Q4 2021 Quarterhill Inc Earnings Call
Over a six year base period options on that agreement could extend it another four years.
Bgc's track record of securing option years has been very strong. So we would expect the total value of the contracts these contracts would be much higher over their lifetimes.
In 2022, so far we have completed two new agreements.
First is a nine year $60 million sub contract agreement with WSI USA to provide our back office system for the 405 express lanes in Orange County, California.
Second is a two year $5 million contract to implement and operate express lanes in Alameda County, California. This is a short term interim solution volatile agency finalizes procurement plans for the expansion of the roadway network and integration of the permanent tolling solution.
Another key development DTC in 2021 was the appointment of Kevin Hulbert CEO , Kevin is an accomplished leader with more than 30 years in the Ics industry and almost 20 of those years with PTC as both the industry and the ECC business inside and out and has been an instrumental person in bringing new business and new talent to the company.
He is the right person to lead ATC today as it seeks to capitalize on its large pipeline and explore collaboration with Iot.
<unk> has also had a record year for order bookings in 2021, with new contracts and New York State, Illinois, Idaho, Oklahoma, and Hawaii, among others, resulting in a record backlog at the end of the year on the implementation front considerable work was done in Indiana, which has been the Companys largest project over the past 18 months.
R&D is deploying its way in motion systems to promote safer rhodri globally, and with an eye using its data collection expertise to facilitate direct enforcement capabilities in the future.
Earlier, this month <unk> announced another $5 million contract with Indiana further extending this relationship.
Wayne Motion systems were also deployed in Ohio in 2021 with a potential priority use technology to be used in the future to enable weight based tolling for trucks, and Virginia, <unk> practice system, which is used to identify unsafe tires at highway speeds was responsible for removing 13000 <unk> tires from the road in 2010.
One taxes now deployed in 12 states and these results in Virginia have garnered interest from several other neighboring states.
Or do you made two tuck in acquisitions in 2021 sensor line and Bds, which have expanded the company's enforcement offerings as well as their presence in Europe .
The transactions led to the establishment of R&D Europe , and the hiring of <unk> in January to lead the organization.
And those priorities for 2022, our integration and growth.
I'll have to further integrate processes functions and development across the European business, while driving growth at the safety and enforcement products in the R&D portfolio, such as Red light and speed cameras sensors and traffic intersection and control solutions.
Looking now at Weiland, our licensing business. It was a year characterized by a number of licensing and patent acquisition successes, while continuing with challenges posed by the pandemic.
Throughout the year or Covid was a hurdle for licensing and business development travel preventing in person meetings and the courts experienced continued COVID-19 related delays and rescheduling as they work through their backlog of cases. Despite this wireline completed several licensing deals with the likes of LG, Motorola and Marvell among others.
Generated positive adjusted EBITDA for the year as a whole, which was wildlands CT positive adjusted EBITDA in the past five years.
Violence, New subsidiary Universal connectivity technologies incorporated acquired a portfolio of patents in Q4 of 2021 from a leading semiconductor company. The acquired patents relate to a wired connectivity, including various USB C technologies used in applications, such as desktop and laptop computers.
Tablets mobile phones gaming consoles and smart Tvs.
This new portfolio establishes a new licensing program addressing several mid market segments.
In terms of ongoing litigations subsequent to 2021 year end, we received a decision from the court of appeals for the federal circuit or CFC and the U S and the case against Apple incorporated.
As noted in our press release on February 4th we view that appeal decision is favorable Wi Lan with <unk>.
The FCC has remanded the case back to the district court for another trial focusing on the amount of damages payable.
<unk> innovations incorporated a island subsidiary also as pending litigation against Apple in Germany. There are three infringement hearing scheduled during 2022 corresponding to the three patents in suit.
In addition to these cases wildland or its subsidiaries has several other litigations and ongoing licensing discussions that it expects to move forward with in 2022.
In December we announced the strategic review for the Wildland process.
Sorry for the wireline business and we're encouraged by the end of an interest that we've received since the announcement was made.
<unk> is one of the licensing industry's leading companies having established a strong track record over the past 15 years.
<unk> has a diverse collection of patent portfolios that have been successfully license to many companies around the world by a focused and experienced team of IP professionals.
The process is underway and style has been hired as the financial adviser it's around the review.
<unk> is a global investment banking advisory firm in the serve companies of more than 80 countries over its 30 year history with its substantial experience and IP transactions. We believe it will be an excellent advisor to assist with the wildland strategic review process.
Turning now to our strategy and priorities for 2022 and beyond for several years, we have spoken of our focus on Ips and in 2022 will continue to transition towards that of a pure play Ics business.
In my opinion, there has never been a better time to be in Ics. The industry has multiple market tailwind, including first the simple need for new and upgraded infrastructure second an inadequate funding from traditional sources like the gas tax which will be increasingly supplemented by newer tech based user driven solutions like <unk> and <unk>.
<unk>.
Third guess federal government's infrastructure, Bill, which will see it allocate billions for new infrastructure projects in the coming years, which is a trend that we're seeing worldwide.
Finally policy initiatives related to sustainability objectives traffic management and enhanced safety are driving governments at all levels still look at tech based infrastructure solutions.
<unk> are having the effect of increasing the industry outlook for growth in the double digit percentages historically Ics grew at a rate in the neighborhood of 5% per year, but over the next several years as expected that the industry could grow at a CAGR of up to 15% quarter.
<unk> is well positioned to capitalize on this growth we have two strong platform businesses in UTC and IRB.
We have talented teams and our strong reputation in their respective fields with HCC is tolling and priority is commercial vehicle aberrations and enforcement.
Both are coming off record years in terms of newer bookings, having grown backlogs and sales pipelines and both have internally generated pipeline for M&A to go with the external deal flow sources.
So against this backdrop, our key priorities in 2022 are first to drive organic growth with the execution of new project implementations and sales pipeline conversion second execute on our M&A opportunities and third integrate further our Ics businesses.
On the M&A front, we have previously spoken of our commitment to deploy $400 million over five years on M&A and we continue to work towards this goal in 2021, we deployed $160 million of capital on M&A and in the fall we added a $57 5 million.
And at $57 $5 million to the balance sheet, where the convertible debenture financing.
Along with our working capital and additional flexibility in our debt facility, we have a strong balance sheet to deliver on our M&A objectives, and we have good deal flow where transactions of all sizes.
M&A will focus on three areas first scaling existing businesses, which could be either international or North America second, adding products service capabilities, including technologies, our operational assets that reinforced the markets, we're already in or a third diversifying into new customer bases or end markets, which typically will also lever.
Our existing solutions.
On the integration front, while <unk> will continue to operate with their unique branding, we see lots of opportunities for the businesses to work together and leverage one another strengths.
With cost synergies there are some savings to be had in sort of the administrative areas, but by and large the businesses are in fairly unique verticals and operating independently.
With operational synergies, we are already starting to get some talent benefits between the two companies project implementation timelines for either R&D or ATC.
To a spike in the need for engineering or other skill sets that can then tail off over time the businesses are thinking about that talent pool collectively and how they can start to harmonize the need for the specialized skill sets.
Regarding technology, Roadmaps and product plans for the two businesses.
Even though they are focused on different areas. There are some foundational types of technology that is developed together can benefit both.
Computer vision is one example, it is expected that over time, the industry will move away from transponder reading into using more intelligent cameras to identify vehicles broadly speaking computer vision can enabled us.
Businesses had plans to make investment in this technology. So we can work together to better maximize that investment.
On the revenue side, there have been times in the past one agency partnered with <unk> and we will see more of that going forward already there are a number of international deals that R&D has insights into where GTC could potentially play a role.
In the U S. We are seeing some places where there is overlap in the customer pools with select state or local entities and it is still in early days, but ECC is starting to see opportunities, where our traffic management solutions to form part of a more holistic offering to the customer.
In summary, we're very pleased to see how the relationship between the good business has developed so far and we have only scratched the surface of the potential collaboration between the two.
Our recent contract wins and Ips suggest that.
Suggest we see growth in 2022 revenue from our Q4 2021 run rate level with the new revenue coming onboard more than offsetting a few projects that are rolling off this year.
In addition, we think that adjusted EBITDA margins in 2022 should resemble those in Q4, but will expand in subsequent years towards the targeted level of 15% as some of those major projects moving to the operations phase.
Finally, as our business continues to evolve we will look to add leadership and expertise to help us execute on our strategy and capitalize on the opportunity in Ips.
Along these lines of this year's annual meeting on April 21st we're looking to add two new board members rescue Lewis and Pamela sphere.
Rusty is a veteran with the Ics industry and played an instrumental role in creating and reading frame score one of the industry's leading totaling companies <unk> has more than 20 years of experience in accounting and finance from a variety of public and private corporations and professional services providers, including C suite experience and transaction processing, which makes our well.
Positioned to provide insights into our totaling back office systems and interoperability opportunities.
More information on both can be found in our circular which is now available on our website. We look forward to their contributions as we pursue both organic and acquisition related growth opportunities for the business.
With that I'll turn it over to Steve to take a closer look at our financials.
Thank you, Brian and good morning, everyone.
Well take a look at key consolidated numbers as well as members from our Ikea and licensing segment.
Starting at the top line consolidated revenue in Q4 was $51 2 million and $125 7 million for the year.
<unk> revenue in Q4 included a full quarter of contribution from the EPC and with significantly higher at $46 5 million compared to $17 6 million in Q4 2020.
Q4, 2021 revenue also included revenue from sensor line and Bds, which were hired earlier in 2021.
The Central Texas, and Orange County contract represent two of the three opportunities mentioned on quarter Hills last conference call, where EPC has been selected as a vendor of choice.
It had not yet signed a contract at.
At the time, we were either in the standard protest period post election or when the final contract negotiating stage regarding the third opportunity. We are currently in contract negotiations and expect to announce the completion in due course.
Licensing revenue was up in Q4 compared to Q4 last year, but down year over year due to the significant licensing activity in Q3 of 2020.
Despite the headwinds related to COVID-19.
<unk> continues to show it can complete agreements in a challenging environment, while simultaneously planning for the future and adding to its patent portfolio.
Consolidated gross margin was 24% in Q4 and 30%.
Through the year.
Ips segment gross margin was 28% in Q4 and 34% for the year.
Gross margin in Ikea can fluctuate depending primarily on the nature of the projects underway during the period and the related margin profile.
In addition, since more than half our Ics revenues are denominated in U S dollar currency volatility between the U S and Canadian dollars can impact margin.
As we move through the initial implementation phase of project with Ohio River Bridges, Central Texas, and Orange County margins in 2022, we'll reflect that in the initial implementation years, usually the first two revenue tends to have a growth or gross margin.
Have a lower gross margin in a range of 10% to 15% while the subsequent operational years of those contract revenue has a higher gross margin in a range of 30% to 50% with the higher end largely dependent on the level of change orders involved.
Gross margin at Weiland will fluctuate, depending primarily on the level of litigation and contingent legal and partner costs incurred in the respective period relative to revenue generated for the full year wireless had gross margin of 15%.
Total consolidated operating expenses were higher year over year in both Q4 and the full year period. The increase in operating expenses was primarily driven by the addition of the cost base of centralized Bds and EPC as well as by special charges, which primarily primarily represented acquisition related costs.
During 2022, we will take steps to establish an optimal cost structure for the business as we continue the shift towards.
More of an operating company structure versus that of a holdco with operating entities beneath it 2022 will be a bit of a transition year in that respect.
Consolidated adjusted EBITDA in Q4 was 878000 and $5 million for the full year period.
On a segmented basis, the Ics business generated adjusted EBITDA of $4 1 million in Q4, and $12 7 million for 2021.
Adjusted EBITDA benefits from the addition of ATC sensor line and Bds via acquisition. However, those increases were offset by a high margin project in Indiana, which occurred during the second half of 2020 government expense relief programs that were in place in 2020, due to COVID-19, and foreign exchange fluctuations, which negatively.
<unk> impacted revenue and margin from 2021.
Wireless adjusted EBITDA for 2021 was $1 2 million demonstrating its ability to generate positive margin of more modest levels of revenue and which reflects the leaner business model put into place in recent years.
Cash generated from operations was 794000 in Q4 and cash used in operations for the year with $13 3 million cash.
Cash cash equivalents and short term investments.
$2 6 million at December .
<unk> 31, 2021, compared to 141 $3 million at the end of the prior year.
During 2021, we used appropriately $88 2 million of cash including transaction costs from the balance sheet on the acquisition of ATC sensor line in <unk>.
Working capital stood at $105 7 million at year end.
We had several positive developments regarding our capital structure in 2021, which were.
The addition of a debt facility totaling approximately $82 million.
Of which $75 million with use of the EPC acquisition.
The filing of a preliminary shelf prospectus with capacity to raise up to 200 million over a 25 month period.
And we also raised $557 5 million.
Our convertible debentures in October collectively this gives us further flexibility and resources to pursue M&A.
Regarding return of capital to shareholders, we continue our quarterly dividend payments in Q4.
March 10th press release, we announced details of our next dividend payment.
The board of directors has declared ineligible dividend of 125 per share payable on April eight 2022 for shareholders of record on March 18 2022.
In closing, we remain well positioned to continue to execute our M&A strategy, we have a strong balance sheet today with cash and working capital and we have three operating companies capable of generating cash to further support the Ics acquisition.
<unk> strategy.
Ics revenue comes with a more steady and predictable.
Profile, which we believe should result in quarter Hill elevating its profile in the investment community receiving a valuation consistent with other public companies that scale and ultimately unlocking growth in shareholder value.
This concludes my review of the financial results and I will now turn.
The call over to the operator for Q&A. Thank you.
Thank you, Sir ladies and gentlemen, we will now conduct a question and answer session. If you'd like to ask a question Press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star two.
Speaker phone please lift the handset before pressing any keys.
One moment. Please for your first question. Your first question comes from Steven Li with Raymond James. Please go ahead.
Thanks, guys couple of questions for me.
First on licensing.
So now that the sales processes underway are you still signing licensees and therefore 2022 east.
He is going to be a normal year for licensing.
Should we expect licensing activity to be down substantially.
Hi, Stephen Thanks for joining.
What I'll say is that the.
Yes.
We did announce the strategic review and the process is underway, but but wildland as is being run as is the.
The strong business that it is so we will continue to seek licenses in the business as we always have historically.
Alright thats good.
Sure.
So EBITDA margin in the quarter was with a full quarter of ATC was up it was high single digit.
Given the number of new contract wins in your prepared remarks about lower margins early on.
Is that high single digit is that a good margin level for the entire year.
Or you still expect quarterly progression through the year.
Sure.
Yes, we do think that the numbers that you see in Q4 on the margin side are probably indicative for the overall year.
A couple of things that relate to that.
One is that with the new wins, we do have a much higher proportion of implementation revenue in the in the Ics business, which is we.
Indicated.
<unk> tends to be lower in margin and then there are still some of those headwinds that.
We're looking at on the on the supply chain side, <unk> or wage inflation over time as we were talking about we see 15% EBITDA margins as the as the right target and expectation in the coming years and as those contracts mature.
Thank you.
Thank you. Your next question comes from Gavin Fairweather with Cormack. Please go ahead.
Oh, Hey, good morning, I thought I'd start out just on the infrastructure Bill I guess, it's been about 100 days since then.
That was passed curious to what extent, that's changing your conversations with customers whether it's.
Changing any.
Activity in the pipeline just curious for.
How that's influencing the demand picture there.
Yes, hi, Kevin It is starting to work its way through as you might expect these sorts of bills do take time to reach the ultimate states. Although some of the states that we've talked to already had provisions in place plans ready to go in and ready to move out the door. So so I think especially on the <unk>.
Side of the business.
We're seeing more activity as it relates to it because the funds are now more available.
The ECC pipeline was already very strong prior to the infrastructure Bill and his.
We will just be reinforced by the by the activity that's underway.
Got it and then maybe on <unk> on the new contracts, obviously, a $160 million is a big number.
How should we think about number one the revenue ramp of these new contracts and the timing of revenue starting to flow and secondly to what extent is their front end loading on these contracts related to implementation services.
I think if I did the math right.
Steady across all years, it would be $20 million a year, but I suspect that the the early year there'll be a bit higher.
Yes, it's a good question and there actually theres variability amongst the amongst the contracts on the revenue profile.
Generally speaking you will see.
Some amount of Frontloading over the first couple of years around implementation, but there are times that.
The programs and the implementation itself will be spread across several years that we're talking about multiple roadways are are different phases of the project.
Will vary a bit.
But I think the average that you are talking about there over time is probably the right one to think about and given some of the variability in the programs.
Probably not a bad assumption.
The.
We are working through.
As it relates to timing and ramp up there or.
Some things there to manage but we have got notice to proceed on all of those contracts that are getting underway with each.
And then lastly for me, obviously with the strategic review of Wilen, and becoming an idea.
Pure play the plan is to reduce the corporate office and kind of dissolve that holdco structure.
Have you quantified the cost reductions that you'd be looking to achieve as that plays through there.
Excuse me.
We we havent yet I think what I can say is that we will be looking to.
Reduce the size of actual dollars, but also even more so as a percentage of revenue as the as the Ics businesses grow organically and as we continue to do M&A. There I think we will see.
Perhaps some some modest dollar reduction in 2022.
But can.
Given that we will.
Assuming a successful result on the island process, which we do expect that we will still hold them for a good portion of the year.
So.
A number of things that still have to take place as a result of that and plus.
Still underway on the implementation of the integration planning side to quantify some of the other areas, which will also some of those will take some time, especially if you're looking at different kinds of support contracts and things like that that would be renegotiated. So don't have.
Just show yet for.
For 'twenty three but for 'twenty, two we would expect to see again some.
So modest modest declines in <unk>.
Overall cost and then what we'll be doing from an integration standpoint is looking across obviously, all the components and trying to optimize and have the right.
The degree of support and overhead across all the units. So that will include looking well beyond the corporate structure and to the units and how they operate as well.
Great. That's helpful. I'll pass the line. Thank you.
Thank you. Your next question comes from Doug Taylor with Canaccord. Please go ahead.
Yes, Thank you and good morning.
One primary question for me I am just trying to understand your comments about the margins in the Ics business.
Relative to the original expectations for EQT to contribute.
Was <unk> $95 million to $120 million in revenue and 12 $5 million to $15 million and adjusted EBITDA.
Are you signaling here that with the recent contract wins, perhaps revenue is.
Can be higher than your original expectations, but margins.
Lower given the mix of new contracts and implementation work can you help me with that.
Yes.
Good question.
And I think probably.
Probably a good one good way to say it I think that we feel good we feel good about the growth that we're going to see is as we indicated in the upfront comments.
We would expect.
Some some modest growth off of the <unk>.
<unk> of an annualized version of Q4 and 2021 related to.
The new contracts that are being signed and then as it relates to to EBITDA.
Yes that mix combined with some of the other the other areas that I referred to on on supply chain and wages are performing a little bit more of the constraint on the margin side does that help.
Yes. It does so so are you, saying that still possible UGC will generate 12 $5 million to $15 million, but it'll be a different margin profile than what might have been later.
At the outset.
Really don't want to get into specific guidance, along those lines because of.
Some of the moving parts that we talked about before in terms of the timing of ramp up and then some of the other variables that are coming in but.
But I.
I'd just go back to the.
Kind of modest growth off of off.
<unk> Q4, and then some.
<unk> similar margin profile.
So then taking the Q4 kind of run rate that you've established here.
Would you still expect season.
Seasonally stronger Q3, Q2 Q3 in terms of the <unk> business.
So to use this as a baseline and a little bit stronger through the middle of the year.
Arriving at the same margin profile and then expanding in the year.
In the years to come after that is that the right way to think about it.
Okay.
Well have to get back to you on the seasonality piece for IRB any let's take a closer look at some of the incoming deals and the timeframe associated with it. So I don't know if theres necessarily a pattern to interpret there at least for this year and given the amount of signings that they had as well.
Not sure if I can confirm that but we can get a better sense to you from.
From a closer look at the deals we've signed in the backlog.
Okay. Thank you all best one.
Thank you.
Thank you. Your next question comes from Todd Copeland with CIBC. Please go ahead.
Hi, yes, good morning.
I'll just follow up on that margin question, if I could and then I had a couple of follow ups.
When you say similar margin profile.
What does that actually referring to.
Just to what we achieved in Q4.
I see so you are saying modest growth off the $51 million annualized and a relatively comparable margin given inflation and supply chain et cetera.
That's essentially the message.
Yes, that's right.
Okay, Okay and that and that includes all of these new contracts that you've spoken about as well, whether it's $20 million a year are spread out our front end load or anything like that that's all.
Embedded in that in that discussion.
Yes, Thats right.
Yes.
Thank you for that.
In terms of the balance sheet for all acquisitions and capital activities as it is it.
Up to date as of the end of the year are there any any pro forma adjustments are cash and debt as presented that's that's essentially where it is now.
I'll, let Steve jump in on this but what I will say just from a balance sheet standpoint, and kind of capacity as it relates to M&A. We feel good about the position that we're in we've got strong balance sheet overall in that we've got cash and debt facility and other things that we can do to to act on the pipeline.
We have.
And then I'll, let Steve kind of referred to the the.
More detailed parts of the question.
Yes, Hi, Hi, Todd.
It's relatively the same right now is the structure you are seeing at 2021 Theres been no major material events in that area.
Okay, that's great I appreciate that color.
And then just on.
On wildland and strategic review.
It sounds like you've had some interest in the business so our takeaway should be.
You feel pretty good about.
The chances of selling selling that business.
At a.
At a price you.
Deem to be fair is that is that the messaging on strategic review.
Yes, I mean, we.
Since we announced in December we had we've had.
Very nice inbound interest in it and in the conversations we had in the selection of a.
Of an advisor and you got a lot of good insights from them and especially south is too.
As to the attractiveness of the business.
So we do feel good about.
A positive outcome there for lots of different reasons.
Just.
Again, while <unk> as a.
A track record of performance and other one of the best licensing.
Companies in the industry and have a history of.
Generating very very nice financial returns. So when you look at that the processes. They have of course the portfolio of patents that they have in the team. That's in place. We just believe that there is a lot to like in that business and then look at the broader market.
Activity as well the the money that's looking for attractive assets like that and in this particular IP space I would just think it lines up well for a successful outcome.
Okay. This is.
By no means this is more of a sort of editorial observation as opposed to.
Drawing the parallel specifically to wildland, but I thought the Blackberry patent sale.
I wouldn't have necessarily.
Describe that is.
Pristine outcome, it was fairly slow and dragged out and the price was just okay. So this this.
This seems like you're you're you're getting a lot better interest then they ended up getting or at least that's my perception of what happened at Blackberry, So take that for what it's worth.
But I appreciate I appreciate your answers here thanks a lot.
And I will say, thank you to I appreciate youre joining in.
The one.
The one thing to stress, there or kind of relative to Blackberry wireline.
Complete business with team and strong portfolio and processes and methodologies for.
For for optimizing returns so.
But yes, certainly appreciate the questions there.
Yes, that's a good point on the business being established yet.
Yes.
<unk> or other types of financial firms are considering considering it.
Certainly a very important point, thanks a lot.
Yeah.
Thank you as we have no further questions at this time I will turn the call over to Mr. King for closing comments.
Okay.
Thank you very much and thanks, everyone for joining in for the questions today.
Ken just.
I want to reiterate.
Some things that I said before about the attractiveness of the space.
That we're moving into and as it relates to Ics in this transition to a pure play in that regard.
As I mentioned before I don't think there is.
Been a better time to be in Ics, and having seen a number of different industry verticals over time.
Rarely see anything as attractive as what we're seeing here in terms of the tailwind on the market side.
And really undeniable trends. So we just don't see changing and then we've got some great platforms.
To build from that have very strong momentum in the market strong technology and strong teams as well.
And then we will expect to see some some growth here in 'twenty two as we were as we were talking about before.
Before related to the new business signings that.
Both R&D and if you see that have had and then.
Margins on the Ics business similar to what we're seeing on the.
Q4 Ics.
<unk> as well so we see a lot of momentum going into <unk>.
So this year at Ics and <unk>.
The bigger and better things to come down the road. So I appreciate everybody joining me again today and look forward to talking to you again very soon.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.