Q-Free ASA

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Earnings Call Transcript 2022-Q3

[Thale Solberg, executive]

Good morning, everyone, and welcome to Q-Free's presentation for the results of the third quarter in 2022. My name is Thale Kuvas Solberg, and I'm the President and CEO of Q-Free, the primary mover in Chilean traffic solutions. Together with me today, I have Trond Christensen, who is our CFO, who will be presenting the financial results later on in this presentation.

For those of you who are not quite familiar with Q-Free, I just want to give you a brief insight to who we are and what we do. We were founded more than 40 years ago. And Q-Free has, with this heritage, a pioneer in the industry of intelligent transportation systems for decades. Q-Free today is an international player with a Norwegian footprint. And we have offices in more than 15 countries, selling to more than 50 different markets worldwide. We have revenue of NOK 900 million for last year. And as you will hear later, we have been through a shift in our business models, now having a significant growth in annual recurring revenue and also having a record high order intake and backlog.

With regards to sales, we have 1/3 of our sales in the Americas, 60% of our sales in Europe as well as 10% in Asia Pacific, Middle East and Africa. We are more than 330 transportation technology professionals and enthusiasts working every day to address the key challenges in the modern society. Micro trends such as population growth and congestion is what we actually are working on every day. Urbanization brings with it mobility challenges such as congestion, accidents and pollution. And that is why Q-Free is dedicated to develop and deliver intelligent solutions for efficient, safe and sustainable transportation based on innovative technology and open platforms.

Congestion alone was in the U.S. estimated to have an annual cost of USD 53 billion in 2021 alone. In Q-Free, we have dedicated our solutions for Q-Flow, as we call it, helping out with traffic signal management, regional freeway management as well as multilane free flow charging all contributing to a better flow of traffic. We are designing solutions for a world with less congestions, better air quality as well as less frustrations for those who are queuing and we're ensuring that traffic is going from slow to flow.

Another price that we pay for increased mobility in the world is actually the fact that 1.35 million people lose their lives in traffic yearly. That means that all -- just today, 3,700 people will lose their life in traffic. That has an impact on both the individuals as well as the society, and it has a high cost. That's why we, in Q-Free, are living solutions contributing to safer roads and travels, a solution package that we call Q-Safe, our solutions consist of accident management, connected intersections, weigh-in-motion where actually we collect weight data without disturbing the driver as well as automated license plate recognition called ALPR enforcement.

The population growth also brings with it a higher transportation demand. And research shows that this will double both in people and goods the next decades. With more freight transportation, there will become more pollution as well. WHO estimates that 18% of global CO2 emissions actually comes from road vehicles. That is why our solutions such as congestion charging and low-emission zones will be very vital in the days to come as they contribute to less noise and reduced air pollution, healthier communities as well as generate funds to ensure that we have more sustainable infrastructure going forward.

So if we go into the more technical side of our solutions, we do divide those into 2 main lines of business: tolling and traffic management. Within tolling, we deliver hardware, we deliver onboard units, tags and transceivers that are sold into tolling systems as well as back office systems. And we're also a world-leading supplier of ALPR technology that recognizes and identifies vehicles based on their license plate. Almost 220 of our colleagues are working with the tolling business line and generate a revenue of NOK 600 million. 80% of that revenue share is still based in Europe, but we are seeing a shift in that as well. And within traffic management, we have most of our business in the Americas.

Traffic management is actually about signal monitoring and freeway monitoring through hardware and software solutions. As previously mentioned, we have Weigh in Motion as well as traffic counting and classification equipment for monitoring traffic, which a lot of our customers are appreciating because they need to understand how the traffic flows and who is using our roads. Traffic management is currently delivering 1/3 of our revenues, which, as I said, 75% of the revenue coming from the Americas. If you look into where do we deliver our solutions and products. We have a significant global impact and legacy. We have delivered intelligent traffic solutions worldwide for decades. I'm not going to go through all of these here, but some of the ones that we have delivered is the congestion charging in Stockholm. We have toll collection systems in Norway, Portugal, Australia, Thailand and Chile, meaning that we're actually delivering tolling systems worldwide. We have delivered truck tolling systems in Slovenia, statewide ATMS systems in Virginia and in Colorado, signal management in Georgia and you get the grips of it, we are worldwide.

So if we then look into some of the major wins that we've had in the third quarter 2022. Of course, I'm not going to go through all of our wins here, but I'm just going to give you a short snapshot into some of the new wins that we've had. We did in the U.S. earlier this quarter win the North Carolina statewide traffic signal contract. That is worth NOK 48 million, and it has a basis of 7 years of recurring revenue, again, supporting our shift to recurring revenue business model. We do also see that there is potential and significant upsell opportunities within that contract. In the U.K., we did win again the Department of Transportation in U.K.'s frame agreement. It is as it is a frame agreement, it's implying an annual sale of NOK 18 million. And what is very happy to see that we are getting repeated confidence from that customer, which has been with us in Q-Free since 2008 and we also have a large order in France with NOK 32 million, a tag order for one of our customers, the Vinci Autoroutes. And again, we're being chosen again by the customer, who we have a long track record with and that tags will mainly be supplied in 2023. All of these add up to an already solid back quarter of orders. And that means that also given that we have more recurring revenue contracts coming in, our recurring revenue this quarter was up to 37%, up from 30% same period in 2021.

But we do also work every day on innovation and development initiatives. And in October, we have also shared with the market some exciting news on the new efforts that have been taking place. Horizon Europe consists of many various research and development projects. And the new MODI project is a new and groundbreaking project, demonstrating automated freight transport on both public roads and confined areas in the northern part of Europe. And we're very happy that Q-Free has been selected as 1 of 29 partners to actually contribute with knowledge into this project. We will here use our competence and products within C-ITS, RUC as well as back office, working with our new partners in the MODI project and participating in actually forming the future ecosystem for automated driving. So it's a sign of quality in what we do, the knowledge that we have being actually chosen to be participating here. On the traffic management side, we did in October, launched our new Kinetic Mobility Platform at the ITS World Congress in mid-October. This is the first single truly integrated traffic management system, which provide mobility across local, intercity and regional traffic operations. It is a web-based ecosystem. And it actually elaborates and allows collaboration on common mobility goals across conventional operations and jurisdictional areas. We'll get back to more information on the Kinetic Mobility Platform in next quarter as well. And having given you a snapshot on the organization and what we're working on this quarter, I'm going to hand it over to our CFO, Trond Christensen, who will take you through our financial results for the quarter.

[Trond Christensen, executive]

Good morning, everyone. Same as last quarter, I'm going to start by taking you through the 5 key takeaways that we have on our financial figures this quarter. Our current -- our annual recurring revenue, as Thale has already mentioned, continues to grow and it grows significantly, we're up almost 30% compared to same period last year. And this is now a substantial part of our total revenue. So Q-Free is now definitely no longer a mainly project-oriented organization, we are an organization that continues to deliver continuous services to our customer. Also, our backlog is significantly growing, we are up 36%, which is also a testament of the long-term perspective of the contracts that we are currently entering with our customers. We are also back in a quarter-to-quarter annual growth on our turnover, and this is in spite of some pretty significant issues on the supply chain situation. as well as the conversion to recurring revenue in our business model. We will give you more details on that later. Our earnings are not fantastic this quarter, but it's very important to notice that there are some one-off effects of NOK 7 million on the quarter that we will also comment on later as well as some effects of currency adjustments, et cetera.

In general, we still think we have very good control of our operating expenses. Our working capital is also slightly negative this quarter, also affecting our net interest-bearing debt, again, affected by the supply chain situation, but expected to improve significantly during the next couple of quarters. These are the main figures, 6% annual growth on the revenues. This growth would have been 2 digits percentage if it had not been for the conversion to annual recurring revenues, give you more details on that later. The recurring revenues are up 30% which is just amazing figure, and we've had that for quite a few quarters now. I cannot promise you that we will have the same growth rate every quarter moving forward, but this is definitely a trend that's here to stay. NOK 15 million EBITDA, down a bit from last year, but again, affected by both the supply chain situation and one-off expenses of NOK 7 million. Cash flow from operations, a combination of invoice arrangements with the customer, milestone payments, et cetera, and still building a bit of inventory to make sure that we have the ability to deliver in the future, has affected that negatively so that cash flow from operations is negative with NOK 11 million. And yet again, a fantastic quarter when it comes to order intake, NOK 316 million, more than double what we had same quarter last year.

Now for the main P&L. Again, not an amazing growth on our top line, but we are growing organically. We have more than NOK 10 million in turnover that would have been added to the top line if we were selling tolling projects according to our previous business model rather than selling them as long-term recurring revenue project so we would have had a significant growth. Also, if we did not have any supply chain issues on product deliveries, the growth would have been significantly larger. We now also see that the recurring revenue proportion of our total revenues are up at 37%. That's significantly up from 30% same quarter last year. So we quite clearly here see the transition that we are making from a project and product delivering organization to being more a service and long-term maintenance delivery organization to our customer. Gross margin remains fairly stable, even if there's definitely a price pressure on components and everything that happens with freight, et cetera, in the supply chain organization so we are quite happy that we managed to maintain that at a very healthy level. Our earnings, NOK 15 million, quite a bit down from last year, but there's a few very important things to notice there, we do have one-off effects in the quarter of NOK 7 million due to changes in the management team and other organizational things that we have put into our group expenses. These are expenses that we will not have moving forward, but that we have considered to be sensible to prepare the organization for the future.

Also, as you know, there's a lot of fluctuations in the macro figures, especially the U.S. dollar versus Norwegian kroners have had a significant effect on the OpEx line, and you will see that if you look at the traffic management figures in our segment reporting where most of our expenses are in U.S. dollar. So that's also actually quite a big explanation for the increase in OpEx. Of course, Q-Free, like everyone else feels the inflation, we see the pressure in salaries, perhaps especially in the U.S. and in Norway, but also all over the world. Of course, it affects the figures, and we'll do it moving forward but we think we have that under reasonably good control. No big surprises expected in that area. And we have also consciously increased somewhat on the number of people we have and the categories of people we have to prepare the organization for the future and investing in both technology, increasing our commercial footprint and preparing for the future. You should also notice that after COVID the world has now really opened up, so of course, travel expenses increased, but not dramatically and we are investing more money into going out there and meeting our customers, whether it's one-to-one on projects or if it's in trade fairs or conventions or whatever, which has now started getting back to more normal levels compared to what it was before COVID.

Revenue development, again, we are now at an organic growth rate of 5% quarter-on-quarter. Not a very big growth but would have been double digit if tolling projects in Norway would have been delivered according to a normal project model versus an annual recurring revenue model. Also, we would have had significant more deliveries if there were no supply chain issues in the quarter. So the market is there. We do have the capacity to deliver but we prioritized to transfer more of our business to a recurring revenue model, and we are, of course, affected by what is happening out there in the world with the supply chain. It's also good to see that traffic management is starting to take a bigger proportion of the total revenues. Again, recurring revenues, up 30% year-on-year. We expect that to keep increasing in the next couple of quarters as we are deploying new projects in the market where we have entered contracts, but we are in the process of deploying this. Of course, we cannot promise the same growth rate kind of uninterrupted in the long-term perspective. There will be some slowdowns initially, but we are now doing more and more of our development into products that are more suitable for recurring revenue business models, which will give us long-term earnings. We look at the revenue and look at the split on the segments, tolling has a reasonably slow growth, but tolling is at least on this quarter, the segment that is most affected by both the component shortage and the conversion to the recurring revenue model because they have a few significant projects that would have generated revenue and profits if we have been doing them under the old business model.

This will continue to vary a little bit from quarter-to-quarter depending on what contracts, what the customer actually wants, et cetera. So this will fluctuate somewhat. And it's also now good to see that traffic management is at a good organic growth rate, of course, helped a little bit by currency effect since this is a lot of U.S. dollars in those figures but they are growing, and we think there's a huge potential in the traffic management segment. Historically, they are varying a little bit more from quarter-to-quarter because they have some significant deployments that can have some significant one-off impacts on the quarter, depending on what we are deploying in a specific period. So that will definitely definitely vary. So EBITDA is down. I have mentioned the main reasons for it. Again, one-off effects, NOK 7 million, some currency effects on OpEx. And of course, not that huge growth in turnover due to supply chain issues as well as the conversion to the annual recurring revenue model. And this is also what we see quite clearly on the EBITDA per segment where we see that the main effect on OpEx, especially if you go to the notes in the financial report, you will see that most significant effect on OpEx is perhaps on traffic management and that's where we are most affected by both inflation in U.S., plus the currency effect, U.S. dollar versus Norwegian kroners, but where we also consciously has started increasing a bit on hiring new people and some of them quite expensive to make sure that we have the right resources available for future growth, both in more footprint in the marketplace but especially perhaps within research and development to be able to take more future-looking products to the market. That's something that we will give more information on in a later quarterly presentation.

Order intake, really happy about that one. We have been significantly about the -- over 1 on book-to-bill now for several continuous quarters NOK 316 million order intake in the quarter, 168% increase from same quarter last year. Amazing book-to-bill, especially traffic management had a really good period this quarter, 2 major very important contracts that Thale talked about earlier in the presentation. And this continuous increase in order backlog that we are seeing is definitely helping us to secure the future. It's getting longer perspective on our backlog due to more recurring revenue contracts. And the growth there is also a huge testament that the customer is definitely putting its trust in Q-Free and our ability to deliver on future projects. Our cash flow and our available funds and our interest-bearing debt have gone a little bit to the wrong direction this quarter. But for good reasons, and it's been conscious decisions on our side how we have been handling this. Like we mentioned previous quarters, we are willing to spend cash because we have cash. We are willing to spend cash in building inventory and securing future deliveries. 2022 is not the year to think about just-in-time deliveries on your projects when you get a project, you need to secure the deliveries of all key components so that you know that we will be able to deliver, be able to keep our people busy, be able to meet customer expectations and we're willing to put that cash up there and do those purchasing maneuvers to be able to get the projects going and keep delivering what we need to do.

We have -- we feel ourselves that we have very good control on this. We have quite large supplies of cameras and other equipment lying in Spain, ready to get put up in the countries to be delivered in the fourth quarter. We have Weigh in Motion systems that were initially planned to be used in Ukraine, which for obvious reasons are not going that way now, but makes us more able to deliver on projects compared to our competitors. We also expect quite a lot of that to be moved out in the next couple of quarters. And we also have quite a lot of general supplies available in Norway to be prepared for project deliveries in the months to come. So we feel this is under very good control and we do expect this to improve in the next couple of quarters. And the balance sheet in total is, of course, reflecting this. But still, we are very solid with an equity ratio of 50% and still have all the cash we need available to make the good business decisions moving forward. And our leverage ratio is still way beyond many of our competitors. And even if our financial expenses will naturally rise with both the change in interest levels and the amount of cash and net interest-bearing debt we have, we are still very comfortable with the level that we are at. Okay. And with that, I think I will let Thale come back and talk a little bit about the future.

[Thale Solberg, executive]

Thank you, Trond. As shown in previous quarterly presentations, and also shown here today a solid foundation has been made to make sure that we have an organization that is catering for scale and growth. We have reduced business complexity as well as we have continued to build strong presence in our existing markets. And given new management, the strategy plan still is firm. We do see a positive outlook on the future because the micro trends that we have described earlier today with increased population, increased traffic and congestion as also subsequent pollution, a lot of new markets are opening up, where governments see that they need to take stance in order to make sure it's a sustainable tomorrow. We do see new potential in France as the country is moving away from traditional barrier tolling to multilane free flow, which we do deliver here from Q-Free. The Baltic states and as well as other European countries are also looking into national truck tolling systems and to congestion charging, much the same as we did deliver in Slovenia back in 2017 and '18. Also, Switzerland is moving towards road user charging, an interesting new area where we have done a lot of R&D development. And Italy, is now moving to reregulating the tag and roadside market, a new opportunity that has arisen. All of these are interesting opportunities in new markets as well as there is a lot of potential in our existing markets and customers as well in the U.S., where we have still some states that we need to target.

So in summary, the outlook, we are ready for further growth. We will continue with our efforts of building systems that will meet market expectations in the months and years to come. We will further strengthen our sales organization to ensure that we do reach out to our existing and new customers with our new products and solutions. We will continue to leverage our scalability in our product portfolio and not at least, we will ensure that we still continue to capitalize on Q-Free's clear sustainability agenda. We're moving through an transformation of a more robust and scalable recurring revenue model which we also have presented the first signals today, and we are well positioned to benefit from the micro trends that we do see for efficient, safe and sustainable transportation. Further growing pipeline of upcoming tenders as shown as well as project to build on, we are definitely well positioned to deliver on long-term revenue growth targets going forward. And with that, I think we are ready for Q&A sessions. Please join me, Trond.

[Trond Christensen, executive]

Yes. I'll try to do that without breaking down our mini studio here. So we have a few questions. One listener is asking how we are affected by the chip shortage in the world, microchips that is.

Of course, we have been affected by that like everyone else. Our third quarter figures are definitely affected by it. We have a significant backlog on tag deliveries. We were not able to manufacture and invoice as much as we hoped for in third quarter, but it looks a lot better for Q4 and moving forward. We expect to be able to manufacturer at close to maximum capacity. As a general comment, I can also say that with the effect on the global economy these days where things are definitely slowing down a bit and inflation, et cetera, what we see in general is that a lot of consumer electronics-related business is slowing down. And that's actually having a positive effect on us because it makes more microprocessors available in the market. So the lead times on these components are going down. What we also see is that when we bid to customers, our availability on products are at least no worse than our competitors. It rather tends to be slightly better in some cases. So we are fairly comfortable with that one.

We also have one question about what we think about the -- if we can say something about our share price?

The answer to that is, no. As a matter of policy, we do not comment on the share price. Our job is to build a profitable Q-Free in the long-term perspective, and we try to do our best to communicate our plans and how we are thinking and what we are planning to do as best as we can even if we are a small cap and have very limited resources to spend on Investor Relations, but we do not comment on the share price itself.

What kind of cost inflation adjustment clauses do you have on the long-term contracts?

I mean, we are in so many markets that it's hard to give a very general comment on that. But we are, of course, taking that into account when looking at new contracts, and we would never enter a very long-term contract without having taken that into consideration. So as a general comment, I can say that we are not considering that to be a major threat to our business.

Let me see. Yes. There's one comment regarding -- or a question regarding CapEx. There is an increase in CapEx?

Yes. There are 3 reasons for it. Slight increase in research and development activities. We do have a lot of interesting research and development going on to get off-the-shelf products that we will be able to provide as a recurring revenue product moving forward, and that's one factor. We have had an investment this year in the new ERP system, which is a few million NOK. We have finished capitalizing with that we are live with the new system so that's kind of all done with. And also remember that we have some contracts now where Q-Free actually installs, owns and operates tolling systems, roadside equipment, where we could have put value on these systems in the balance sheet in the third quarter but not recognized any revenues. These are systems that are going live, either late third quarter, in fourth quarter and first quarter of next year that will generate recurring revenue, but there is some CapEx related to those. So it's a mixed mixed effect on those things.

Can you talk about the challenging macro we are currently facing? How this would affect us into 2023? And so also whether this affects customer behavior?

Not really a big issue for us. When it comes to customer behavior to start with that, it's more that we now see things opening up after a corona -- very affected by corona period where it has been difficult to talk to customers, perhaps especially public authorities, where it's not so easy with home office and Teams and those things. So on the customer side, it's easier to communicate, and we see that there are some very significant projects that have been on hold for several years that are now starting to move. So we are optimistic on those opportunities. And even if macro figures say that things have to slow down and things like that, it's -- I think it's more consumer and perhaps also some industry related, but not so much public sector, which is a big part of what we are doing. So I think it's less of an effect for us compared to many other companies.

[Thale Solberg, executive]

And also with the macro trends with regards to increased population and also focus on sustainable transportation, it definitely opened up and lower new markets for us as presented here previously as well. And it also makes sure that some of the old technologies being changed over to more new technology that we've seen in various states as well in the U.S.

[Trond Christensen, executive]

Yes. And we also have one question related to some backlog and the figures there, it's pretty technical, so I won't take that on the webcast, but the person who has posted that question if you drop an e-mail. My e-mail address is on our Investor Relations page, just drop an e-mail, and I'll give an answer to that one.

[Thale Solberg, executive]

Okay. I think that's the last question coming in here. So with that, I want to thank you all for joining us this morning, and I wish you all a very nice, Friday. Thank you so much.