Quarterhill Inc
TSX:QTRH
US |
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
|
US |
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Mastercard Inc
NYSE:MA
|
Technology
|
|
US |
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
|
US |
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
|
US |
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
|
US |
Visa Inc
NYSE:V
|
Technology
|
|
CN |
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
|
US |
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
|
US |
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
|
US |
Coca-Cola Co
NYSE:KO
|
Beverages
|
|
US |
Walmart Inc
NYSE:WMT
|
Retail
|
|
US |
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
1.5
2.01
|
Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
Johnson & Johnson
NYSE:JNJ
|
US | |
Berkshire Hathaway Inc
NYSE:BRK.A
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Mastercard Inc
NYSE:MA
|
US | |
UnitedHealth Group Inc
NYSE:UNH
|
US | |
Exxon Mobil Corp
NYSE:XOM
|
US | |
Pfizer Inc
NYSE:PFE
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
Nike Inc
NYSE:NKE
|
US | |
Visa Inc
NYSE:V
|
US | |
Alibaba Group Holding Ltd
NYSE:BABA
|
CN | |
3M Co
NYSE:MMM
|
US | |
JPMorgan Chase & Co
NYSE:JPM
|
US | |
Coca-Cola Co
NYSE:KO
|
US | |
Walmart Inc
NYSE:WMT
|
US | |
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Good morning, and welcome to Quarterhill's Q3 2020 Financial Results Conference Call. On this morning's call, we have Paul Hill, President and CEO; and John Rim, Chief Financial Officer. [Operator Instructions]Earlier this morning, Quarterhill issued a news release announcing its financial results for the 3- and 9-month periods ended September 30, 2020. 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 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 on the company's annual information form and other public filings that are available on SEDAR. During this conference call, Quarterhill will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by the IFRS. Adjusted EBITDA is defined in the company's quarterly and annual filings that are available on SEDAR. Please refer to Page 3 of the company's Q3 2020 management's discussion and analysis for our full cautionary notes regarding the use of forward-looking statements and non-IFRS measures. Finally, please note that all financial information provided is in Canadian dollars unless otherwise specified. I would now like to turn the meeting over to Mr. Paul Hill. Please go ahead, sir.
Thank you very much, and good morning, everyone, and thanks for joining us on today's call. In terms of agenda, I'll begin with a look at recent business activity, followed by an update on our M&A strategy. After that, John will take a more detailed look at some of the key numbers for the quarter, and then we'll open it up for questions. To start things off, I'd like to welcome John to his first call as CFO of Quarterhill. Hiring a CFO was one of my top priorities upon joining in June, and I'm really pleased to have John in the seat. John has 25 years of executive experience, including his most recent stint as CFO of a publicly traded company. We are both based in Toronto and plan to move our head office from Kitchener to Downtown Toronto in the near future. Our leadership team is now firmly in place, and I look forward to John's contributions as we execute on our plan to build Quarterhill into a leading Canadian technology company. Q3 was a busy and successful period for Quarterhill. On October 8, we announced preliminary revenue of $80 million to $87 million and adjusted EBITDA of $32 million to $36 million. We are pleased to have come in above the high end of the revenue range of $88 million and above the adjusted EBITDA range of $39 million. These strong results were driven by a record quarter at IRD and by substantial licensing activity at WiLAN, which had its best quarter in 3 years. At the same time, Quarterhill delivered on its promise to return capital to shareholders via the completion of our substantial issuer bid and commencement of our normal course issuer bid. Q3 results combined with our already strong balance sheet have increased the optionality with our M&A strategy, enabling us to look at a broad set of opportunities. Taking a quick look at our portfolio companies. I'll start with IRD. This is our business in the intelligent transportation systems, or ITS, industry. Overall, business remains very strong at IRD with order bookings and backlog both at high levels. During Q3, IRD announced new contract wins in the Ukraine, Paraguay, New York State and with the U.S. federal government as well that happened just after quarter end. These transactions highlight how IRD continues to successfully build out its global footprint. IRD helps cash-strapped governments drive efficiencies and improve revenue collection. This is a value proposition that resonates very well during this pandemic time. Depending on the path that COVID takes as well as the impact of the U.S. election, it is possible there could be some delays in timing of orders or delivery of materials in the coming quarters. But overall, the outlook for IRD remains positive as its products and services support essential services for governments. Now turning to WiLAN. Q3 results reflect a strong quarter based on the closing of several license agreements and settlement of some litigations. The cash flows generated from Q3 further strengthened our balance sheet and can be used to support growth and return of capital initiatives. While WiLAN's results are difficult to predict quarter-to-quarter, this is the sixth quarter of positive adjusted EBITDA in the past 8 quarters. Demonstrating consistency when reviewed over a broader time horizon. The COVID-19 pandemic has had some impact on WiLAN's business, driven by the postponement of certain litigations in the U.S. as well as an inability to hold face-to-face meetings. These postponements may result in delays in concluding agreements rather than resulting in lost opportunities. Our transaction with Kingston Technology is an example of a planned Q2 deal that slipped into Q3. However, even with delays, WiLAN showed that despite the pandemic, you can still complete agreements and deliver significant financial performance. Regarding its litigation with Apple, as expected, Apple filed its appeal on July 15 with the Court of Appeals for the Federal Circuit. This is the appellate court in the U.S. that handles all patent appeal matters. WiLAN filed a cross-appeal on July 28. Opening briefs are expected to be filed before year-end. Beyond that, we expect a trial date sometime in the fall of 2021, with that date likely being set in the spring of 2021. Regarding the return of capital to shareholders, we've made several commitments in 2020, and we continue to follow through on them. We completed our substantial issuer bid in July, canceling approximately 2.7 million shares in the process. And in early August, we launched a normal-course issuer bid. The NCIB runs through August 9, 2021, during which time, we can purchase up to 11.3 million common shares. At the end of Q3, less than 2 months in, we had already purchased 1.6 million shares. I'd now like to take a few minutes to update you on our strategy, which relies on organic growth from WiLAN and IRD as well as growth through acquisitions. A more detailed overview of our strategy was provided on our Q2 call, a recording of which is available on our website. At a high level, our M&A activity will focus on ITS. ITS is a stable, recession-resistant industry with high barriers to entry, and it blends technology with infrastructure in order to provide essential services to governments that are looking to drive efficiencies and new revenue opportunities. As ITS becomes more interconnected, we believe [ we can use ] WiLAN's deep expertise in 5G, which is a key enabling technology for ITS in the future. Looking at the landscape of opportunities, we see 3 legs to our M&A strategy: The first involves tuck-in acquisitions in the ITS road market that IRD currently operates in. This would include areas such as commercial vehicle operations. The second leg seeks out larger ITS opportunities in the road segment or in other ITS segments such as rail. These would most likely be stand-alone businesses reporting directly into Quarterhill. The third leg of the strategy is where we are looking at adjacencies to ITS, which might include investments in smart cities. These likely would be stand-alone acquisitions as well and initially on the larger side in order to provide a beachhead to build from. This is a natural complement to the IRD business as these are tech-enabled markets focused on infrastructure. Our M&A pipeline continues to grow in each of these areas, and we are well positioned to execute on our plan. We see ample opportunity to diversify in the markets with attractive growth dynamics, reliable revenue streams and reasonable valuations. Execution of this strategy will make ITS more material through our financial results over time, which will help to generate more predictable revenue streams and ultimately enhance shareholder value. We are pleased with our strong Q3 performance and the resilience of our companies during the pandemic. These results have further strengthened our financial position and increased our options within our M&A plan. With that, I'll turn it over to John for a look at the Q3 numbers.
Thank you, Paul. Good morning, everyone. It's a pleasure to be here with you today. Just to note up front that, with the sale of VIZIYA, the financial statements for the 3- and 9-month periods ended September 30, 2020, and for the respective comparison periods in 2019 have been prepared to reflect continuing operations and, therefore, exclude results during those periods from VIZIYA. Operating results from VIZIYA for 2019 and 2020 are reported as net income or loss from discontinued operations in accordance with IFRS 5. So I'll start my review with a look at revenue. For the quarter and year-to-date period, revenues are up, reflecting strong performance from both IRD and WiLAN, as Paul mentioned. Q3 revenue was up fourfold from Q3 last year, and the year-to-date revenue was $126.4 million, up from $124.6 million last year in the same period. As Paul mentioned, in Q3, we saw the upside of the variability in WiLAN's business model, which drove a year-over-year increase in revenue for both the quarter and year-to-date period. So while there may be variability on a quarterly basis, over longer horizons, WiLAN has had a relatively consistent track record of performance. IRD also had strong top line growth of approximately 22% in Q3 compared to the same period last year. IRD's Q3 2020 results reflect the fundamental strength in the business as well as certain ongoing projects in the U.S., such as with the State of Indiana. Recurring revenue was $5.4 million in Q3, of which more than 95% of that is generated by IRD. Finally, so far in 2020, IRD has maintained a 100% renewal rate on all term maintenance contracts. Gross margin in Q3 was 52% and year-to-date was 45% compared to 11% and 41% in the same periods last year. The increase in gross margins year-over-year primarily reflect lower cost of revenue achieved by WiLAN related to license agreements signed in Q3 as well as IRD achieving [ higher and climbing ] gross margin on the project with the State of Indiana. Quarterly cost of revenues for WiLAN are primarily contingent in nature. For example, they are dependent upon the level of contingent litigation and contingent licensing partner expenses incurred in a particular period. These contingent payments -- arrangements have allowed WiLAN to often generate solid financial results and derisk the capital costs for IP acquisition as the patents are typically acquired for little to no upfront cost in exchange for a profit sharing model on the licensing. Moreover, the selective use of contingent or partial -- contingent legal prearrangements aim to minimize litigation costs until litigation settlements occur. Excluding special charges from 2020 and 2019, operating expenses for Q3 and the year-to-date period decreased by approximately 10% and 12%, respectively. This primarily reflects lower amortization of intangibles and lower SG&A. The portfolio companies have kept close eye on expenses during the pandemic and have received some benefit from the government's CEWS program on both the SG&A and R&D levels. Also of note, we have embarked on the implementation of an enterprise-wide back-end SaaS solution, which has some onetime costs reflected in our SG&A. These solutions directly support our M&A growth plans and help to scale up the business and drive back-end admin efficiencies as acquired companies are added to our portfolio. Adjusted EBITDA on a consolidated basis for Q3 was $39 million, up from negative $4.4 million last year. Year-to-date, adjusted EBITDA of $37.3 million or a margin of 30% compared to $29.8 million or a margin of 24% last year. Adjusted EBITDA was driven by strong revenue and gross margins from both businesses as well as overall cost management. Returning to the theme of looking at WiLAN over a longer period of time, in the 6 years from 2014 through 2019, WiLAN had only 1 year of negative adjusted EBITDA and in all other 5 years generated healthy levels of adjusted EBITDA. So far this year, WiLAN's adjusted EBITDA is $34.4 million through 9 months. Cash and cash equivalents and short-term investments at quarter end were $129.7 million, up significantly from year-end but down a little bit from the end of Q2. The decline from Q2 is due to the timing of collections for certain patent licensing agreements signed in the quarter as well as the payment of approximately $9 million on share buybacks and $1.4 million on dividends. Our cash balance has increased significantly since the end of Q3 due to the collection of a large portion of our receivables, offset in part by certain contingency payments related to those licensing agreements I just mentioned. Overall, from a working capital perspective, we had $180.3 million of working capital at the end of Q3, and that's up from $153.9 million of working capital at the end of Q2. The strength of our Q3 results gives us a lot of options with which we can pursue our diversification strategy and support the growth of our existing portfolio companies. Regarding the return of capital to shareholders, in Q3, we used $5.8 million to cancel 2.7 million shares via the SIB and used approximately $3 million to cancel approximately 1.6 million shares via the NCIB. As a result, total common shares outstanding at the end of Q3 stood at approximately 114.6 million compared to just under 119 million earlier this year, and the buyback has continued since the end of Q3. In addition to the buybacks, we also paid dividends in Q3 totaling $1.4 million. Taking into account 3 dividend payments made this year, along with the SIB and NCIB activity, Quarterhill has returned approximately $13 million of capital to shareholders so far in 2020. And finally, this morning, in our earnings release, we announced details of our next dividend payment. The Board of Directors has declared an eligible dividend of $0.0125 per share payable on January 11, 2021, for shareholders of record on December 11, 2020. So this concludes my review of the financial results, and I'll now turn the call back to the operator for questions.
[Operator Instructions] Your first question comes from the line of Gavin Fairweather from Cormark.
I just wanted to start out on WiLAN. Obviously, an impressive quarter for that business. Would you characterize kind of the plumbing in terms of litigation and license negotiation as being kind of back to normal now? Or are you still finding that things are kind of building up and not moving at the same speed as before?
Yes. We -- as I mentioned in my remarks, there has been a bit of a COVID effect. And I think I highlighted an example of that where the Kingston agreement was actually planned in Q2 but ended up slipping to Q3. And it's really dealing with logistics around having in-person meetings and that sort of thing. So there has been some of that. But we are seeing things improve somewhat. And obviously, Q3 is sort of evidence of that.
Okay. That's helpful. And then just on IRD, I mean, maybe you can add some kind of color to the international expansion here. Obviously, a string of international deals for that business. I mean, how much more upside are you seeing internationally? And how are you kind of working to make that business more and more international in nature?
The growth in international in North America is similar right now. And actually, I would say, if anything right now, Europe is being more affected -- or the IRD business is more affected in Europe and South America due to COVID than even North America. So I would say sort of the profile of revenue mix across various geographies is going to be kind of similar in the next number of quarters as to its historical performance. Now having said that, we do see a lot of opportunity in Eastern Europe. We're quite interested in that market. The issue right now is, in Eastern Europe, they are experiencing a bit of a spike in COVID right now.
Great. Got it. And then maybe for John. So your receivables kind of jumped from $11 million to $72 million. So obviously, reading kind of between the lines and your commentary, it sounds like that -- most of that is some of the license deals from WiLAN that you finalized towards the end of the quarter. So in terms of coming up with more of a current cash balance, we could kind of tax that and assume some direct costs associated to that to come up with a kind of current cash balance. Is that -- am I thinking about that correctly?
Yes, definitely, you are. We look at our overall working capital. And as I mentioned, since the end of the quarter, we have received a significant amount of the receivables that you see there reported.
Your next question comes from the line of Doug Taylor from Canaccord Genuity.
Just to put a finer point on Gavin's last question. With all the receivables and payables kind of settling out from what was a very strong quarter since quarter end, the incremental cash to the quarter end cash balance, I mean, is it fair to say an additional $30 million once you normalize payables and receivables? Is that in the range? Can you just help there because we don't really know what's a normal level of payables and receivables in those businesses?
Yes, absolutely. I have to be careful with what I say because, as you know, the licensing agreements are confidential as well as our partnering agreements as well. So what I can say generally is that we derisked our legal fees as it relates to licensing and settlement agreements. And the quicker you settle them -- actually, they're on a sliding scale. So that's why you'll see from quarter-to-quarter, you'll see sometimes better margins. And that just means that we're closing deals a little quicker. So the close -- the quicker you close them, the less contingency that you have to pay. So what I would say about the cash is that you have our receivables and you have our gross margin that we reported. And so you can kind of back into sort of the overall, including all activity that we had in the quarter, the cost of revenue associated with that. So if you take the net of that, that could be a proxy for what you could expect for our cash balance. Now of course, we also have the share buybacks, the dividends and our ongoing operating costs. So that will have to be factored in as well.
So there's a potential for the payables to be different than what you've allocated there in -- depending on when those payables are paid in terms of contingent consideration. Is that -- am I understanding that correctly?
No. With the payables, the -- as soon as we book our cost of revenues, which we have for the licensing agreements, the payables are set.
Okay. All right. We'll switch gears then. You mentioned, I mean, the impact of COVID on the WiLAN business and your ability to -- the courts and things like that. But with respect to the M&A program, have you found that COVID and restrictions regarding travel and social distancing continue to impact your ability to evaluate transactions and management teams and things like that face to face? Or do you -- is that a hurdle at all that you need to overcome with respect to beginning to deploy capital against the 3 legs of your M&A program that you laid out?
Yes. It's not insurmountable, but it certainly poses some challenges, especially acquisitions that we have to travel to. I think people are doing creative things to work around it. We are doing things like on-site due diligence by having representatives or companies that are in those countries, walking around with camera phones and things like that. So there's ways to do it. It's -- and so that's sort of the challenge part. I think on the more positive side, I think there are -- some of the valuations are getting attractive, more attractive, I would say. So -- but yes, but definitely not insurmountable. It just poses a little bit of a challenge. And I think getting deals done perhaps take a little bit longer than they might under normal circumstances because of some of those logistical issues.
And I would add to that...
Okay. And -- go ahead.
Sorry. The only thing I was going to add to that, though, is -- as with is typical with M&A activity, a lot of it is an information review as part of the due diligence. And so that part hasn't changed. And anecdotally, I'm sure you can corroborate this with others as well, but with the partners that we're working with, we certainly have a robust M&A pipeline with a lot of opportunities that we're reviewing. But we're not alone in that respect. There is a lot of activity that's going on right now in terms of investigation. So I think it's common to everyone.
Yes.
Paul, you made an interesting point there about the valuations of potential targets becoming more attractive. And I think most who would spend time in the technology landscape would say that valuations have -- are increasing. So I wonder if I can press you a little bit on where you are seeing more attractive, if it's at the smaller end of the scale or across your 3 -- the 3 pillars of your M&A program.
Well, one of the reasons, as I mentioned on the last call, that we decided on ITS as our focus area is valuations. We feel we -- they are less competitive because it is a niche market to an extent. It's a very large niche market, but it is a niche market. And so certainly, if you look at enterprise software or consumer software, those valuations are very high right now, and I completely agree with you. I don't see that as much in the ITS space. And the other dynamic, of course, is with COVID, every business -- virtually every business has experienced some softness in their bookings or even their revenue and profitability. And that ultimately translates to value as well. So I would say these are -- the deals that we're looking at would be less competitive than you would see in something like enterprise software, where you might have 10, 15 potential buyers at the table. We're not seeing that. We have -- in some cases, we're either alone at the table, or it's a small number of potential suitors. And so that creates better-value kind of opportunities for us.
Okay. I appreciate the color. Congrats on a very strong quarter.
[Operator Instructions] Your next question comes from the line of Todd Coupland from CIBC.
A couple of modeling questions, if I could. What's the rough run rate OpEx for the business, excluding large lumpy WiLAN quarters? Could you just give an idea of what that is, please?
Yes. I can speak to it a little bit. I think if you look at our historical sort of SG&A, as I mentioned, we do have some onetime costs this year because we're fortifying and enhancing sort of some back-end SaaS solutions that we have that position us to grow and scale rapidly. But I would say they're a good indicator. Just take out -- just look at our cash flow statement and take out sort of depreciation and those types of things and you get a good sort of run rate of our cash OpEx. What I would like to point out, though, is in the cost of revenues. I touched upon this a little before. Since you bring up WiLAN, specifically, they have a diversified strategy, but more and more, we're seeing this partnership model where we acquired those portfolios with our partners and we help them monetize those portfolios. Along with that, though, are contingent legal fees. And so there's a portion of the legal fees that make sense for us to pay on an ongoing basis, but it's a very small proportion. By far the larger portion is the litigation. And those, we derisk now by having a contingent payment model. And so it's very difficult to tell you sort of what our run rate is as it relates to sort of WiLAN's business because of that contingent model, but what it does is it derisks those cash costs upfront for litigation. So in other words, we don't have to incur those costs and wait for the final conclusion of the litigation. It's only if and when we are successful and we win that those get paid out. So we feel like this is a very good model that derisks our cash costs and provides a more predictable base for sort of operating expenses.
Okay. Great. That's helpful. And then just on M&A, if you think about your pipeline, would you expect to put cash to work in 2020? Or are the COVID hurdles likely to push that into 2021?
Yes, it's possible. We have an active pipeline. It's possible. As I said earlier, I think COVID does slow things down a little bit on due diligence because of the challenges around on-site meetings and reviews. But what I can tell you is we are very active. And it's hard to say with certainty, but it is possible.
There are no further questions. At this time, I will pass the call back to Todd (sic) [ Paul ] for closing remarks.
Well, thank you, everyone, for joining today. We look forward to reporting back on our activities in the coming months and certainly speaking with you again on our next earnings call. Have a good day. Goodbye.
That concludes today's conference call. I will now -- you may now disconnect.