Quarterhill Inc T.QTRH

ETC Pipeline - M & A conference call

[astutein]

Cabbie Let's talk your ballgame ITS and Conference call.  I have read conference call 3 times regarding ETC. In conference call Paul stated:

Etc continues to make good progress on its pipeline and hopes to announce new wins in Q4. He further states the selected  vendor after protest of weeks, the selected Vendor enters a period where Vendor enters a period of where final terms of contract are negotiated.
No formal announcement until final contract signed.

in question by analyst Paul responded 
I can tell you that ETC is currently approaching that final contract negottation phase for three new 
opportunities that have an average term including option of 13 years.  He mentioned 100million range  and 100 million range.

I seems from talk we have won 3 major contracts.

Cabbie If we win these three major contracts will our EBIDA skyrocket and drive the price of our ITS skyward and be a game changer?

[Capharnaum]

No, because on ETC contracts, margins grow over time and are lower initially.

[cabbieJBJ]

Astutein, Capharnaum is correct. I believe Paul Hill said that margins are in the 35% range over the life of the contract, but in the 10% to 15% range on startup. Check the transcript to confirm. I think Hill also commented on the $90M - $120M revenue forward estimate was from continuing operations and did not include new contract wins. This needs to be checked against the transcript.

[cabbieJBJ]

Astutein, nothing has been won yet, but the situation appears promising. We're all going to have to learn the ITS sector and its lingo. We need to understand if when ETC is "selected" if they are the only vendor. We learned about the 2-week protest period yesterday. Once the negotiation period gets underway, the nuts and bolts are nailed down. What I don't know is if ETC is the

[v_guerriero]

At the contracting phase they are the only player at the table.   Yes, a deal can fall apart as they write the terms and conditions, but that is rare.  The other things that we have learned is that these contracts can be manifold the original due to the change orders that come through.  So on paper, this is $400M of revenue from Ohio plus these other three contracts, but will

[cabbieJBJ]

v_g, thank you for reminding us of the typical 8.8x multiplier effect on these kind of ITS contracts.

[v_guerriero]

You can do the math.  It is a razor and blades model.  Gillette doesn't make any money on the razor.  They make it all on the blades.   10% margin on the $100M original contract. 20% margin on the $800M total change order. This is the equivalent of collecting the Apple verdict multiple times (spread out over 10 years of course)   

[BearBullMarket]

I used to work in sales and all I did was write/ respond to RFPs and contract them as well. There is NO WAY, that any vendor nor client would have over 8 times contract value in Change Orders, No Way. These contracts mentioned are 10 years and your saying that the client is willing to spend almost the entire RFP contract value in 1.5 years in Change Orders. Why not issue a new RFP if the scope is

[whaler83]

I'm a project manager. A typical project size I manager is around $50M-$100M (approx 5 year project in execution) and I generally manage multiple projects arlt a time. I'm currently preparing variance documents asking the board for more money due to change orders on 2 projects. Both are in the 30% range in additional change orders. If I put change orders in for 8 times the original

[v_guerriero]

You can look at the investor presentation.  I am not making this stuff up.   State transportation departments start adding new highways.  Or new toll routes. Instead of having two or three competing back office systems they tend to go with the incumbent.    

[barneyj44]

Great information Guerriero and Cabbie, keep up the great work . Nice to see a small rebound today....

[shareholders1]

Two posters with RFP experience have now commented on VG 's post (copied below). Similar to VG's "here comes the HALT !" posts of a few weeks ago, this seems to be more ridiculous hype from VG and my view is what VG writes is not entirely credible. Seems like a pump and dumper. VG Post: "You can do the math.  It is a razor and blades model.  Gillette doesn't

[whaler83]

i'd say that the original contract could likely result in additional contracts worth up to $800M from the client. Why would you build 1 road with 1 toll system then another road with a different toll system?  So in theory, the original $100M contract is just the start. Unless the contractor totally screws that contract up. My opinion

[cabbieJBJ]

Shareholders, ask Dave Mason for comment on the 8.8x mutiple.  Then share it with the board as we are all learning about the ITS segment.  While it's high comnpared to the RFP experience of a couple of posters here, it is in the investor presentation.

[shareholders1]

Based on what you have posted, my prior comment seems incorrect. Nonetheless, I will follow-up.

[whaler83]

i just think its either  a) a difference of language between construction industry personell and non construction industry personell (change orders vs. multiple contracts) b) industry specific to roads to have change orders of that magnitude The definition of a project is that it has a defined start and a defined end.  If change orders submitted during the project result in 8 times

[whaler83]

sorry meant to reply to a different thread

[cabbieJBJ]

Whaler, there has been much important learning this week about the ITS sector and ETC.  More to come for sure.  You should be aware that the 8.8x is based on four ETC existing contracts as outlined in slide 14.  I'm guessing, but the difference between fixed point construction contracts and tolling contracts is that ETC is providing a service during a term of 10+ years

[whaler83]

Sounds good to me. However they want to call it, 8.8x of original contract value sounds fantastic. What a sector to be in. Looking forward to the next 5 years.

[cabbieJBJ]

Astutein, my understanding now is that ETC is the winner and the 3 RFPs are now in the protest phase. After the protest period (usually 2 weeks), and resolution of protests, if any, negotiations can begin. Negotiations typically take about a month to complete. If all goes well and according to timing norms the should be an announcement towards year end.