Quarterhill Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good morning, and welcome to Quarterhill's Q1 Fiscal 2021 Financial Results Conference Call. On this morning's call, we have Paul Hill, President and CEO; and John Rim, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following management's presentation, we will conduct a question-and-answer session during which analysts are invited to ask questions. Earlier this morning, Quarterhill issued a news release announcing its financial results for the 3 month period ended March 31, 2021. This news release along with the company's MD&A and financial statements will be available on Quarterhill's website and will be filed on SEDAR. Certain matters discussed today during today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on SEDAR.

[Paul Hill:]

Good morning, everyone. Thanks for joining us on today's call. In terms of an agenda, I'll start with a look at the business highlights. Followed by John who will take a look at the key financial highlights. Then we'll open it up for questions. We have slides to accompany our remarks which can be viewed on the webcast portion of this call. The slides will also be available after the call on our website. In Q1 consolidated revenue was $19.3 million and consolidated adjusted EBITDA was negative $469,000 at the end of the quarter with a strong balance sheet with $132 million of cash and working capital if $155.6 million. Q1 was a good start to the year with both portfolio companies generating positive adjusted EBITDA despite the weakening of the U.S. dollar and the ongoing pandemic. On the M&A front, we're off to a good start in 2021. We've made two acquisitions and we have a healthy acquisition pipeline. I'll start my review of the quarter with a look at results from each portfolio company. IRD had a good quarter with steady revenue, higher margins, and the acquisition and integration of centerline. IRD signed a five year $13 million contract with the state of New York in Q1. This is to install, manage, and maintain traffic data collection sites around New York City. The data is used to assess transportation needs and highway infrastructure performance as well as for safety purposes such as evacuation routing. It's part of a broader move IRD has seen within its customer base to harvest data for the purposes of improving safety and as a source of revenue or cost savings. IRD also launched a web based analytics platform that is enabling cities in Belgium and France to collect and analyze vehicle, bike and pedestrian data to enhance safety. The solution comes from IRD's Belgian subsidiary iCOMS and will also be deployed in a pilot program in Vancouver. Overall, the pipeline and order book and the outlook for IRD remains rock solid. WiLAN had a positive adjusted EBITDA in the quarter. And while we expect the business will have its characteristic variability in 2021 on an annual basis we expect WiLAN to generate positive cash flows consistent with its track record. COVID has added the latest some litigations and license agreements, but we believe these are temporary delays only.

[John Rim:]

Thanks, Paul. And good morning, everyone. Thank you for joining us on the call and it's great to speak to you again this quarter. Starting with our top line consolidated revenue in the first quarter was $19.3 million. As Paul mentioned, both our operating segments enjoyed solid results in the quarter with IRD, I just want to remind everyone that the business typically experiences seasonality is less project work is performed during the colder weather months and also given that a large portion of its revenue is from North American project implementations. IRD's Q1 2021 revenue was $11.5 million compared to $11.4 in this comparable period last year. IRD's Q1 revenue this year got a boost from Sensor Line which was acquired in the first week of January, but also experienced some of the effects of the weakened U.S. dollar compared to the same period last year. In terms of WiLAN's performance in Q1 it resulted from the execution of several agreements during the quarter including a license agreement that settled litigation relating to TV and display technologies with LG, the licensed patents related to memory interface technologies and digital display and TV technologies. As we've mentioned before, WiLAN's revenue may be variable quarter-to-quarter, but on an annual basis the business has consistently generated strong margins and cash flow. These cash flows are an important source of capital for M&A strategy and also to reinvest in the WiLAN business itself, as shown with the patent acquisitions that we made near the end of last year.

[Operator:]

And your first question comes from the line of Doug Taylor with Canaccord. Please go ahead.

[Doug Taylor:]

Yes. Thank you. And good morning. Appreciate that last slide that you shared with us there. So I guess I wanted to ask one question to start on this slide and that's, can you speak to the reasons and the justification for the expansion in the multiple from the kind of 10x that you're at now, buying things that eight times and yet ending up with a 14 times valuation multiple? What are the, you think the changes in the business model of the revenue mix or the dynamics that you think are going to justify that multiple expansion?

[Paul Hill:]

Hey, Doug, it's Paul. Good morning. So first of all, there is some proof points already, I mean, the last two acquisitions we've made are in the mid single digit range. There are also public comps that we can provide to the public ITS companies that trade in the kind of 13 to 15 range and some a little higher than that. So there's a public cost sort of ITS companies that scale I would call it. Just looking at the M&A pipeline that we have, the bigger deals could potentially be slightly higher multiples than we paid for the first couple but not by a wide margin . So it's kind of a combination of looking at the public comps of ITS, the deals that we've already done, the current pipeline and we can see kind of a healthy gap between what we can pay and what we think we can get valued at scale as ITS but maybe, John, you have other comments on that.

[John Rim:]

Yes. I do Doug. It's a good question. Obviously as we're looking at companies that are not at scale, that are private, that are owner managed businesses, they don't have the same type of synergy potentials as a larger organization. We're seeing that now with Sensor Line. They have access to our sales channels and we're already starting to realize opportunities there. So I think in addition to past practice and what we've seen, what we can buy companies for and what the public is valuing other ITS and adjacent industry companies at scale that gives us a lot of confidence. In addition to that, I would also say there are cost synergies as well to be realized. Obviously, if we're on common systems, common processes, common sales channels, there are opportunities in that respect as well, too. And I just think that the larger organizations, the things that typically come with being larger and at scale access to other opportunities, higher barriers to entry, things of that, like all contribute to the fact that we're seeing these multiples in the public company markets.

[Doug Taylor:]

And the cost synergies that you talked about is not reflected in this graph or this demonstration you've given us here.

[John Rim:]

This is straight on multiple accretion. We have a more detailed model obviously. I mean, we've tried to be conservative here, as I mentioned before, we want to try to isolate the impact of just our M&A program and a comparison with public company multiples for larger companies at scale in our industry, but absolutely with our internal models we model in growth rates, we model in cross synergies, we even model in, have several other scenarios in terms of sales synergies as well too. So that's why we are very confident, we're very optimistic in the strategy.

[Doug Taylor:]

Okay and you point to relatively stable performance in terms of EBITDA from the WiLAN asset which is anything but stable, in particular this year, I mean is there anything standing in the way of you achieving that historic $40 million plus EBITDA and cash flow in 2021?

[Paul Hill:]

Well, I think you mentioned it right there is if you look at our last four or five year average, we're between $80 million of $90 million of revenue, $30 million to $40 million of EBITDA consistently on an annual basis every year. Nothing come to our attention that would suggest that it would be other than that at this time. And we have a lot of confidence in our WiLAN business and their ability and their track record of achieving those results.

[Doug Taylor:]

And I wonder, I mean, you assumed proceeds from the litigation with Apple factor in that statement. Could you help us think about that?

[John Rim:]

I mean, I think Paul gave an update on the status. Variability because comps in the IP licensing business because of the nature of that business and the sort of the relative lack of predictability in the timing. But also, there are other considerations. Our team is expert, the negotiation process to optimize the value of our licensing agreements as well. So that is also something that's strongly considered during that process. So. I'm sorry --

[Paul Hill:]

I would also just say, just a bit more color on that. I mean, first of all, just on the Apple case, where we're at specifically on that is there is going to be an oral argument sometime in the fall to the Court of Appeals and normally there's a decision made somewhere from three to six months after that hearing. That's kind of a historic norm. So if you play that out it's kind of early part sort of called first half of 2022. So just to answer your question, no unless we settle the case along the way just if you look at the timing of that process as it unfolds it's more likely if it goes all the way to bleed into 2022.

[Doug Taylor:]

So I will put it another way. You could get there without it you feel.

[Paul Hill:]

Yes, listen it's very, WiLAN has a very active pipeline. I mentioned a bunch of the things. There is Motorola, there's Micron, there is AMD, there is Google, Amazon, Microsoft. The Apple case in Germany. It is a very active pipeline. It's a similar comment I have on the M&A pipeline, they're both very active. So we're confident that WiLAN is going to perform to kind of historic performance. But on a quarterly basis, we all know the profile of that business and that's what you do see if you're looking at the quarterly level. At the annual level we're very confident.

[Doug Taylor:]

Okay. I mean, you've again, kind of reiterated this $400 million capital deployment target for the next five years. You've obviously got over $100 million in cash right now and the ongoing cash flow but perhaps you can just refresh us on, you mentioned low cost sources of capital where you referring just to the cash on hand or what would be your ideal capital structure to achieve that exiting 2025, I guess if you could pick.

[Paul Hill:]

If we were looking at a larger acquisition or larger acquisitions we are contemplating leveraging through debt, primary debt. At these interest rates, you can drive greater returns assuming you have the growth profile. So we are looking at sort of leveraging on leverage scenarios as we model these acquisitions. I don't know John, if you want to add something to that?

[John Rim:]

Yes. Absolutely. No, Paul, I think you got the essence of it. Doug, as we acquire companies, obviously we're acquiring cash generating companies as well too. And so with no debt, and over seven times current ratio where we're under leveraged in my opinion. And so with the interest rates being so low, I speak with financial institutions all of the time who were approached by offering financing. And we can, the acquisitions that we make, can easily support the carrying costs. So it's just provides incredible flexibility for us to have that available to us and it also improves our returns, obviously because the business that we're buying is basically funding and servicing its own debt. And so it's definitely part of our strategy. But we're going to be selective and thoughtful and have conservative levels of debt where it's the coverage is easily managed.

[Doug Taylor:]

Okay. I think I've paused the line enough. I'll pass it. Thank you.

[Paul Hill:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Paul Piotrowski with M Partners.

[Paul Piotrowski:]

Good morning guys. I just had a question. I had a question with respect to IRD. You guys noted some contract delays? Can you guys go into a bit more detail and talk about that? And maybe just quantify it a little bit more? And then as well maybe add on what you're seeing in Q2?

[Paul Hill:]

Yes. it's not, I wouldn't say it characterizes very substantial. But if you look at the revenue of IRD there is a component of revenue around projects and also servicing of equipment that we have in the field, for example. The way the revenue recognition works is you have to perform those services in order to recognize the revenue. So you can imagine with COVID there are periods of time where the crews just can't get on to the site and we can't recognize the revenue. I mean, having said that, I have to say Q1 was a very strong quarter for IRD. It's a seasonally softer quarter because you're dealing with winter months which also limits the ability of the team to service some of their gear. So it's always seasonally softer than other quarters. But having said that, if you add back the FX because they had very big headwinds with the U.S., the softening of the U.S. dollar, if you put that back in and look at it more from a constant currency basis, IRD had a very strong quarter especially considering they are the headwinds of FX and COVID. And so that's number one. Number two Sensor Line off to a fast start to I mean, we've already done a deal in North America on that product. And we have a pipeline going all over our distribution network. This is a company with a great product but had very little in the way of sales coverage. And so there is a bit of that going on, but I think we're getting near the end of that hopefully. And it should be a strong future.

[Paul Piotrowski:]

Okay, great. And then I know this is pure speculation, but what do you guys kind of handicap the odds of maybe coming to some kind of settlement with Apple ahead of time? Or where do you think this will kind of go the course?

[Paul Hill:]

I really can't comment on that. And I don't know. I mean that is always possible. We've seen it in the past with other litigations that at a certain point that can make sense for both parties but I can't really comment beyond that.

[Paul Piotrowski:]

Okay. All right. That's it for me. Thanks a lot, guys. I'll pass the line.

[Paul Hill:]

Thanks Paul.

[Operator:]

As we have no further questions at this time, I will turn the call over to Mr. Hill for closing comments.

[Paul Hill:]

Okay, well thank you operator and thank you everyone for participating in today's call and we look forward to speaking with you again on the next call. Good bye.

[Operator:]

This does conclude today's conference call. You may now disconnect your lines.