Quarterhill Q3 2026 Earnings Call - DEFI TECHNOLOGIES INC

Financial Performance:

• Q3 2026 revenue reached $43.2 million, up 9% year-over-year from $39.7 million, marking the highest quarterly revenue since 2022.
• Gross margin expanded 230 basis points year-over-year to 29%, driven by restructuring and improved contract economics, yielding $12.3 million in gross profit.
• Achieved fifth consecutive quarter of positive adjusted EBITDA at $3.9 million (9% of revenue), a significant improvement from $1.4 million (3% of revenue) in Q3 2025.
• Revenue backlog stands at $418.9 million as of September 30, 2026, representing a strong pipeline of existing signed contracts and defined extensions.
• Cash flow from operations used $8.6 million in Q3 (versus $6.4 million generated in Q3 2025), primarily due to acquisition-related transaction costs for the Conduit deal.
• Cash balance increased to $51.6 million at quarter-end from $26.2 million in Q2 2026 following a $51.8 million CAD private placement and divestitures.
• Capital structure simplified by fully repaying $57.5 million CAD in convertible debentures and accrued interest post-quarter; eliminated dilution risk from debt conversion.

Guidance and Future Outlook:

• Management targets closing the Conduit tolling business acquisition in Q4 2026, pending regulatory approvals (TSX) and closing conditions.
• Strategic focus for 2027 is on accelerating growth and scaling the business, leveraging a strengthened balance sheet and improved operating performance.
• Confidence in execution remains high, with management stating they have "never been more confident" in the strategy.
• The new AI-enabled modular platform is being rolled out to customers starting in January, designed to automate labor-intensive tolling operations and scale to broader transportation markets.

Business Segments and Product Lines:

• Tolling: Secured a multi-year subcontract with LA Metro (approx. $28.2 million, up to 14 years) to support Express Lanes back-office systems, validating next-generation technology capabilities.
• Commercial Vehicles: Achieved traction with a $5.25 million contract in Oklahoma for full screening suite deployment (I-35) and won maintenance contracts from Pennsylvania and Idaho DOTs.
• AI & Technology: Leveraging vehicle ID, automated image review, and anomaly detection to improve accuracy; investing in AI capabilities to create efficiencies and support transportation agencies.
• International: Expanding presence in Europe and the UK via inherited Conduit assets and commercial vehicle growth; divested underperforming speed enforcement cameras in Germany to align strategy.
• Divestitures: Sold remaining 10% equity interest in YLAN and received an early $6.25 million earn-out payment, generating $8.5 million in aggregate proceeds.

Market and Competitive Landscape:

• Technology serves as a primary competitive advantage, enabling wins in long-duration transportation programs and allowing phased adoption without replacing existing agency systems.
• Market opportunities identified in upcoming RFPs for tolling and Intelligent Transportation Systems (ITS) in North America, Europe, and the UK.
• Conduit acquisition expected to enhance market position, with customers expressing cautious optimism regarding the transition and integration.
• Bidding strategy for joint RFPs with Conduit is currently subject to antitrust considerations, with full details expected upon deal closing.

Risks and Challenges:

• Regulatory & Integration: Closing of the Conduit acquisition is contingent on receiving TSX approval and satisfying other closing conditions; integration planning is ongoing.
• Market Sensitivity: Customer feedback on the Conduit transition is described as "cautiously optimistic," indicating potential operational friction during the handover.
• Cash Flow Volatility: Near-term cash usage impacted by acquisition-related transaction costs, though this is a non-recurring factor relative to prior periods.
• Forward-Looking Uncertainty: Standard risks apply regarding material differences between anticipated results and actual outcomes, detailed in public filings.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing successful restructuring, financial stabilization, and the strategic value of AI and new technology.
• Management highlights the successful "bought deal" private placement as evidence of strong institutional and insider support.
• Executives (Chuck Myers and David Chiron) focused heavily on the shift from "fixing the balance sheet" to "accelerating growth."

Analyst Questions and Answers:

• Conduit Transition: Regarding customer feedback on the Conduit integration, management noted cautiously optimistic sentiment and anticipation of changes; specific feedback remains confidential.
• LA Metro Project: Confirmed the project is well underway with implementation revenue expected; wins attributed to company size, reputation, and partner relationships rather than public press.
• European/UK Strategy: Plans to leverage Conduit's existing UK tolling footprint while growing commercial vehicle operations; focus remains on high-value ITS opportunities.
• Financial Metrics: Q&A confirmed that sequential gross margin flatness is normal for the mix; future margin expansion will be driven by squeezing efficiencies in the commercial vehicle operations.
• Balance Sheet Status: Pre-closing debt capacity excludes the Conduit deal; current debt load is limited to the existing term loan following the conversion of convertible debentures.

Other Key Points:

• All financial figures are presented in U.S. dollars.
• Management will participate in the Roth Technology Conference (NYC) and Cowan Tech Conference (Toronto) in the coming weeks.
• The company continues to view the next-generation AI platform as a scalable solution for the broader transportation sector beyond just tolling.