Q2 2021 Quarterhill Inc Earnings Call
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Good morning, and welcome to quarter Hills, Q2 fiscal 2021 financial results Conference call on this morning's call. We have Paul Hill, President and CEO and John <unk>, Chief Financial Officer. At this time, all participants are in a listen only mode.
Following managements presentation, we will conduct a question and answer session during which analysts are invited to ask questions to ask a question. Please press star 1 on your Touchtone phone to register.
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Earlier this morning quarter Hill issued a news release announcing its financial results for the 3 and 6 month periods ended June 32021.
This news release, along with the company's MD&A and financial statements will be available on quarter Hills 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 in the company's annual information form and other public filings that are available on SEDAR.
During this conference call quarter Hill will refer to adjusted EBITDA.
Adjusted EBITDA does not have any standardized meaning prescribed by Ifr S.
Please refer to page 3 of the Companys Q2, 2021 management's discussion and analysis for full cautionary notes regarding the use of forward looking statements and non <unk> measures.
Finally, please note that all financial information provided is in Canadian dollars unless otherwise specified on.
I'll now turn the meeting over to Mr. Hill. Please go ahead Sir.
Good morning, everyone and thanks for joining us on today's call. It turns on the agenda I'll start with a look at the business highlights followed by John who will take a look at financial results. Then we'll open it up for questions Q.
Q2 consolidated revenue was $18.9 million consolidated adjusted EBITDA was negative $3 million and we generated $1.7 million of positive cash from operations.
We ended the quarter with a strong balance sheet with $122.7 million of cash and working capital of $138.5 million.
In Q2, we continue to make progress on our M&A strategy, completing our second acquisition of the year VTS.
We've made considerable progress integrating integrating both acquisitions generating new revenue opportunities realizing cost synergies and laying the groundwork priorities further expansion into Europe I will touch on these developments in more detail shortly.
Wildland completed license agreements in Q2, but COVID-19 continues to be a headwind for some licensing discussions and litigations, where in person meetings or court schedules are being delayed.
As a result Q2, some agreements that we had planned on closing on the quarter got pushed out to future periods.
Earlier, this week Wildland announced patent portfolio acquisitions, and a license agreement on patents that relate to the wireless technologies used in the automotive industry. So they're off to a good start in Q3.
The automotive industry as a promising new market segment for our wireless patents and we have a number of new opportunities in the pipeline.
Those who have followed us for a long time know the episodic nature of wildlands revenue. Despite the quarter variability on a relatively consistent basis wilen delivers significant annual cash flow.
Expect that to be the case again in 2021. This means that we're looking for a strong second half from the business and we remain encouraged by the pipeline of agreements. The team is working on.
Regarding our litigation in the U S with Apple all preliminary briefings have been completed and we're waiting for the oral hearing date from the federal Court of Appeals, which could be released any day.
I believe the hearing will likely take place this fall or early on the spring of 2022.
In addition, wildland has upcoming trials with Amazon This November and with Micron in August 2022.
Business is also evaluating several interesting patent portfolios for acquisition in the coming quarters.
<unk> had a good quarter with solid financial performance integration of 2 acquisition and growth in its pipeline.
So far in Q1, and Q2 sensor line has performed to our expectations on the integration is going well.
In North America IR day is leading all sales efforts for sensor line products and has already closed deals in New York and Indiana.
<unk> is currently conducting trials in other states, which could result in much larger multimillion dollar opportunities that wouldn't have been accessible to sensor line on its own.
With Bds Q2 reflected a contribution only for May and June.
So far the business is on track on the integration is going very well.
<unk> develops and manufactures and sells traffic monitoring devices that require drivers speed and red light and fractions.
There are currently the only radar based products certified under new regulations in Germany that enabled direct enforcement of truck traffic violations.
This is an area of enforcement that we really like and think has significant growth potential for example here in Toronto. The city has installed more than 100.150 Red light cameras.
Long with 50 speed cameras and as the process of rolling out 50 more.
I can tell you from personal experience. These cameras are working.
In terms of revenue synergies IRT on VTS are working together on several opportunities in Germany.
Leveraging <unk> European footprint to bid on new business in countries, where they have no previous sales coverage.
Together these 2 acquisitions demonstrate the global platform on the IRT business since the ability to identify acquire and grow acquired companies.
We have initiated a further integration of its 3 EU subsidiaries.
Your line VTS and icons to establish a more substantial beachhead in Europe. The company has opened a search for a European General manager, who will oversee the acquired companies and lead the expansion of Iot in Europe.
We are pleased so far with the progress of the 2 acquisitions and we intend to complete more transactions this year.
We think we can get a couple done a couple more done in 2021, we have a solid pipeline and we'd like to get some larger deals on the board this year.
These could be businesses that are similar in size and scope to IRB with well established brands and with their own M&A strategy.
With attractive market tailwind is in place we believe the outlook for IRT in the ETF industry in general is very positive.
With that I'll turn it over to John for a look at the financial highlights.
Thank you Paul and good morning, everyone I'll take a look at our key consolidated numbers as well as the numbers from TFS and licensing segments separately.
Starting with revenue our consolidated revenue in Q2 was $18.9 million and $38.2 million year to date.
Revenue was up year over year in Q2, as both the Ics and licensing segments grew revenue, but slightly lower year to date due to a more moderate value of agreements completed in the licensing business in Q1 this year.
Ics revenue was higher for both Q2 and the year to date period, primarily due for the inclusion of revenue from the acquired companies as well as resilience in its core business. Despite the COVID-19 pandemic still remaining a challenge in most parts of the world.
Paul mentioned, we are already seeing revenue synergies from the acquisitions and expect this to continue as our businesses become more integrated.
Licensing revenue was up in Q2 compared to the same period last year, but down slightly year to date.
Despite the headwinds related to COVID-19, Wildland continues to show it can compete agreements in a challenging environment and as Paul mentioned Wildland is off to a great start in Q3 with a license agreement completed on patents that relate to the LTE wireless tech in the automotive sector, which is a new biz.
Yes.
We expect a stronger second half of the year for wildland going forward.
From a gross margin perspective consolidated gross margin for Q2 was 18% and 26% for the year to date period.
Margin in the 2 periods was lower than last year, primarily due to lower litigation expenses at Wilen and the respect of 2020 periods litigation payments do fluctuate based on the level of activity.
For particular period for example in Q2 last year litigation activity with low for quartz reacted.
To the initial onset of the COVID-19 pandemic.
Ics margin gross margin was 37% in Q2 and 42% year to date the decrease in <unk>.
Q2, compared to last year was primarily due to the activity in nature projects underway in the quarter and their specific margin profiles.
The increase in year to date gross margin was primarily due to there being a higher proportion of product sales, which tend to carry a higher margin than in the same period last year.
In terms of operating expenses total consolidated operating expenses were slightly lower in both Q2.2021 and the year to date period Ips operating expenses were up modestly in Q2 with the addition of the central line on Bds acquisitions.
Overall as always we continue to keep a close eye on expenses at our corporate level.
And our portfolio companies.
In terms of adjusted EBITDA for the Ips segment had positive adjusted EBITDA in Q2 of $2.7 million, which was down from Q2 last year.
And $4.1 million for the year to day period, which was up from the same period last year for <unk>.
Both Q2 and the year to date period, the Ics adjusted EBITDA margin was around 15%.
Adjusted EBITDA margin for Ics, Ken as I mentioned before fluctuate depending on the nature of projects underway in the quarter.
The revenue mix.
And the seasonality that is inherent in the <unk> industry.
And as we've mentioned before Q1 is typically a slower period just due to.
The weather.
Adjusted EBITDA for the licensing business was lower in Q2, and the USA period.
Primarily due to the higher contingent legal and partner costs in 2021.
On a consolidated basis, adjusted EBITDA was negative $3 million after corporate expenses.
Which generally include all of our public company costs.
In terms of cash flow on the balance sheet. So cash generated from operations was $1.7 million in the second quarter and cash used in operations for the year to day periods for $1 million.
The balance sheet remains very very strong with $122.7 million from cash and $138.5 million on working capital again with no debt.
We continued our quarterly dividend payments in Q2, along with our share buyback spending.
Spending a combined $3.2 million on both activities.
And this morning in our earnings release, we announced details of our next dividend. The board has declared ineligible dividend 125 per share on October 8.
1 for shareholders of record on September 10, 2021.
So in closing we remain very well positioned financially to continue to execute on our M&A strategy.
They'll have a very strong balance sheet with significant cash from working capital as.
As well as the ability to support leverage and we have 2 operating segments that we.
You need to believe in and continue to generate cash annually on a consolidated basis to help support our acquisition strategy.
As we've talked about before our plan is to deploy $400 million on our strategy over the next 5 years, we've already made 2 smaller acquisitions.
And as discussed on our last call.
We believe that doing so.
Could add an incremental $300 million plus.
Plus of revenue to our Ics business, along with $50 million of adjusted EBITDA over the next 5 years on top of what we're doing already.
Ics revenue.
In line with our strategy comes with a more steady and predictable profile.
And we believe that should result in quarter Hill, receiving a valuation that is consistent with other public Ips on Iot telematics companies.
That have achieved similar scale.
So the net result of our strategies unlocked that shareholder value over the next 5 years and very remain very optimistic that we're going to execute on that so that concludes my review of the financial results and I'll now turn the call over to the operator for Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by 1 on your Touchtone phone you will hear 3 total prompt acknowledging your request and your questions will be pulled on the order. They are received should you wish to decline from the polling process. Please press star followed by 2 if.
If you are using a speaker phone please lift the handset before pressing any keys 1 moment. Please for your first question.
Your first question comes from Doug Taylor Canaccord, Doug. Please go ahead.
Yes. Thank you good morning, Doug.
1 area I just wanted to.
Flesh out a little bit as you.
Looking for a little help with what gives you the confidence in the inflection in the wildland business you are kind of.
You are telegraphing here for the second half for this year or is this some of these signings we've seen post quarter as it is at the pipeline and I just wanted to understand how you're handicapping the risk that.
Court openings or would slip further because I think many of the jurisdictions. You typically are litigating in are in areas that seem to be in the midst of a third wave right now.
The courts by Hey, Doug its Paul Yes.
The courts.
Isn't really the issue it was a year ago. They were closed for in some cases over a month.
We're not seeing that at the moment.
It gives me confidence is just the pipeline the level of activity. The fact that we're off to a better start in Q2 Q3 than we were in Q2.
We've announced a couple of deals already.
So yes, there's just a lot to work with and it's starting to look like the year is going to shape up in a similar fashion to loss youre not exactly probably but its backend loaded it's fair to say.
But theres just enough to work on and we spend a lot of time on the pipeline and working with the wildland team to understand that.
Okay and the other thing that I want to drill down on that you mentioned in your prepared remarks is I think.
Talking about the potential for more sizable deals at least a little more constructively than we are.
We've heard recently and I think in particular, you said deals of the same size and scale as the IRT transaction and so I just want to understand with deals like that or are we going to be looking at things that are.
Potentially.
Accretive on a multiple basis, which is kind of been challenging given the.
On the multiple that it's been afforded to the wireline business is going to be about cost synergies of combining these with IR day are these going to represent kind of new platforms that youre going to be layering on additional tuck ins to get cost synergies down the road.
Help us think about what.
What we should expect from those those first couple of transactions.
Yes.
That you are talking about.
I would say the most likely scenario is more of a platform acquisition that would take us into adjacencies to IR D companies with their own brand their own their own M&A strategy that.
We have sort of similar scale and scope as IR day, but in an adjacent market would be.
Something thats quite possible and while we are in the meantime, I mean, we have a pipeline that has varying sizes of acquisition targets and it hasnt.
I have been here 1 year John has been here since last fall and that M&A pipeline has matured a lot over that period of time.
It's not surprising that the first couple of acquisitions were smaller in nature right. As you would imagine those are easier to get done take less time easier to integrate and so as the pipeline matures as our time in the seat.
Is longer than we can contemplate larger acquisition.
Thanks, Doug.
For that I mean.
You mentioned sort of Iot for that type of size, we certainly have the financial means to do it as I mentioned before we're carrying no debt. So we have opportunities for leverage in this very low cost interest environment.
And then secondly, as Paul mentioned.
Pipelines, so those kinds of companies are out there.
Obviously, we have to come together and make sure. It's good for US it's good for the seller.
But what we can say is that we're definitely exploring those kinds of opportunities.
Last question for me I mean are you comfortable with more sizable acquisitions doing these fully.
I guess virtually or are you waiting for travel restrictions to EPS, I mean, particularly for transactions that might be in Europe or size or elsewhere in the world.
Or are you going to be waiting to meet and visit.
Visit on all of that before pulling the trigger on something of size.
I'm traveling.
So.
So.
An acquisition of that sort of scope, obviously, you want to spend some time with the teams getting at other team has seen the facilities et cetera, So I am traveling.
And on the on the financial diligence side I mean.
Even even before COVID-19.
You know.
Youre getting information from a data room and scheduling calls.
The CDM person stuff is very important obviously and so yes, we got the first 2 done without going in person. Although we had people on the ground in Europe, because we do on a Belgian company called icon that was helpful and we have some <unk>.
Staff on the ground in Europe, So we were able to.
To do the smaller acquisitions remotely.
It wouldn't be possible with a large acquisition and I am personally traveling on some of my team is down travel.
Just wanting to confirm that COVID-19 restrictions on travel restrictions don't seem to be.
Our gating factor here and in the rollout of your M&A program and it sounds like it doesn't.
I'll pass the line, yes, okay. Thanks Barry.
Thank you. Your next question comes from Maxim Barren core Mark Maxim. Please go ahead.
Hey, good morning, good morning.
Just had a couple of questions regarding the strength in wireline in the second half of the year.
So my first question is just the strength come from several large deals or is it more broad based across the type of deals that you're getting and just my second question would be.
The strength is it split evenly between license agreements and litigation or how does that split look thanks.
Yes, I would say.
It's a number of deals so the pipeline.
The way, we get to our numbers in the second half there are many paths.
Any combinations that debt that will get us there. So I think you can assume that it's a number of transactions of different sizes as opposed to a couple of very large deals that debt.
And of.
When 1 way or the other is more dramatically.
So that would be my comment on that.
Did you want to comment on.
Yes.
Below that.
Many pathways and Theyre all.
The litigation I did mention <unk>.
Amazon.
Our.
There is a trial date in November.
It's a hard question to answer because sometimes cases are settled before.
It gets to trial right. So.
I don't know how you would categorize that is that a licensing deal or is that litigation right. So.
So I would say that is also a mix yes.
If you look at the history, but very few have actually call on full.
All the way through the court process.
<unk> negotiated beforehand, that's right.
So what I was going to say is theyre all of varying sizes, it's just timing.
Got to come together to get something that's comfortable for both parties and I would just point out we are off to a good start in Q3, we've announced a couple of deals already so already were.
Headed in the right direction in Q3, yes.
Thank you. Your next question comes from Todd Coupland CIBC Todd. Please go ahead.
Yes, good morning, everyone. Good morning, good morning.
I wanted to first ask about.
Yes, its IR D plus the acquisitions so <unk> in total is that.
$17 million.
In the quarter is that a pretty good run rate for all of the businesses now that have been acquired.
So.
With <unk>.
<unk> wasn't fully integrated in the financial results right. It was only a half a quarter roughly yes, we acquired <unk> in April so, but that's relatively small I would say, obviously Q3 has been the largest quarter always for IR day.
In terms of the other 2 acquisitions, what I can tell you is that they are tracking towards our business case.
Which basically forms our budget for the year.
Other thing to take note too as we reported in Canadian dollars and.
As you are familiar with higher dis business half of it is in the U S and so last year with the onset of Covid the exchange rate.
Was quite high I think it was in and around the 1009, that's quite a big FX headwind right now with the U S. Dollar so weak day now it is changing and I think that's 1 reason for optimism as well too.
Slips and sort of normalizes back to sort of at least for last 5 year average but.
This year, we're looking at $1.25 in the quarter. So that's a big difference.
I would say on a constant currency basis, the businesses are tracking.
But because we reported in Canadian dollars and the difference in exchange rate that hit us a little bit but.
We're optimistic that that's going to normalize and.
Youll start to see that run rate number is pretty soon.
Okay.
And then is there any way to think about sort of organic constant currency growth.
Yes.
With the acquired businesses in <unk> I mean is it mid single digits is that low double digits. How are you thinking about.
The market are those combined businesses.
Yes.
We track the IRT business organically tracks more or less to the market historically the market CAGR is somewhere in the 5% 6% range.
There's some recent market studies that are predicting more more like a doubling of that number over the next number of years as all of this new infrastructure spending comes into into the market. So that's why when I talk about the tailwind that's what I'm referring to it.
For example in the U S. The infrastructure spending bill rate that that money will eventually flow down to the state level and show up.
As new opportunities for Etfs vendors like ourselves so.
So that's more on the kind of 13% to 15% CAGR, but it's going to take a bit of time for that cash to flow down to that level, probably a few quarters. So we think we'll start seeing that CAGR improves somewhere in 2022.
So you won't see necessarily a lot of organic growth beyond kind of that 5%, 6% range probably Intel.
That money starts flowing.
The other aspect is and we have talked about sales synergies on out.
Sensor line on Bds are smaller acquisitions, but again they are very much limited to sort of the European market and they didn't have the sales channels and the same infrastructure related to sales as we did and so we're already seeing opportunities now those take time to flush out the nature of RFP cycle.
And the other Ics industry are longer, let's say relative to maybe some other industries, but we're already starting to see those in all you want to talk about a few.
Landed a couple of deals already I mentioned in my remarks, Indiana and New York those are deals that probably sensor line wouldn't have seen on their own we have coverage in those markets. We have existing relationships. So we can bring those products. If you look at DDS, they're a German there a product that sells primarily in the German and Austrian market I mean that also very very it's great.
<unk> Thats being adopted all over the world now as I mentioned, if you look at photo radar Red light cameras Theres a lot of investment in those areas to drive new sources of revenue to government. So we think can take those products into <unk>, which operates in over 50 countries right now and.
And Paul also mentioned our integration efforts I mean, theyre pretty much from an operational perspective.
We're gonna start unlocking the synergies, but they're already integrated obviously they are integrated on the sort of back office financial reporting and we also expect to achieve cost synergies as well too whether it's global insurance policies or redundancies and management and staff.
Turning to unlock those after a transition period as well too so.
We'll hit synergies on both sides. It just takes a few quarters to kind of.
See them roll through the results and hopefully we get some cooperation on the FX as well too.
Okay.
Super helpful.
And then I think I thought you said EBITDA margin was 15% in Etfs is is that the right number to think about.
This business on a run rate basis or net.
What's the range with synergies I guess is maybe a more direct question.
Yeah.
So couple of things 1 is in our Ips business in Ips is such a big tent.
We're in commercial vehicle operations, we do dabble in other areas, obviously as well too.
And we do projects services, and we sell some products as well too right products tend to be higher margin. So theyre going on thats going to flow all the way down to your EBITDA margin.
Other areas in Ics could have a different margin profile I would say for our current <unk> business right now.
I mean, we can go back to previous financial reporting that you can do the math they were around 11% to 13%.
So getting to 15% already I think that's a reflection of some of the acquisitions, we've made as well as some of the center. The other gross margin has improved with some other more product centric acquisition back, but yes. The products our products are anywhere from 50% to 65% growth margin.
So for 15% is actually.
Kind of the bar that we try to get to some pretty good working number for IR day, but other businesses that we acquire going forward in the industry could could be higher or it could be slightly less but still very cash generative depending on the type of business additives.
Okay.
That's helpful.
And then on Amazon can you just remind us what.
What is actually the infringement.
Net debt they've been taking advantage of.
Yes, and just to help us understand which patents you put forward.
Just at a very high level.
Attempting to get into lots of detail around it it's essentially the voice activated assistant technology. So you think of.
CRE is an example of that so some of the underlying technologies related to voice activated assistance.
Okay.
I mean youre, taking it to trial so it's.
Your your opportunity is not sort of single digits of millions. This is like a material infringement and just see where you get to I guess is the read on going all the way to trial right.
I can't comment on that.
Size or scope, but but yes, I mean that is the area that we're focused on with them.
Okay.
Okay, and then just what you got asked about wireline a little bit, but if I could.
You said, you'll do the catch up.
And sort of get back to.
For the averages in terms of wireline I mean, that's how I've always thought about that business. So it's not a big surprise to hear that.
Is the catch up though.
I guess, if you're going to catch up in the second half of the year for the full year gets you back to average is it.
Probably as action can be potentially quite.
Quite a bit higher in the second half.
And are there scenarios, where you sort of have an outsized year.
With everything Thats in the pipeline or is it is it just getting you back into the average it's the things that you think it's going to close end up closing thanks a lot.
Yes no.
Zinc is.
I think the year is shaping up in many ways like last year, except that I think that I think last year. We had the 1 really large wildland quarter. It may not be that kind of scenario, but it is definitely the similarity is that it's a backend loaded year.
But terms of order of magnitude that that would be kind of the range but.
I would say you know the.
Wildcard is there are some large projects that could settle at any point right. So that's the part that you just can't predict at all we have on Apple case.
We have hearings happening.
In the fall right. So it's hard to predict that kind of scenario and I wouldn't factor that into my comments really yeah. Okay.
That's helpful. Thanks, a lot guys I appreciate it.
Thank you there are no further questions at this time I will now turn the call back to Mr Hill for closing remarks.
Okay, well, thanks, operator, and thanks, everyone for participating on today's call and we look forward to speaking to you again in the coming months.
Thank you.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.