Is ETC performing to expectations?The simple answer is probably yes.
In announcing the closing of the ETC acquisition, the news release said,
"On a post-synergy basis, within the next 12-18 months, Quarterhill estimates that ETC will generate annualized revenue between $95.0 to $120.0 million and Adjusted EBITDA between $12.5 to $15.0 million."
Trailing 12-month revenue baseline pre-acquisition was ~$66M, reflecting IRD results. As of Q1-22, TTM revenue is $126M. On the year end call, management indicated that the Q4-21 revenue represented the expected run rate based on known new business. Q1-22 was slightly short at $38M, but management commented as follows:
While we've had a good run of winning new business and our implementation and new sales pipelines remain full, several factors in Q1 impacted our top and bottom-lines in the ITS segment, which are largely timing related.
One is that there is seasonality in IRD's Q1 due to regular delays related to winter weather. This can impact project implementation and related billing and we saw some of that and in Q1. We see IRD is picking up in Q2 and into the second half of the year as we enter the stronger seasonal periods. IRD already also had a project which certainly costs we're recognizing Q1, while related revenue will be recognized in Q2 and Q3.
At ETC, certain new project implementations ramped up a bit slower than expected in Q1, but again, nothing that we don't see as picking up during the remainder of the year. We're definitely not talking about any lost opportunities in any way.
As an example, in one case, a customer decided to begin implementation on a series of smaller tolling lanes first, rather than starting with a larger portion of their road network, which had been originally planned. It doesn't alter the scope of the project, just the timing of the work and the receipt of the implementation revenue associated with each set of lanes.
The third factor relates to the macroeconomic forces that I spoke up on our year end call in March, which include both availability and cost of labor and supply chain issues impacting access to certain project materials. Both had an impact in Q1, but we are working to mitigate that impact going forward.
To address supply chain impacts, we're working to secure alternative sourcing, adjusting operations, and working with customers to get hardware orders and much earlier programs.
On the labor side, our ITS businesses have strong cultures and we're doing well retaining staff which is certainly a competitive advantage these days. To accommodate the significant amount of new business this year, we continue to add resources and recruiting experienced hires, while also ramping up college recruiting, offshore capabilities, and other sources of technical talent.
Finally, to recognize both supply chain and labor cost, we're aligning our proposals and pricing to reflect the realities. As for the outlook for the ITS segment in 2022, we have work to do, but our view has not changed from our year end call and we continue to expect growth a year from Q4 revenue run rate with an adjusted EBITDA margin in line with that generated in Q4.
Based on this information, the TTM revenue at year end should be ~$185M to $200M, an increase of ~$119M to $139M from baseline.
In addition, management indicated that the ETC sales pipeline order of magnitude was ~$4B (USD $3B). Any awards in line with historical win rates would push the 2022 revenue well above the top $120M figure disclosed at acquisition.
The revenue target may be more challenging. As noted in the management comment above, steps are underway to ameliorate the impact of inflation, human resources and supply chain issues. As several new contracts that have onboarded this year work through the implementation phase and into operations, we are told margins will improve. It is incumbent on management to deliver demonstrable results that point to an achievable EBITDA 15% target as F2022 unfolds.
If management can demonstrate the path to the EBITDA target, investors will focus on the top line, which appears to be quite exciting.