Quarterhill Inc.

Good morning and welcome to Quarter Heels Q1 2025 Financial Results Conference Call. On this morning's call, we have Jack Myers, CEO, and Morgan Demke, Interim Chief Financial Officer. At this time, all participants are in a 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, please press star 1 on your touchtone phone to register. Should you require any assistance during the call, please press star zero. Earlier this morning, Quarter Hill issued a news release announcing its financial results for the quarter ended March 31, 2025. This news release, along with the company's MD&A and financial statements, are available on Quarter Hill's website and on TDR+. 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 CDER+. During this conference call, Porter Hill will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to the company's Q1 2025 MD&A for full cautionary notes regarding the use of forward-looking statements and non-IFRS measures. Finally, please note that all financial information provided is in U.S. dollars unless otherwise specified. I will now turn the meeting over to Mr. Myers. Please go ahead, sir.

Thank you. Good morning, everyone, and thanks for joining us on today's call. In terms of agenda, I'd like to discuss highlights for the quarter. after which Morgan will take a look at the key financial results. Following Morgan, we'll open it up for questions. In summary, our Q1 results reflect our ongoing business transformation and turnaround activities for the past 18 months. As we've discussed previously, Q1 is traditionally our seasonally slowest quarter, which had an impact on our results. Our results were also affected by the two legacy contract, tolling contracts that remain in renegotiation which we mentioned during our Q4 call. Despite these challenges, we continue to make progress on our strategic initiatives, such as our new technology architecture, the onboarding of new leadership, and the expansion of our bidding activity and unlocking of new markets. For the quarter, revenue was $33.9 million and adjusted EBITDA was negative $3.4 million. Regarding the two tolling contracts and renegotiation, They represented $3.6 million in revenue in Q1, but they negatively impacted our adjusted EBITDA by $3.2 million. So excluding those contracts, we would have been close to adjusted EBITDA break even for the quarter. The good news is we remain actively engaged in these negotiations and working towards resolutions that we expect will improve our financial performance in the coming quarters. Finally, our contracted revenue backlog stood at $476 million at quarter end. Let me turn now to the performance of our individual business units. Our safety and enforcement unit continues to perform well, delivering solid top-line growth and strong margins in Q1. This consistent performance stems from our long-term customer relationships, product innovation, and our team's dedication to addressing client needs effectively. During the quarter, we signed new contracts in several states, including Indiana, Illinois, Oklahoma, and New Hampshire. At the IBTTA conference in March, we featured Ithea, our AI vehicle counting and classification system, which generated significant interest from attendees. These capabilities, along with ongoing technical enhancements to our traffic data collection systems, deliver improvements in accuracy and reliability creating real value for our customers while strengthening our competitive position. I'll speak more to some of our activity at that conference in a moment. In our tolling unit, we announced a significant new contract in Q1 with ACTC, valued at $40 million, with options to extend an additional four years at $15 million. Implementation on this project has begun, and we expected to contribute more meaningful to our results as we progress through the year. We also want follow-on business with existing clients, which speaks to the strength of our customer relationships and our ability to expand those mandates over time. Just this week, we announced the successful completion and full systems acceptance of the U.S. 290 toll road project for the Central Texas Regional Mobility Authority, CTRMA. The U.S. 290 toll road in Austin is a critical six-mile corridor that has been successfully upgraded to an expressway facility. This enhancement has tripled the roadways capacity and delivered meaningful reductions in travel times for the users of both tolled and non-tolled lanes. We also successfully completed phase three of the 183A toll project for CTRMA. This project provides direct access between key transportation points and significantly improves traffic flow in the region. What's noteworthy about this achievement is that the effective collaboration we fostered between TxDOT, which is the Texas Department of Transportation, and the other stakeholders throughout this project. This approach ensured timely completion and it reinforces our standing as a trusted partner for complex multi-agency initiatives. While we continue to win follow-on business with existing customers, We've also intensified our pursuit of competitive bids and remain optimistic in securing meaningful new contracts this year. That said, we're taking a disciplined approach to pricing. We won't pursue business at any cost, as shareholders have witnessed and are witnessing the consequences of that type of strategy. Switching gears, as most of you know, we have a 10% ownership stake in YLAN, the IP business that we sold in 2023. Our 10% stake entitles us to 10% of any dividends distributed by the LP that owns it. In Q3 2024, we received a $3.8 million dividend. And in April of 25, we received a second dividend in the amount of $3.2 million. This payment will contribute positively to our cash position and will be reflected in our Q2 2025 financial statements. Let me... take a moment to update you on our strategic priorities. Our primary focus remains on growing our core tolling and enforcement business units through improved integration, ongoing technology innovation, increased business development activity, and enhancing our customer relationships. We continue to see growing opportunities to expand in Europe, as well as other regions like the Middle East. and we expect to see some progress on this front in 2025. Regarding our new technology architecture, we have deployed significant time and investment in our next generation offering. In doing so, we're making progress in our transition from being primarily an integrator to becoming a more software-focused company. Our new platform is built on a microservices architecture. that enables us to develop, deploy, and scale components independently, enhancing our market responsiveness and improving our ability to maintain solutions over time. This strategic shift is designed to drive higher margins, create defensible proprietary offerings, and enable recurring revenue streams. The platform supports both our tolling and enforcement business while facilitating expansion into new verticals like logistics, Artificial intelligence, AI, is increasingly integral to our operations. Our AI strategy focuses on two key areas, visual technology applications for vehicle ID and classification, and data mining and analytics. Both capabilities have promising applications across all our business units and are aligned with customer demand. Technology development in the ITS industry has been evolutionary in recent decades. But AI now presents revolutionary potential, the most significant innovation opportunity since RFID emerged in 1980s and 90s. We are among the first companies to explore comprehensive AI capabilities from convolutional neural networks, transformation models to large language models and generative AI built directly into our products. The ITS industry generates substantial data, and we're equipping our customers with the tools to transform this data into actionable insights that address critical challenges in operational efficiency, roadway safety, and infrastructure management. This paradigm shift represents the compelling reason I'd return to the industry. As mentioned earlier, The 2025 IBTTA Technology Summit in March was in our backyard in Dallas and was a real success. We had demonstrations of our new software with several customers, and the feedback was excellent. Among other things, we showed off our digital video audio system, DBAS for short, which uses AI to classify in real time without needing any prior training. That would be training of the models, by the way. We also gave people a hands-on look at our quantum vehicle detection system, which is an above-ground tolling solution that's generating a lot of attention. That, by the way, is an offshoot of our acquisition of Red Fox last year. Overall, it was great exposure for our team and our technology and an important milestone event for helping us stand out as innovators in the transportation technology area. On the logistics side, the pilot project we launched in the rail sector is serving as a valuable reference account, providing insights and a foundation for replicating our approach with other businesses in this vertical. Also, as mentioned, this market stands to benefit from the new technology architecture. I'd like to talk about board and leadership. Over the past 12 months, we've added new leadership capabilities to both management and the board. On the executive side, this has helped lead to important changes with our technology development and sales and marketing teams. At the board level, we held our annual AGM earlier this week and now have six board members, four of whom are new within the past six months. The changes to our board reflect the evolution of Quarter Hill over the past 18 months. and they align with our focus on core ITS operations and technology in financial management. I discussed the addition of Pat Dion, Sr. and Robin Saunders on our last call, but it's worth stating again that their combined experience in transportation systems, equity and debt financing, business development enhances our ability to capitalize on our growth opportunities. And now, I'm pleased to welcome Asha Denier and Stephen Smith as our newest members of the board. Following their successful election at our annual meeting earlier this week, Asha and Stephen have complementary skills. Asha brings strong legal and governance experience, while Stephen brings years of financial expertise. This mix will be key as we look to growing our core business and exploring potential acquisitions. They both help guide companies through similar growth phases, and bringing them on board shows our commitment to attracting leadership with the right mix of skills to create long-term value for our shareholders. Our outlook. Looking ahead, we remain laser-focused to drive revenue growth and margin improvement as we move towards the second half of the year. Completing our contract renegotiations, executing on our sales pipeline, and advancing our technology are our primary goals. On the renegotiation front, we have entered a structured settlement process for one of the two contracts to try to resolve the situation positively. Even though these projects generate some revenue, as you can see, it is unprofitable revenue, and it wouldn't be prudent for us to continue with the status quo. Generating consistent cash flow remains our top priority. The dividend received from YLAN will strengthen our position in Q2. And we continue to focus on improving operational cash generation across the business. Our bidding approach for new projects now ensures cash flow neutrality through the implementation phase, which represents a significant improvement over our historical approach. In conclusion, in closing for this, While Q1 presented expected seasonal challenges along with the ongoing impact of contract negotiations, we remain on track with our turnaround and with business transformation. We're building a stronger, more resilient business with enhanced technology capabilities, improved operational efficiency, and a path to top-line growth, margin expansion, and positive cash flows. I want to thank our team. for their continued dedication and hard work during this phase. We're excited about the opportunities they had and remain committed to delivering long-term value to our shareholders, investors, customers, and employees. With that, I'll turn it over to Morgan to discuss our financial results in more detail.

Thank you, Chuck, and good morning, everyone. I'll start with a look at revenue in the quarter. Q1 revenue was $33.9 million, down $1 million from Q1 last year. The decrease was primarily due to the timing of revenue received from certain ongoing projects, which in general leads to some quarterly fluctuation. As you know, Q1 is our seasonally slower quarter due to the impact of winter weather on implementations, which explains the sequentially quarterly variance. As Chuck mentioned, the two contracts that are in renegotiation contributed $3.6 million to revenue in the quarter. This revenue generates a significant negative contribution to operating margins, which is why we are pursuing the renegotiations. touch on their margin impact in a moment. Finally, at quarter end, we continue to have a significant backlog of US $476 million, providing good visibility into revenue for 2025 and the next several years. 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 Q1 was 12% compared to 20% in Q1 last year. The decrease was primarily due to the poor margin on the two noted tolling projects, which was partially offset by continued strong margin performance from our enforcement unit. Total operating expenses for Q1 were $11.2 million compared to $10.5 million in Q1 last year. The increase was primarily due to investments in leadership and resources for our project bid development teams, which were offset in part by steps we've taken elsewhere in the organization to optimize the workforce. Q1 adjusted EBITDA was negative 3.4 million compared to positive 0.2 million in Q1 last year. The two tolling contracts that are being renegotiated resulted in a reduction to adjusted EBITDA of 3.2 million in Q1 2025. So excluding those two contracts, Q1 adjusted EBITDA would have been a more modest loss of 0.2 million versus negative 3.4 million. As we've said previously, driven by continued steady results from the enforcement unit, and better expected performance from our tolling unit, we are looking for adjusted EBITDA to grow in 2025 compared to 2024. Completing the two renegotiations will be a big contributing factor for generating that growth. Turning now to the balance sheet. At quarter end, we had adjusted working capital of $59.8 million compared to $66.2 million at the end of 2024. As stated previously, we used 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 to benches and derivative liability. We ended the quarter with cash and cash equivalents of $26.1 million compared to $31.9 million at the end of 2024. As Chuck mentioned, subsequent to quarter end, we received a $3.2 million dividend for our 10% ownership in YLN. This will be reflected in our Q2 statements. Also on the cash front, one of the main focuses has been the progress, billing, collecting on some of our longer-standing unbilled revenue balances, with work still to be done on a sprint that should help our cash balances in future periods. In 2025, we continue to expect positive cash from operations for the year, assuming completion of the negotiations. 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. I'll turn the call over to the operator for Q&A.