The quarterly figures came in below Redeye’s estimates on top line, and well below on EBIT. Weak System Sales and a temporarily heightened cost base caused the poor profitability.

Managed Services incl. Licenses amounted to SEK50.7m (+22% y/y) and accounted for 45% of sales in the quarter. Revenues were impacted negatively by heavy snowstorms in the USA, causing fewer cars on the roads and thus fewer tickets. The company did not quantify the effect but we estimate a c5% negative impact.

We continue to see a bright future for this part, both short and long-term. Particularly, we expect more and somewhat larger cities to be added to Sensys Gatso's list of customers. Investments in the sales organization have already been taken, resulting in a higher cost base. Now, we await the reaping of the fruits. Also, new markets outside the USA (like the examples from Australia, Ghana, and Colombia) are also likely to drive growth.

Sales from Service & Maintenance came in c10% above our estimates, landing at SEK36.0m, +31% y/y. Sales was, however, boosted by one-off replacements in Sweden and the Netherlands, which both had to replace cameras that had been demolished. Service & Maintenance accounted for 32% of sales in the quarter, meaning that TRaaS revenues accounted for 76% of total revenues. This business area continues to accumulate contracts as more systems are delivered, which makes 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 2024 from the large contract from the Netherlands.

System Sales continues to be lumpy – as is its nature. Q1 came in at only SEK27m, -39% y/y. System sales accounted for only 24% of sales in the quarter. Compared to last year, there were no revenues from either Sweden or Saudi Arabia. Compared to our estimates, we had anticipated revenue generation from both Sweden and the Netherlands.

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 is depending on requirements from the customers. 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, but the timing is outside of Sensys Gatso's own control. We estimate some of this to be moved to 2024. Also, we estimate that the large contract from the Netherlands will contribute to SEK25m in 2023 and cSEK100m in 2024. Last, Sensys Gatso expects the large order from Trafikverket in Sweden to generate revenues from Q4 2023.

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 that the current order of SEK275m. Hence, this could be an important short-term trigger. The company stated that it is currently going through a testing period for this application for the Saudi customer.

The gross margin was slightly below our estimates in the quarter, landing at 40%. Despite a higher-than-expected share of high-margin TRaaS revenues, it was lower than we anticipated. The company stated that prolonged project deliveries caused higher costs of goods sold (COGS) than normal. As a reminder, Managed Services have a considerably higher gross margin than System Sales. However, new go-lives in Managed Services imply a cost for setting up new cameras, which temporarily hurts the gross margin. Thus, the gross margin was lower than a 'normalized' level.

Looking ahead, we expect continued heightened COGS in Q2 and Q3, causing a rather low gross margin. From Q4, we expect this effect to go away, but the gross margin will then be weighed from a higher share of System Sales.

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

OPEX incl. depreciation and amortization was SEK53.8m, just below estimates. Also, the company had SEK20m in CAPEX compared to a more normalized level of cSEK7m per quarter. The total underlying cost base was thus cSEK64m (53.8m, less D&A of 10m, plus 20m CAPEX). The company reported that the cost base is temporarily heightened due to temporary consultants in R&D to enable fast deliveries to the Netherlands and Trafikverket. In practice, the company is completing its development of FLUX which will make deployment and delivery more scalable. Hence, expect a normalized cost base of cSEK54m by Q3 and then possibly even lower due to scalability.

EBIT margin landed at -7.6% in the quarter. As already mentioned, the temporarily low System Sales and heightened cost base together caused poor profitability. Also, the company’s expansion of its sales force in the USA is hurting the company’s profitability and will likely continue to do so throughout 2023.

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.

To see the underlying reality of what has happened to the business, we think the following chart is worthwhile. As can be seen below, the margin improvements have come from both a scaling OPEX and an improved gross margin. However, OPEX has come up as a consequence of lower System Sales and investments in the US sales organization.

We think profitability will show big improvements starting in late 2023. Then, we expect System Sales to be strong (helped by Saudi, Sweden, and the Netherlands) and that costs will come down to a more normalized level.

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.

The EBIT margin for the last twelve months is now down at 1.8%. The reason why is the company's substantial investments in its sales team, causing a heightened cost base. 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 above 40% 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.

By the end of Q1, Sensys Gatso had a strong financial position with SEK72m in cash balance and very little debt. While we think a smaller acquisition may be likely within two years, we do not think it will happen during 2023.

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