Quarterhill Inc.

Good morning and welcome to Quarter Hills Q4 and Fiscal 2025 Financial Results Conference Call. On this morning's call, we have Chuck Myers, CEO and Morgan Demke, Interim Chief Financial Officer. At this time, all participants are in the listen-only mode. Following management's presentation, we will conduct a question and answer session during which analysts are invited to ask questions. To ask a question, you will need to press star 1 on your touchtone phone to register. Should you require any assistance during the call, please press star 0 for the operator. Earlier this morning, Quarter Hill issued a news release announcing its financial results for the 3-in-12 month ended December 31, 2024. This news release, along with company's MD&A and financial statements, are available on Quarter Hill's website and on CR+. Certain matters discussed during today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on CDAR+. During the conference call, Quarterhill will refer to adjusted EBITDA Just that EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to the company's Q4 and fiscal 2024 MD&E for full cautionary notes regarding the use of forward-looking statements and non-IFRS measures. Finally, please note that all financial information provided are in U.S. dollars unless otherwise specified. I will now turn the call over to Mr. Myers. Please go ahead, sir.

Thank you, and good morning, everybody. Thank you for joining us on today's call. In terms of the agenda today, I'll discuss the highlights for the quarter and the year, after which Morgan will take a look at the key financial results, and following Morgan, we'll open it up for questions. Overall, we're pleased with the 2024 performance, which included significant progress on the turnaround efforts that we began a little over a year ago. For the full year, revenue grew 6.5%, and we generated positive adjusted EBITDA of $0.2 million, including $1.2 million in Q4. While our adjusted EBITDA margins were impacted in 2024 by primarily three legacy tolling contracts, we made progress resolving these issues. One was resolved in 2024, and we're in advanced discussions on the other two. Resolving these issues should have a positive impact on our margins. Another important milestone was achieving $6.5 million in positive cash from operations in Q4. We had also achieved positive cash from operations in Q2, which was the first time in two years we had done so. We are very pleased with the recent progress on cash flow front. While there still will be some fluctuations from quarter to quarter, especially during the seasonal quarters like Q1, we think that our recent progress reflects the early stages of reversing our historical trend of quarterly and annual cash burns. To, in part, to improve cash from operations, cash on the balance sheet grew to $31.9 million at the end of the year, up from $23.1 million at the end of Q3. Finally, our contracted revenue backlog stood at $495 million at the year's end. I joined the company 18 months ago, and after a period of time in the chair, it became evident that we were effectively faced a turnaround situation. While we had solid operating assets, personnel, customer relationships, the business required integration, leadership changes, strategic planning, a new technology roadmap, and the renegotiation of certain tolling contracts. I'll now spend a few minutes discussing our progress on these initiatives. During the year, we established and executed on a comprehensive three-year strategic plan with several key focus areas. First, we focused on growing our coal tolling and safety and enforcement business units through improved operational efficiency, and enhance customer relationships. By strengthening our project management capabilities and integrating our operations more effectively, we've been able to deliver better results for customers while laying the foundation to improve our financial performance. Second, we took steps to expand in Europe, leveraging our existing footprint and expertise in that region. We participated in the inter-traffic show in Amsterdam, which gave us valuable opportunities to advance discussions with potential customers, prospects, and partners on entering the European tolling market. Our acquisition of RedFox has further enhanced our capabilities and potential in this geography. Third, we substantially increased our focus on software development to support our tolling enforcement business and to penetrate into other verticals. This shift from being primarily an integrator to becoming more of a software-focused company is designed to drive higher margins and create more defensible proprietary offerings. We're developing a new architecture that will expand our revenue opportunities from software applications and should significantly improve our ability to maintain software. With AI already a part of our business, and it's poised to become a much greater component moving forward. Fourth, we began our entry into niche markets in the logistics industry, focusing initially on intermodal terminals, ports, borders, and asset management. We launched a pilot project in the real logistics sector, which has provided valuable insights and a foundation for expanding our mandate with our customers. It has also provided a basis for replicating our approach with other businesses in that large market. A significant portion of our effort throughout 2024 was dedicated to integrating and optimizing the business. We launched a unified branding effort that brings together our entire portfolio under the Quarter Hill brand, and we sold certain non-core assets to focus on our higher growth opportunities. This included selling our position in the China joint venture in the fourth quarter and our Chilean enforcement business, which was sold at the end of 2023. We also substantially enhanced and integrated our tech leadership and development capabilities. Our technological advancements are centered around new architecture design and expanded revenue opportunities from software applications, In recognition of this growing importance, we formed a technical advisory committee with two renowned AI software leaders, Bobby Parikh and Vinet Khosla, who have extensive experience in developing transportation-related technologies at companies such as Uber, Google, and Apple. This committee is guiding our efforts as we further integrate AI capabilities throughout our offerings and develop next-generation solutions. In our tolling business unit, we made significant progress resolving some of the inherited contracts that had challenging implementations and economics. We had positive developments with E470, CTRMA, and ACTC, generating expansion opportunities and or moving the projects into the operations phase. As I mentioned earlier, while a couple of challenging contracts remain in negotiation, we're still in active discussions to resolve them. On the new business front, we secured a significant win with the ACTC Alameda contract expansion to start this year, which further expands our footprint in California. That contract is valued at $40 million with options to extend it another four years for an additional $15 million. Implementation on that project will begin shortly. The acquisition of RedFox has further enhanced our value proposition and technical capabilities in the tolling space. Their quantum software platform offers unique capabilities in vehicle protection and classification and was recognized for excellence with two King's Awards for Enterprise in the UK, one for innovation and another for excellence in international trade. We're actively integrating their quantum software into our bids and solutions. Our safety and enforcement unit had another strong year with steady top-line growth and reliable margins. Throughout 2024, we secured multiple wins in multiple jurisdictions with new contracts in Washington, D.C., New Jersey, our first in Tennessee, South Dakota, California, and several others. We also expanded internationally with new agreements in Thailand and South Korea. A particularly exciting development has been growing adoption of our AI vehicle classification system for traffic monitoring. This system uses AI video automatic traffic recorders to count and classify vehicles, which is essential for highway planning, design, maintenance, and management. We secured multiple contracts for this technology, including in North Dakota and Minnesota, and have now deployed over 50 systems. This success demonstrates our leadership in applying AI to the transportation challenges and creates a foundation for further AI-driven innovations across our business units. Our vision is to become the number one or number two player in the segments we operate in. Underpinning this, our goal is to achieve growth while generating reliable cash flows. This will help us build a healthy and sustainable balance sheet capable of supporting both organic and acquisitive growth strategies. We believe our industry is ripe for consolidation, which provides opportunities to accelerate growth through M&A. For 2025, we expect to drive organic growth revenue with adjusted EBITDA margin expansion. Of note, Q1 is traditionally our seasonally slower quarter, which means we expect to see a sequential dip in revenue and adjusted EBITDA and then resume growth during the remainder of the year. Much of that, by the way, occurs due to weather issues. Regarding the broader economic environment at this time, we believe our business is not likely to significantly impact by tariffs. We expect the underlying activity in our industry to remain strong. Nonetheless, we're actively monitoring the situation and proactively exploring options to mitigate any potential impacts. Finally, In the past few months, we've added two new board members, Pat Dion, Sr., and Robin Saunders. Pat and Robin strengthen our leadership capabilities with complementary expertise critical to our growth. Robin brings over three decades of financial innovation, M&A experience, and infrastructure investment experience, having led transactions exceeding $30 billion across 15 countries. Pat brings specific industry knowledge from his leadership roles at SEPTA and the Pennsylvania Turnpike Commission, along with his multiple entrepreneurial successes. Their combined experience in transportation, infrastructure financing, and business development enhances our ability to capitalize on growth opportunities in the IPS industry. In closing, 2024 was a year of continued transformation and progress for Quarter Hill. We've established a solid foundation for growth, improved our operational efficiency, enhanced our technological capabilities, and strengthened our financial outlook. While we still have work to do in our turnaround, we're confident in our strategy and our ability to execute our growth plans. I want to thank our talented team for their hard work and dedication during this phase. We're excited about the opportunities ahead and remain committed to delivering value to our shareholders, customers, and employees. With that, I'll turn it over to Morgan to discuss our financial results in more detail. Morgan?

Thank you, Chuck, and good morning, everyone. Before we get into the financials, please note that discussion pertaining to the 2023 financials reflect only the results of our ITS business. YLAND's financial results for the three and 12 months ended December 31st, 2023 are reflected in the discontinued operations line items on our P&L and cash flow statement as that business was sold in June, 2023. With that, I'll start with a look at revenue in the quarter. Q4 revenue was $38.9 million and $153.3 million for the year. The increase for the full year revenue was due to growth in both our enforcement and tolling business. The decrease for the quarter was primarily due to the timing of revenue received from certain ongoing projects, which in general leads to some quarterly fluctuation. Of note, the Chilean business was sold at the end of Q4 2023, so there's no revenue from that business in 2024. As Chuck touched on in his section, at the end of the year, we had a significant backlog of U.S. $495 million, providing good visibility into revenue for 2025 and the next several years. More specifically, we have visibility into approximately 80% of our target 2025 revenue from our backlog. Also note, a large portion of the backlog is higher margin contracted maintenance revenue versus implementation revenue, which we expect will drive better margins in 2025 and beyond. Gross margin percentage in Q4 was 20% compared to 20% in Q4 last year and 18% for the full year compared to 21% in 2023. The full year decrease was primarily due to the reserves taken for certain tolling projects in Q3 2024, which were partially offset by continued strong margin performance from our enforcement unit. Total operating expenses for Q4 2024 were $11.2 million compared to $15.8 million in Q4 2023. 2024 OPEX was $43.7 million compared to $47.9 million in 2023. The year-over-year decreases were primarily due to lower R&D expenses and other costs. As previously mentioned, SG&A increased in 2024, driven by investments in leadership and resources for our project, bid, and development teams, which were offset in part by steps we took to further optimize our workforce during the year. Q4 adjusted EBITDA was $1.2 million, and for the full year was $0.2 million. This compares to $2.3 million in Q4 last year and $2.9 million for 2023. Adjusted EBITDA for 2024 was impacted by the $4 million due to reserves taken in Q3, which was discussed on our last call. Excluding the impact of those reserves, adjusted EBITDA for 2024 would have increased over 2023. As Chuck mentioned, driven by continued steady results from the Enforcement Unit and stronger revenue performance from the Tollan Unit, we expect adjusted EBITDA to grow in 2025. We expect a seasonal impact in Q1, as mentioned earlier, and then for margins to be stronger and growing in subsequent quarters. Turning now to the balance sheet. At year-end, we had adjusted working capital of $66.2 million, compared to $78.9 million at the end of 2023. As stated previously, we use adjusted working capital, a non-IFRS measure, to highlight the strong working capital position that we have. Adjusted working capital is defined as working capital adjusted for convertible ventures with a derivative liability. We ended the year with cash and cash equivalents of $31.9 million, which was a significant increase from $23.1 million at the end of Q3 2024. The $8.8 million increase in cash from Q3 was primarily due to stronger margin and operating performance, as well as the collection of proceeds from the sale of our share of our Chinese joint venture. The sale of that non-core asset generated net proceeds of $4.4 million. Improving our cash position remains a top priority. One of our main focuses has been the progress billing and collecting on some of our longer-standing unbilled revenue balances. With work still to be done on this front, that should help our cash balances in the future period. In 2025, we expect positive cash from operations for the year. Due to the nature of our business, operating cash flows may vary significantly between periods due to changes in timing and working capital balances, namely with collections and payments. This concludes my review of the financial results, and I'll now turn the call over to the operator for Q&A.