Quarterhill Inc. ((TSE:QTRH)) has held its Q2 earnings call. Read on for the main highlights of the call.
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Quarterhill Inc. Faces Mixed Fortunes in Latest Earnings Call
The recent earnings call for Quarterhill Inc. painted a complex picture of the company’s current financial landscape. While there were positive developments such as revenue growth, international expansion, and cost-saving measures, these were tempered by significant challenges including negative EBITDA, problematic contracts, and a debt covenant violation. The company is actively working to address these issues, but its financial performance remains under pressure.
Revenue Growth and New Business Wins
Quarterhill reported a Q2 revenue of $43.1 million, marking a 4% increase from the same quarter last year and a 27% rise from Q1. The company has successfully added $85 million in change orders and wins this year, including a significant $25 million annual renewal for an existing contract, showcasing its ability to secure new business and maintain existing relationships.
Cost-Saving Restructuring
In a bid to improve its financial standing, Quarterhill has implemented a restructuring plan expected to save approximately $12 million annually. This plan involved reducing the workforce by about 100 positions, equating to roughly 15% of the total headcount, with most savings anticipated in the cost of sales line.
Strong Performance in Safety and Enforcement Business
The Safety and Enforcement business segment of Quarterhill has shown robust growth, with its top line increasing during the quarter. This segment has significantly improved its gross margin, rising from about 20% to over 40% over the last six quarters, indicating strong operational performance.
Expansion into International Markets
Quarterhill’s international expansion efforts are bearing fruit, with recent wins in Djibouti, Thailand, and South Korea. These contracts, including a notable $2.8 million deal with the Louisiana Department of Transportation, underscore the global demand for the company’s enforcement solutions.
Investment in Next-Gen Technology
The company is investing in a new technology platform built on microservices and AI architecture, with a launch planned for Q3. This platform will feature AI-driven capabilities such as vehicle fingerprinting and predictive analytics, aiming to enhance Quarterhill’s technological edge and operational efficiency.
Negative Adjusted EBITDA
Quarterhill’s Q2 adjusted EBITDA was negative $2.7 million, a decline from the positive $1.7 million reported in Q2 last year, though it showed improvement from negative $3.4 million in Q1. This negative performance is a key area of concern for the company.
Problem Contracts Impact
Two problematic contracts significantly impacted Q2 adjusted EBITDA, reducing it by $3.9 million. Despite efforts to cut costs, these contracts continue to pose challenges, with ongoing mediation efforts underway to resolve the issues.
Debt Covenant Violation
Quarterhill was not in compliance with its financial covenants as of June 30. However, an amendment to the credit agreement has provided a waiver through Q3, offering temporary relief as the company works to stabilize its financial situation.
Decreased Gross Margin
The company reported a Q2 gross margin of 15%, down from 21% in the same quarter last year. This decrease is primarily attributed to poor margins on two tolling projects, highlighting areas needing improvement.
Forward-Looking Guidance
Looking ahead, Quarterhill aims to achieve sustainable profitability and margin expansion by resolving its problem contracts, realizing cost savings, and growing its higher-margin business. The company has secured $85 million in new orders and a $25 million annual contract renewal, indicating strong performance in its Safety and Enforcement unit, which has seen gross margin growth from 20% to over 40% in recent quarters. Additionally, investments in new AI-driven technology platforms are expected to enhance offerings and operational efficiency.
In summary, Quarterhill Inc.’s earnings call revealed a company navigating through both opportunities and challenges. While revenue growth and strategic investments paint a positive picture, issues like negative EBITDA and problem contracts underscore the hurdles ahead. The company’s efforts to restructure and expand internationally are promising, but achieving sustainable profitability will require addressing these financial pressures effectively.