Quarterhill Inc.
Q3 2021 Earnings Call Transcript

Published: 10 Nov 2021

[Operator:]

Good morning, and welcome to Quarterhill's Q3 Fiscal 2021 Financial Results Conference Call. On this morning's call, we have Paul Hill, President and CEO; and John Rim, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the management's presentation, we will conduct a question-and-answer session, during which analysts are invited to ask questions. Earlier this morning, Quarterhill issued a news release announcing its financial results for the three and nine-month periods ended September 30, 2021. This news release along with the company's MD&A and financial statements will be available on Quarterhill's website and will be filed on SEDAR. 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. During this conference call, Quarterhill will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to Page 3 on the company's Q3 2021 management's discussion and analysts 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 Canadian dollars unless otherwise specified. I would now like to turn the meeting over to Mr. Hill. Please go ahead sir.

[Paul Hill:]

Thank you. Good morning everyone and thanks for joining us on today's call. In terms of agenda, I'll start with a look at business highlights followed by John who will take a look at our key financial results. Then we'll open it up for questions. Q3 consolidated revenue was CAD 36.3 million and consolidated adjusted EBITDA was CAD 7.6 million. We ended the quarter with CAD 60 million of working capital. And subsequent to quarter end closed a CAD 57.5 million convertible debenture that was oversubscribed and included the full overallotment options. The key highlight in Q3 was the acquisition of ETC, an ITS leader in tolling in the US market. The transaction has transformed Quarterhill into a major player in the ITS industry and ETC fit perfectly with our M&A strategy for several reasons. It establishes Quarterhill as a leader in the tolling vertical, which has strong market tailwinds. It's a second ITS platform for tuck-in acquisitions and a sister organization to IRD. ETC has an experienced management team that is targeting a CAD 4 billion pipeline of sales opportunities. There are good long-term revenue synergy opportunities between ETC and IRD. And it transforms the financial profile of Quarterhill to a predominantly ITS company with more visible and predictable financials. In Q3 just prior to the acquisition, ETC signed a 10-year contract to provide its back-office ERP solution to the Ohio River Bridges authority. The new system will streamline billing, improve ease of self-service and facilitate quick issue resolution for their customers. The 10-year contract is valued at approximately CAD 100 million and includes systems design, implementation and seven years of toll service operations. Two optional three-year renewal periods could increase the value of the agreement significantly. In addition, there is potential for expansion for change orders during the 10-year contract period, which could further increase the lifetime contract value. ETC continues to make good progress on its pipeline and we hope to be in a position to announce new wins in Q4. The process from any of these contract awards is that after an RFP period a short list of vendors is chosen and then from that list of vendors selected, a protest period of about two weeks follows. Should the protest period pass without issue, the selected vendor enters a period where final terms of the contract are negotiated. As a general practice, we will not make a formal announcement until the final contract is signed. That being said, I can tell you that ETC is currently approaching that final contract negotiation phase for three new opportunities that have an average term including option periods of 13 years. As these deals get closed we will announce contract values if it's permitted. Again, while they are not yet completed agreements these opportunities are either sale end of the protest period or in the contract negotiation phase. We expect to have updates on them soon. As M&A strategy, we continue to build a strong pipeline and we're seeing a number of high-quality assets of all sides as in attractive valuations. We set out with an ambitious target of deploying CAD 400 million over five years on M&A. And so far in 2021, we've deployed approximately CAD 160 million on three deals. Our intention is to keep the pace of M&A brisk and we continue to believe there's never been a better time to be an aggregator in the ITS market. The convertible debenture financing completed subsequent to quarter end, provides us with additional flexibility and resources to pursue this strategy. It was a successful CAD 57.5 million financing that involved a syndicate of seven dealers. It was oversubscribed and brought more than a dozen new institutional investors to the Quarterhill story. Increasing our profile in the investment community and raising the level of institutional ownership remain important objectives for us. IRD had a good quarter with new wins in Illinois, Oklahoma and Idaho. On a year-over-year comparison, IRD was impacted by FX headwinds and COVID-related delays in particular in Latin America, with several projects in the regions were temporarily placed on hold due to lockdowns. Excluding FX, revenue year-over-year would have been consistent with Q3 last year, despite the COVID delays in Latin America. We expect that FX will normalize in the near-term and that projects on hold will resume in these markets as they open. The strong fundamentals remain in place at IRD. It had a record quarter for new bookings. It has significant contracted backlog and the tuck-in acquisitions made earlier this year, Sensor Line and VDS are tracking ahead of plan. As we mentioned on our last call, IRD has already had some success bringing Sensor Line products to the US market and the companies are working together on other opportunities both in the US and outside North America. Finally, IRD has made good progress in appointing a head of its European operations and we expect we will have a person in the seat in January. Establishing this role will help us execute our strategy by strengthening our presence with customers and accelerating both our organic and acquisitive growth in the region. Q3 was WiLAN's best quarter thus far in 2021, with several license agreements resulting in solid adjusted EBITDA. WiLAN also acquired some patents in the semiconductor space, adding depth in an area of strength for the company. We remain optimistic for Q4. Deals are getting done as we saw in Q3. However, the timing for completing agreements remain variable and COVID is still a hurdle for travel and in-person meetings. As well, the courts do continue to experience some COVID-related delays as they work through their backlog of cases. Regarding WiLAN's litigation with Apple in the US, the oral hearing of federal appeals court took place in early October. A ruling could take anywhere from a few months to six months. WiLAN also has ongoing litigation with Apple in Germany with the first of three hearings having taken place in October, a second is set for later this month and a third scheduled for March. WiLAN's pipeline and patent portfolio remains solid and we continue to view the business as a reliable generator of cash flow to support its own expansion objectives as well as our broader ITS M&A strategy. In closing, we have made significant progress on our M&A strategy this year bringing scale to our ITS business and enhancing Quarterhill's revenue and earnings visibility. We have been working hard to get our story out to the investment community and we continue to do so in the coming quarters. We're encouraged to see some of the results of that effort and the strong interest we had in our convertible debenture offering, which was well oversubscribed. Already we have two institutional investor conferences lined up for January and we'll share more details on those events in the near future. With that I'll pass it over to John for a closer look at the numbers.

[John Rim:]

Thank you, Paul and good morning, everyone. I'll now walk through the consolidated third quarter results as well as the results from our ITS and Licensing segments. Consolidated revenue in Q3 was CAD 36.3 million and CAD 74.5 million year-to-date. Revenue was lower than the comparable period – prior year periods, due to the lower size of agreements completed in the Licensing business in 2021 versus the comparable periods in 2020. ITS revenue was higher for both Q3 and the year-to-date period, primarily due to the inclusion of revenue from the acquisitions we've made in 2021. Despite the COVID-19 pandemic remaining a challenge notably in Latin America where several projects were postponed due to lockdowns, IRD continues to demonstrate resilience and we are very encouraged by the strong underlying fundamentals of its operations. IRD's pipeline remains strong as its order book was at record levels in Q3. It has a significant backlog and future quarters will benefit when those delayed projects resume activity. Regarding ETC. The ITS segment in Q3 only included a month -- the month of September. As stated at the time of the acquisition, we estimate that ETC will generate annualized revenue between CAD 95 million to CAD 120 million and adjusted EBITDA between CAD 12.5 million to CAD 15 million within the next 12 months to 18 months. With contracts like Ohio River Bridge in Q3 and other opportunities moving through the pipeline here in Q4, we believe we are well on track to reach those targets. Licensing revenue was up in Q3 compared to Q1 and Q2 of this year, but down year-over-year due to the significant licensing activity that we saw in Q3 2020. Despite the headwinds related to COVID-19, WiLAN continues to show it can complete agreements in a challenging environment and remains a consistent generator of cash to support Quarterhill's overall M&A strategy. Consolidated gross margin was 42% in Q3 and 34% year-to-date which were lower than the comparable prior year period. The ITS segment gross margins were lower in 2021 as they fluctuate depending on the nature of projects underway during the period and their related margin profile as well as currency volatility between the US and Canadian dollar. Since a large proportion of our revenue in the ITS segment is denominated in US dollars and a portion of our cost of sales in North America are in Canadian dollars the depreciation of the US dollar during this period relative to the prior year has impacted our gross margin within this segment. In the prior year, we also had larger projects that we're undertaking with significant profit margins compared to a moderate mix of active projects this quarter with a lower margin profile. WiLAN gross margins rose slightly in the quarter and were lower for the year-to-date period 2021 period. Gross margin at WiLAN will fluctuate depending primarily on the level of litigation and contingent legal and partner costs incurred in a respective period relative to the revenue that's been generated. In terms of operating expenses, total consolidated operating expenses were higher in both Q3 2021 and the year-to-date period. The increase in operating expenses was primarily driven by the special charges and transaction costs, which relate to the acquisitions of Sensor Line VDS and ETC as well as the addition of those operating cost basis of those businesses. Overall, we continue to keep a close eye on expenses at the corporate level and all of our portfolio companies during the pandemic. Consolidated adjusted EBITDA in Q3 was CAD 7.6 million and year-to-date was CAD 4.1 million. The decrease in the 2021 periods was primarily due to the significant level of licensing activity at WiLAN in the prior -- in Q3 in the prior year. On a segment basis, the ITS business generated adjusted EBITDA of CAD 4.5 million in Q3 2021 and CAD 8. million for the Q3 year-to-date period. Both 2021 periods were impacted year-over-year by the deterioration of the US dollar versus the Canadian dollar in 2021 versus 2020 as a fixed portion of overheads are denominated in Canadian dollars as well as the fact that there were higher margin projects during Q3 2020. WiLAN's adjusted EBITDA for Q3 2021 was CAD 5.4 million and for the year-to-date 2021 period was CAD 2.7 million. Cash used in operations was CAD 10.9 million in Q3 and cash used in operations for the year-to-date period was CAD 15 million. Changes in non-cash working capital balances resulted in cash used in operations in Q3 and a majority of the increase in receivables has been collected post quarter end. Having used approximately CAD 75 million of cash from the balance sheet on the acquisition of ETC, our cash balance is down from the prior quarter end. However, the balance sheet remains strong with $60 million in working capital. And subsequent to quarter end, we completed the $57.5 million convertible debenture offering. We had a few positive developments regarding our capital structure since our last call. So I'll take a couple of minutes to summarize them. For the acquisition of ETC we've paid approximately $150 million, of which $75 million was cash from our balance sheet and the remainder was debt financing provided by syndicated banks led by HSBC. The debt facilities included a $63 million term debt facility and a $19 million revolving credit facility. For the acquisition, the term debt facility was drawn in full and $12 million withdrawn on the revolving credit facility. The debt facilities also include an accordion feature, which we can access for future M&A purposes. In October, we filed a preliminary base shelf prospectus with capacity to raise up to $200 million over a 25-month period. This will allow us to access capital readily, as strong M&A opportunities arise. And subsequent to quarter end, we raised $57.5 million through our convertible debenture offering. We raised this financing for several reasons. We expect to replenish our balance sheet over time from our existing portfolio companies, but having the additional capital now gives us tremendous flexibility to be opportunistic in the near term, given the quantity of high-quality assets we're seeing in our pipeline and our desire to maintain the pace of our M&A growth. On the convertible debentures, the conversion price is approximately 45% premium as of yesterday to the current share price. So we're able to raise capital in a non-dilutive way now at a relatively low cost interest rate. Finally, it is an opportunity to bring new institutional investors to Quarterhill and that's an area of focus for us, that we think over time is important to driving shareholder value. So, in closing, we remain well positioned to continue to execute on our M&A strategy. We have a strong balance sheet today with cash and working capital, as well as the ability to support additional leverage. And we have three strong operating platforms capable of generating cash to further support the acquisition strategy. As we have said many times, our plan is to deploy up to $400 million on our strategy over the next five years to scale the ITS business and we've made great progress so far in 2021, having deployed approximately $160 million or 40% of the five-year target on the three acquisitions. As we discussed in the past, we believe that deploying this capital could add an incremental $300 million plus of revenue and $50 million plus of adjusted EBITDA to our ITS segment over the next five years, on top of our IRD business over that time. ITS revenue comes with a more consistent and predictable profile, which we believe should result in Quarterhill receiving a valuation that's more consistent with other public ITS and IoT telematics companies that have achieved similar scale. The net result of the strategy is to unlock our growth in shareholder value over the next five years. Finally, we continue to -- our quarterly dividend payments in Q3. And with this morning in our earnings release we announced details of our next dividend payment. The Board of Directors have declared an eligible dividend of $0.0125 per share payable on January 10 2022 for shareholders of record on December 10, 2021. So this concludes my review of the financial results and I'll now turn the call over to the operator for Q&A.

[Operator:]

Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. Your first question does come from Doug Taylor from Canaccord Genuity. Please go ahead.

[Doug Taylor:]

Yes. Thank you. Good morning.

[Paul Hill:]

Good morning. Good morning, Doug.

[Doug Taylor:]

Since our last update, the large infrastructure bill that's been working its ways through U.S. political arena has certainly progressed. I wonder, if I could just get you to update us on any revised thinking about, how and when that might start to manifest in terms of bookings for IRD and ETC and whether that has impacted any of your conversations around the pipeline for either of those entities, yet?

[Paul Hill:]

Yes. Good question, Doug. Yes. First of all, it's great news that the bill got approved and what we anticipate is the money will start flowing down to the state levels over the next few quarters. It won't be instantaneous, but we will see incremental funding of program and there's a lot of momentum. We're seeing it especially in the ETC pipeline. We have a lot of deals in the pipeline over CAD 4 billion of opportunities. And we think if -- I mean this will even secure that pipeline and grow it incrementally over time as well. So we're very optimistic about it.

[Doug Taylor:]

Good quarter for the ITS businesses overall, do recognize that there's some seasonality in those businesses.

[Paul Hill:]

Yes.

[Doug Taylor:]

But just trying to I mean now that you've had ETC kind of under your umbrella now for I guess a couple of months. Can you provide us any update on, how we should think about modeling out the seasonality of that combined entity and whether ETC is as seasonal as the IRD business had proved to be?

[Paul Hill:]

Yes. There is some seasonality for sure. I would say, what I'm thinking is this time of the year sort of Q4 time of the year, as you see in a lot of technology companies, there's a bit of a hockey stick, which is a little bit different than IRD, right? Because IRD seasonality is kind of Q4 Q1 -- Q1, especially. So it's a little bit different in terms of when those things happen. And actually one of the things that's happening in terms of synergies between the companies even is, we're kind of taking advantage of some of the differences in seasonality of the two businesses by sharing some resources especially in the US market. So that's an example of where that can play to our favor. But we're seeing really good opportunities in Q4. I mentioned on the call that we have three deals that we're getting into the contract negotiation phase. So we've essentially been selected and have made it through the protest period. And so that's just -- it bodes very well for the quarter as well for the ETC business.

[Doug Taylor:]

That's great to hear. I just wanted to clarify, I mean you announced the license with Motorola. And I know it's hard for us to kind of understand the size and magnitude of these licensing agreements when you press release them. But the timing of it, I just want to understand whether that was in fact all reported in Q3 or is that a Q4 item? And if that was one of the big reasons for the working capital receivables machinations kind of around the quarter end?

[Paul Hill:]

I'll let John answer the second question. First question, is yes, it was a Q3 deal. So it showed up in Q3.

[Doug Taylor:]

Okay.

[John Rim:]

Yes, absolutely. Doug, you hit the nail on the head. There is a bit of a lag. There is always a timing difference of when the deals are signed and we recognize revenue and then we eventually collect the cash on it. But that was post Q3.

[Doug Taylor:]

Okay. And I mean you maintain a pretty constructive outlook for quarter -- for WiLAN I should say for the balance of this year. Previously, you'd kind of talked about the potential for that business to generate cash flows in the ballpark of what it had done on an annual basis in recent years. And as we're halfway through Q4, I wonder if I could pin you just maybe a discussion of whether you do think that 2021 for the factors that you mentioned with things getting pushed out may end up being a softer year for the WiLAN business and then you'll recapture some of that in the years ahead?

[Paul Hill:]

Yes. I mean as I've said in the past, we don't provide guidance for WiLAN just because of the nature of the business as you know. A couple of things I would say to consider. First is, we do have a strong licensing pipeline at WiLAN. We've got over 20 licensing programs that are active and multiple opportunities in each of those programs. We have litigations on the horizon with companies like TCL and Micron AMD and of course, Apple both US and Germany and Canada. Other considerations I mean there was a recent summary judgment that went against us with Amazon a non-infringement summary judgment that happened a couple of weeks ago. So that's more of a headwind effect. And we're evaluating our options there as it relates to Amazon in that litigation that was scheduled to happen. And I think the other thing is, we don't want to kind of rush these negotiations just to drive a certain number in a certain quarter. We want to make sure that we're maximizing the return on these deals. But I would say, what I said last time which there's a lot to work with and it's very active with that caveat around COVID delays there is a backlog in the course. That's a fact. And this Amazon ruling will -- the effect of the Amazon summary judgment is that that will delay that certainly out of the quarter for sure.

[John Rim:]

Yes. And Doug it's -- we've mentioned it quite a few times before but WiLAN remains variable, but that's exactly why we're focused on ITS. And we're diligently working way on our M&A execution strategy so that we have stronger visibility into our revenues on a more consistent basis quarter-on-quarter. And we made great progress so far this year.

[Doug Taylor:]

Yes. I think we can all see that it's been a successful strategy so far, but I do have to put something in our model for WiLAN as you know. I appreciate the color. I'll pass the line.

[Operator:]

Thank you. Your next question comes from Steven Li from Raymond James. Please go ahead.

[Steven Li:]

Hey, thanks guys. Hey Paul, I wanted to clarify a couple of your prepared remarks.

[Paul Hill:]

Sure.

[Steven Li:]

So first on M&A. In the press release you say ETC can accelerate M&A. Can you give a bit more color on that? Are there that many more active targets in tolling for example?

[Paul Hill:]

Yes. Yes absolutely. I mean ETC had its own existing M&A pipeline before we acquired the company. So we essentially inherited a very active M&A pipeline. And there's lots of opportunities around extending their product capabilities and service capabilities be it through vertical integration of some of their supply chain be it through offering BPO services for some of their capabilities be it software acquisitions et cetera. So yes absolutely. So the way to think of it is we had a very active IRD tuck-in pipeline and now we have a second full tuck-in pipeline under ETC and we're working both in parallel.

[Steven Li:]

Okay. That's great. That's helpful. And then again on ETC the three contract awards that are in the protest period are they similar in scope to the Ohio River's one?

[Paul Hill:]

Yes. That's a good way of looking at it. Like Ohio is in that sort of $100 million range a 10-year contract. If you take the three opportunities that we're working on right now you can kind of just on an average basis assume they're in the same kind of ballpark in terms of size and contract length.

[Steven Li:]

Okay. That’s great. Thank you.

[Paul Hill:]

Sure.

[Operator:]

Your next question comes from Gavin Fairweather from Cormark. Please go ahead.

[Gavin Fairweather:]

Hi, there. Good morning.

[Paul Hill:]

Good morning.

[Gavin Fairweather:]

Just to start out on ETC just on the three kind of later-stage opportunities. Can you confirm is that a mix of kind of roadside back office or both or?

[Paul Hill:]

It's both. Yes. There's opportunities in both. Yes.

[Gavin Fairweather:]

Yes. And then just on kind of that $4 billion pipe that's being pursued. Given kind of the sales cycle in this type of business would you expect most of that to kind of move through to award kind of over the course of 2022, or could some of it trickle longer, I guess? I'm just trying to think about like when that business will be contracted?

[Paul Hill:]

Yes. Most of that is going to happen. There was a decision made on that pipeline over the next 18 to 24 months, but a lot of it is actually happening in 2022 which is great news. And of course, as I mentioned we have three deals we're working on that we're getting very close to the end of the process right now. So they're kind of evenly spread honestly over that period of time roughly.

[Gavin Fairweather:]

Okay. Great. And then, maybe just on ITS. Just on the gross margin profile, it could be a bit tricky. I mean IRD's gross margins to kind of bump around between, kind of the low to high-30s. And then, I think with ETC their margin profile can flex around depending on where they are on projects and change orders and things like that. So any kind of help that you can provide us on how we should be thinking about the gross margin profile of that business might be helpful for us from a modeling perspective?

[Paul Hill:]

Yeah. I’ll make a couple of comments, and then I'll ask John to chime in on it as well. What I would say is, ETC is very much in growth mode right now where they're -- as we just said right, they're pursuing a very large sales pipeline. And the nature of that business, the tolling business these 10 to 13-year contracts is the margin expands over the life of the contract. So, the overall margin profile for ETC is a function of the maturity of your customer base. So, given that we are adding a lot of new customer's ETC there'll be a bit of margin compression in the short-term but over the long term that margin profile will improve quite significantly, especially as we get into change orders and extensions. But -- so there's a bit of a trade-off between growth and margin for ETC over the next period of time as we pursue these new deals. That would be my -- and I wouldn't make any changes to your assumptions around IRD. Those margins will continue to probably hover into that kind of 30% range that you described. John, do you want to comment more on that?

[John Rim:]

Yeah. I think you did a great job sort of encapsulating that sort of at a high level. So I echo that. When you get initial contracts, you're in what's called the implementation phase. And it's during that implementation phase that you're looking at between, I would say, 12% to 15% gross margins, but it matures overall. And I think our average with change orders over the term of the contract is in the 30% to 35% gross margin range. So it scales up. You go implementation, then it's service and maintenance and then it's change orders which the margins there are high 30s to 50% even in some cases. So as we grow, I think what you should be seeing is top line growth with a lower margin profile. But still we have tremendous amount of capacity at the ETC business we're scaling up and a positive contribution margin. And then, as the contract matures and progresses and change orders start to come in then the margin of those new contracts starts to increase on average. And then, of course, we have our existing customer base, which are already in various stages in their life cycle and some are very mature and some are sort of in the middle and so forth. On the IRD side, I think we mentioned on a couple of other calls. They -- we have acquired two product businesses. I mean those were tuck-ins. They're smaller, but the product margins are higher. The other between 50% to 60%. And so they -- as they grow those businesses that could contribute more to the gross margin, if they become a higher proportion of our sales. And then the final thing, and I mentioned this during my prepared remarks is, the -- we report in Canadian dollars. We have the majority of our sales in US dollars. When that flips, also our cost of sales there are some Canadian dollars in there, 30% of our cost of sales for IRD, 70% of the SG&A in Canadian dollars. And so, as we see the US-Canadian dollar start to normalize, back to sort of historical levels, you'll also see an improvement from there I believe over time.

[Gavin Fairweather:]

That was very helpful on different moving parts there. And then, just lastly for me maybe on WiLAN. We've been speaking about some of the core plumbing issues and the backlog for some time. Curious if you have any visibility on an improvement to that? And then maybe just secondly like, is that in any way kind of impacting license negotiations and those types of things if the courts are just clogged up?

[Paul Hill:]

Yeah. I mean that's been an issue really since COVID started for, not just the WiLAN business but even parts of the IRD business as we just talked about with Latin America shutting down last quarter with the fourth wave, right? What's changed though is the courts are open generally speaking now, but what has happened is there's a much larger backlog of cases. So, it's evolved from a situation where the courts were closed at the beginning of COVID essentially for a period of time to now a situation where the courts are working through a backlog that accumulated over the COVID period. And so yes, it does have an effect for sure. And the other effect is as I mentioned in my remarks as well is travel, right? And a lot of licensing deals the most effective ways to get those deals done is in-person. And some of that has been more difficult until recently and that's starting to improve as well. But it's still kind of early days of travel improving as well.

[Gavin Fairweather:]

Great. That’s it for me. Thank you.

[Paul Hill:]

Thank you.

[Operator:]

Thank you. Your last question comes from Todd Coupland from CIBC. Please go ahead.

[Todd Coupland:]

Good morning everyone.

[Paul Hill:]

Good morning.

[Todd Coupland:]

I had a few questions if I could. Just wanted to pro forma the cap structure. So, the only change in all the acquisitions including ETC have been funded at the end of this quarter but you added the convert and then you add that to the cash. Is there any other adjustments to any other debt items on the balance sheet post the end of the quarter?

[John Rim:]

No, I think you've captured the two big pieces.

[Todd Coupland:]

Okay. And then I was just curious you said you reset your loan agreement. What's the average interest rate on the long-term debt in the term please?

[John Rim:]

So, we filed our -- the actual the credit facility on SEDAR as material contract. I believe we redacted the grid. So, it depends on our leverage ratio, but it's based off of -- it's a base rate plus LIBOR and it's in the low single-digits.

[Todd Coupland:]

Okay. So, 3%-ish for the debt that you've added would be reasonable in terms of modeling it?

[John Rim:]

Yes, I'd say that's pretty reasonable.

[Todd Coupland:]

Okay. And then it's 6% on the convert I think is the outcome?

[Paul Hill:]

Yes, 6% on the convert, yes.

[Todd Coupland:]

Yes. Okay.

[John Rim:]

The other thing Todd is I did note that $12 million out of the credit facility was on a revolver. That's a committed revolver as we've outlined in our credit facility document there. We can pay that back and redraw it again at any time with a day's notice. And so we manage our working capital and we manage our cost of capital as well too. So, we have a lot of cash right now to manage and flex that up and down as we need.

[Todd Coupland:]

Okay. So, just for modeling purposes. So, model out the 3%-ish on the $63 million and then you with the excess cash you probably pay the revolver down and just see how it goes with other M&A et cetera?

[John Rim:]

That's exactly it, right? Since we had the cash we paid -- not incurring the interest. And then when the -- when we need the capital M&A comes up and as we've mentioned we have a lot of things in our pipeline, we could access it immediately.

[Todd Coupland:]

Right. Okay. That's great. I also wanted to ask you about the ETC 10-year deals. So, you're more or less saying they add $10 million a year in revenue is my takeaway. So, $10 million to $30 million if you win them all. So, with that effectively the incremental revenue to the $95 million to the $120 million that you called out when you announced the deal?

[Paul Hill:]

Well, the Ohio River Bridge's deal was closed before the acquisition. So, that one was already factored in. The ones I'm referring to would be incremental. But we did -- obviously, when we gave you that range, we had assumptions around certain win rates as part of that, right? So it's not simple math. I would say there is a degree of additives nature to it though.

[John Rim:]

Yeah. So just to provide a bit more color. When we gave you that range, we -- I think we also mentioned on our calls that ETC was at various stages of various RFPs that they had been working on. So the other thing that we mentioned was the $95 million was kind of their base business, what they've already secured. So it is incorporated -- it is incorporated in that range in the short term. There's other deals that they're working on as well too.

[Paul Hill:]

But I guess the bigger point I would make is the momentum is very good at ETC and their win rate is higher than we had originally modeled, which is great. But it's going to take time for those to become sort of additive to the model in kind of any kind of material way yet. So I think the range is looking good. And we'll see as more deals come in. But these deals -- I just want to put a caveat. They're not signed deals, right? They're just -- they're in the process. We've been selected, but not contracted. And so, there's always that possibility that they don't all close, right?

[John Rim:]

Yeah.

[Todd Coupland:]

But I mean on that point, the takeaway is sort of $95 million is pre these deals if you will and then they flex to these deals, if you're successful somewhere in the range?

[Paul Hill:]

Yeah, that's not quite that simple. But yes, I mean that's sort of the way to think of it I would say yes.

[Todd Coupland:]

Yeah. Okay. Okay. Okay. That's great. And then just -- I mean you put the teaser out there you have the shelf and deep M&A pipeline. Doesn't sound like there's too much integration that you need to worry about with ETC. So lots of opportunities. So the message is you're still working hard on that pipeline and you don't feel gated by this last deal, is that right?

[Paul Hill:]

That's right. Absolutely, right. Yeah. Very active. There's some very attractive assets out there. And as I said earlier ETC came with its own M&A pipeline and there's some very attractive opportunities there.

[John Rim:]

Yeah. But the thing I would say is it was large -- because it's a separate platform with its own management team in a separate subsegment of road, the integration is largely sort of back-office financial reporting systems that type of thing. But I think Paul has alluded to a few things as well. The CEOs of both our ITS businesses are already talking and bringing each other deals and talking about ways they can work together long-term. It's pretty exciting.

[Paul Hill:]

Yeah.

[Todd Coupland:]

Okay. That sounds good. And then just for modeling purposes, I mean I more or less took the $100 million and spread it out over a year. With these deals having to close still, is that maybe the wrong way to think about the rhythm of the business and it will ramp up over time to that $100 million? Is there any granularity you can talk about on that?

[Paul Hill:]

Yeah. So like just to sort of -- not to pick on a particular deal, but just for instance. If we were to close a $100 million deal over a 10-year period, you can assume the revenue split is relatively even over that period of time. So you divide it by 10 essentially.

[John Rim:]

Yeah.

[Paul Hill:]

There are sometimes a little -- there's a little bit of front-end loading to it sometimes. So in other words, year one might be more like 12, 13. And the reason for that is there's a lot of upfront implementation work and then you kind of go into more of a maintenance contract running the operations of the system over the subsequent years. So it's one of the reasons the revenue at the beginning of the contract can be quite strong, but then the margin is a little bit lower at the beginning of the contract too, because you're taking on sort of upfront cost to get the system implemented. That's kind of the dynamic of these deals.

[John Rim:]

Yes.

[Todd Coupland:]

No. But Paul, what I was wondering is even -- let's say whatever timing these take a while to sign, is it appropriate right now to just take the $100 million in 2022 and divide by four? Is there more of a gradual path up to that sort of $25 million a quarter type of revenue level?

[John Rim:]

Well, it's just to make sure that we're clear here. When we say $100 million that's a 10-year contract.

[Todd Coupland:]

Sorry. No I'm thinking about the original ETC guide. Sorry, I apologize.

[John Rim:]

Sorry, quarter-over-quarter -- yeah, I think Paul mentioned earlier, ETC is less affected, let's say by seasonality than IRD is. It's simply because they have …

[Todd Coupland:]

Yeah.

[John Rim:]

…couple of components, right? They do outside roadside -- systems implementation which is outside, but there's, the back-office ERP systems. So that is not outside. So IRD has a ton of projects. And they're all outside. So…

[Todd Coupland:]

Okay.

[John Rim:]

… IRD is a bit more impacted.

[Paul Hill:]

Yeah. So there's just less seasonality. Yeah, I didn't catch what you were saying there Todd. Yeah, John is right there's less seasonality on it. So yeah, I think you're on to the right point there.

[Todd Coupland:]

Okay. Okay. And then, just one other question on the M&A, I mean, ETC, I mean, I guess I would consider that transformational for Quarterhill. Do you …

[Paul Hill:]

I agree.

[Todd Coupland:]

… when you look at the pipeline, I mean, you filed a big shelf. So I mean, do you see even see a step function up from that, in terms of incrementally transformational in terms of the types of things you could do? Just talk about like, the types of things you're giving serious consideration too?

[Paul Hill:]

I mean there are a number of conversations happening in parallel and deals of all sizes. I would say, what's most probable, are mid-size to smaller-size in the nearer-term just because, we can probably get to those deals and get them done in a shorter timeframe. So think more in terms of tuck-ins I think in the near term. But tuck-ins of more scale though. If you remember the first two deals we did were quite small, right? They were basically vertically integrating. One was a fiber optics company Sensor Line and the other one is a pretty exciting company but a small company in the photo radar area in both German. Those are small deals though. So I think we're looking at things a little bigger than that. John, I don't know if you'd add any color to that?

[John Rim:]

Yeah. I mean, like Paul and I our philosophy is first and foremost we want a quality business. There's, lots of synergy opportunities. And when we get a deal done they're very actionable, right? But that said, another consideration is we want to -- it's a lot of work. So we want to -- if we can move the needle. And so Paul mentioned, there's a -- ETC came with a great pipeline itself. It's in the space that we want to be in as well too enhance our capabilities. And so very exciting times and a lot of good high-quality assets there that are -- yeah like Paul mentioned, bigger than the very small ones that we did at the beginning of last year or this year.

[Todd Coupland:]

Yeah. Okay, okay, yeah great. Thanks for all the color. I appreciate it.

[John Rim:]

Anytime, thanks, Todd.

[Operator:]

Thank you. There are no further questions at this time. Mr. Hill, you may proceed.

[Paul Hill:]

Well, I'd like to thank everyone for participating on today's call. And we certainly look forward to speaking to you again in the coming months. Thanks. Goodbye.

[Operator:]

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating. And ask that you please disconnect your lines.