or less what we would have delivered. Now with COVID-19, not so much still lockdowns but the supply chain issues and the war in Ukraine, it is a bit difficult to say that this is exactly how it will play out. There might be delays to deliveries or project completions. But to the best of our knowledge, this is how it looks. And again, good outlook for the second quarter based on this.

Cash flow was strong from operations, NOK 35 million compared to a negative cash flow of NOK 5 million last year. From investing, NOK 12 million we spent compared to NOK 7 million last year, partly has to do with the new ERP system that we have implemented. And from financing, NOK 12 million negative compared to NOK 7 million last year, which we -- which is, again, due to repayment of debt.

Available credit and cash at hand has increased 33%. So the cash generation has been good for the past year. We're now at NOK 192 million in available credit and cash at hand. And I think that's a really solid development over the past year. And even if you compare it to first quarter 2020, it's a tremendous jump.

Balance sheet, not very big months compared to the previous quarter. But what we would like to highlight is the equity ratio of 46%, slightly up versus first quarter '21. And also the working capital ratio has come down from 14% last year to 10% in this quarter, which is a good development.

Net interest-bearing debt down by 32%. So we have repaid a lot of our debt. We're now at a net EBITDA 12-month ratio of 1.2. And also in terms of net financial items, the money we spend on interest, et cetera, has come down significantly. Maybe not so much compared to during the first quarter last year, but compared to previous years, we spend a lot less money on interest expenses, et cetera, which also helps EPS, of course.

Now to the strategy and outlook part. I have gone through a status on the first and second part of our strategic plan numerous times, so I will not do that. We have completed the first phase, reducing business complexity and optimizing resource allocation. We have built a strong presence in existing core markets, and we have definitely revamped our entire product offering. What I do want to talk a little bit more about is the third phase called scale, which is about scaling standardized solutions to selected new target markets. This is not done in 2 days. It's done over years, but I think we are in a very good position to shift gears and start scaling our business.

First of all, we are serving a large and growing addressable market, driven by megatrends such as urbanization, we -- and population growth. Passenger kilometers and tonne-kilometers are expected to increase, double over the coming decades. This, of course, will have an impact on investments in Traffic Management and Tolling and other ITS application areas. If you just look at the past 6 years, Traffic Management has grown by 4% annually, Tolling by 6% annually and other traffic technology areas by 5%, but it's a $25 billion market. It's a huge market and it is growing.

Long term, good growth prospects. But even short term, if we look at our specific opportunity pipeline, we are looking at numerous attractive opportunities. We have already won projects worth NOK 500 million. We have NOK 250 million in awarded but not yet signed contracts. We have NOK 1 billion in open tenders for Tolling and ALPR solutions, NOK 300 million in Traffic Management projects, and as usual, NOK 70 million, NOK 80 million, NOK 90 million, NOK 100 million per quarter in small opportunities. Altogether, the opportunity pipeline for 2022 is NOK 2.3 billion, and we have already locked in NOK 750 million. So the order intake in 2022 should be solid. And of course, over time, order intake translates into revenue growth.

To drive growth, we have worked a lot on standardizing our portfolio and making it more scalable. I will not go through all of these details. But to explain a little bit how it works. If you are on the left side of this chart, where you deliver fully customized or heavily customized solutions, it's hard to scale. Every single project you win is a customized delivery. You need a lot of resources and you need a lot of time and there's plenty of risk involved in delivering a contract.

If you are on the right-hand side, you more or less have off-the-shelf solutions. Business is scalable. You deliver solutions out of the box. You need fewer resources. You need limited delivery times and risk is low.

What we have done in terms of our portfolio is to basically move all our different building blocks to the right. We're not fully off the shelf in terms of all products and services that we deliver. And for some of these products and services, we will never be. But there's a huge difference between being 25% commercially off the shelf and 75%. But as you can see, we are now more or less on the right-hand side of this slide. This means that we can scale our business more profitably, faster and with less risk than we could in the past.

This means that we will target new markets when they open up, and they are actually opening up. First of all, we have a lot of activity going on in existing markets, in the Nordics, in Iberia, in the U.S., in Chile, in Australia, in Thailand, there are numerous projects happening in places where we are. And of course, that's always our key priority, to do more business in existing markets because that's where we have the highest profitability. But we will not ignore some of the new markets that are opening up.

France, this is one of Europe's biggest tolling markets in terms of tolling revenues, I think second behind Germany only. We -- France has decided to implement a technology system called Multi-Lane Free-Flow based on DSRC technology, which is exactly what Q-Free does. They have decided to do that nationwide and it has to happen fast. So basically, we are able to take our existing solutions for tolling and use them in France.

So that's what we're doing. We are targeting new projects, big projects in France. We have opportunities over time in the Baltics. All of them have said that they want to introduce new nationwide truck tolling systems like we did in Slovenia in 2017 and '19. So that's 3 really big market opportunities. Croatia, Austria has similar ambitions. Switzerland will look into road user charging which we, by the way, are piloting in Norway. And Italy has been deregulated so that we have an opportunity to go and sell both products and roadside systems.

In the U.S. also, lots of opportunities to sell our traffic management solutions. We have a strong presence. We're among the biggest players in North America, both in traffic signal software and statewide ATMS solutions. But there are several states that are up for grabs in the coming years, and we will, of course, target them. And there might also be interesting export opportunities for our North American Traffic Management business to take what they have done successfully in the U.S. and do that, replicate that abroad.

Although we will use partnerships to expand to a lot of these new markets to keep costs down and then risk down, we also are scaling up our internal sales organization because we've done the heavy lifting on the technology side. Now we need also to add commercial resources to tell the world about all the great things we have in our portfolio. It doesn't matter if you have the best solutions unless customers are made aware that you have them, and that's what we're doing. We have hired a new Head of Global ALPR sales in our ALPR division. We are looking to add a couple of sales resources in the U.S., a couple of sales resources in Europe to really sell our ALPR solutions, and they are off the shelf. They are ready to be deployed.

ATMS. New head of inter-urban sales, new head of urban sales, a couple of urban regional sales managers recruited and onboarded. So we're almost done with the sales buildup. We need a few more sales resources over time. And also, of course, we will need to add sales resources in new markets, but new hires with our pending future contract wins. So that basically means that we are on track in terms of scaling our business. We have completed the first phase successfully of our strategic plan. We have completed the second phase successfully, and I'm confident that we will complete the third phase of our strategic plan, scaling up successfully in due time.

And then the person leading that scale-up work will be a different person than me. So Trond Valvik, our Chair of the Board, would like to address you all with respect to the planned CEO transition, and also share some thoughts on behalf of the Board. So please, Trond, the scene is yours.

[Trond Valvik, executive]

Thank you, Hakon. Good morning, everyone. My name is Trond Valvik, as Hakon said, and I'm the Chair of the Board in Q-Free. I wanted to use this opportunity to give you some information around the process of replacing Hakon and recruiting a new CEO and also some reflection from the Board on how we view the general activity in the ITS market and the company's position in this market.

After Hakon's notification of termination in early January, the Board chose to spend some time making a thorough evaluation of the most important strategic priorities for the company in the years to come and the skill set and qualification needed and wanted in a future CEO to develop the organization and company further along the strategic path that we have lined out for the company.

We have engaged an international recruitment adviser, which has searched and identified interesting candidates, both in Scandinavia and internationally. The recruitment process is still ongoing, but we feel quite confident that we will be able to recruit a good successor to Hakon with a profile of skill set that will match the company's need going forward.

One of the reasons why we have taken time to make a thorough recruitment process is also linked to the fact that Q-Free today has a well-functioning and experienced management team in addition to Hakon. So we are prepared for and expect that it could take some months from Hakon's exits at the end of June until a new permanent CEO is operational. We have, therefore, planned for an interim solution, which I feel confident will take care of the company in an excellent way for as long as it's needed.

If a new permanent CEO is not in place as of 1st of July, we have planned for an interim solution where our current CFO, Trond Christensen, could function as an interim CEO. The rest of the group management team will continue as is with Fredrik Nordh as Executive Vice President and Head of Tolling; Morten Andersson as Executive Vice President and Head of Traffic Management; and Idunn Bjelland as Senior Vice President, Brand Communication and Marketing. Further, if needed, I as the Board Chair are prepared to allocate time to work even closer with the group management to contribute and to support them in the interim phase, as -- if needed.

So over to the market and a few comments on that. As we, from time to time, receive questions on the Board's view on the market dynamics in the ITS sector and potential external market interest regarding the Q-Free share, I would like to use this opportunity to provide some general comments on the topics from you -- from the Board's side and from the company's side.

As stated in the quarterly report, we observed increasing M&A activity, consolidation and interest among large investors in the ITS market, both in North America and here in Europe. Several transactions has been announced recently. For example, Atlantia's acquisition of Yunex, formerly the ITS division of Siemens; ST Engineering's acquisition of TransCore; and PTV and Bridgepoint's merger with Econolite, just to mention a few.

The entry of private equity players into the ITS space as we have witnessed during the past couple of years also implies increased M&A activity and focus in the sector going forward. And as a result of this increased M&A activity, Q-Free also from time to time receives informal inquiries from advisers and others seeking information on the sector in general and on Q-Free specifically.

What we are very pleased to observe is that Q-Free is viewed as a player with leading technology within the Traffic Management segment and within the Tolling segment. Q-Free solutions, both our hardware and our software, are viewed as market-leading model and future-proof. In addition, we are acknowledged for our many strong and unique references and customers around the world despite our relatively limited size in terms of turnover.

In our view, this puts Q-Free in an attractive position in several aspects. First, Q-Free today is a good platform for future growth, both organically and also as a platform for consolidation. And then also by utilizing the fact that Q-Free is a listed company. In addition, Q-Free is also an unanticipated good match for several of the larger players in the ITS market, players that might be searching for the best future-proof tech solutions to develop their own customer bases. And for the sake of good order, to the Board's knowledge, Q-Free's largest owner share this view that the company is an attractive -- is in an attractive position. And she has also a pragmatic view in investigating different directions and opportunities going forward if they should arise, both organically and inorganically, whatever might be required to create the best possible shareholder value over time for all the shareholders in Q-Free.

So to summarize, we are quite happy with the position we are in as is, but Q-Free follows the market closely and will continuously evaluate and consider taking part in value-creating structural opportunities if they should arise.

And from a more operational point of view, the main focus for the Board during the last couple of years has been to support the management in transforming the business from more a project-orientated business to a more recurring revenue-based model. We strongly believe that a recurring-based model both will increase stability in the business, as such, higher margins over time. And we also believe it will make Q-Free more attractive investment object in stock market. And we are quite proud of what the management has achieved with regard to the recurring revenue transformation until now in a relatively short period of time. And we want to continue this transformation going forward. And one of the reasons that I mentioned is that this will also be a key factor when we have to select and recruit a new CEO to find a person with knowledge of recurring business models.

As this is Hakon's last quarterly presentation for Q-Free, I would like to use the opportunity to thank Hakon on behalf of the Board and myself for your cooperation during the last 6 years and for his efforts and achievements for the company and for being a vital part in the transformation of Q-Free into a leading technology players with healthy financials. And as Hakon likes to put it, a company which is ready to shift gears in the terms of growth. So I wish you good luck, Hakon, and all the best for the future.

[Håkon Volldal, executive]

Thank you, Trond. Then we have a few questions that have come in during the presentation that I would like to address before we finish up.

There is one question. You appear to have a very strong momentum in the Tolling segment, while Traffic Management had some headwinds in Q1 mainly due to Ukraine. Can you give us a comment on the 2022 outlook for the Traffic Management segment?

We believe Traffic Management, overall, will have a better year in 2022 compared to 2021 based on the following analysis. The urban segment had record-high hardware sales last year. So the sales of traffic controller has been very strong. What we haven't seen in 2019, '20 and '21 is software sales on the level that we had back in 2018 and really the profitability of the urban business depends on software sales. During the COVID lockdown, we haven't been able to really deliver ordered systems or win new ones because there hasn't been any capacity on the receiving end among our customers to do these projects. And they've also taken funding for these type of projects to do basic stuff like building roads or maintaining roads, filling potholes, fixing broken electricity, et cetera.

With the infrastructure package that was approved by the U.S. a few months ago, the basic funding for our customers is in place, which means the money set aside to do technology investments will be more protected than it has been in the past. That will give us the opportunity to both deliver our backlog but also win new projects. So we already see a growing list of software projects for our urban business, and that's key to profitability.

We expect that to increase, not to be back on 2018 levels. We expect that to happen next year, but it will be, hopefully, this year, a step-up from 2021.

Inter-urban, it's a very stable business. Now with all these long-term contracts that we have with statewide ATMS customers, we have a solid business. And also these customers generate what we call task orders, which are basically purchase orders to do software tweaks and add functionality, et cetera, that will add to either the recurring base or generate one-off high-margin revenues. That will continue to increase, and that's a stable, growing business in Q-Free.

On the Infomobility side, you saw a very weak first quarter driven by the NOK 6 million provision on accounts receivables in Ukraine. We see increasing momentum in both the U.K., Rest of Europe, Middle East, U.S. and South America. So we are optimistic that we will be able to win new business and drive both revenues and profitability in the Infomobility segment in 2022. So first quarter is not really representative of what we expect Traffic Management to deliver in 2022. As I said, we expect Traffic Management to contribute more to overall profitability in '22 than it did in '21.

Another question, are you still being affected by chip shortages? Or is this situation improving? Are you still observing high M&A activity in the ITS market?

I think Trond commented on the activity in the ITS market. So no need for me to add further comments to that. Regarding chip availability, yes, it is a constraint. We have -- yes. If you look at 2020 and 2021, we probably lost NOK 75 million to NOK 100 million each of those years compared to a normal year in product sales because we did not have enough chips to provide tags.

In 2022, there's a slight improvement. We have higher volumes shipped in the first quarter 2022 that we've had for several quarters on our basic chip. Then we are introducing another chip into the market, which will be less affected by the bottlenecks that we currently experience. And that's something we are working on and hope to finalize it very soon. This is, by the way, also a reason for why CapEx in the quarter is higher than normal, investments in this tag that we will launch to help work around some of the supply chain constraints that we have. So we actually expect the situation to improve significantly in the second half of 2022 and expect product sales to increase significantly over the volumes we've seen in '20 and '21 and also the first quarter.

Last question. Given the NOK 28 million contract in Traffic Management that you received in April and the ongoing conflict in Ukraine, how should we look at Q2 revenue in Traffic Management? Are we likely to continue to see declining revenue next quarter?

Exactly how it will play out in the second quarter is a bit tough to be very specific about. But I think in the second quarter, we will have higher Traffic Management revenues than in the first quarter. Seasonally, first quarter is always the weakest quarter also in Traffic Management. So we think second quarter will be better than the first quarter. Also based on the backlog that we have, we expect this to happen. So Traffic Management will have a rebound, I think, in the second quarter.

More importantly, I think then the nominal total revenue for Traffic Management is the revenue mix and how do I actually get some more software sales into the mix because ultimately, that's what drives profitability.

So yes, I don't see any additional questions. So with that, we conclude our first quarter presentation. Again, I think it's a very solid report when you think about the fact that it's the first quarter, which is, as I said, plenty of times, seasonally the weakest quarter. We are proud about the financial highlights, and then we are very pleased with the order intake that we reported. And we see that we continue to have a win rate on projects that we bid on in excess of 60%, which is very high.

So it looks good for '22 and beyond. We -- as I said, we firmly believe that we are now in a position to profitably scale the business. We have done the heavy lifting on the technology side. We have a solid base with our core markets, we have a high order backlog. We have an increasing share of recurring revenues. We have a good cash position. Everything is in place for continued expansion.

And the person who will drive that going forward will not be me. This is the last quarter, so I would like to thank you all for being with me for almost 6 years. And I hope you will continue to follow Q-Free and root for us. I will continue to root for Q-Free from the sideline. And despite the fact that I'm leaving, I have not lost any confidence in Q-Free. On the contrary, I strongly believe in the fundamentals of this industry and Q-Free specifically on the position we have developed. And now it's time to capitalize on the heavy lifting and all the hard work that has happened over the past years. And it will be exciting to see what's next for Q-Free.

So thank you all. I hope you enjoyed the presentation. And then the next quarterly update will be in July. Thank you all.