Total revenue was SEK157m, +65% y/y, and just below our estimates of SEK163m. All business units were roughly in line with our estimates. EBIT was SEK8.3m, corresponding to an EBIT margin of 7.1% (-4.4% last year). It should be noted that the Netherlands order did not generate any revenues in Q3, which we had anticipated. Instead, it will start generating revenues in Q4. As such, the underlying revenues and earnings were even stronger.

Managed Services incl. Licenses amounted to SEK54.9m (+21% y/y) and accounted for 35% of sales in the quarter.

We continue to see a bright short- and long-term future for this part. In the short term, sales growth should start accelerating considering the high CAPEX year-to-date, of which SEK50m has been for installing speed cameras for new projects in the USA. Looking more long-term, we expect the Ghana joint venture to start driving growth from mid-2024.

Also, there has recently been a trend shift in the USA, where traffic fatalities are increasing - causing many states to favor speed cameras more positively. Two major additions from the last months are Florida and California - states that substantially increase the market potential for Sensys Gatso. Florida is starting with school zones only (which is typical), whereas California starts with only the large and semi-large cities. While this start offers significant potential, there is likely even more to come as these states adopt more use cases and include all sizes of cities. Apart from Florida and California, Sensys Gatso states that there is positive momentum throughout the USA.

Sales from Service & Maintenance amounted to SEK31m, +1% y/y, which we think undermines the underlying reality of this part. Service and maintenance accounted for 20% of sales in the quarter, meaning that TRaaS revenues accounted for 55%. This business area continues accumulating contracts as more systems are delivered, making this kind of revenue predictable and stable.

As for Managed Services, we believe both the short and long-term future look bright. Looking ahead, we see a smaller revenue boost in 2024 from the large contract from the Netherlands, which we expect to be further boosted from 2025.

System Sales continue to be lumpy – as is its nature. Q3 came in at a solid SEK71m, growing by 267% y/y, though meeting very easy comps. System sales accounted for 45% of sales in the quarter. The SEK275m Saudi order contributed by SEK30m in Q3.

As we continuously state, investors should look at revenues on a last-12-months basis, which shows that revenues are developing well. In its nature, this segment has quite lumpy deliveries, and timing depends on the requirements of 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 last-12-months basis. See below:

Looking ahead, the company’s order book is strong. First, there is SEK39 left of the SEK 275m Saudi order - to be delivered in Q4 (vs SEK30m in Q3). Also, we estimate that the SEK400m contract from the Netherlands (upgraded from previously SEK250m) will contribute SEK200m system sales between the nine quarters Q4'23 to Q4'25, implying an average of SEK22m per quarter.

Also, we see a good chance of Sensys Gatso winning several large tenders in Europe - e.g., two in the Netherlands (called EG39 and EG40) and one in Ireland. Considering the recent success in the Netherlands, first winning a third of the SEK750m contract and then upgrading this to more than 50% of it, we believe the company’s chances are very good.

The gross margin was in line with our expectations, landing at 38% - lower than last year due to a higher share of system sales.

Looking ahead, we expect strong y/y growth in System Sales, meaning the gross margin will likely remain below 40% for some quarters. 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 SEK51.8m, 4% higher than we estimated. The company stated that administrative expenses were at temporarily heightened levels due to a seasonal effect and some FX impact. Our impression was that this level should come down about SEK2m to recent historical levels.

As previously stated, we think it’s important to include depreciation and amortization in the cost base because this is basically R&D costs but capitalized. By this, we mean that the company would not be able to progress as 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.

EBIT margin landed at 7.1% in the quarter. The company’s expansion of its sales force in the USA has put pressure on the company's profitability, but we expect improvements from now and onwards. EBIT margin for System Sales was strong in Q3, whereas profitability in Managed Services was still muted. We expect a rather constant cost base and a scaling revenue base to improve profitability for this business.

Looking at the chart below, 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. After a period with temporarily heightened costs and temporarily low revenues from System Sales, we expect profitability to improve as both of these normalize. However, considering the substantial order backlog, we believe revenues will be heightened in the upcoming period of at least two years.

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 factors will continue going forward, further pushing up the EBIT margin. Between Q3'22 and Q2'23, OPEX as % of revenues were at heightened levels for the reasons we mentioned above.

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%), the business model has a high operating leverage. Thus, the margin expands when sales increase due to a rather fixed OPEX 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 35% 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 Q3, Sensys Gatso had SEK50m in net debt excl. liabilities to shareholders, and SEK73m if included. We expect the company to increase further net debt going forward as speed cameras for new projects in Managed Services are installed.

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

One of the ongoing procurements includes supplying, implementing, managing, and maintaining speed cameras for an expected period of 6 to 12 years. The application period actually ended in March and was first expected to be announced in June but it has apparently been delayed. Considering that the company is mentioning it now, it could imply that the award could happen shortly.