Quarterhill Inc T.QTRH

RE:RE:v-g Last chance

[cabbieJBJ]

Pay attention weegee.  Let's review what we know:

1. The ETC and IRD platforms have been awarded contracts totally ~ US$485M in the past 24 months.  Based on these awards, the top line revenue number is secure.  Should there be any slippage in project elements, the revenue is only time shifted...not lost.  This projects a long term stable revenue landscape for QTRH.
2. Add-ons, change orders and option periods in the awards are not reflected in the US$485M, thereby providing additional support for the top line number.  At the time of the ETC acquisiiton, QTRH revealed that ETC total revenue from contracts was 8.8x the original face value.
3. The loss of IRD revenue from Ukraine due to the war with Russia is real (my estimate is $10-$12M = ~5% of F22 revenue).  However, in the longer term, once the war ends and reconstruction is undertaken, IRD stands to reap more than it lost. Therefore, Ukraine is not a long term revenue issue. 
4. At the time of the ETC acquisition, QTRH guided ongoing EBITDA of 15% throughout a contract for ETC with a lower number initially due to lower ramp up margins on new contract awards.  Year 1 guided at C$12.5-15.0M EBITDA on revenue of C$95.0-$120.0M.  Q1 was only slightly below the target.  IRD has traditionally exceeded the 15% target.
5. In all likelyhood, inflation will be higher in executing the contracts than factored in at the time of the quotes.  This will put pressure on margins and necessitate sound margin management.  Any contracts awarded now will reflect better estimates of inflation and the inflation challenge will become less of an issue.
6. There is no widespread pressure in the USA to abandon tolling at the state and local levels.  ETC's technology allows for flexibility in tolling programs.
7. The US$1.5B Infrastructure Bill's money is starting to flow to the local level rpoviding robust funding for the kinds of projects where tolling plays an integral role.

There are two main risks:

1. The inability to manage materials and labor inflationary/supply chain pressures.
2. Cancellation of tolling iniitiatives.

Margin management is unknown.  Q2/22 should give an early glimpse on the magnitude of the risk and management's abiliity to deal with it.  A widespread move away from tolling and other user pay programs is possible, but highly unlikely IMO; nevertheless, it needs to be recognized as a risk.