Q-Free ASA

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Earnings Call Transcript 2021-Q3

[Hakon Rypern Volldal, CEO & President]

Welcome to Q-Free's Presentation of its Third Quarter 2021 Financial Results. I'm pleased to announce quite strong results on behalf of Q-Free today, and we are quite pleased with the performance in the quarter.For those of you that don't follow Q-Free on a regular basis, I'll just spend 2 minutes to recap what we do. We are a company that work with traffic management and tolling solutions. We were established in 1984, headquartered in Trondheim, Norway, offices in 15 countries, roughly 350 employees from more than 30 different nationalities, and we've sold products and solutions to more than 50 markets around the world.We are organized in 2 business areas, one being Tolling, where we provide onboard units, we provide toll stations, complete tolling solutions and also software licenses and solutions for recognizing license plates.Our second business area is Traffic Management, where we do monitor traffic on highways through advanced software systems, what we call ATMS systems, and we also provide traffic controllers and software systems for signal management.In principle, we help address 3 key mobility challenges related to congestion, accidents and pollution, and we have various solutions to help mitigate the negative consequences of congestion, accidents and pollution.Now if we jump to the highlights for the third quarter. Revenues, NOK 204 million, down from NOK 210 million nominally. But if we adjust for currency effects and assets held for sale, meaning divested assets and compare apple-with-apples, we reported a 4% organic growth, despite negative consequences from global supply chain constraints, and specifically for Q-Free, lack of access to microcontrollers for tolling tags.Despite -- of NOK 204 million only, I should say, in the quarter, we've reported NOK 31 million in EBITDA, which is in line with what we did last year, and EBIT was stable at NOK 18 million. And it's good to see that we are now able to report EBIT without hiding it, because it's positive.Order intake, NOK 118 million compared to a very high order intake last year. It's low compared to previous quarters, but we are not concerned. As I will show, we have already signed couple of important contracts in the beginning of fourth quarter, and we also have a very healthy pipeline of contracts that will be awarded in the coming weeks and months, so we are not concerned at all.Order backlog is still high at NOK 1.1 billion, a tad below last year, but that's mainly due to exchange rates and the fact that we adjust the order -- the value of the order backlog with currencies. And with euros and dollars predominantly now being a bit lower compared to last year, we will say that the order backlog is still healthy and comparable to last year.Cash flow from operations, very strong, up 50% to NOK 36 million, and it's good to see that there is a good link now between EBITDA and cash flow from operations.In terms of the operational highlights in the quarter, we finalized our Queensland tolling project delivery in Australia. That has been a very important project for Q-Free, that we have rolled out in 2021. We went live with ALPR, so automated license plate recognition solution for New York toll authorities. It's a massive project, and it's a recurring business for us.We went live with a state-wide advanced traffic management system for Colorado DOT to help them monitor what's happening on their highways. It's a big system, 10-year contract, and it brings in roughly $1 million annually in recurring revenues.We expanded our cycle monitoring network in Scotland to more than 50 sites. So Glasgow is one of the cities where we have deployed a lot of Q-Free equipment to help facilitate more bicycling.We continue our rollout of Weigh in Motion in Ukraine. We have installed several sites, and additional sites will be installed later this year and also next year. As a consequence of the activities in Ukraine, on Weigh in Motion, on Tolling and on Traffic Management, we have established a subsidiary in Kiev, Ukraine, currently, with no employees or one employee.Financial update in more detail. If you look at the summary, revenues down 3% nominally. But as I said, if you adjust for currency effects and assets held for sale, and specifically the Parking business that we divested earlier this year, revenues are up 4%. The 9-month figure is up 2% nominally, and 9% adjusted for currency effects and divestitures.Gross contribution and gross margin, still strong, so 68% gross margin in the third quarter, up 4 percentage points. So that's strong, and it sort of builds on the trend we've seen so far in 2021 that gross margin is higher than last year. It is, of course, related to the revenue mix, and when we sell fewer tolling tags, which has lower margin than some of the software services, and service and maintenance activities we do, it has a positive impact on the margin.OpEx is up 5%. It might seem like a big jump. But if you look at the year-to-date figures, we're down 1.6%. And bear in mind that in the third quarter last year, we had full impact of all COVID-19 related cost reductions. So furloughs, also the voluntary salary decrease we had of 10% kicked in. So compared to last year, I think it's still the quarter with solid cost discipline.And it results in an EBITDA of NOK 31 million and a margin above 15%, which is a strong result. Also, we have an EBIT of NOK 18 million, 9%, and we have an EPS of NOK 0.13, which is a significant increase from last year. And you can also see the year-to-date figure with solid EBITDA and EBIT, so we're actually ahead of last year in terms of EBITDA, already, and we have reversed negative EBIT to a positive EBIT, and EPS is significantly above. So all-in-all, I would say 2021 has started well, and third quarter is another good quarter for Q-Free.Some more details on the main drivers. If you look at revenues, as I said, 3% down nominally, but adjusted 4% up. 64% in the quarter came from Tolling and 36% from Traffic Management. And year-to-date, it's similar, 63% from Tolling and 37% from Traffic Management.Here is the slide showing the adjustment. So reported revenues, NOK 210 million. Assets held for sale, as we booked in revenues that we booked for Parking in the third quarter last year, roughly NOK 10 million. And also currency effects, mainly euro and U.S. dollars, down by NOK 4 million, you get to an adjusted third quarter 2020 revenue base of NOK 196 million, compared to this quarter NOK 204 million.And normally, we would have reported higher revenues, but because of the global shortage of microcontrollers or chips or whatever you want to call it, wafers, we were not able to fulfill all orders related to tolling tags. And consequently, revenues are a bit below what we would normally expect. We don't expect this to go on for a very long time, but it's challenging in certain periods to get these components and fulfill orders. So we're not -- we haven't lost orders up until now, but deliveries have been postponed. So we have a huge backlog of tolling tags for next year.Segment revenue details. Tolling, a bit below last year, again, as a consequence of the low tolling tag sales. Traffic Management, up by 25%, and as we divested assets held for sale, no revenues. Year-to-date, Tolling is in line with last year. Traffic Management is significantly up. And as I said, if we adjust for currency effects and assets held for sale, revenues are up 9% year-to-date.EBITDA, good development with the exceptional first quarter, which is seasonally a bit difficult quarter. I think, both the third quarter last year, and fourth quarter -- second quarter this year and third quarter this year are strong EBITDA quarters, down by 5%. But rolling 12-month EBITDA is now NOK 103 million, NOK 105 million if we adjust for assets held for sale. And margin is up again to 15%. Year-to-date, it's 12.1% compared to 7.9% last year, so also a positive development on the margin side.Most of the margin is coming from Tolling. Traffic Management was also positive in the quarter and group functions below last year, so we ended up at NOK 31 million compared to NOK 32 million.Year-to-date, we are way ahead of last year, both Tolling and Traffic Management are ahead. We lost -- spent less money on assets held for sale as we have stopped Parking activities, and group functions fairly stable, means that we are up by more than 50% EBITDA year-to-date. And we also have good expectations for the fourth quarter, so I think we will beat 2020 performance considerably in -- or 2020 performance this year.Order intake. I think that's the only sort of weak KPI in the report, the order intake, compared to what we have done in previous quarters. NOK 118 million is not particularly high, 48% from Tolling, 52% from Traffic Management, which is also a bit unusual. Tolling is usually higher. But there were 2 things to say about this.First of all, the timing is not perfectly related to when Q-Free reported quarterly results. So in early October, we signed a NOK 40 million minimum contract in Australia to replace tolling roadside systems for its Sydney Harbour Bridge and the Sydney Harbour Tunnel. It's NOK 40 million, including 5 years of recurring service and maintenance, and it represents the third major tolling project for Australia in the past 2 years. So Australia is becoming an important market to Q-Free, and there are additional contracts to be awarded in that market going forward.Second highlight which I would like to announce today is that Q-Free has been selected by 2 of the regional toll operators in Norway, Vegamot and Bompengeselskapet Nord. They operate in the Northern part of Norway, as the preferred third vendor for mobile tolling solutions and replacement of what we call 3-gantry toll stations in Norway.We're also qualify as 1 out of 2 suppliers that can bid on new projects involving single gantry toll stations. And as this is a frame contract, we don't include it in our order backlog. We only report it as order intake. We only include contracts with a guaranteed minimum value. But if you look at the expected value of this contract, it will probably be in excess of NOK 100 million.The actual amount depends on who will win the call-offs on future mini-tenders and then how many mobile stations and 3-gantry solutions will there be. But our estimate is above NOK 100 million, it could be NOK 200 million, it could be NOK 300 million over the coming 10-15 years. Because what is good about this contract is that it represents a recurring contract. These projects will be annualized, and we will charge an annual fee for providing the equipment and service and maintenance services. So this will add to our annual recurring revenues. It will be long term contracts over the coming 10, 12, 15 years.Also, the opportunity pipeline is very solid. If you look at all known contracts -- not all in the market, but the contracts that Q-Free will bid on and where we think we have an opportunity to win, we are talking about more than NOK 3 billion in accumulated value, spanning from Tolling products to Tolling Systems, which is the biggest chunk of this, ALPR, traffic management and miscellaneous smaller orders. So more than NOK 3 billion will be awarded according to plan. It might change, but according to known plans, these would be awarded during the fourth quarter of 2021 and 2022.Already, we have submitted bids with an accumulated value in excess of NOK 600 million waiting to be awarded. So we're not concerned at all about order intake. It does vary from quarter-to-quarter. And more so now, during COVID-19 than before, because customers need more time to prepare. There are delays in processing certain things, and they don't stick to the original timelines all the time. But they need the projects, they need the equipment, and we see an increased activity in terms of tenders coming out and bids we have to submit. So not concerned, as I said, about order intake. It's -- it was a bit low in the third quarter, but we have great expectations for the fourth quarter and also 2022.The order backlog is also healthy, 3% nominal decrease from last year. But as I said, it's mostly related to currency effects. And if you look at the expected delivery schedule, what we have in our order backlog for the fourth quarter is NOK 221 million compared to the NOK 204 million we reported in the third quarter. So we should be ahead in the fourth quarter compared to the third quarter on revenues.There will also be some small orders coming in during the quarter where we can take delivery in a couple of weeks. So usually, it's a bit higher. But again, these are uncertain times, and it's not all -- it's not always the case that customers take orders when planned. So caution during the COVID-19 pandemic that delivery schedules might change. But it looks good. It's higher than what we reported in the third quarter.Cash flow is also improving significantly, from operations, NOK 36 million, stable in terms of investment activities. It's usually around NOK 7 million, NOK 8 million per quarter and financing NOK 7 million related to interests and down payments. And as a consequence of a strong cash generation, we have now NOK 184 million in available credit and cash at hand. So after spending some cash in the first and second quarter to secure components and parts and send cameras and readers out to the different markets, doing deployment of Tolling solutions, we're now back at NOK 180 million plus, which is a good number for us, and it helps us finance ongoing activities.The balance sheet is fairly stable compared to the figures we reported end of June. No major changes actually. Equity ratio is up 4 percentage points year-on-year, and also the working capital ratio is down by 8 percentage points compared to third quarter 2020. So good KPIs also on this.Net interest-bearing debt is down almost 40% since third quarter 2020. So we're now at a NIBD/EBITDA ratio of 1.4. And as you can see, net financial items, NOK 100,000 plus compared to minus NOK 16 million last year, and that's also why EPS looks a whole lot better this quarter.Now if we take a look at the outlook. I'm not going to go into details on all -- on the strategy, because we have shared details on the different phases, Phase 1, Phase 2, Phase 3, in previous quarterly reports, and I don't have a new story to tell every single quarter. So if you are interested in the progress we made or what we actually accomplished and did related to Phase 1, what we're doing now in Phase 2 related to building a strong presence in existing core markets and also further developing our technology offering. And what we plan to do now from 2021 in terms of scaling our standardized solutions to new markets, please take a look at the second quarter presentation or the first quarter presentation, or the fourth quarter 2020 or the third quarter 2020. There are numerous presentations with details on this.What I would like to highlight in today's presentation is something that we haven't communicated a lot to the market. But I'm often challenged by investors that Q-Free is so volatile. Our revenues are project related. And that was true a few years ago. But if you look at our revenue base today, it's actually not that volatile. And the underlying revenue base also consists of several long term contracts.So if you look at annualized recurring revenues, or ARR it's constantly increasing. We've gone from annualized ARR NOK 215 million in the first quarter to NOK 245 million. So it's steadily increasing. NOK 128 million comes from services, so typically long term service and maintenance agreements, and NOK 117 million comes from software. And if you look at the split between Traffic Management and Tolling, it's roughly NOK 180 million from tolling and NOK 70 million from traffic management.So it's actually a solid base. I mean, NOK 117 million in pure software recurring revenues is not bad. And where is this coming from? 48% of it comes from what we call Advanced Traffic Management Systems. So on the picture, you can see a typical operational traffic management center in the U.S., where you have plenty of operators monitoring what's happening on their roads -- main roads, and we provide the software systems to do that monitoring.That software system is linked to thousands of different devices, from variable message signs to cameras to weather stations to -- most equipment on the road side is linked to this. And they use this in order to plan traffic and respond to incidents or events.48% of our recurring software revenues come from this product. Statewide inter-urban, as we call it, software platforms that includes operations and maintenance. It's a combination of cloud and on-premise systems. We move to the cloud. We have done integrations on all the 3 major cloud platforms. So we know how to do that, and the trend towards SaaS and cloud hosting continues. So this is something we expect will continue to grow. We have, among our key customers today, Colorado DOT, Virginia DOT, West Virginia DOT, Iowa DOT and so on.The second major part of our software ARR is license plate processing. So 38% comes from this product or service, rather automated and manual processing or license plates for tolling transactions. So when you have a car that drives on a toll road, you often collect images of the license plate, and those images have to be processed either manually by people or by software. And we use our advanced software to do this, because it's much cheaper to do this than to send it to manual validation.And the trend among toll operators is towards more demanding KPIs and higher automation rates. So it's good for us. We continuously work to improve our product and performance and add new features. And we sell this into the U.S. to several toll operators, and we want to bring this product now also into Europe and offer it to European toll operators. So it's not transaction based. It's often flat monthly fee, and then you have sales opportunities related to overachieving on the KPIs. So this product is -- or this journey is something we would like to continue to expand -- high-margin, off the shelf, solid, good contracts.And then we have tolling back-office systems. 28% -- no, 21% of our recurring revenues come from advanced transaction processing and system management for toll operators. So in addition to the ALPR, we also look at data from the transceivers, and we collect all the roadside data. We process that in order to enable the toll operator to build customers. This is important in new markets without legacy platforms. So we have delivered some of these systems in existing toll markets, and there will be a need to deliver this system also into new tolling markets that don't have a platform like this. That is a long term agreement that you typically enter into.So also when some people challenge me on, is this really recurring? And I would say, yes, it's recurring. And the great thing about Q-Free is that we have a long lock-in period. So if you look at the mobile subscription or Netflix or the streaming service, you can cancel the service the next day. And we have typically 7, 8, 10-year lock-in periods on this. And after 7, 8, 10 years, it's not given that they cancel it. It's typically renewed -- typically extended. So I would say the solidity of our recurring revenues is fantastic.Now what are we planning to do in order to grow this. With the ATMS software product for highway surveillance and monitoring, we, of course, plan to win new inter-urban statewide operation and maintenance contracts, a la, Colorado DOT. And we also plan to increase sale of software products on SaaS contracts. So we have specifically developed a couple of standalone products that we sell on a SaaS contract to operators. So they don't have to invest in sort of a mega system or a whole new platform. They can also buy certain products off the shelf and integrate that with their current system, even though they're not running Q-Free.We plan, on the ALPR side, to increase sale of what we call our Intrada Insight offering in the U.S. Numerous projects coming out to do processing of images, and we plan to replicate the U.S. business model in Europe. On the tolling back-office side, we will increase sale of simple back-office solutions to, for instance, tag issuers. This is what we sold to Leaseplan earlier this year. And we also plan to sell full-scale back-office solutions, a la, what we did in Portugal and Slovenia in connection with new tolling projects in new markets. So we expect all of these 3 components to continue to grow and add to our recurring revenues.If I look at the financial outlook, we have said that in 2021, we target 10% organic revenue growth at 2020 FX rates. Book-to-bill above 1.1 and 10% EBITDA, more -- or higher -- more than 10% EBITDA margin. And long term, we talk about NOK 1.3 billion to NOK 1.5 billion in revenues, plus potential bolt-on acquisitions and 15% to 20% EBITDA and 10% to 15% EBIT margin.Just to give an update on that for 2021. Revenue will grow organically, whether that's 8%, 10%, 9%, 7%, 11%, it's extremely hard to predict given that we have limited visibility on chips and microcontrollers. We believe 8% to 10% organic revenue growth is achievable, pending global supply chain situation. We have 9% organic growth year-to-date. And then we have to see what the impact would be on microcontrollers. So we have been promised deliveries. So we will have tags available in the fourth quarter. And most orders are not lost, but postponed, but it creates a challenging environment in terms of forecasting growth and knowing exactly what you will end up with.Having said that, margin, we are getting quite comfortable with our margin ambition. We had 12% margin year-to-date. We have a favorable product mix with solid margins, solid cost control. And as you could see, our order backlog for the fourth quarter was NOK 220 million. So provided that we don't do something stupid in the fourth quarter, which we, of course, will not do, we should be able to deliver close to the year-to-date figure also for the full year. So I'm quite comfortable with the guidance on EBITDA margin.2025 outlook. We just reiterate, no changes made to that. NOK 1.3 billion to NOK 1.5 billion, assumes around 8% growth for Tolling and a bit higher for Traffic Management, and we think that's achievable. We see that there's a lot of activity happening on the Tolling side, lots of replacement projects in existing markets, and also new markets moving towards Tolling, specifically truck tolling opportunities in Eastern Europe.And there are also early signs of a market recovery for Traffic Management in the U.S. But I have to say the U.S. market is not as digitalized as Europe. So it's a bit tricky to get people to work from home. And they don't always have access to their systems and procurement stops. But now we see things have started to move again. So early signs, and we hope this will continue.And margin targets unchanged. We stick to the 15% to 20% EBITDA ambition and 10% to 15% EBIT ambition. But I should say that, if anything, I believe the upside on the margin long term is higher than the downside. So if anything, if you revise it, I would say that the potential is that there will be a backward revision on long term margins.Then we conclude the slides we had prepared, and we'll take questions from the audience.There's Q&A functionality in Teams that we use, and there are some questions that have come in that I will try to answer.

[Hakon Rypern Volldal, CEO & President]

It's just, what is the expected increase in turnover in 2022 compared to 2021? I think we have no specific guidance on that. We typically don't guide per quarter, but it should fall into the ranges that we have given for the long term forecast. So even though we say that we want to grow more than 10% per year, what will 2022 be? Well, it could be higher, it could be lower. But I, at least, believe there will be positive growth. And since tag sales has been depressed in 2021, there is, of course, room to do extra on that next year. And -- but it depends on a lot of factors. So it's very difficult to say, but I believe the -- you should use the long term targets as a guidance also for 2022.There is a question, is the low order intake in the quarter primarily caused by fewer awards in the industry or a lower win rates in the quarter? And it's primarily caused by fewer awards.Of course, we don't win all projects that we bid on, but there are very few projects that were awarded in the third quarter. We lost a couple, won few others. But in general, the list was very short for us in terms of projects being awarded. They were moved to fourth quarter. So that's why we think things will pick up in the fourth quarter. 2 of the contracts you already saw. I shared some details on those with you. And if we had those in the third quarter, things would have looked quite normal. Now I think maybe we will have a strong fourth quarter. So there's nothing wrong with the pipeline. It's just that the timing has been a bit off lately. So they have been delayed these awards. But we -- as I said, we were waiting for contracts to be awarded. And we have already handed in specific proposals for more than NOK 600 million, so we're not concerned. There's nothing wrong with the market. Huge potential still out there.Do you expect equal growth across Tolling and Traffic Management for the future?No. I think we have commented on that, previously. Tolling, we expect to be in maybe the 8% to 10% annual growth range, whereas Traffic Management should be closer to 15%, 20%, depending on how fast North America recovers. So I think Traffic Management will definitely grow faster than Tolling for 2 reasons. '21 has been still a low year for Traffic Management, and the base is much smaller than for Tolling.Can you say something about ongoing M&A trends in the industry and has Q-Free been in any such dialogue since last quarter?Of course, we don't comment on M&A activity. Q-Free is now, I would say, a well-performing company with a very attractive portfolio, and a good brand name and brand recognition in the industry. So of course, we are an attractive asset for potential buyers. But as long as we don't announce anything, these discussions happen behind the scenes all the time, but nothing specific that we want to inform the market about.In general, there is a lot of activity, though, in the transportation sector on the M&A side. So a lot of deals have been announced lately -- fairly large deals also with some public companies being acquired by private equity investors. Some consolidation between SWARCO and Dynniq. Some assets we know are being put up for sale -- but large assets. So this sector is now attracting a lot of capital from private equity investors, and they like the theme of sustainable traffic. So they are attracted by the ITS space and would like to allocate some of their capital to an industry which is bound to grow, because we need more mobility. So I think it's an active space in terms of M&A activity, and it will continue going forward.What is the Q-Free headcount on employees working in sales and marketing?I think we have -- our headcount is around 30 for people working in sales and marketing. And it's a number that we have an ambition to increase. Q-Free has been very focused on development and technology, and there's a reason why we have solid, high-performing products and services in all segments. But I think going forward, we need to invest more into commercial resources -- more salespeople, more people that can assist the sales teams. So I think that will be a priority for us going forward, to strengthen our commercial skills and build a stronger sales team and organization inside Q-Free.I don't have any additional questions. These are all the questions I had.So thank you for watching our third quarter webcast. And again, we are quite pleased with the results for the third quarter, and we feel that Q-Free is now in a good place. We have a high-quality revenue mix which generates solid margins and good cash flow, and we are well positioned to capitalize on the favorable macro trends related to more efficient, safer and sustainable transportation. So thank you, and have a good day.