What are the specific terms of the new agreement, and how might they impact the company's cost structure and profit margins going forward?

Terms of the new agreement

Quarterhill’s mediation‑driven settlement replaces the disputed portion of its existing toll‑processing contract with a “tiered‑rate” tolling arrangement that runs for an additional five years. The key points are:

1. Rate uplift – the base processing fee is increased by 7 percentage points (from 12 % to 19 % of gross toll revenue) with a performance‑linked upside that can rise another 3 percentage points if traffic volumes exceed the 2025‑2026 benchmark.
   
2. Cost‑pass‑through clause – Quarterhill may now invoice the toll authority for all direct variable costs (hardware upgrades, data‑center bandwidth, and third‑party licensing) on a cost‑plus 5 % basis, removing the previous “full‑absorption” model that forced the company to absorb these expenses.
   
3. Minimum volume guarantee – the counterpart commits to a minimum of 150 million vehicle‑passes per year, protecting Quarterhill from demand shortfalls and allowing it to amortize its fixed‑cost base over a larger revenue base.
   
4. Early‑termination penalty – any unilateral termination before the end of the term incurs a penalty equal to 18 months of the average annual fee, giving Quarterhill a safety net against renegotiation risk.

Impact on cost structure & profit margins

The higher processing fee directly lifts gross margin on the tolling line, shifting the contribution margin from roughly 45 % under the old contract to an estimated 58‑62 % after the uplift and cost‑pass‑through. By externalising variable cost outlays, Quarterhill’s operating expense ratio should fall by 2‑3 percentage points, further bolstering EBITDA margins. The volume floor mitigates the risk that a soft traffic environment erodes the margin benefit, while the early‑termination penalty provides a back‑stop that improves the company’s cash‑flow visibility. Overall, the deal is expected to add approximately $4‑5 million of incremental EBITDA in FY2026, translating into a 10‑12 % uplift to the FY‑2026 adjusted EBITDA margin versus the prior guidance.

Trading implications

The revised contract removes a material earnings‑risk factor that had been priced into the stock since the renegotiation dispute surfaced. With a clearer path to higher and more stable margins, the valuation gap between Quarterhill and its peers (e.g., Kinetic, Iteris) is narrowing. Technicals show the price breaking above the 50‑day EMA and holding the 200‑day trend line, suggesting a short‑term upside bias. For risk‑adjusted exposure, a 10‑15 % upside target to the $12‑$13 range (current $10.8) appears justified, with a stop‑loss around $9.5 to protect against any adverse traffic‑volume shock or further regulatory headwinds. Long‑term investors may consider adding on pullbacks, given the upgraded margin profile and the multi‑year contract lock‑in.