Redeye concludes that Q2 was stronger than Redeye expected, with higher-than-expected revenues and lower cost base than expected. Both System sales and TRaaS came in stronger than estimated. The company's financial guidance for 2023 is also reiterated - indicating higher topline and EBITDA than Redeye previously estimated.

Managed Services incl. Licenses amounted to SEK55m (+24% y/y) and accounted for 41% of sales in the quarter.

We continue to see a bright future for this part, both short and long-term. In the short term, we expect the several new orders (commented on here) to drive growth. Also, Florida recently regulated speed-enforcement solutions, and additionally California is looking to do the same. This is likely to be a major driver for future growth of this segment.

Sales from Service & Maintenance came in just below estimates, landing at SEK32m, +10% y/y. Service & Maintenance accounted for 24% of sales in the quarter, meaning that TRaaS revenues accounted for 65% 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 2023 from the large contract from the Netherlands, which we expect to be further boosted from 2024.

System Sales continues to be lumpy – as is its nature. Q2 came in at SEK46m, -10% y/y. System sales accounted for 35% of sales 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 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. Also, we estimate that the large contract from the Netherlands will contribute with SEK125m in 2023. In Q2, the first small deliveries to the major project to Swedish Trafikverket were initiated. In H2, these are expected to continue, but the main ramp up is expected in 2024.

Also, the recent order of SEK152m to the Middle East could be the same customer as the Saudi one. If not, a potential additional order for this customer can be much larger that the current order of SEK275m. Hence, this could be an important short-term trigger.

The gross margin was strong in the quarter, landing at 42%, mainly driven by a low share of System Sales. 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. Thus, we think the gross margin was higher/lower than a 'normalized' level.

Looking ahead, we expect strong y/y growth in Managed Services, which means several upstarts and the costs that come with this. This will likely weigh on the gross margin in Q3. Also, we expect a larger share of sales coming from system sales which has a lower gross margin than the TRaaS business.

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 SEK50m, SEK5m below estimates. It could be that some of the temporarily heightened OPEX from Q1 was instead recognized as CAPEX in Q2. As such, we think it is too early to say whether this was a normalized level or not.

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 this level, 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.

EBIT margin landed at +4.2% in the quarter, significantly better than our estimated -4.8%. The beat was partly due to higher sales, partly higher gross margin, and partly a lower cost base.

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. We think both of these factors will continue going forward, further pushing up the EBIT margin.

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.

Sensys Gatso has invested considerably in building up its sales force in the US, which has put significant pressure on the profitability for this segment. We think the investments are correct and are starting to bear fruit. Soon, we believe the sales force will stabilize which will then lead to improved profitability. 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 almost 50% today. This has contributed to two things: 1) less lumpy revenues and 2) higher profitability. However, a certain volume of System Sales is needed to ensure profitability - something we expect in the following quarters. 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 Q2, Sensys Gatso had a strong financial position with SEK54m 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: