Q4 2022 Quarterhill Inc Earnings Call
Good morning, and welcome to the quarter shows Q4, and fiscal 2022 financial results Conference call.
On this morning's call, we have John Gilbert <unk> interim CEO , and John Karnes, 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 one on your Touchtone phone to register.
Should you require any assistance during the call. Please press star zero.
Earlier this morning quarter Hill issued a news release announcing its financial results for the three and 12 month periods ended December 31 2022.
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.
Risks factors that could affect results are detailed in the Companys annual information form and other public filings that are available on SEDAR.
During today during this conference call quarter Hill will refer to adjusted EBITDA.
Adjusted EBITDA does not have any standardized meaning prescribed by <unk>.
F R S.
Please refer to the company's Q4 and year end 2022, managements discussion and analysis for <unk>.
Full cautionary notes regarding the use of forward looking statements on non I F. R. S measures.
Finally, please note that all financial information provided is in Canadian dollars unless otherwise specified.
I will now turn the meeting over to Mr. Gilberto <unk>. Please go ahead Sir.
Thank you good morning, everyone and thank you for joining us on today's call. My name is John Gill, Barry Hi, I'm, the chair quarter Hill, and the interim CEO .
As we announced on Monday, I have assumed the role of interim CEO until such time as a full time CEO is named.
The board has formed a CEO search committee to conduct a search and we will be engaging in executive recruiting firm to assist with this process. I think it is also very important to note that all senior management, who have run the various business units under the quarter Hill umbrella and are responsible for the P&L of those business units remain in place and <unk>.
To the success of the business.
Before getting into the discussion on 2022 and the outlook for 2023, I want to acknowledge that breast departure will seem like a sudden change with him having been in the CEOC for only about 15 months.
I want to start by confirming our commitment to the Ics business.
We continue to believe that the <unk> industry has excellent growth prospects. There are multiple tailwind set are creating new opportunities to capitalize on the integration of technology and infrastructure and we believe that these trends will continue as much of this investment is long overdue.
The industry also has an underlying stability and predictability with.
Recession resistant nature to it that had great appeal to us as we were looking for a counterbalance to the variability in our licensing business.
Notwithstanding industry growth within our peer group, our Ics business results and particularly the results of ATC were disappointing and changes needed to be made in order to deliver better results for shareholders in 2023 and the years beyond.
Quarter Hill has one of the largest <unk> footprints in North America, and we have a substantial market opportunity in front of us both domestically and internationally.
BTC and <unk> are both leaders in their field, IRT and enforcement and ATC and totaling and both are well positioned to grow both organically and potentially through acquisitions.
In the past year and a half we have made progress on winning new business, which position us well for the future, but we haven't moved fast enough on integrating our <unk> businesses, which frankly has contributed to the financial performance far below our expectations and below those of the investment community as a result, the board came to us.
Our conclusion that the time to act was now hence the changes we have announced.
The board has begun to take steps to find a new CEO and for most we will be looking for candidates that have the type of operational expertise required to take our <unk> operations to the next level in terms of bringing the businesses closer together capitalizing on the growth in the industry and doing so well generating healthy margins positive cash flow.
And positive earnings.
<unk> experience would be a prime asset to have as well.
Let's move now to the primary business at hand, which is reviewing our 2022 performance and discussing our outlook for 2023.
In terms of the agenda for today's call I'll start with a look at 2022 consolidated segmented highlights after which John Karnes will take a look at the key financial results and then we will open it up for questions.
Quarter Hills consolidated revenue for 2022 was $305 $7 million consolidated adjusted EBITDA was $64 6 million in cash from operations was $39 6 million. These.
These results reflect revenue growth from both the Ics and licensing segments. However, the adjusted EBITDA was driven once again by Weiland our licensing business.
2022 was a mixed year for the Ips segment, which saw us achieve some important operational highlights but at the same time some of the challenges that we faced and have discussed on prior calls persisted throughout the year impacting financial results. Nevertheless, we do believe that the worst of these issues are behind us and that we are set up for a much better 2000.
'twenty three.
<unk> had a strong year in 2022 with new contracts and New York State, Indiana, Idaho, along with expansion contracts in South to South Dakota, and Nebraska on the international front.
<unk> continues to leverage its global footprint to win new mandates and is currently active in deployments in South Korea, Poland, Thailand, and Tanzania among others.
<unk> also won new business in 2022 that included contracts with Alameda County for New tolling lanes are back office contract in Orange County, as part of a WSB consortium and our contract with EZ pass, where we are building an interoperability hub for 40 tolling agency spanning 18 U S States.
And in 2020 to UTC had seven projects in the implementation phase and we expect a number of these implementations to transition to the operational phase in 2023 and the rest in 2024. This should have a favorable impact on the Ats margins as John will describe in his section.
As you know 2022 posed some challenges for the <unk> business in terms of supply chain disruptions wage and material inflation and operational over overruns, which affected performance as our tolling projects move into the operational phase. We also expect to see some more change. We also expect to see more change order activity.
Which can favorably impact revenue and margin.
In 2023, we will continue to bid on new projects 2022 saw delays in new projects coming to market, but we think these delays are beginning to lift in activity will increase this year ETE continues to have a strong pipeline of new opportunities.
One of our top priorities in 2022 was to integrate the <unk> businesses, we look to reduce expenses without impacting our ability to sell and deliver and we also sought to better assimilate the teams in order to generate more cross selling opportunities align their tech roadmap and enhance the process for development of developing new products and services.
It's clear we didn't achieve the level of integration progress that we intended to but in Q4 had the initiative of the board. We did undertake a workforce reduction a consolidation of certain facilities and the elimination of some duplicate <unk> noncore services, we are accelerating our initiatives with shared services model across the cities.
<unk> and this will be a major area of focus in 2023.
Related to the integration, we recorded a $4 million restructuring charge in Q4, and we believe that the some of these actions will result in annual savings to quarter Hill of at least $4 million when fully implemented.
Regarding our outlook for this year, we see a better picture emerging with the Ics business businesses expect to deliver revenue growth and positive adjusted EBITDA, including the absorption of all corporate segment costs to put that in perspective for you in 2022, the Ats segment, including all corporate overhead costs at <unk>.
<unk> Hill would have generated an EBITDA loss of approximately $11 5 million. So this is a significant improvement that we're calling for in 2023.
Now looking at our licensing business, while and generated significant revenues in 2022 and drove the adjusted EBITDA positive adjusted EBITDA for quarter Hill licensing agreements with Apple Micron Kyocera, among others will enable weiland to build on its long track record for generating cash flows on an annual basis.
I want to thank and commend the team at wildland for their strong performance and their perseverance in 2022 as they delivered solid results, while undergoing an emotional leadership transition, resulting from the sudden passing of their CEO , Michael Eskew in may of last year.
Regarding the strategic review for Weiland I acknowledged the process has taken much longer than investors would like but the process remains ongoing and we continue to entertain and explore options for the business options for the business in the meantime, it's business as usual for the team as they seek to build their pipeline and execute on their various licensing programs.
We will continue to keep shareholders abreast of any material developments with the business and with the strategic review.
In closing shareholders can expect a better year for Ats business in 2023 to get there we will focus on winning new business executing on existing projects, reducing costs and driving operational efficiency.
And as I said at the outset, we are big believers in Ics and I see a significant opportunity ahead of us with multiple growth tailwind at our back as.
As mentioned in our press release on Monday, I do not plan to stand for reelection at our upcoming annual general meeting, but I will remain interim CEO until a replacement is named.
With that.
At this point I will turn it over to John Karnes for the financial review, it's John .
Thank you John good morning, everyone.
I'll start with revenue and take a look at key consolidated numbers as well as select numbers from our Ics and licensing segments.
As John already mentioned consolidated revenue for the year was up significantly from 2021, driven by both licensing and Ics Q4 revenue was essentially flat year over year with licensing of course seeing its big boost in Q1 and being more in line year over year in Q4.
On the other hand in Q4 generated $40 1 million after giving effect to the cumulative negative impact of approximately $4 8 million of noncash project forecasting items, including a $3 6 million negative out of period adjustment to true up percentage of.
Completion revenue taken in Q2, resulting from forecasting of the project. We discussed earlier last year. This adjustment was offset with corresponding cost of sales. So it had no impact to Q4 margin.
But it was necessary to true up revenue for the project and for the year.
We also recorded an incremental $1 2 million noncash impact to revenue from our year end percentage of completion forecasting of the estimated work to complete one additional project.
John mentioned, an expectation for growth in 2023 and supporting that is.
Outlook is a solid backlog of contracted revenue a significant pipeline for new logo opportunities and the potential for change order and follow on orders from our existing customers.
As we've discussed in the past the profitability of this new revenue is largely dependent on the phase of the project and the nature of the service. We're bidding on we generally think of implementations like the numerous projects. We currently have underway as generating relatively low margin in the early phase since the industry tip.
<unk> bids aggressively upfront to win deals initially.
Over time however.
18 to 24 months, the implementation phase wraps up and the maintenance term begins which can easily extend for 10 years or more and which customarily allows a higher margin than the implementation phase.
And going on in the background throughout there are usually opportunities for change orders Upsells and cross sells that offer the prospect for even higher margins, yet, making it essential to look at these projects as long term investments at a blended contract value and gross margin.
Looking ahead for the Ips segment for 2023.
2023 will be the second year of a 24 month implementation effort or the projects. We currently have an implementation. These projects are progressing toward go lives and are scheduled to move into their operating terms later this year or early in 2024 with this transition to operations over the next.
Few quarters, we look to see a shift in our revenue composition, bringing with it an attendant gross margin enhancement opportunity.
Since we would normally expect to begin seeing opportunities for change orders and enhancement projects. During this period.
Consolidated gross margin for 2022 was 38% compared to 30% in 2021.
Gross margin for 2022 was higher than 2021.
Due primarily to the strong Q1 this year in the licensing business as we've discussed.
Gross margin in Q4, 2022 was 21% compared to 24% in Q4 last year.
As mentioned, we look for a gradual margin improvement beginning later this year and into 'twenty four as our implementations go live and we move into operations.
Consolidated operating expense for Q4 and for the full year, we're up in dollar terms, primarily due to the full year costs of the three <unk> businesses, we acquired in 2021, including UTC as well as materials and wage inflation experienced throughout most of 2022.
As John mentioned Q4 also in Q2. These included a $4 million restructuring charge related to integration activities in the quarter.
Overall, the actions, we took in the quarter and the year to integrate our businesses and streamline our corporate cost is expected to save us around $4 million annually.
The increase in consolidated EBITDA for fiscal 2022 was primarily driven by a significant licensing in Q1.
Q4, adjusted EBITDA for the Ics segment was around $1 million positive, which included the negative impact of the $1 2 million of project overruns I mentioned earlier.
In addressing revenue.
Looking forward John mentioned, achieving positive adjusted EBITDA in 2023, including absorption of all corporate segment overhead costs, improving from a loss of around $11 5 million in 2022.
We think this is a reasonable baseline assumption for the year. When you consider that 2020 two's results included a $10 $5 million or $10 $5 million of unanticipated implementation costs.
Which would have offset the loss largely.
<unk> also taken into account the $4 million of the cost structure, we took out under the the Q4 reorganization.
So apples to apples with 2022, this should leave us well positioned to deliver positive EBITDA in 2023, all things being equal.
Quarter Hill generated cash from operations of $39 6 million in 2022, while cash used in operations was around $1 7 million in Q4.
Cash cash equivalents and short term investments were 69 point excuse me $67 9 million at December 31, 2022, compared to $72 6 million at year end 2021. In addition, we also had $6 5 million of unrestricted short term investments at the year end of 2012.
Two.
Notable cash outlays for 2022 included $36 1 million of debt repayments, a $14 6 million dollar payment to settle litigation with the former owners of vizio and $5 $7 million and dividends paid to shareholders.
With those debt repayments, our long term debt stood at $26 2 million at year end down from $62 1 million at the end of 2021.
At year end the company was offside on its ratio covenants under our credit under its credit facility.
We amended our covenants subsequent to year end to address the issue with our banks, but the $26 2 million outstanding under our credit facility will nevertheless be reflected as current at year end under Ifr S.
Regarding return of capital to shareholders. The board has declared the next eligible dividend of 125 cents per share payable on April 11, 2023 to shareholders of record on March 31 2023.
In closing 2022 had some challenges but looking ahead.
We built the foundation for an improving improving 2023 and beyond especially when factoring in our mature project portfolio more efficient cost structure substantial sales pipeline and industry leading technology.
This concludes my review of the financial results and I will turn the call back 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 the one on your Touchtone phone.
You will hear a three pronged acknowledging your request.
Should you wish to decline from the polling process. Please press the star followed by the two.
If youre using a speaker phone please lift the handset before pressing Guinea keys one moment. Please for your first question.
Your first question comes from Gavin Fairweather of Cormack Securities. Please go ahead.
Oh, Hey, good morning, Thanks for taking my questions.
Good morning, Kevin.
Just on the just to start on an E. T. C. You you talked about the seven projects, which are at various places in their implementation journeys maybe you can just.
Help us understand what what's the cadence of those moving into into operation throughout the year and 'twenty four.
Yes.
John Karnes weigh in a little bit on this just because he's just got way more history on it I can tell you that we did do a project to review.
Just earlier this week and Theyre all of that sort of different levels, but maybe John has.
Get better feel for the timing yes.
Yes, we've got projects that will be going live as early as early summer and then we have projects more in the fall and the remainder of the falls by mid by mid year of next year everything that we have in our portfolio today, that's implementing should be live and should be moved over into operations.
Okay. That's helpful. And then obviously you've had some cost overruns, which you discussed in the prepared remarks, what's your level of confidence that you've now provisioned appropriately and we shouldn't see any more.
Cost overruns hitting the P&L.
2023.
Well every quarter, we will go back in <unk>, we will re forecast. The projects. These are complex industrial operations, having said that typically when you see overruns on these projects do you see them in the early phases of the projects as I mentioned. These are 18 to 24 month implementations, we're halfway through things.
Things are on fragrance progress now and wed like to think that.
Any surprises have shaken out at this point so.
As we mentioned earlier, we look for improved results in 2023, we're not looking for anything like what we had a $10 $5 million of implementation losses in 2022.
Kevin I would just add to this a little bit and saying that we've literally just started a much more rigorous process in terms of project review with a much broader audience overseeing some of the project.
Timetables cost and implementation phases and to the extent that there is going to be future cost overruns. I think we are going to be able to recognize them much sooner, which gives us the ability to kind of deal with them and sort of mitigate it much quicker than happened in 2022.
That's helpful. So when you think about I guess the positive adjusted EBITDA for <unk> of <unk>.
Would it be fair to say that that's backend weighted as some of those projects come in and then therefore, you're hopefully entering 24 with.
The higher run rate than that.
That would be a fair assessment correct.
Okay.
Just on <unk> can you just discuss the performance there I mean, it sounds like Youre pretty pleased with how the year played out in <unk> and as that business is the run rate of that business changed materially versus the call. It 12 ish million of EBITDA that it was doing in 2020 in 2021.
<unk> continues to perform it continues to grow it's not the most exciting business in the world, but it has sort of predictable growth curve to it and it has a reasonably predictable margin.
To it so we like this business the management of that business is always sort of performed for us year over year time over time and they have a great footprint not only in North America, but in some expanding markets. So it'll continue to be.
One of the flagships of our Ics business.
Okay. That's helpful. And then just lastly, before I pass the line it looked like in <unk>. There was some additional kind of.
Hmm.
<unk> expense or lawyers fees, this quarter, which impacted the gross margin.
Recall seeing that too often I mean, I think normally the delores are working on contingency on most of the files. So can you just provide some more color there and then maybe.
Any kind of big.
You know litigations are upcoming trials that you'd point out as well.
Yes.
The cost structure side, yes, what you saw this quarter was an aberration, we don't can't go into detail because its proprietary but thats not a permanent <unk>.
Increase in the cost structure of the cost structures around $5 million of expenses like that a quarter and we think that's a reasonable number going forward. So again cant go into a lot of detail, but this quarter was a bit of an exceptional quarter.
And then in terms of litigation going forward.
Not to comment on the outcome or the timing of litigation.
Okay I'll pass it on thank you.
Thank you.
If any analysts have any questions. Please press star one at this time.
Your next question comes from Maxwell car.
And partners. Please go ahead.
Good morning, gentlemen, how are you Sir.
Good.
I just had a question regarding Blackberry and the recent sale of their patent or the recent patent transaction do you look to that as being any sort of a benchmark for wildland or is that completely separate in your eyes.
Sorry.
Yes, I mean, I think Maxwell <unk> first and foremost.
Blackberry patent portfolio has been for sale for.
A very very long time.
And just about everybody in the industry, who would have any interest in that it has looked at it and they've struggled with this with this process.
I don't look at it as any kind of.
Precedent or proxy for what's happening with our strategic review at.
At Wildlife to say, except for the fact that you can you can take some measure of the fact that it takes a long time to find somebody who really understands a patent license and the value within the patent licensed portfolio and how to continue to monetize that but other than that I don't I don't see it being connected to.
Our process and any in any great way.
Okay. Thanks, and are you able to provide any color around.
The settlement with micron or is that.
Is that out of the question at this time no we cannot talk about any of those settlements.
Okay and then.
I guess lastly, when we look at the Ics business and where it's headed.
Globally, there are some regions that have a lot more.
Positive tailwind and others is there any where you're focused on in particular.
Generally speaking you guys have a pretty wide geographical reach with regards to the Ics business, but again is there any region, you're focusing on for 2023 or is it.
As things come.
Well I would say that our focus is going to continue to be North American base. I mean, it's close to home, it's more efficient for us too.
To be focused in that particular area and we think that there is an enormous opportunity for us in North America, we don't have to deal with legal or currency issues and some of those things that being said <unk> will continue to have implementations and win.
New business in international markets, but Etc's focus is going to continue to be North America and predominantly in the U S.
Alright. Thank you very much that's all for me.
Okay.
Thank you.
As we have no further questions at this time I will turn the call back over to Mr. Gilbert for closing remarks.
Thanks, Michelle with that I'd like to thank everybody for participating on today's call. We look forward to speaking with you and keeping you abreast of all of our developments in the coming months and weeks weeks and as always please feel free to reach out to me. If you have subsequent questions. Thank you.
Okay.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
[music].