The quarterly figures came in above Redeye’s estimates on both top line and especially on EBIT. This was despite no revenues from the new agreement from Trafikverket were recognized in the quarter, as well as some SEK2m in one-off costs from ERP implementation. The company has gained a strong momentum in Latin America and delivered four system-sales projects during the quarter. The company states that it has higher gross margin on these projects than normal, thanks to its strong brand in the region. All in all, we think the company has a great momentum that we think will bear fruit in 2023 and 2024.

Managed Services incl. Licenses amounted to SEK58m (+45% y/y) and accounted for 36% of sales in the quarter. In the quarter, Sensys Gatso went live with its customer in Tasmania, Australia. This rendered SEK9m in revenues, compared to the total contract value of cSEK74m over three years. Hence, the quarterly average revenue recognition from this deal should be cSEK3m lower than what was recognized in Q4.

We continue to see a bright future for this part, both short and long-term. In the short term, we expect inclusion of the joint-venture contract in Colombia to contribute positively by cSEK3.5m per quarter, though likely starting in Q2. However, we expect cSEK3.5m less revenues per quarter from the Tasmania contract, so these should net zero. As such, we expect new deals in the USA to drive growth. Management commentary on the conference call indicated a strong pipeline. The recent extension deal for Pawtucket in the USA (which we commented on here) is expected to add cSEK2m per quarter, starting in Q1. Putting this together, we expect a slight dip in revenues in Q1 compared to Q4, but then starting to grow again.

Looking more long-term, we expect the Ghana contract to contribute significantly. The contract is worth SEK800m starting in H2 2024 until 2033, i.e., 9.5 years. If distributed evenly, this implies SEK84m per year. Since Sensys Gatso’s part of the contract is 40%, this means SEK34m per year in annual recurring revenues. This should be compared to our estimated annual revenues for managed services in 2024E of SEK261m and SEK312m for 2025E. Hence, the contract is essential to our estimated growth journey for this business unit.

However, considering that Sensys Gatso owns less than 50% of this joint venture, revenues and costs will not be included in the company’s P&L. Instead, 40% of the net income or loss from the joint venture will be seen in “income from associated companies”, below EBIT in the P&L.

Though, for the sake of clarity and simplicity, we include Sensys Gatso’s 40% stake of the deal in our estimated income statement.

Sales from Service & Maintenance also came in above our estimates, landing at SEK36m, +10% y/y, despite meeting tough comps. Service & Maintenance accounted for 22% of sales in the quarter, meaning that TRaaS revenues accounted for 58% of total revenues. This business area continues accumulating contracts as more systems are delivered, making this kind of revenue predictable and stable.

Just as for Managed Services, we believe both the short and long-term future look bright. Looking ahead, we see a smaller boost of revenues in 2023 from the large contract from the Netherlands, which we expect to be further boosted from 2024. Also, the order from Trafikverket will also contribute to a minor extent in 2023 and 2024, but more so in the following years.

System Sales continues to be lumpy – as is its nature. Q4 came in at SEK68m, -32% y/y. System sales accounted for 42% of sales in the quarter.

In the quarter, Sensys Gatso completed four projects in LatAm - three in Ecuador and one in Uruguay. These contributed with revenues of SEK34m in Q4. No revenues from the Trafikverket order was recognized in the quarter.

As we continuously state, investors should look at revenues on a rolling-12-months basis, which shows that revenues are developing well. In its nature, this segment has quite lumpy deliveries, and timing depends on customer requirements. As such, even Sensys Gatso itself cannot estimate sales on a quarterly basis. Therefore, we strongly urge investors to look at this segment on a rolling-12-months basis. See below:

Looking ahead, the company’s order book is strong. First, there is 25% left of the SEK 275m Saudi Order. The remaining SEK69m is estimated to be delivered in H2 2023. Also, we estimate that the large contract from the Netherlands will contribute with SEK125m in 2023.

Then, we expect the Trafikverket order to start contributing positively in Q1, adding an estimated SEK17m per quarter.

Also, we see a good chance of Sensys Gatso winning an additional contract for speed and red-light cameras from the same Saudi customer. The potential order for this new area can be much larger than the current order of SEK275m. Hence, this could be an important short-term trigger. However, the company stated in the conference call that the discussion is taking time, implying that investors may have to wait a a quarter or so, we think.

The gross margin was strong in the quarter, landing at 48.5%. The company states that gross margin was boosted by a higher share of Managed Services, as well as higher margin on system sales from LatAm. The company’s strong brand in the region justifies good price levels, which boosted the gross margin for the period.

As a reminder, Managed Services have a considerably higher gross margin than System Sales. However, new go-lives in Managed Services impliy a cost for setting up new cameras, which temporarily hurts the gross margin.

Looking ahead, we expect a strong year from system sales which will be boosted by the orders from Sweden and the Netherlands, primarily the latter. This will likely weigh on the gross margin.

However, we expect the gross margin to increase long-term as the TRaaS business constitutes a larger part of total sales.

OPEX incl. depreciation and amortization was SEK57.8m, out of which cSEK2m was related to a one-off cost for implementing a new ERP system. This project is not fully completed yet, so we estimate some costs for this also in Q1 and some in Q2. Also, other operating income/costs was SEK -2m in the quarter. The underlying figure is hence cSEK54m.

As previously stated, we think it’s important to include Depreciation & Amortization in the cost base because this is basically R&D costs but capitalized. By this, we mean that the company wouldn’t be able to progress in the way it wants to without these investments. Thus, we think it’s good and cautious practice to include it as we look at the cost level.

From SEK54m, which we think is normalized, we expect slight growth throughout the year as Sensys Gatso scales its US offices to grow Managed Services.

Looking at the above diagram, we note that the cost base has not grown materially over the years, despite the growth in sales. The recent uptick is partly due to increased R&D personnel and partly for increased sales force in the USA.

EBIT margin landed at 13.6% in the quarter, far better than our estimates. Looking at the below chart, we see that the quarterly EBIT margin is lumpy due to the lumpiness of System Sales. More important is to note the ongoing margin improvement. We believe this will continue as the company grows with an increasing share of TRaaS revenue. With a larger base of high-margin recurring revenues, we think Sensys Gatso will become increasingly attractive to investors.

We think the following chart is worthwhile to see the underlying reality of what has happened to the business. As can be seen below, the margin improvements have come from both a scaling OPEX and an improved gross margin, though OPEX has increased quite significantly in recent quarters.

For 2023, we think the gross margin will decline due to a higher share of system sales, while we expect OPEX to decline again as a share of revenues.

In this section, Service & Maintenance is included in System Sales.

Revenues for Managed Services are predictable, but profitability is lumpy since installation costs are included in the cost base when a new city enters production mode. Due to the high gross margin (est. 60%), there is a high operating leverage in the business model. Thus, the margin expands when sales increases as a direct consequence of a rather fixed OPEX base.

We think the EBIT margin has been hurt in Q3 and Q4 as the company has increased its sales force in the USA. While a few more hires may be needed, we think margins will now start scaling again. See below for a quarterly and LTM overview.

Revenues for System Sales, which in these terms include Service & Maintenance, are lumpy. However, the share of Service & Maintenance, which is generally recurring, has increased from 22% in 2018 to c30% today. This has contributed to two things: 1) less lumpy revenues and 2) higher profitability. See below.

However, the major margin improvement is likely not only due to an increased share of aftermarket revenues. We also believe the company has gained general efficiency improvements over the years.

Per the end of Q4, Sensys Gatso had a cash position of SEK100m. Including available credit facilities, the company had SEK171m available. We would not be surprised if an acquisition would come in the near to mid-term future.

Looking at the company’s large orders, we have the following orders that are noteworthy:

Growth assumptions to 2027

Total sales 2027: SEK910m

Margins

General

Growth assumptions to 2027

Total sales 2027: SEK725m

Margins

General

Growth assumptions to 2027

Total sales 2027: SEK990

Margins

General