Q-Free ASA

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Earnings Call Transcript 2021-Q4

[Hakon Rypern Volldal, CEO & President]

Good morning, everyone. Welcome to Q-Free's Fourth Quarter and Preliminary Full Year 2021 Results. My name is Hakon Volldal. I am the CEO. And also present today is Trond Christensen, our CFO. I'm happy to report strong fourth quarter results and also full year results. But before we go into the numbers, I would like to briefly talk about Q-Free for those of you that are not familiar with the company, so bear with me as I spend 2 minutes on explaining the basics of Q-Free. The company traces its roots back to 1984. We are headquartered in Trondheim, Norway. We have offices in 15 countries around the world. And we've sold products and services to more than 50 markets globally. We employ 349 employees from 35 different nationalities. We generate annual revenues around NOK 900 million, and we have been publicly listed for 20 years. Q-Free is all about addressing the 3 fundamental challenges of modern mobility. The first one is related to congestion, where we waste an enormous amount of value every year by having people idling in their cars or buses being stuck in traffic instead of spending their time on more productive things. We lose 1.4 million lives in traffic accidents annually and road traffic accounts for 18% of global CO2 emissions. Q-Free is all about addressing these 3 challenges. We have numerous different products and services to help combat these challenges. And we do that by organizing our business in 2 different areas. The first one is tolling, which accounts for roughly 2/3 of revenues and employees. We have a complete offering from onboard units, telematics units inside our vehicle to complete electronic toll collection or congestion charging roadside equipment. We have back-office software systems for transaction processing, and we also have special applications like software for license plate processing. The overall business area is traffic management, where we provide traffic single controllers and local software. We provide also centralized traffic single management software platforms to manage systems of intersections and not just single intersections. And we have freeway management software called ATMS, which are advanced software systems used to monitor and manage traffic on freeways. And finally, we have traffic counting, classification and way and motion systems. Traffic Management then accounts for 1/3 of our revenues and employee base. And being a company that addresses congestion, accidents and pollution, it's important for Q-Free to be an ESG leader. And then we claim that we are. We address emissions with our solutions. We specifically target 4 of the UN sustainable development goals. We are a member of the UN Global Compact. We have a strong focus on diversity and employee satisfaction company, and we're also a responsible company in the way we conduct our business, and we've also been certified according to ISO 9001, 14001, 45001, 27001. As a matter of fact, in 2020, Morningstar recognized Q-Free as one of the Norwegian-listed companies with the lowest ESG risk. Okay. So then on to the highlights for the fourth quarter and the full year. And we are quite pleased with the performance. In the fourth quarter, revenues came in at NOK 212 million below last year, but I'll explain why in a few slides. Profitability was strong, NOK 27 million, and a margin then of 13%. EBIT, we reversed from minus NOK 13 million to plus NOK 13 million in the quarter. Good cash flow from operations, NOK 28 million, and strong order intake of NOK 286 million. So a good fourth quarter. If you look at the full year results, revenues came in at NOK 860 million compared to NOK 889 million last year, adjusted for divested business and currency effects, revenues were actually up 6%. And EBITDA improved significantly from NOK 76 million to NOK 106 million, and I think it's the best reported EBITDA from Q-Free since 2011. So we're quite pleased with that. Also with EBIT, NOK 50 million in positive EBIT compared to a loss last year of NOK 9 million. Cash flow from operations was strong, NOK 88 million. Order intake increased slightly and order backlog also slightly increased despite negative currency adjustments compared to last year. So overall, we're very pleased with both the fourth quarter and the full year. It's, as I said, the best full year since 2011. Some of the things we achieved in 2021 are the following. We won the contract to upgrade the Stockholm's congestion tax system. We won 2 statewide ATMS contracts with Colorado DOT and also West Virginia Department of Highways. We deployed our world-leading license plate recognition software [indiscernible] which manages the New York and New Jersey turnpikes. We divested our Parking business in the U.S. and France. We reentered the Norwegian tolling scene with the contracts to upgrade the E18 and E39 in Norway. We won a contract to provide tolling equipment for A28 in Portugal. We won numerous contracts in Spain, which is becoming a key market for us. We won the prestigious contract for Sydney Harbour Crossing in Sydney. We won a frame agreement for tolling roadside equipment in Norway with 2 of the 5 operators. And we have, in 2022, already announced a couple of contracts on that agreement. The first agreement that was called off on that frame agreement was the contract to deliver tolling equipment for which we announced in the fourth quarter. We have deployed numerous motion -- high-speed motion stations in Ukraine with enforcement. We renewed our frame agreement for traffic controllers with Georgia DOT, which is our showcase on the urban traffic management side. We have all the centralized systems and also deployed 10,000 traffic controllers in the state of Georgia. We expanded our cycle monitoring network in Scotland, and we received multiple large tank contracts to Chile, Russia and Morocco, to mention just a few. So a lot happened in 2021. Now post Q4, we have announced NOK 250 million in new contracts. We won a couple of contracts in Spain. As I mentioned, Spain is becoming increasingly important to Q-Free. We won several contracts in Spain over the past few years. These 2 contracts will generate project delivery revenues in 2022 and also recurring service and maintenance revenues. Then we have 2 contracts, 1 in Europe. It's in an existing Q-Free market, and it will generate NOK 8 million in recurring revenues over 15 years. And then the final one is for which will generate in excess of NOK 4 million in annual recurring revenues over 15 years. We have not disclosed exactly where these contracts are and what the exact amount is on the contract. And the reason for that is there are additional call-offs to be made in the future, and we don't want to make our pricing that transparent to competition, but it's sizable. Altogether, NOK 250 million during the first 6 weeks of the year, and we have NOK 300 million that we have been awarded, but we have not yet signed those contracts. When you are awarded the contract, it's highly likely that you also get it signed. So it's a matter of time before I think we will announce NOK 300 million in additional order intake. So the order intake in Q1 is really solid. It looks very good, and it builds on the strong order intake we had in the fourth quarter. Another highlight I would like to mention is that we made headlines in Norway, and I think also abroad with our new road usage charging concept. We are testing out new technology in Norway to charge motorists based on distance driven rather than paying when you pass through a certain point on the road. So this will be a large scale pilot in Trondheim, Norway, involving 200 volunteers that will install Q-Free's road user charging technology in their vehicles. We will track the vehicle movements and calculate a price based on distance driven. And of course, the price will depend on when you drive. It will be probably more expensive in the morning and in the afternoon than in the middle of the day where exactly you're driving, so it could be more expensive inside the city center than around the city center and what kind of vehicle you're driving. So you can differentiate between battery electric vehicles, hybrid electric vehicles and fossil-based vehicles. The price can then be compared to what each driver would pay in the existing tolling scheme. So this will generate a lot of data and will help the authorities figure out a scheme that is fair, but also ensures that you collect sufficient money from people driving on the roads to finance and maintain roads. Now let's look at the detailed financials. Revenues, as I said, down 17% year-on-year. It's -- I will explain on the next slide why that is so. Gross contribution down 12%, that is helped by an improved margin of 3.3 percentage points. OpEx significantly down by 16%, and the cost control and the improved margin then helped us deliver an improved EBITDA of NOK 27 million, and we increased our margin from 10% to almost 13%. Also, EBIT was positive. Last year, we had some impairments of intangible assets. This year, we don't expect any impairments, and we then delivered NOK 13 million in EBIT, 6.2% EBIT margin and a positive EPS of NOK 0.30. For the full year, revenues slightly down nominally, as I said, adjusted for currency effects and the divested business, revenues were up 6%. Gross margin improved from 61% to 64%. OpEx was down more than 5% despite the fact that we had a salary reduction for 6 months among all employees for 10% as part of our extraordinary COVID-19 action plan. So despite the cost reductions last year, we actually managed to reduce the OpEx by more than 5%. Consequently, EBITDA improved by almost 40% from NOK 76 million to NOK 106 million and a solid margin of 12.3. EBIT margin is almost 6% and EPS from minus NOK 0.46 to plus NOK 0.53. So we're happy to deliver a strong EPS in 2021. Now the revenue development, 10% down organically year-on-year, 17% nominally. The reduction is due to low product sales and also currency effects. If you look at the composition, roughly 2/3 came from Tolling and 1/3 from Traffic Management. And I do get some questions about what is behind this? And we can see Tolling is down 11% in the quarter, Traffic Management 17%. We had some assets held for sale from parking last year, and we divested that in 2021. So obviously, no revenues from assets held for sale. So 17% down adjusted for divested business and currency, 10% down. Year-on-year, full year, 6% up, driven by traffic management. There was a slight reduction in tolling due to low product sales and an increase in traffic management. Now if we try to adjust some of these figures, there are some extraordinary things happening on the revenue side. First of all, we need to adjust for assets held for sale, then you should also be aware that in 2020 and 2021 due to shortage of microcontrollers, it has been difficult to produce and deliver a sufficient number of tags or onboard units in our tolling division. Sales have been depressed, not because of weak demand on the contrary, but because of supply chain issues. We are working to fix those supply chain issues. We expect 2021 to be significantly better in terms of tag volumes. But if we normalize this, I would say that if we take out the NOK 35 million from 2020 related to parking and we add back NOK 65 million in normalized tax sales, fair, so the comparison would be NOK 920-ish million in revenues last year. If you look at the reported revenues in 2021, we ended at NOK 860 million, only NOK 2 million in revenues from Parking. We had NOK 44 million in negative currency effects. So the NOK was stronger in 2021 than in 2020, especially against the dollar and the euro on a full year basis. Also, if we add back normalized tax sales, we're at NOK 977 million, would be a fair comparison. Bear also in mind that we are going through a phase where we convert from project sales to what we call ARR, so annual recurring revenues. That means that in the past, we would take a project, let's say, a NOK 50 million contract and maybe half of that would be project revenues and the other half would be service and maintenance. The 1/2, the NOK 25 million, would be booked in 1 single year. Now we take that NOK 25 million, and we spread it across 10 to 15 years. And of course, that impacts revenues negatively short term, but it builds a solid business, and it also improves profitability and transparency over time. So it's a wanted development. It will impact revenue recognition negatively, but it's helps to remove some of the volatility that you have historically seen in Q-Free. So it's something that we will continue to do, although we will then not be able to report a strong revenue growth as we normally -- or as we otherwise would have done. In the outlook section, I'll come back to our perspectives on revenues. But based on the contract pipeline and the order I expect 2022 to deliver strong growth over 2021, just to have stated that. In terms of profitability, we've had a good year. Q1 is always a weak quarter. It's a bit difficult to get started. Second and third quarters, in terms of seasonality, are the best. And then fourth quarter, if you avoid some of these nonrecurring items, it's usually also a good quarter. That's what we have experienced in 2021. We have had 3 solid quarters and, let's say, a normal Q1, which is a week -- a bit weaker. But overall, NOK 106 million in EBITDA and NOK 108 million when we remove the negative impact from Parking, which we have now divested. That means we delivered an EBITDA margin of 12.3% in 2021 or 12.5% if we adjust for assets held for sale. So we are pleased with this profitability. Of course, we want to further improve it, but it's definitely a step in the right direction. The EBITDA in the quarter came from predominantly Tolling and also Traffic Management contributed positively. And on a full year basis, Tolling delivered most of the EBITDA. Traffic Management had a significant improvement over last year. We avoided the negative impact from our parking business and group functions were stable. So that's why we improved the overall EBITDA margin by 3.8 percentage points and the overall EBITDA by almost 14%. Order intake. We had a very strong first quarter, then a couple of weak quarters. And in the fourth quarter, we bounced back. So we booked NOK 286 million in orders, which means on a full year basis, we generated NOK 989 million in order intake and a book-to-bill of 1.15, excluding frame agreements, and that's up 4% compared to 2020. Tolling accounted for 83% of the orders in the fourth quarter and 66% in 2021 as a whole, whereas traffic Management had 17% in the quarter and 34% overall for 2021. Order backlog was up 3%. Again, it's impacted by currency. We always adjust the order backlog based on updated currency rates. At the end of 2020, I think we had more favorable currency rates than we had at the end of 2021. But despite that, normally, it's up 3%. Expected delivery schedule. We have close to NOK 200 million already locked in for the first quarter, NOK 174 million for the second quarter and then NOK 750 million related to the second half of 2022 and beyond. So these are first and foremost, long-term contracts. Cash flow was strong, NOK 28 million, slightly down from last year, but still on a solid level. Investments were up due to capitalized R&D. We're not doing this due to run accounting tricks. On the contrary, we're trying to sort of adapt to accounting practices and IFRS rules. So that's why we have increased the capitalization. Cash flow from financing, NOK 13 million negative compared to minus NOK 22 million in fourth quarter of 2020. Credit and cash at hand stable compared to third quarter. So cash at hand plus available credit around NOK 180 million, which is sufficient to finance what we are currently doing. Balance sheet. Some changes, predominantly on the equity side. We have now an equity ratio of 47% compared to 37%, 1 year ago. Working capital ratio slightly down from fourth quarter of 2020 from 17% to 14%. So nothing special to report on the balance sheet side. I think it's a solid balance, and it's developing according to plan. It's normal that it grows as we continue to expand the business. What's important to notice is our reduced debt. We have reduced our debt by 40% in the quarter. We have, of course, paid interest and also paid down some of the loans. We now have a 12-month net EBITDA ratio of 1.29 compared to 2.1, 12 months ago. I think that's a solid leverage ratio. Net financial items, because we have reduced our debt and also because we have delivered better results, which means we pay lower interest rates. We have reduced our net financial items from minus NOK 10 million in fourth quarter 2020 to NOK 4 million in the quarter. So this also, of course, has a huge impact on the EPS for the year as a whole plus we have less debt, and we spend less money on interest. If I look at strategy and outlook, I'm going to repeat what I have tried to communicate for almost a year now that we are following a certain plan in Q-Free. The first phase, you could almost trace back to when I joined the company in 2016, we spent a long period of time trying to obtain the right focus for the company. We have reduced business complexity and the reason we did that, the reason we divested a lot of businesses and pulled out to certain markets was to optimize resource allocation and improved execution. We have been in the build phase, where we have built a strong presence in core markets. We don't have a very large home market in Q3. So we need to have a number of markets that represents our, let's call it, base markets that we can rely on for continuous business. We cannot just be opportunistic and go all over the world to bid on projects. We need certain markets that generate stable revenues and new opportunities. And we have made significant investments on the technology side to stay ahead of competition and make sure we have the best possible offering in the market. Now we are approaching the third phase, which we call scale. And it's all about scaling standardized solutions to selected new target markets in order to generate growth. So let me recap a little bit what we've done. In the first phase, in the focus phase, we went from 6 to 2 business units. We went from 21 to 15 markets. We pulled out of several markets that were not good markets for us. And as a consequence of the divestments and also closing down some of our offices around the world, we reduced our employee base by 25%. You might think that, that is negative, but I think it has enabled Q3 to have a cost base, which allows us to deliver strong results even though we don't win sort of elephant projects. So it has given Q-Free stability in terms of earnings and also make sure we have a cost base that we can actually build on in order to deliver profitable growth. We've also changed our capital structure and improved our financing, and we've gone from a net EBITDA ratio -- leverage ratio from 4.5 to 1.3. So a lot has been achieved in terms of focus. In the second phase, I mentioned that we have established on core markets. And on the Tolling side, there were 9 markets specifically that generates more than 80% of our revenues. They also generate 30% -- or the 30% of the revenues are ARR-type of contracts, long-term contracts, typically 8 to 12 years plus possible extensions. So in Tolling, we have these markets and they give us every single year new opportunities. And we have an organization in place, a team in place that can capture these opportunities and that gives us a solid sort of base to grow from in Tolling. It means that when we have secured our position in these markets, we can also take on new markets. The same goes for Traffic Management. We have a number of key accounts that generate more than 30% of revenues. You might think that 30% is not much. But if you look back 5 years, I think that figure was maybe 10%. So now it's 30%. We do repeat business with these customers. We have long-term contracts. Also, 25% of our revenues are recurring. So we start the year with 25% of last year's revenues, more or less in our books and is growing. Also on the Traffic Management side, we have long-term contracts, typically 5, 10 years, but they are normally extended. So for legal reasons, the customers might enter into a 5-year contract, but they have options to extend it for another 2 plus 2 plus 2-year period. I mentioned that we've also revitalized our technology platform. And after going through the portfolio, I think we have touched almost every single hardware component and every single software program that we have in Q-Free and updated both hardware and software over the past couple of years. We have made new transceivers and new onboard units on the Tolling side. We made a complete new family of camera systems or imaging systems. We have made continuous improvements to our ALPR software. We are making a new standardized back-office transaction platform. And as I mentioned in the introduction, we have also made a new onboard unit for road user charging that we will pilot in Norway this year. On the Traffic Management side, we have unified our urban and inter-urban software platforms, so they have the same technology stack, the same GUI, the same sort of logic behind them, and we've also launched new stand-alone software products. In case we're not able to sell a full platform, we can sell individual modules to certain customers. We have made new ATC cabinets. We have consolidated our controllers from a lot of different variants down to fewer variants, and we made new local software advancements to control a single intersection. On the formability side, we've made a 16-lane traffic counter and classifier. You might ask where do you actually deploy that? And it's predominantly in the U.S. In California, for instance, you have highway systems where you need to monitor 16 lanes, 8 lanes in each direction. We have developed a new high-speed Weigh-in-Motion system with enforcement, which we have deployed in Ukraine, and we are in the process of making software solutions in order to complement our hardware sales with new software solutions to customers. Another important part -- or it's not just about launching new products or upgrading products, but it's about the scalability. And this slide is a bit complicated, but what I wanted to show is the development in terms of scalability. So on the top, you see the degree of COTS, commercially off the shelf from fully customized to completely off the shelf. A lot of our products and solutions are now completely off-the-shelf. If you buy an antenna or a DSRC tank, it's produced and shipped to you with limited sort of customization or efforts from Q-Free side besides printing a unique sticker on the tag and personalizing it. The software licenses for ALPR you can buy online from our web shop, you can buy traffic controllers and also traffic signal software and stand-alone software products as completely off-the-shelf. Same goes for our imaging systems and more advanced ALPR software solutions, which we sell as a SaaS offering hosted by us. The big development has happened on 2 fronts. First, system delivery on the Tolling side. What is that? Well, it's when you win a project and you want to deliver that project, the installation process, the commissioning process, the tuning process has to be optimized. And we have digitized that -- digitized the processes. We have deployed a lot of new tools in order to help automate certain processes and speed up the delivery. So from running maybe 2 or 3 projects per year, we now deliver 10 to 15 projects per year because we have become much more efficient in delivering this. So that's a major improvement. It reduces the risk of our delivery, it reduces the cost of our delivery and it enables us to take on more projects in parallel. The one remaining item is the back-office software platform, which, by nature, is a product that you need to customize. But we want to bring that up to, let's say, 2/3 that are off-the-self and then 1/3 is customized, and we're in the process of doing that. We have launched the first version of that product. We have some development yet to be completed, but we expect that during 2022 that back office platform is there. On the Traffic Management side, we have already made a heavy lifting on the freeway management software. It's now much more out of the box than it used to be. And then one example is Colorado DOT. We delivered software solution to them during a period of 6 months. So we're not talking years, we're talking months now. And that wouldn't have been possible unless we had made significant investments into our platform in the periods 2017 to '21. Another important thing when it comes to deploying these software systems on the traffic management side is that you need to integrate this system with the customer system, and they might run everything on Azure, they might use Amazon, they might use Google. And then we have now done deployments in all major cloud environments, which means we know how to integrate with customer systems, whether they use Amazon, Azure or Google. And that speeds up deployment also significantly. So if you look at this slide, I think the scalability of our solutions is very high. It continues to increase, and this is what we want to capitalize as we move from the build phase to the scale phase. Last comment is related to recurring revenues. I fundamentally think that we are talking about recurring revenues, and these are truly recurring revenues. They're not all SaaS, but they are recurring. We have NOK 250 million in recurring revenues, long-term contracts that will generate a stable annual revenue base. Based on the backlog we have, if we decompose that into annual revenues, it's roughly NOK 250 million per sale -- or per the end of the fourth quarter. In the first quarter, we won contracts that will add to this base. If we look at the split between software and services, software accounts for 46% or NOK 115 million. And these are SaaS-type contracts with high margins on the service side, yes, there are some COGS involved, so it's not the same margin structure as for software, but it's still with a high margin when we do the service and maintenance work and when we do other types of services based on these long-term contracts. So that's another foundation, which is in place: technology, markets and revenue model. Now it's time to shift gears. We've completed the first 2 phases. Now we want to move into the third phase. And as a backdrop, population growth and urbanization are driving infrastructure investment needs. If we look at some predictions -- these are from McKinsey. If you look at passenger kilometers, expected development from 2015 to 2050 expected to double. So the number of kilometers driven by all people on the planet will double. In terms of goods toll kilometers, expected to double. What does that mean? Well, it means that the average annual investments in transportation infrastructure will also double, not for every single piece of infrastructure, but if you look at roads specifically, McKinsey's prediction is that you need to double from $700 billion per year to $1.4 trillion per year. It might not be $1.4 trillion, but it shows that if we want to facilitate transportation and mobility in the modern society, you need to invest into the infrastructure. That means that both the Tolling business and the Traffic Management business will grow. If you look at global ETC revenues or revenues collected by our customers, it's expected to increase by 12%. It's driven by, of course, tariff increases, so you pay more per year for the same passage, but also by new toll roads that are being built. The only way to finance new roads in many markets around the world is to put up a toll collection system. That's what finances the construction and the maintenance of that toll road. So as a concessionaire, you bid on the project, you get the opportunity to put up a toll collection system, you go to your bank and you do a bond based on predicted cash flows from the toll collection system. Whether the growth will be 8% or 10% or 12% or 14%, we don't know. But if you look at the underlying trends, we expect growth to be healthy. And most predictions are around 10% annual growth for companies such as Q-Free, if you look at the market we address. On the traffic management side, we specifically target traffic monitoring systems, so the red bar and the traffic signal control systems, and this is for the U.S., the global market is, of course, higher. In the U.S., the growth is expected to be 10% per year overall, and we expect to capture our fair share of that market growth, and I think we also have opportunities to grab market share. So for Q-Free, we expect maybe Traffic Management to have a higher growth rate than for Tolling, but still Tolling to have a very solid growth rate going forward. We also based that on what we see in our CRM systems and contracts that we target. If you look at all the contracts that we expect will be awarded in 2022, it sums up to NOK 2.3 billion. We will not win all of this. But we have signed already NOK 250 million in Q1 and an additional NOK 300 million have been awarded to Q-Free, but are not yet signed. So we expect to announce those contracts in the coming weeks. That gives us a very strong start to the year with NOK 500 million -- in excess of NOK 500 million in order intake. So with new opportunities also arising, I think the order intake is going to be very good in 2022. And of course, that also positively impacts revenue generation. So even though revenues were nominally down in 2021, there are explanations for that. We've had issues with microchip availabilities; we've had COVID-19, which means certain projects have been postponed, both in the U.S. and in Europe and now we see that these contracts are being tendered and customers are eager to get to work on planned projects again. So I think revenue growth in 2022 will be solid. We will enter new markets to leverage our portfolio innovations and scalability because the benefits of having scalable products is that you can take these solutions out to new markets without doing a ton of work in order to adapt to local requirements. And the good thing for Q-Free is that we have a combination of existing markets with ongoing upgrades like in Norway, like in Sweden, like in Australia, Portugal, Spain, the U.S., Ukraine, there are lots of opportunities in these markets where old infrastructure is upgraded with new technology. But we also have new Q-Free markets. France is targeting a nation-wide upgrade of their tolling infrastructure to a more modern multi-lens free-flow solution. We have truck tolling opportunities in Ukraine, Lithuania, Latvia, Estonia, Croatia, Austria. And Italy has been deregulated, so it's possible for other companies than just Italian companies to compete in Italy. And in the U.S., we have numerous states where we can fight for new statewide deployments or software solutions. So I think we will carefully select which markets we address. And when we enter new market, I think strategic partnerships is something we will always consider in order to reduce the costs and risk of our expansion. And a few examples: Spain, all these contracts that we have won in Spain, we have won through partnerships with local companies. We do the roadside equipment, we do first and third-line service sensor support and they typically handle the second-line support. And installations are made by our Q-Free Portugal team. So we wouldn't have been successful -- or as successful in Spain as we have been with these partners. Same with France. To cover France with a nationwide service and maintenance setup is quite challenging. It means you would need to have people employed in various locations, logistics for spare parts and everything is challenging. So we have partnered up with a large French construction and industrial group, but we will have sort of the same scope split as we have in Spain. We do the roadside equipment, we do first- and third-line service maintenance and support, whereas our partner will handle civil works that field service. And of course, also being able to have a local partner on your team is important when you deal with French customers. Ukraine. Challenging political situation in Ukraine. But if you look at what we did in 2020 and also have done in 2021, we have installed lots of Weigh-in-Motion systems. And we've done that through partnerships with local world construction companies, where, again, we provide the equipment, and then we train partners to handle installations and field service all over Ukraine. So we don't have lots of employees in Ukraine and physical assets in Ukraine. We work with partners in order to handle the opportunities. Now if these markets develop into very sizable markets with long-term contracts, then, of course, it makes sense to build up a local presence. But I think this is a very good way of capturing the first opportunities without doing as we did in the past, racking up significant costs before there were any revenues. Even if we go with partners and try to limit sort of investments in offices and local teams initially, we will ramp up our sales organization. We will hire more people to drive ALPR software growth. We have an opportunity to boost our sales of global licenses. We want to expand our very profitable and good business model for ALPR SaaS in the U.S., and we want to introduce that model to Europe. That means we need to hire people to help us on the sales side. We will forcefully go after software opportunities on the ATMS side in the U.S. We need to drive sales of our kinetic mobility in new U.S. markets. We need to drive sales of our kinetic signals in new U.S. and export markets. And we want to push in for mobility software solutions, what we call kinetic count. In order to do that, you need people. And we need, over time, to have sales resources in new markets that can upsell on the existing contracts and also create new business opportunities. So we will make some investments in 2022 into ramping up our commercial efforts in order to facilitate growth. I think when you look at the outlook and when you talk about the future, you have to also remember a little bit where we are coming from. And if we look back, financial performance has improved significantly in recent years, but that doesn't mean we're satisfied and think that we've reached sort of the peak of what we can do. On the contrary, we want to further improve. But from a roller coaster ride, project-driven, volatile -- look at these numbers, they're quite stable. We have stabilized the performance. EBITDA margin has been solid 4 or 5 years, and especially in 2021, it has been good. What is maybe lacking is the top line growth. But remember that in 2016 and '17, we had more than NOK 100 million in revenues from divested businesses. So we generate more from the same businesses that we have kept than we did 5 years ago. Also in 2020 and 2021, we have had, let's call it, extraordinary low sales of tags due to component shortages. I think that will improve in 2022. We have several things we are working on in order to find a way to deliver more tags into the market. But again, it's also that we have cost control. We have an attractive margin structure and now it's about scaling the business, and that's why we are investing in sales and marketing people. We have been adamant that we need to have the best products and solutions. We have made a lot of investments and a lot of efforts to improve our portfolio. Now we need to communicate that portfolio and sell it to the market. So that's why we call it the third phase scaling. We reiterate our high-level financial goals. We still believe in 10% average annual growth over the coming years and in the NOK 1.3 billion to NOK 1.5 billion range. We believe in 15% to 20% EBITDA. We're at 12%, 12.5% if you adjust from parking. And we believe in an EBIT margin in the 10% to 15% range. It's all enabled by attractive megatrends: increasing revenues, which stabilizes the top line and makes it possible to sort of every year grow instead of having these ups and downs based on project deliveries. We have an increasing share of high-margin software revenues and the increased scalability of our solutions enable margin expansion. It's a big difference between selling or bidding on a project, knowing that you need to put in 30,000, 40,000 development hours compared to having a license that you say, "Okay, so how much do I want for this?" The work is being done, so it's all about margin. And that's what we experienced on the Traffic Management side, and that's also what we experienced on the Tolling side because we now have a much more scalable platform. For 2022, specifically, strong underlying market growth, but -- so I think nominally, revenues will increase in 2022 over 2021 definitely. ARR conversion will delay some of the revenue recognition. But despite that, I think we will see revenue growth in 2022. Attractive underlying margins, but increased investments in sales, as I commented. COVID-19, which right now is less of a concern, but who knows, maybe in a few months, it might be a concern and component availability are the 2 key uncertainties. We expect the tag markets to come back, where the market is there, but the supply of tags to come back, and we will have better access to microcontrollers, so we can increase the shipments of tags. And the good thing, I think, when it comes to COVID-19 is that if you look at prices on contracts, the willingness to pay for service and presence and, let's call it, loyalty and a solid concept is higher than it was before COVID-19. I think the sort of the price pressure has dropped off a little bit. It is more about quality now and that benefits suppliers like Q-Free. We sell on price, but we want to deliver a certain quality. So overall, I think for 2022, the outlook is quite good. We have had a fantastic start to the year with the orders that we have announced and there are more orders to come. So I think with that, I move on to the Q&A session by saying that we are happy with 2021 and plan to further improve on that going forward.

[Hakon Rypern Volldal, CEO & President]

If I look at the Q&A, the questions that have come in. There is one question related to the chip shortage. I think I've commented on that already. There's one question you added in the outlook section: a comment about M&A, which was not there last quarter, has anything changed? Not really. There's been high M&A activity in this industry for several years, but it has picked up in 2021. I think more ITS deals were done in 2021 than in past years. And we also see an influx of capital and interest from private equity companies. So there's definitely more momentum in our industry than there used to be. And I think the latest big thing that happened was that Atlantia acquired Yunex which is the old ITS division of Siemens. So there's a lot of activity going on. And I think what we are trying to do is to deliver the best possible return for shareholders by developing our business as best as we can. And then of course, if there's interest in Q-Free, it will be evaluated as we've done in the past. Revenue growth has been disappointing since 2016. What do you foresee to change in the market? And then Q-Free will suddenly drive growth to double-digit growth despite the headwind from ARR conversion of the revenue stream? As I said, you need to correct for the businesses that we have divested. I think it's unfair to compare a company with 6 divisions to a company which has divested parking and urban in Europe and pulled out a lot of profitable and unprofitable markets. So the 2 businesses we have definitely had growth since 2016. Could it been higher? Yes, probably. But we have focused on profitability. We've been very clear on the fact that we need to have profitable growth. There's no point in growing if you don't generate profits. So with our cost control, with our portfolio, we are now, as I said, in position to actually forcefully drive revenue growth. And to do that, we need more people to communicate the strong offering that we have. So I believe in strong growth for Q-Free. There's nothing wrong with the market. As I said, it's probably double-digit underlying growth in our 2 different market segments. And I think Q-Free can also capture market share. So we should have underlying growth plus market share growth. It will not be -- it will not be linear. It's not 10% or 12% every single year. There will be years with 20% growth and then maybe 2% or 20%, minus 5%, plus 20%. So it's a bit -- it's not linear. But as we have communicated, we strongly believe in 10% annualized growth until 2025. And the headwind from ARR, is that really a headwind? I mean you need to look beyond and below the top line. It's all about how the top line is constructed. Doesn't matter if you report revenue growth and everything below is just bad. If it's pass-through revenues that you do on behalf of subcontractors with 0 margin or if you include NOK 100 million in freight revenues, I mean that's a bad quality revenue. We want high-quality revenue. So I think it's more important to grow profitably than to just grow. Despite that, I believe in nominal revenue growth with high-quality revenues for Q-Free going forward, absolutely. Is there any sign yet of order intake due to the U.S. infrastructure plan? When do you expect any order effect, if any, from this initiative? The big effect from the infrastructure plan or the Infrastructure Bill in the U.S. is that all these state DOTs rely on federal funding because their main source of revenue is from gas taxes. And as engines become more efficient and people have driven less during the pandemic, they've had a budget deficit. And what happens then? Well, they need to spend all their available cash on road maintenance, fixing the basic stuff, filling puddles, exchanging traffic single heads, fixing street lighting, a tunnel or a bridge that needs repairs. That's basic. What do you do when you don't have enough money? You delay investments in new technology, you delay the investments in the future. So I think the main effect for us is that these DOTs finally get their basic funding back, so that they can protect the investments that go into ITS. So that's one thing. The other thing is -- and that's maybe more important than people in certain European markets realize, you need your customers to be available on the ground when you deliver these systems. You need to be able to travel, sit down with them, do training of their staff on software systems. You need to be able to go out in the field and have somebody supervise the installations. And when customers are not able to travel, when they're confined to a home office, when they don't have even access to their IT systems, you get nothing done. So I think for us, we wait -- or we not wait, we anticipate that 2022 will be sort of the year where the U.S. traffic management market normalizes. We made a step in the right direction in 2021, but still it was difficult to get business done. With the infrastructure bill that secures funding and travel restrictions gradually being lifted, I think we're able to speed up the market's growth and Q-Free's growth in North America. Will you sell your shares in Q-Free when you join Nel?I plan to keep my shares until they have what I think is the right value. And I think we have a way to go to show to the markets and the investors what kind of values we have inside Q-Free. Of course, as the CEO of Q-Free now, I think we -- I think Q-Free is a fantastic company. And I think we don't get all the good stuff out yet, but that's what we're working on. I think we will deliver strong growth and margin expansion. I personally believe in the long-term goals. So from that, you can -- you have to deduct whether I will sell my shares or not, but I look at it as a financial investment, and I want the return on that investment. In Q4, more cash was spent on investments versus earlier quarters, can this be explained by a different way of recognizing cost or is it mainly other factors? I commented on that. It's difficult with all these accounting rules and policies to know exactly how to handle development or R&D expenses. We have been -- way back, we were -- we put too much into our balance sheet. And then we went completely in the other direction and put almost nothing in our balance sheet. That was intended. From my perspective, I wanted to do expense -- all the expenses to actually know what's going on inside the business and not build up a big pile of expenses in our balance sheet that had to be depreciated over time or even written off. I think now we're trying to find that right balance between what should actually be activated and what should not. And we're still conservative, but we have increased this slightly from a very low level. So it's just -- it's also a matter of what kind of projects you are running, whether it's long-term development of standard products or one-off products. And I think now that we have more standard products, it also makes more sense to depreciate those products over a longer period of time because you know you will have repeat sales versus a single customization you do for a single customer that you will never be able to sell again and then you need to expense this there and then. So that's the reason. Two months ago, the EU commission asked 424 major cities to implement green mobility plans within a few years, how do you think this will impact Q-Free's market going forward? I think it will definitely boost Q-Free's market opportunities and maybe for us in Europe, especially on the tolling side. I think you will see more systems like they have in Stockholm and partially in Norway and also in London and Milano, what we called congestion charging. So a ring basically built around the city to control the traffic going into the city and limit pollution and traffic movements into city centers. I think that is something that most cities will implement in Europe, be it Paris or Berlin or Prague or you name it. I think that will definitely come. I think another thing that we see already is tolling systems for heavy goods vehicles because heavy goods vehicles account for a big portion of road surface wear and tear. If you look at the amount of money you need to spend on fixing roads or maintaining roads, I think heavy trucks account for, don't quote me on that or risk me on that, but let's say, 70%, 80% of the wear and tear is actually from heavy trucks, really heavy trucks. So to generate some extra income from those that actually lead to or represent most of the costs, it's not a bad idea. So that's why we see the Baltic countries, a lot of countries in the Eastern Europe, looking into these type of schemes. And then the question is what kind of technology will be used? Will it be based on DSRC, like we have in European markets or more satellite-based systems? And again, for Q-Free, it really doesn't matter. For DSRC, we delivered the roadside systems, and we can deliver the onboard units. For a satellite-based system, well, you can use our new road user technology inside your vehicle. But still you need enforcement stations. So you need the roadside equipment. So -- and you need back-office systems. For GNSS or satellite-based systems, they're more sort of complicated than for DSRC systems, so there are pros and cons, but we have technology and offering to serve both sort of technology choices. And I think that will definitely benefit Q-Free. Then there is a question of how many contracts do you think you will announce in 2022? I think that's very difficult to answer. I think I have given my -- as much detail as I can on the slide that shows the total pipeline of contracts what sums up to NOK 2.3 billion. And of course, there will be additional contracts that we are not even aware of that will come out for tender in 2022, where customers all of a sudden decide, oh, we need this and we want to run a process. And it takes a couple of months to run a process. So what happens in September, October, November, we don't know that yet. This is based on what we know. So I think it's impossible to say how many contracts we will announce. But I can say that right now, we're looking at NOK 2.3 billion, and we have probably secured NOK 550 million. So I think it will be a good year in terms of order intake. That's how far I will go. Okay. I don't see any additional questions. So with that then, I conclude this webcast. Thank you for watching. And again, pleased to announce what we think our strong fourth quarter results and definitely very solid 2021 results. So thank you, and good-bye.