Q3 2020 Quarterhill Inc Earnings Call

Over longer Horizons, Wilan has had a relatively consistent track record of performance.

I'd also had strong topline growth of approximately 22% in Q3 compared to the same period last year.

Today'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 our team.

Finally, so far in 2020 I already 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%, 41% in the same periods last year.

The increase in gross margins year over year, primarily reflect lower costs of revenue achieved by Wilan related to license agreements signed in Q3 as.

As well as I already achieving higher than planned gross margin on the project.

With the state of Indiana.

Quarterly costs of revenues or why lennar, primarily contingent in nature. For example, they are dependent upon the level of contingent litigation and contingent labor.

Licensing partner expenses incurred in the particular period. These.

These contingent payments arrangement have allowed wireline.

Too often generate solid financial results and de risk the capital costs prior to the 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 fee arrangements and 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% 12% respectively.

This primarily reflects lower amortization of intangibles and lower SGN name.

The portfolio companies kept close eye on expenses during the pandemic and have received some benefit from the governments Cws program, both DS Cheney and R&D levels.

Also of note, we have embarked on the implementation of an enterprise wide backend.

SaaS solution, which has some onetime costs reflected in our us Genie.

These solutions direct this quarter M&A growth plans and help to scale up the business and.

And drive back end in mid 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 margin, 30% compared to $29.8 million or a margin of 24%.

Last year.

Adjusted EBITDA was driven by strong revenue in gross margins from both businesses as well as overall cost management.

Returning to the theme of looking at wireless over a longer period of time in the six years from 2014 through 2019, Wilan had only one year of negative adjusted EBITDA and then all other five years generated healthy levels of adjusted EBITDA.

So far this year wireless adjusted EBITDA at 34.4 million through nine months.

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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 sign.

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.

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 Thats 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 cancelled 2.7 million shares via the S&P and.

And used approximately $3 million to cancel approximately 1.6 million shares via the NTSB.

As a result total common shares outstanding at the end of Q3 stood at approximately $114.6 million compared.

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 three dividend payments made this year, along with the S&P and empty IB activity quarter Hill has returned approximately $13 million in 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 bill dividend of 1.25 cents per.

Per share payable on January 11, Twentytwenty, one 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.

At this time as a reminder, please press star then the number one on your telephone keypad. If you would like to ask a question.

We will pause for just a moment chicken, Paul the Q and a roster.

Your first question comes from the line of Gavin Fairweather from Cormark. Your line is open.

Oh, Hey, good morning, guys.

Or any other.

I just wanted to start out on on wireline, obviously, an impressive quarter.

For that business would you characterize kind of the plumbing in terms of litigation and light and Nick.

Negotiation as being kind of back to normal now are you still finding that that thing either are kind of building up and not moving at the same speed as before.

Yes, we have as I mentioned in my remarks, you know there has been a bit of a covert effect and I think I highlighted an example of that where.

The Kingston.

Agreement was actually planned in Q2, but ended up slipping in Q3, and its 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 improved somewhat and obviously Q3 is sort of evidence of that.

[laughter].

Okay. That's helpful. And then just on the IR D. I mean, maybe game 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 or anything internationally and how are you kind of working to make that business more and more international in nature.

The growth the growth in international and North America is similar right now and actually I would say if anything right now Europe is being more effective or the Iraqi business is more effected in Europe and South America.

EBITDA Cove, and then even North America.

So I would say sort of the profile of revenue mix across various geographies is.

Is going to be kind of similar in the next number of quarters as as to its historical performance now having said that we do see a lot of opportunity in eastern Europe.

And we're quite interested in that market. The issue right now is in eastern Europe. They are experiencing a bit of a spike in cove it right now.

Great got it and then maybe for John to your receivable kinda jump from 11 million to 72, So obviously reading between the lines in your commentary it sounds like that most of that is some of the license deals from wireline that you find that toward the end of the quarter help in terms of coming up with more of a current cash balance we could kind of.

Talk Scott and you know it seems and some direct costs associated to that to come up with a.

<unk>, a kind of current cash balances I 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.

Okay got it thanks, so much I'll pass the line.

Thank you. Your next question comes from the line of Doug Taylor from Canaccord Genuity. Your line is open.

Yes. Thank you good morning, I'm just to put a finer point on Kevin's last question with all the receivables and payables kind of settling out from from what was a very strong quarter since quarter end the incremental cash to the <unk> quarter end cash balance I mean is it fair to say an additional 30 million once you normalize payable.

Sales and receivables is as I'm the range can you just.

Can you just help there because we don't really know, what's a normal level of payables and receivables and those business.

Yeah absolutely.

I have to be careful with what I say because as you know the cream to licensing agreements are are confidential as well as our partner your agreements as well so what I can say generally is that.

You know, we de risked our legal fees as it relates to licensing and settlement agreements and [noise].

The quicker you settle them actually over there on a sliding scale so.

So that's why you will see from quarter to quarter, you'll see sometimes better margins that just means that you know we're closing deals a little quicker. So the quote the quicker you closed on the less contingent fee that you have to pay.

So what.

What I would say about the cash is that you have our receivables and you have a gross margin that we reported.

And so you can kind of back into sort of the overall, including all the activity that we had in the quarter the costs of revenue associated with that so if you take the net of that that could.

Could it be a proxy for what you could expect.

For our cash balance now of course, we also have the.

Share buybacks or dividends and our ongoing operating costs and that'll have to be factored in as well.

So there's a potential for the payables to be different than what you have allocated there and depending on when those payables or are paid in terms of contingent consideration is that am I understanding that correctly.

No we believe that with the payables the as soon as we book our costs of revenues, which we have for the licensing agreements.

This so the payables our SAP okay.

All right most switch gears then.

You mentioned I mean, the the impact of Cove it on.

The wireline business and your ability to or the courts and things like that but with respect to the M&A. A program have have you found that cove it.

And the restrictions regarding travel and social distancing continue to impact your ability to evaluate transactions and and management teams and things like that face to face or do you see you.

You know, it's not a hurdle at all that you need to overcome with respect to beginning to deploy capital against the three legs of your M&A program that you laid out.

Yeah. It is it's not insurmountable, but its certainly poses some challenges, especially a acquisitions as you know we have to travel to.

You know I think people are doing creative things to work around it you know we are doing things like on the site.

Due diligence by having a representatives are companies that are that are in those countries are walking around with.

Camera phones and things like that so there's ways to do it is it and and.

So that's sort of a 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 yeah, but definitely not insurmountable, it's just the poses a little bit of a challenge and I think 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.

Yeah, I would add to that I'm sorry.

Sorry no.

The only thing I was going to add to that though is.

You know as with.

As is typical with M&A activity a lot of it is you know it information review as part of their due diligence and so that part hasnt changed.

And anecdotally I'm sure you can corroborate this where with others as well, but you know you know what the partners that were working with we certainly have a robust.

M&A pipeline with a lot of opportunities that we're reviewing.

But where we're not alone in that respect there is.

A lot of activity that's going on right now in terms of the investigation. So I think it's there's commentary one.

Yep.

Paul you made an interesting point, there, but the valuations of potential targets, yes, I'm, becoming more attractive and I think most who would spend time in the technology.

You know landscape would say the valuations of.

Are increasing so I 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 you know across your three the three pillars of your M&A.

Program.

Well one of the reasons as I mentioned on the last call that we decided on I T. S is our focus area is valuations we feel we.

They are less competitive 'cause it because it is a niche market too is to an extent is very large in each market, but it isn't in each market.

And you know so certainly if you looked at enterprise software or consumer consumer software. Those valuations are very high right now and I completely agree with you I don't see that as much in the IPO space.

And the other dynamic of course is with Cove is every business virtually every business has experienced some softness.

In their bookings or even the revenue and profitability and that ultimately tramp translates to volume as well. So I would say these are these the deals that we're looking at would be less competitive than you would see in something like enterprise software. We might have 10 15, a potential buyers at the table, we're not seeing that.

We have <unk>.

In some cases were either alone at the table or it.

Or it's a small number of potential suitors.

So that that creates a better value kind of opportunities for us.

Okay. No I appreciate the color congrats on a very strong quarter I'll pass the line.

Thanks, Doug.

Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Todd Coupland from it see RBC. Your line is open.

Hi, good morning, everyone.

A couple of modeling questions if I could.

What's the the rough run rate opex for the business excluding.

Yeah, a large lumpy wireline quarters could you just give an idea of what that is please.

Yeah, I can speak to speak to that a little bit I think if you look at our historical sort of SGN a.

As I mentioned, we do have some onetime costs this year because we are.

You know fortifying and enhancing sort of some backend SAP solutions that we have in that position us to grow in scale rapidly but.

But you know I would say there aren't good indicator.

You know just take out just look at our cash flow statements and take out sort of depreciation and those types of things you can get a good good I'm good sort of run rate of our of our cash opex.

What I would like to point out though is in the cost of revenues I I touched upon this a little before.

Since you bring up why land specifically.

You know they have a diversified strategy, but more and more we're seeing this partnership model.

Where.

You know we acquired those portfolios with our partners.

And we help them monetize those those those portfolios along with that though our contingent legal fees.

And so you know there's there's a portion of the legal fees that make sense for us to to to pay on an ongoing basis, but it's a very small proportion so.

The by far the larger portion the litigation [noise] those.

Those three D. rich now [noise].

Hi, having a contingent payment model.

And so it's very it's very difficult to tell you sort of.

What our run rate is as it as it relates to sort of wind linens business because of that contingent model.

But what it does is it de risks those cash costs up front for litigation. So we didn't in other words, we don't have to incur those costs and wait for the final conclusion of a litigation, it's only if and when we are successful and we win.

That those get paid out so we feel like this is very good model that de risks, our cash cost and provide them a trip predictable base for sort of operating expenses.

Great. That's a that's helpful. And then just on M&A, if you think about your pipeline.

Would you would you expect to put a class to work in 2020 or the covert hurdles likely to push that into 2021.

It's very much.

Yeah, it's possible we have an active pipeline it's possible as I said earlier I think.

I hope it does slow things down a little bit on due diligence because of the challenges around onsite meetings and reviews, but.

But.

What I can tell you is we are very active and Ah you know.

It's hard to say with certainty, but it is possible.

Okay.

Appreciate that color and good luck, we'll talk soon thank you.

So.

There are no further questions.

At this time I will pass the call back to Todd for closing remarks.

Well. Thank you everyone for joining today and 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 does you may now disconnect.

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