Quarterhill Inc. (QTRH) Earnings Call Transcript & Summary

Welcome to the Quarterhill Inc. Annual Meeting. My name is John Gillberry. I am the Chair of the Board, and I'm speaking to you today from my home up in Gray County. Of course, we are all aware of the worldwide COVID-19 situation that has turned our lives upside down. It is impossible for me to say enough about that situation. So I don't know that it's prudent to even to try other than to say that everyone at Quarterhill and our subsidiary companies, International Road Dynamics, VIZIYA and WiLAN, hope that all of our shareholders, employees, their families and communities recover as soon as possible and make our ways to better days. Although we're disappointed that we can't see each of you today, our thoughts are with you and your families and the communities that you serve. We want to thank you for your patience as we navigate through this unprecedented situation, and we think that you'll agree that we -- that we've done the right thing by moving to a virtual meeting in light of the circumstances. Instructions on how to ask questions and the voting procedures will appear on your screen as we proceed. As with any new technology, unexpected glitches may occur with these meetings and potentially to both your and my Internet connections. But our service providers for this platform are very experienced at running these types of meetings and will do their best to help us out. I will pause for 15 to 20 seconds after asking if there is any discussion on a particular motion or asking for questions to take into account any latency we may experience over the Internet. This meeting will now come to order, and I will ask Prashant Watchmaker to act as Secretary of the meeting and Roxanne Parsaud of Computershare Investor Services, Inc. to act as scrutineer. Based upon the statutory declarations provided by Computershare, I confirm that the notice calling this meeting together with the management information circular and form of proxy for this meeting were mailed to Quarterhill shareholders in accordance with Quarterhill's bylaws and the Canada Business Corporations Act. I have received a preliminary scrutineer's report, and there is a quorum present here today by proxy representing more than 25% of Quarterhill's issued and outstanding common shares. Therefore, I declare this meeting as regularly called and properly constituted for the transaction of business. Each Quarterhill shareholder present at this virtual meeting that has properly registered other than a guest is entitled to 1 vote for each share held. Each matter to be voted on at this virtual meeting must be approved by a simple majority of the votes cast by all shareholders present today. We will conduct the votes on matters before us via poll. On a poll, every shareholder entitled to vote on the matter has 1 vote in respect of each share entitled to be voted on the matter held by that shareholder. The poll will be open for all resolutions at the same time, which will allow you to choose to vote on each resolution immediately or wait until the conclusion of discussion on each resolution prior to casting your vote. I will announce the results of voting on each resolution at the end of the formal portion of the meeting. Following conclusion of the formal portion of this meeting, I will deliver a brief presentation on behalf of our Board of Directors. After which, I will address appropriate questions from shareholders, starting with questions that have already been provided to us prior to the meeting. Where questions are of a similar nature, they will be organized by theme. And in the interest of everyone's time, I will not address the same question or similar questions twice. Shareholders and proxy holders may address the meeting when there is a request to discuss a motion before the meeting. If you want to address the chair on any motion, please type in your question or comment in the Message section once it opens up during the discussion period. If there is any discussion or question, I will read the question aloud. This meeting has been called to consider 3 matters. The first item of business is the presentation of Quarterhill's audited financial statements for the fiscal year ended December 31, 2019, together with the auditor's report. The financial statements were mailed to shareholders who requested them and can also be accessed on our website at www.quarterhill.com or from Quarterhill's SEDAR issuer profile page at www.sedar.com. We would like to dispense with the reading of the auditor's report since all requesting shareholders should have received a copy of the report. May I ask for a shareholder to move that we dispense with the reading of the auditor's report? Would a shareholder or proxy holder please make the motion?

Mr. Chair, I so move.

Thank you. Would a shareholder or proxy holder please second the motion?

Mr. Chair, I'm pleased to second the motion.

Thank you. Is there any discussion of this motion? As there's no discussion, I'll now call for a vote on the motion before the meeting. Would all voting shareholders and proxy holders please enter your votes in Lumi? [Voting]

The next matter to be dealt with is the election of directors. In accordance with Quarterhill's articles, the Board has determined that 6 directors should be elected at the meeting today. As mandated in Quarterhill's bylaws, all nomination for election of directors were received by our Corporate Secretary at least 30 days prior to this meeting. The circular for this meeting identifies the following individuals as management's nominees: Roxanne Anderson; John Gillberry; Ron Laurie; Paul McCarten; Richard Shorkey; and James Skippen. As the number of individuals nominated is equal to the number of vacancies on the Board of Directors, and there being no further nominees as permitted by Quarterhill's bylaws, could a shareholder or proxy holder please move the nomination of the slate of directors?

Mr. Chair, I so move.

Thank you. Would a shareholder or proxy holder please second the motion?

Mr. Chair, I'm pleased to second the motion.

Thank you. Is there any discussion on this motion? As there is no discussion, I now call for a vote on the motion before the meeting. Would all voting shareholders and proxy holders please enter your votes in Lumi? [Voting]

Thank you. Now could a shareholder please move these nominees to be elected as Quarterhill's directors to hold office until the next annual election of directors or until their successors have been duly elected or appointed?

Mr. Chair, I so move.

Thank you. Would a shareholder or proxy holder please second the motion?

Mr. Chair, I'm pleased to second the motion.

Thank you. Is there any discussion of this motion? As there is no discussion, I now call for a vote on the motion before the meeting. Would all voting shareholders and proxy holders please enter your votes in Lumi? [Voting]

The final item is the appointment of auditors. May I please have a motion moving that PricewaterhouseCoopers LLP chartered accountants be appointed Quarterhill's auditors for the next year and that the directors be authorized to fix their remuneration?

Mr. Chair, I so move.

Thank you. Would a shareholder or proxy holder please second the motion?

Mr. Chair, I second the motion.

Thank you. I now call for a vote on the motion before the meeting. Would all voting shareholders and proxy holders please enter your votes in Lumi? [Voting]

This concludes the formal corporate matters to be attended to at this meeting. Before concluding the formal part of this meeting, is there any other formal business to come before us today? As there is no formal business, I ask for a motion to conclude the meeting.

Mr. Chair, I so move.

Thank you. Would a shareholder or proxy holder please second the motion?

Mr. Chair, I am pleased to second the motion.

Thank you. Is there any discussion of this motion? As there is no discussion, I now call for a vote on the motion before the meeting. Would all voting shareholders and proxy holders please enter your votes in Lumi? [Voting]

Voting has now closed on all matters that were before this meeting. Although I do not yet have the results of the live voting, I can declare that based on the proxies received for the meeting, all matters that were put to a vote today have passed. And in particular, I declare the nominees to be duly elected as Quarterhill's directors until the next annual meeting or until their successors have been duly elected or appointed. We will issue a press release within the next two days with the full details of all matters that were voted on today and also file results of the meeting on SEDAR. At this point, the formal portion of the meeting is now concluded. I'll now provide an update on our business on behalf of the Board. After which, I will take appropriate questions from shareholders and proxy holders. This is our safe harbor statement, which indicates that some of the presentation content and language used may be forward-looking in nature. As you can appreciate, actual future results may differ from expectations in place today. I'll start with a look back at 2019. 2019 was a strong year, a reflection of what Quarterhill and the individual businesses are capable of delivering. Let's start with a look at some of the financial information and operational highlights of the year before moving into recent developments. In 2019, strengthened performance of all our portfolio of companies drove the consolidated results. On a consolidated basis, revenue was up 90%, and adjusted EBITDA improved by more than $50 million. Within the portfolio, WiLAN bounced back strong from 2018, resulting in significant growth, good margins and good cash flow. Shortly after year-end, WiLAN won a second trial verdict versus Apple, which I'll discuss in more detail later. Acquired businesses. After some fine-tuning in 2018, IRD had a record year in 2019. VIZIYA also delivered on a broad enterprise mandate in 2019, resulting in record results and pointing to the potential for the business going forward. Overall, a year that demonstrated the potential of our portfolios to deliver growth and cash flows. Diving into the 2019 numbers in a little more detail. On the revenue side, see the variability in WiLAN as it relates to 2018 and the rebound in 2019. However, you will also see that over the 4-year period, the WiLAN business has generated relatively consistent level of revenue, which translates on the right-hand side to strong adjusted EBITDA. The orange bar is the addition of IRD and VIZIYA. These acquisitions have added a couple of key components to the business. One is recurring revenue, which was $21.1 million in 2019, with the majority of that being generated by IRD and VIZIYA. Second, the 2 companies generated $10.1 million of adjusted EBITDA. Both contributed positive cash flows to Quarterhill in 2019. This is the type of performance that we were looking for when we acquired the businesses in 2017. It's not unrealistic to have -- there to have been a transition period of sorts post acquisition, and we are pleased with these businesses -- where these businesses are here today. Our balance sheet remains strong. We had close to $70 million of cash at year-end, up from the prior year-end. We have very little debt. Our balance sheet gives us the flexibility to consider a number of options as it relates to growing the businesses and driving shareholder value. I'll get into these in a little more detail later in the presentation. One of the options that our financial and operational profile enables is our quarterly common dividend. So we do continue to return cash to shareholders via this method: $4.5 million in 2019 and $140 million in total for the 11-year period through 2019. As you know, we've recently announced our intention to explore options for returning additional capital to shareholders. I'll discuss these shortly. Suffice to say, we have no intention of reducing or eliminating the current quarterly dividend at this time. I'll take a few minutes now to look at each of the businesses individually. WiLAN, our patent license business, enjoyed a strong 2019, growing its revenue by more than 280% to $79.8 million and generating more than $37 million in adjusted EBITDA. WiLAN's successful long-term track record suggests that by continuing to focus on its licensing and partnership strategies, the business can deliver significant cash flows. Our licensing activity in 2019 with companies such as NVIDIA, LG and SK hynix demonstrates that our patent licensing business is alive and well and remains a very important component of our portfolio. For WiLAN, momentum in the business has carried over on into 2020. And on January, we announced that WiLAN won a second jury verdict against Apple in the damages trial held in the United States District Court for the Southern District of California. The jury's verdict -- in the jury's verdict, WiLAN was awarded $85.23 million in damages. In terms of next steps in this trial, we are currently in the customary post-trial process known as JMOL, J-M-O-L. During the JMOL process, both parties can file motions with the court in an effort to influence the court's final judgment. Right now, the next steps are: post-trial motions by both parties are due to be filed on or before April 7; next, opposition briefs are to be filed by April 21; reply briefs would then be filed on or before April 28. These motions to be heard in the session on May 8 in an effort to reach a decision on JMOL. Please keep in mind that all these dates discussed -- all the dates discussed here are subject to change, especially in light of the COVID-19 situation. Following the hearing on May 8, 1 month after decision on JMOL, if no new trial ordered, judgments is finalized. One month after judgment finalized, deadline to move to appeal. There's a 1 month that judgment to appeal. 14 months after appeals are filed, appeals are heard. And 6 months after appeals are heard, there could be an appeal decision. The bottom line is, assuming no change to these dates, if there is to be an appeal, and keep in mind, either side can appeal this recent verdict, that an appeal decision would likely be reached in approximately 24 months. As we said in the past, we are always open to negotiation at any time on a reasonable outcome. With 2 jury verdicts in our favor so far in this trial process, we believe that we have a strong position to negotiate from. IRD had a strong finish and a solid year, with revenues and adjusted EBITDA both at record levels for the company. IRD continues to assert itself in the ITS, intelligent transportation system, industry as a leading systems integrator and a solution provider with its own well-respected suite of proprietary technologies and related products. IRD's results in 2019 were driven by growing project activity, and in particularly, strength internationally with several new projects in Europe and Africa. We believe that the prospects for IRD remains strong, and we continue to support investments in the business. To drive its organic growth, IRD will look to leverage the growing interest in some of its new products such as the VectorSense tire sensor suite and related vehicle in motion traffic intelligence systems as well as its growing pipeline and order book, both of which began 2020 at higher levels than it did a year ago. 2019 was also a record year for VIZIYA. VIZIYA's growth was primarily driven by a significant enterprise software license agreement signed in the third quarter. We think that transaction demonstrates the potential that VIZIYA has to compete for and win large transformational enterprise opportunities. While we don't expect to see this type of transaction to occur every quarter, we would look for this to be a catalyst for further large enterprise sales and partnership opportunities in the future. In Q4, we appointed Paul Sunderland as interim Chief Executive Officer of VIZIYA. We believe that Paul's experience in managing software sales and development for some of the world's leading engineering and construction projects will be a great asset to VIZIYA at this stage of its evolution. I want to take a few minutes now to discuss COVID-19 and the impact on our businesses. As stated in our press release on March 30, Quarterhill, WiLAN, IRD and VIZIYA have implemented measures to protect employees, customers and others from the spread of the virus. These protective measures include working from home, eliminating travel, following closely the guidelines issued by health and regulatory authorities in their respective geographies that our portfolio of companies operate in. All portfolio of companies remain in operation and are executing on existing customer mandates while also working to build and sustain business pipelines and advance new opportunities through their respective sales cycles. As expected, the enhanced precautions being taken and the current business environment itself suggests that there may be some delay in delivery of certain ongoing services. But fundamentally, the operating prospects for all portfolio of companies remain sound, and importantly, are backed by Quarterhill's strong balance sheet. As this slide indicates, we believe Quarterhill has the type of financial and operational profile to endure this crisis. We have significant cash and very little debt, and we have portfolio of companies diversified by business and industry. WiLAN itself has -- is a proven cash flow generator as it has done over the long term. $327 million of cash from operations has been generated in the past 10 years. While WiLAN is dealing with the reality of negotiating and closing license opportunities without the benefit of face-to-face meetings, the work continues, and as evidenced by the announcement on March 31 regarding a license agreement with UMC, they are still generating results in this environment. For IRD, many implementations remain ongoing as IRD's services are considered essential services to maintaining infrastructure in many states. We are constantly monitoring Europe and South America as things unfold in those geographies as well. At VIZIYA, in similar fashion, they continue to execute on customer mandates while still working to maintain an active pipeline. Some concluding thoughts here are: all businesses are tracking to plan, but we are working through some logistics issues at IRD and some professional service deployments at VIZIYA as a result of some of the remote working requirements required right now. We are not in a position today to provide a potential financial impact related to COVID-19 as is consistent with most companies at this point. However, in the coming months, as material developments occur, we will provide the appropriate update to shareholders. Let's move on now to the path forward and our key near-term priorities for the business. In our press release on March 30, we provided an update on our M&A strategy. Given the impact of COVID-19, the underlying uncertainty concerning valuations, the importance of allocating cash and the current vacancies in some of our key corporate executive positions, we announced that we were pausing our M&A strategy and we'll focus on our existing businesses while we explore options to return additional capital to shareholders. Some of the options we are looking at in terms of returning capital to shareholders are: a normal course issuer bid; a substantial issuer bid; a common share dividend increase and/or a special dividend. Regarding our current dividend, as stated earlier, we have no plans to reduce the existing quarterly dividend. We will plan to update shareholders on the intended plans in due course. Regarding the CEO search, this remains ongoing despite the COVID-19 situation. Again, time lines are likely pushed out a little given to the physical isolation requirements in place right now, but we have a strong candidate pool and continue to move it forward by means of outside face-to-face interaction. Finally, we will focus efforts on driving organic growth within our existing portfolio of companies. As you know, we completed restructuring at WiLAN and IRD in 2018, and we benefited from the more optimized operating environments there in 2019. As I mentioned earlier, in 2019, IRD and VIZIYA recorded record results and generated $10 million of adjusted EBITDA combined. We look to use our balance sheet and expertise to build on that success in 2020 and beyond. A reminder of some corporate details are here. We do expect to fill the CEO role in the coming months. In the interim, it is business, more or less, as usual with each of the 3 portfolio of companies being led by talented and experienced CEOs reporting directly into the Board of Directors. The dividend is maintained. And currently, we are covered by 4 analysts today. M Partners, our newest analyst group, launched coverage of the company early in 2020. To summarize today, one of our greatest strengths is our balance sheet, which has substantial cash and minimal debt. In this type of environment, a strong balance sheet is a big asset and can generate some exciting opportunities for the business. The second strength of the business today is the portfolio of companies, all of which are coming off strong years in 2019. So far, with the COVID-19 crisis, these companies are showing the signs of durability that you want to see. I've highlighted many aspects of the WiLAN business already, but it's worth reminding that WiLAN has won 2 jury trials versus Apple in the past 20 months. While the ultimate outcome of this trial remains unknown, it serves as a potential financial catalyst for the business and also a reminder to those in the patent license industry of the effectiveness of our team and our portfolio and our licensing process. And finally, we continue to pay a regular quarterly dividend, and we're in the midst of exploring options, discussed earlier, to return additional capital to the shareholders. That ends our corporate update. I'll now move to the Q&A portion of the meeting.

I'm going to start with questions that have already been sent into the meeting. And we do actually have the opportunity for some online meetings to come in as well, and I will be monitoring for those as well. First question is, could you please give us an update on the patent infringement litigation against Motorola that was initiated in February 2019? I can advise that this case is proceeding through the discovery phase. The Markman hearing that was set for Q3, that has been vacated, and we now expect it to occur in Q4 2020. So you'll have to -- there'll be some time before we have new information on that. The case was also transferred to a new judge. There's a question with regards to WiLAN's litigation on -- with regards to Apple. And the question says, I see a motion for -- I only see a motion for interest cost at WiLAN -- or does WiLAN plan to request legal costs in subsequent iPhone models as damages? We're not going to comment at all on the specific details of our legal strategy, but we can say that WiLAN's position regarding the newer models of the iPhones has been brought to the court's attention as part of the post trial. You can rest assure that the direction the court decides to take and/or how Apple decides to respond as part of its post-trial process, we will be in close consultation with our legal team, and we'll pursue the strategies that we get from the legal team and take those models into account. There's a question here that says, what are the plans to replenish cash if the acquisition strategy is revived? We are going to continue to rely primarily on the 3 businesses to generate cash flows that can be deployed towards the M&A strategy. And as we've seen in the past, those businesses have the ability to generate significant cash flows. So at this point in time, that is the strategy. Sorry, I'm just checking quickly to see if there's any online questions here as well. There's a question that says, if the CEO hired to replace Mr. Parker hits a COVID speed bump, what is the interim plan? The 3 portfolio of companies are being run by experienced and talented CEOs who report directly and regularly to the Board of Directors. It is those businesses that are generating the revenue and the earnings. So that plan remains in place. As I mentioned earlier, we do actually have an active and ongoing process for the recruitment of a new CEO, and we will continue along the plans of recruiting that new CEO. There's a question here that says, does the company still have a shareholder's right plan? No. It was terminated in accordance with its terms 4 or 5 years ago. There's a number of questions with regards to shareholders asking about what we're going to do with our cash. And I've already indicated that we are looking at several options for returning some of that capital back to shareholders. And there's questions with -- there's a question that says with respect to actual earnings in fiscal 2020 in my comment. And my answer to that question is always the fact that we do not give guidance on that particular financial piece of our business. I believe that is all the questions I have before me. I'm going to wait just a moment to see if any questions filter in through the online system. Sorry. There is an online question here that says, what is adjusted in the adjusted EBITDA? This is detailed in our financial statements and also in the MD&A and the annual information form. It's adjusted for stock-based comp, foreign exchange gains and losses and special charges. But I would refer you to those other documents where it is articulated in much greater detail. I am not seeing any other questions come in. So this concludes all matters before the annual meeting. I want to thank everybody for attending today's meeting. We look forward to reporting back to you on some of these developments discussed today. As indicated in our press release earlier this week, Q1 2020 results will be issued on May 21 with detail on our quarterly call to follow on or about -- whatever detail was in the May 7. On behalf of the Board of Directors and the broader team of Quarterhill and its subsidiaries, we hope that you and your loved ones all stay safe and healthy. Thank you again. Goodbye.