Earnings call transcript: Quarterhill’s Q1 2025 reveals AI-driven future amid financial challenges

Quarterhill Inc. (QTRH), with a market capitalization of $116.3 million, reported its first-quarter 2025 financial results, highlighting a challenging period with revenue of $33.9 million, down $1 million from the same quarter last year. The gross margin dropped to 12% from 20%, and the company recorded a negative adjusted EBITDA of $3.4 million. The stock reacted negatively, falling 11.95% to $1.40, nearing its 52-week low. According to InvestingPro analysis, the company’s overall financial health score is rated as "FAIR" with a score of 2.4 out of 5.

Key Takeaways

• Revenue and gross margin declined year-over-year.
• Negative adjusted EBITDA of $3.4 million, influenced by problematic contracts.
• Launch of AI-powered technologies like Ithea and DVAS.
• Strong contracted revenue backlog of $476 million.
• Stock price dropped significantly by 11.95%.

Company Performance

Quarterhill faced a tough first quarter in 2025, with revenue and gross margins decreasing compared to Q1 2024. The decline in financial performance was partly due to two problematic tolling contracts, which, despite contributing $3.6 million in revenue, reduced EBITDA by $3.2 million. The company’s cash position also weakened, dropping to $26.1 million from $31.9 million. InvestingPro data reveals that over the last twelve months, the company has struggled with profitability, showing a negative return on invested capital of -6% and weak gross profit margins of 18.12%. For deeper insights into Quarterhill’s financial health and more exclusive ProTips, check out the comprehensive Pro Research Report available on InvestingPro.

Financial Highlights

• Revenue: $33.9 million, down $1 million from Q1 2024.
• Gross margin: 12%, down from 20% in Q1 2024.
• Adjusted EBITDA: -$3.4 million, compared to +$0.2 million in Q1 2024.
• Cash and cash equivalents: $26.1 million, down from $31.9 million.

Outlook & Guidance

Quarterhill anticipates adjusted EBITDA growth in 2025, targeting a corporate EBITDA margin of 20%. The company is actively renegotiating problematic contracts and aims to grow its pipeline by over $1 billion annually. The focus remains on software-oriented solutions with higher margins.

Executive Commentary

CEO Chuck Myers emphasized the company’s commitment to building a "stronger, more resilient business with enhanced technology capabilities." He highlighted the revolutionary potential of AI, stating, "AI now presents revolutionary potential," and noted ongoing discussions to refinance, reflecting a proactive approach to financial management.

Risks and Challenges

• Declining financial performance could affect investor confidence.
• Problematic contracts impacting EBITDA need resolution.
• The company’s cash position has weakened, limiting financial flexibility.
• The evolving ITS market requires continuous innovation and adaptation.
• Broader economic conditions could impact market expansion efforts.

Q&A

During the earnings call, analysts inquired about contract renegotiations and their financial impact, the potential revenue improvements from AI technology, and the seasonality of the business, with Q1 traditionally being the slowest quarter. The management detailed their bidding strategy and pipeline opportunities, providing insights into future growth prospects.

Full transcript - Quarterhill Inc (QTRH) Q1 2025:

Conference Call Operator: Good morning, and welcome to Quarterhill’s Q1 twenty twenty five 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 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 1 on your touch tone phone to register.

Should you require any assistance during the call, please press 0. Earlier this morning, Quarterhill issued a new release announcing its financial results for the quarter ended 03/31/2025. This news release along with the company’s MD and A and financial statements are available on QuarterHill’s website and on Tidor plus 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 SEDAR plus.

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 q 01/2025 MD and 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.

Chuck Myers, CEO, Quarterhill: 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 eighteen 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 $33,900,000 and adjusted EBITDA was negative $3,400,000 Regarding the two tolling contracts in renegotiation, they represented $3,600,000 in revenue in Q1, but they negatively impacted our adjusted EBITDA by 3,200,000 So, those contracts, we would have been close to adjusted EBITDA breakeven 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

Stephen Lee, Analyst, Raymond James: the coming

Chuck Myers, CEO, Quarterhill: quarters. Finally, our contracted revenue backlog stood at $476,000,000 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 IVTTA 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 $40,000,000 with options to extend an additional four years at $15,000,000 Implementation on this project has begun, and we expect it to contribute more meaningful to our results as we progress through the year.

We also won 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. Two ninety toll road in Austin is a critical six mile corridor that’s 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 are 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 WiLAN, 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 twenty twenty four, we received a $3,800,000 dividend. And in April of ’twenty five, we received a second dividend in the amount of $3,200,000 This payment will contribute positively to our cash position and will be reflected in our Q2 twenty twenty five 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 twenty twenty five 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, DVAS 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 a 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 twelve 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 Quarterhill over the past eighteen 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 Steven have complementary skills. Asha brings strong legal and governance experience, while Steven brings years of financial expertise. This mix will be key as we look to growing our core business and exploring potential acquisitions.

They’ve both helped 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 WiLAN 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 ahead 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.

Morgan Demke, Interim Chief Financial Officer, Quarterhill: Thank you, Chuck, and good morning, everyone. I’ll start with a look at revenue in the quarter. Q1 revenue was $33,900,000 down $1,000,000 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 Trek mentioned, the two contracts that are in renegotiation contributed $3,600,000 to revenue in the quarter. This revenue generates a significant negative contribution to operating margins, which is why we are pursuing the renegotiations. I’ll touch on their margin impact in a moment. Finally, at quarter end, we continue to have a significant backlog of US476 million dollars providing good visibility into revenue for 2025 over 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 $11,200,000 compared to $10,500,000 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 $3,400,000 compared to positive $200,000 in Q1 last year.

The two tolling contracts that are being renegotiated resulted in a reduction to adjusted EBITDA of $3,200,000 in Q1 twenty twenty five. So excluding those two contracts, Q1 adjusted EBITDA would have been a more modest loss of $200,000 versus negative $3,400,000 As we previously 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 $59,800,000 compared to $66,200,000 at the end of twenty twenty four.

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 debentures and derivative liability. We ended the quarter with cash and cash equivalents of $26,100,000 compared to $31,900,000 at the end of twenty twenty four. As Chuck mentioned, subsequent to quarter end, we received a 3,200,000 dividend for our 10% ownership in WiLAN. This will be reflected in our Q2 statements.

Also on the cash front, one of the main focuses has been the progress billing and collecting on some of our longer standing unbilled revenue balances. With the work still to be done on this front that should help our cash balances in future periods. In 2025, we continue to expect positive cash from operations for the year especially the timing of renegotiations. Due to the nature of our business, operating cash flows may vary significantly between periods due to changes in timing of working capital balances, namely with collections and payments. This concludes my review of the financial results.

I’ll now turn the call over to the operator for Q and A.

Conference Call Operator: Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad. If you’re using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star followed by the number 2.

And with that, our first question comes from the line of Gavin Fairweather with Cormark. Please go ahead.

Gavin Fairweather, Analyst, Cormark: Oh, hey. Good morning, and thanks for taking my question. Maybe just to start on the tolling business. I I think that that was a a new point that you brought up, Chuck, in terms of one of the contracts being in a structured settlement. Maybe maybe you can just kind of help us understand what that looks like.

Is there a mediator involved? Is there a a time line that we should think about? What what what does that structured settlement process look like?

Chuck Myers, CEO, Quarterhill: Yeah. There it’s I have I have to be somewhat careful because it is considered confidential, which is why I use the structured settlement. There is a there is a structured process that we’re following with the customer to come to resolution of the costs associated with the operating of that system. I’d like to I can also reemphasize both of the those contracts are in revenue collection mode. So, they’re they’re substantially into their implementation phase.

Gavin Fairweather, Analyst, Cormark: You might not be able to answer, but I’m gonna ask it anyway. Are you are you looking to recoup some

Morgan Demke, Interim Chief Financial Officer, Quarterhill: of the previous losses, or

Gavin Fairweather, Analyst, Cormark: are just looking to fix the margin on a go forward basis?

Chuck Myers, CEO, Quarterhill: It’s Both are distinctly possible. My my my sole my my, you know, primary focus is for this to be cash flow positive as fast as humanly possible.

Gavin Fairweather, Analyst, Cormark: Understood. And, maybe you can I I understand that there’s two that have been causing some issues? So what about the one that’s kind of not in that structured settlement? Are are things progressing on that front as well?

Chuck Myers, CEO, Quarterhill: Yes. They are. It’s just a it’ll it’s a much different customer relationship, and and it’s progressing along. That it’s it’s more of a it’s a it’s a positive relationship with that customer.

Gavin Fairweather, Analyst, Cormark: I understand. And then maybe just on the sales side on on tolling. You’ve had some decent expansions and new wins recently. Maybe you could discuss the size of the pipeline in terms of how many RFPs are hitting the market, how many RFPs you’ve responded to and are waiting for a response on? Maybe just give us a sense of the size of that that bid book and pipeline.

Chuck Myers, CEO, Quarterhill: I can say I knew you were gonna ask that question, Gavin. Our current pipeline that we’re going after is about $2,000,000,000 right now. The weighted our weighting on the on the toll side is about 278,000,000. And on the sales and enforce safety enforcement side, it’s about 250,000,000. We currently have a hundred and $31,000,000 in proposals out for review right now.

We have quite a good backlog of proposals at the moment. We we have been we have been bidding actively.

Gavin Fairweather, Analyst, Cormark: And, yeah, as you start to get some some decisions on those kind of RFPs, like, would would these be things that would be ramping up in ’26, assuming that you you

Chuck Myers, CEO, Quarterhill: No. Some of them some of them will be ramping up this year. We had one that was we should’ve we thought we were gonna hear about that got pushed till October. We have another one that we should hear on in the next few days. So, you know, they’re they’re they’re definitely actively I mean, we’re talking about we we expect some awards very quickly here.

Gavin Fairweather, Analyst, Cormark: Okay. That’s that’s great to hear. And then maybe one quickly for Morgan. Can you remind us of kinda your view of the excess working capital in terms of the unbilled revenue tied to some of these tolling contracts? You sized that up recently?

Morgan Demke, Interim Chief Financial Officer, Quarterhill: Kevin, I don’t have an exact number for you on for those two projects specifically. But,

Chuck Myers, CEO, Quarterhill: really, for the

Morgan Demke, Interim Chief Financial Officer, Quarterhill: balance of the year, we’re looking to actively move that unbilled revenue into AR and collect it in the second half of the year as a whole.

Gavin Fairweather, Analyst, Cormark: Like, assuming, like, I think it was 37, 30 8 million in the quarter. Like, do you help us Yeah. Quantum of what might be excess?

Morgan Demke, Interim Chief Financial Officer, Quarterhill: For the two projects, we we could see a sizable decrease in that in the second half with successful renegotiations. I don’t have exact number, Gavin. I can get back to you on that.

Gavin Fairweather, Analyst, Cormark: Okay. Sounds good. Thank you. I’ll pass the line.

Conference Call Operator: And your next question comes from the line of Todd Coupland with CIBC Capital Markets. I

Todd Coupland, Analyst, CIBC Capital Markets: was wondering if the run rate in Q1 is the right number to use for revenue and loss until these contracts are resolved? If you could just give us a sense on seasonality and where the business should be until you’re able to adjust

Morgan Demke, Interim Chief Financial Officer, Quarterhill: Yes, so typically Q1 is our seasonally softest quarter. So we will start to see an improvement in the quarterly revenue starting in Q2 and ramping up in Q3 and Q4 as we’ve seen in previous years. We can still see some impact until those two contracts are renegotiated, but we’re actively working to limit the exposure on those on a weekly basis. I mean,

Todd Coupland, Analyst, CIBC Capital Markets: the right way to think of Sorry.

Gavin Fairweather, Analyst, Cormark: I was just gonna

Morgan Demke, Interim Chief Financial Officer, Quarterhill: say, in the previous year, it was approximately a $7,400,000 loss on those projects, on those two projects combined for EBITDA.

Todd Coupland, Analyst, CIBC Capital Markets: I see.

Morgan Demke, Interim Chief Financial Officer, Quarterhill: If that helps give some clarity.

Chuck Myers, CEO, Quarterhill: Todd, does that give you some clarity on where we think we will be?

Stephen Lee, Analyst, Raymond James: What the So you

Todd Coupland, Analyst, CIBC Capital Markets: basically Sorry. What was the total last year? 7.4? Yes. Yeah.

So and you you got you hit by 3.2 this quarter, something like that. So,

Stephen Lee, Analyst, Raymond James: yeah. Okay.

Chuck Myers, CEO, Quarterhill: So And some of that is

Todd Coupland, Analyst, CIBC Capital Markets: because is idea that, I mean, just for simplicity, do we just assume until it’s cleaned up, spread that out over the rest of the year? The balance?

Chuck Myers, CEO, Quarterhill: Yeah. I think it depend it depends on timing, but I think the reality is that, you know, we expect that we’re we’re gonna make some positive progress here in the short term on those. We we sure hoping on that. And then but it gives you an idea. If you were to eliminate those two contracts, where our EBITDA would have been.

Fair.

Todd Coupland, Analyst, CIBC Capital Markets: That’s fair. Yeah. Maybe that’s fair.

Conference Call Operator: We were

Chuck Myers, CEO, Quarterhill: we were trying to give clarity to our to our to our shareholders, and the market on what that was, because we’ve been asked that. So, that’s that’s why Morgan did the calculation.

Stephen Lee, Analyst, Raymond James: Yeah. Okay. That sounds good. Okay.

Todd Coupland, Analyst, CIBC Capital Markets: I was wondering so I see the debenture is classified as current now. I guess that’s October 26 that comes due. What’s the thinking and plans for that? How should we be an update on that? Thanks.

Chuck Myers, CEO, Quarterhill: We’re we’re actively in discussions to to refinance those where they are just to make sure that we’re covered. That kind of thing keeps me up at night. So we’re actively in discussions with with banks on on managing that and and or converting it next year.

Todd Coupland, Analyst, CIBC Capital Markets: Yeah. But the conversion price, $3.80. So you’re gonna need to get that 2,000,000,000 of backlog awarded to Quarterhill

Gavin Fairweather, Analyst, Cormark: or the

Todd Coupland, Analyst, CIBC Capital Markets: pipeline, sorry.

Gavin Fairweather, Analyst, Cormark: Yeah. Yeah.

Morgan Demke, Interim Chief Financial Officer, Quarterhill: Got it.

Chuck Myers, CEO, Quarterhill: Yeah. Thank you.

Todd Coupland, Analyst, CIBC Capital Markets: Just on that sorry, one follow-up on the convert. It’s 6%. What’s your sense with the turnaround in the business if you were to refi, do you feel like that’s a lower rate? Do you have a sense on that?

Chuck Myers, CEO, Quarterhill: Don’t have a sense on it yet. I obviously, the the rates have become a little more manageable in that. So I’d probably have a more positive feeling about it now than I would have, you know, three months ago.

Todd Coupland, Analyst, CIBC Capital Markets: Yeah. Okay. Yeah. Fair enough. Yeah.

Okay. That sounds good. And then on the pipeline, Chuck, what do you mean when you say weighting two seventy eight and two fifty totaling and an endorsement out of 2,000,000,000? What does what does that actually mean?

Chuck Myers, CEO, Quarterhill: The high the we we weighted according to a higher probability of our win. So I see. You know, right now, we have actively opened $2,000,000,000 of opportunities, but we see about, you know, 575,000,000 of that, you know, we have a higher probability of when. Okay. So so we wait and we look at it.

Todd Coupland, Analyst, CIBC Capital Markets: Yeah. Yeah. I gotcha. And, if you think about so you see 2,000,000,000 and then you weigh your high probability.

Stephen Lee, Analyst, Raymond James: What does that

Todd Coupland, Analyst, CIBC Capital Markets: look like over the next, let’s say, one, two, three years? Is that $2,000,000,000 stay steady in the pipeline?

Morgan Demke, Interim Chief Financial Officer, Quarterhill: No. Is like, what

Todd Coupland, Analyst, CIBC Capital Markets: what what what’s the opportunity set if we just think about it, looking out a little bit longer?

Chuck Myers, CEO, Quarterhill: I think it probably goes up by over a billion dollars a year.

Todd Coupland, Analyst, CIBC Capital Markets: Okay. Okay. And and, in

Chuck Myers, CEO, Quarterhill: case of Virgin Just so you know just so you know, those so what we do is, as you know, at the beginning at the, you know, beginning of the year, end of last year, I was very careful about making sure we were cleaning up our own house before we focused on opportunities. We brought in a good head of sales that’s really driving this product project right now. And so, we have we have much more confidence in our bidding and proposal capability today. So, we’re definitely getting more active, and we’re definitely looking at more and bigger opportunities.

Todd Coupland, Analyst, CIBC Capital Markets: Yeah. Okay. And and what’s the the urgency, would you say, in the market right now? You have, I guess, you have sort of

Morgan Demke, Interim Chief Financial Officer, Quarterhill: I don’t

Todd Coupland, Analyst, CIBC Capital Markets: know if you’re impacted by Doge. I mean, lot of this is state driven, I suppose. But what’s the urgency, I guess, from a budget point of view? And then maybe leveraging the tech that you were talking about before. Yeah.

Give us a give us a sense on what are the factors that are impacting decisions.

Chuck Myers, CEO, Quarterhill: Right. The the biggest factor is, you know, usually the urgency is that these systems are are in for a long time. So, these these contract lives are coming to an end, or the technology is just kind of evolutionarily phasing out. A lot of these these systems that are bid there’s new ones. There’s new roads, like some of the stuff we looked at CTRMA.

The ACTC is a new road or newer road, anyway. And then we’re bidding we’re bidding on projects right now that have been in existence for a long time, but the technology is basically past its expiration date. So that’s usually where the urgency comes. You know, you touched on the right point, and it’s also got to do with sometimes with these contract renegotiations. I know they’re frustrating for you and they’re frustrating for all of

Gavin Fairweather, Analyst, Cormark: us,

Chuck Myers, CEO, Quarterhill: but they’re state and local contracts, which makes even the federal government look fast.

Stephen Lee, Analyst, Raymond James: So,

Chuck Myers, CEO, Quarterhill: they’re they’re painful to get through, but when they get through, they tend to be long term, you know, steady systems. This, again, is all legacy stuff from before I joined. But but we’re working very hard to get through these things, and hopefully, we’ll have some good news here in the short term.

Todd Coupland, Analyst, CIBC Capital Markets: And sorry, one last question on this. You you made the point on trying to have a higher software content Yes. In your business. What does the EBITDA margin look like with some of these new wins given given that software possibility?

Chuck Myers, CEO, Quarterhill: Right. So if you look at if you look at in the industry, you know, kind of the gold standard is 20% EBITDA corporate wide for this business. I think that there’s a there’s a lot of competition, you know, it’s part of the reason we see a good opportunity in this market because the market’s a bit fractured. You’re probably looking at at companies that are around 12% EBITDA margin across the Yeah. The corporation.

The difference is, if you look at the software, when you look at it from an integration perspective and and you look at yourself as an integrator, you’re looking at kind of 35% gross margins to 40%. Whereas, if you’re looking at the software components, you’re more up in the 6070%. And also, the maintenance gets significantly better with a modern architecture.

Todd Coupland, Analyst, CIBC Capital Markets: So, Chuck, is point on this that that just builds a case for your 20% goal where the industry’s kind of broken down at 10? Or is there a possibility above that? What what what’s your point on the 20?

Chuck Myers, CEO, Quarterhill: I think I think, you know, in the next two years, I think the probability is 20% as a corporate EBITDA. But I do think with the new software platform and taking a, frankly, a much more modern approach to it, you could see those numbers creep above above 20% in the next couple of years and more more software oriented margins. Now, some of it is it’s not completely realistic because you’re still gonna have implementations, you’re still gonna have subcontractors and things like that. But, you know, we still feel pretty good about 20%. And you can see if you if you add back the loss on those two contracts, we’re we’re we’re definitely keeping to our plan.

We didn’t get them resolved as fast as we wanted to, but you can see when we do, we will we we start to approach those numbers pretty quickly.

Todd Coupland, Analyst, CIBC Capital Markets: Sorry, Chuck, one last question. So on AI, you talk about how it can be used for vehicle counting, etcetera. This just a feature that people are going to want? Or does it actually give you revenue upside, I. E, you can actually charge more for that functionality?

Chuck Myers, CEO, Quarterhill: Yeah. What the reason you could charge more for that functionality is it eliminates humans. So right now, you know, a lot of the revenue recovery is based around violations and things like that. And a lot of it involves pretty heavily human involved image review. And when you’re putting those violations together, rather and also when you’re just identifying the vehicles or, you know, we kind of use the the the loose nomenclature of vehicle fingerprinting, you know, identify kind of a blue Toyota with this license number.

Or if I don’t have a license number, find the blue Toyota with these markings that’s been through these lanes because it doesn’t have a license plate, we wanna identify it. So, that’s one. So, you’re not requiring human intervention to do that. And, the other side of it is, when you get the just on the tolling side, it allows you to process you know, disputes and things much faster because you start to use kind of active learning with transformer models and and large language models. It allows the users and the customer service reps to be able to handle the calls and the chats and everything just with much less human intervention, which really drives your operating cost down for the customers.

And and that the software is more more reliable because it shows up at work. On the logistics side, you start to look at what you’re using for models like in a scene. So typical vision systems where we’re just kind of identifying a license plate or the color of a vehicle centered around convolutional neural networks. As you look at transformer models, and think of those as almost serial models. And transformer models are more active models.

So the it’s almost like the experience of actually monitoring a scene and identifying things that come up in an active and a parallel kind of processing thought process. So, there’s a lot more crossover between the convolutional neural networks and large language models, given that we’re using these transformer models, which only really kind of started to come about in 2017 and 2018. So, they’ve only now just gotten very good.

Todd Coupland, Analyst, CIBC Capital Markets: Appreciate you taking these questions. Thanks very much, Chuck. Absolutely. Thanks, Todd.

Conference Call Operator: And your next question comes from the line of Stephen Lee with Raymond James. Please go ahead.

Stephen Lee, Analyst, Raymond James: Thank you. Hey, guys. So on the program contracts, I appreciate the quantification of the impact. But I also want to clarify, as we say run rate impact, so every quarter drags on its $3,000,000 on the EBITDA? Thanks.

Chuck Myers, CEO, Quarterhill: I’d have to think about that for Steve.

Morgan Demke, Interim Chief Financial Officer, Quarterhill: Yes. So we’re taking action to bring that down from $3,200,000 in the first quarter this year. As we referenced last year was approximately $7,400,000 loss on those two projects. So we’re actually working to bring that down so that the quarterly rate or run rate is not $3,200,000 Part of that renegotiation and taking actions within the company. Yes.

Stephen Lee, Analyst, Raymond James: Okay. That’s helpful. Okay. And so leave aside these contracts. So can I ask if IRD grew year over year for Q1?

Morgan Demke, Interim Chief Financial Officer, Quarterhill: Yes, it did. Q1 of this year over last year was a growth of approximately 28%.

Stephen Lee, Analyst, Raymond James: Oh, wow. Okay, very good. Thank you.

Morgan Demke, Interim Chief Financial Officer, Quarterhill: It’s a seasonally soft quarter, so we just started the year off very, very strong. We’re looking forward

Chuck Myers, CEO, Quarterhill: to growing we’ve grown the margin significantly in that business over the last year or two.

Stephen Lee, Analyst, Raymond James: Got it. Thanks, guys.

Morgan Demke, Interim Chief Financial Officer, Quarterhill: You bet.

Conference Call Operator: And that concludes our question and answer session. I would like to turn it back to Mr. Myers for closing remarks.

Gavin Fairweather, Analyst, Cormark: All right. I’d like

Chuck Myers, CEO, Quarterhill: to thank you, the operator, for for hosting the call today. I I always wanna thank the investors and and and our shareholders for their patience and their support. And, you know, we we like to view ourselves as fairly transparent and and provide as much information as as we legally can without doing something we’re not supposed to. And I and again, our employees are working hard. I wanna thank our new board members and, you know, we’re I think everybody’s marching in the same direction.

So we we look forward to a positive outcome.

Conference Call Operator: Thank you, presenters. And ladies and gentlemen, this concludes today’s conference call. Thank you all for joining. You may now disconnect. Have a good day, everyone.

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