Quarterhill Inc. (QTRH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Quarterhill Annual Meeting. My name is John Gillberry, and I am Chair of Quarterhill Board of Directors. I'm speaking to you today from my home up in Gray County. This is our second COVID-related virtual AGM, and I'd like to repeat what I said last year, which perhaps means more than ever this year, that although we're disappointed that we can't see each of you today, our thoughts are with you, your families and the communities that you serve. We want to thank you for your patience as we navigate through this unprecedented situation and our second virtual meeting in light of the circumstances. I particularly want to offer my sincere hope and that of our Board and everyone at Quarterhill and our subsidiaries, International Road Dynamics and WiLAN, that all of our shareholders, employees and communities to recover as soon as possible and make our way to better days. Instructions on how to ask questions and the voting procedures will appear on your screens as we proceed. As with any technology, unexpected glitches may occur with this meeting, and potentially both with your and my Internet connections. But our service providers for this platform are very experienced at running this type of meeting and will do their best to help us all out. This meeting will now come to order, and I will ask Prashant Watchmaker to act as Secretary of the meeting and Roxane Parsaud of Computershare Investor Services, Inc. to act as scrutineer. Based on the statutory declaration provided by Computershare, I confirm that the notice calling this meeting and the management information circular in form of proxy for this meeting were mailed to Quarterhill shareholders in accordance with Quarterhill's bylaws and the Canada Business Corporation 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 is regularly called and properly constituted for the transaction of business. Each Quarterhill shareholder present at this virtual meeting that has properly registered other than as 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 the matters before us by a 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 that matter and 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 the 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 hand the meeting over to our President and Chief Executive Officer, Paul Hill, who will deliver a presentation on the business, after which, Paul and I will address appropriate questions from shareholders starting with the questions that had been provided to us prior to the meeting. Where questions are similar in nature, they will be organized by theme. And in the interest of everyone's time, I will not address the same or similar questions twice. Shareholders and proxy holders may address the meeting where 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 for the discussion period. If there is any discussion or question, I will read the question allowed. At this time, the polls are now open. This meeting has been called to consider 4 matters. The first item of business is the presentation of Quarterhill's audited financial statements for the fiscal year ended December 31, 2020, 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 the 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 this motion?

I so move.

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

Mr. Chair, I second the motion.

Thank you. Is there any discussion on this matter? As there's 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. The next matter to be dealt with is the election of directors. In accordance with Quarterhill's articles, the Board has determined that 8 directors should be elected at today's meeting. As mandated in Quarterhill's bylaws, all nominations for elections 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 nominations -- management's nominees: Roxanne Anderson, Michel Fattouche, Paul Hill, John Gillberry, Paul McCarten, Richard Shorkey, James Skippen and Anna Tosto. 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 nominations of the slate of directors?

Mr. Chair, I so move.

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

I'm happy to second that motion.

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

Thank you. Now could a shareholder please move these nominees 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 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 a voting shareholder or proxy holder -- sorry, would all voting shareholders and proxy holders please enter your votes in Lumi? [Voting]

Thank you. The next item is the appointment of the auditors. May I please have a motion that Ernst & Young 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 second the motion?

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

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

Thank you. The final formal item for consideration at this meeting is a resolution to approve on all -- to approve all unallocated awards under the Quarterhill 2018 equity incentive plan and to improve the granting of awards under the equity plan until April 14, 2023, the third anniversary of this meeting, which resolution is fully set out in Exhibit A to our March 10, 2021, management information circular. May I please have a motion moving that the resolution to approve all unallocated awards under Quarterhill's 2018 equity incentive plan and to approve the granting of awards under the equity plan until April 14, 2023, be approved?

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 discussions 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]

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

Mr. Chair, I so move.

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

Mr. Chair, I second that 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. Voting is now closed on all matters that were before the 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 our nominees to be duly elected as Quarterhill 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 2 days with full details of all matters that were voted on today and also file the results of the meeting on SEDAR. At this point, the formal portion of the meeting is now concluded. I would now like to introduce Quarterhill's President and Chief Executive Officer, Paul Hill, who will provide an update on our business, after which, Paul and I will be pleased to take appropriate questions from shareholders and proxy holders. Paul, it's all you.

Thanks, John. Good morning, everyone, and thanks for joining us today. It's great to be with you. John Rim, our CFO, and I will spend a few minutes providing you with an update on the business and explain why we're so excited about the future here at Quarterhill. Just a quick note on our safe harbor statement. Some of the presentation content and language used may be forward-looking in nature. Actual future results may differ from expectations. 2020 was a solid year for Quarterhill, especially given the challenges posed by COVID. The team has been very busy since I joined last June. We sold VIZIYA for a solid return. We launched a new M&A strategy that's focused on the Intelligent Transportation Systems market or ITS. We generated significant cash flow, and we returned funds to shareholders through dividends and share buybacks. We're set up for a strong 2021. We have a focused strategy, a healthy M&A pipeline, good business fundamentals at both IRD and WiLAN and a very strong financial foundation. And we're off to a good start on M&A, having announced our first acquisition of Sensor Line in January. I've assembled an experienced executive team with a proven track record of execution. John Rim, our new CFO, has deep M&A and public market experience. Rish Malhotra was COO of IRD for 12 years before his promotion to CEO in June. The WiLAN team led by Michael Vladescu has the most experience of any team in the IP industry. They are truly world-class. As for me, this is my third time as CEO of a technology company, and I have over 25 years of operating experience at companies such as Cognos and IBM. I am very confident in our ability to execute, and I'm betting on myself and our team. I've invested over $0.5 million in open market purchases in Quarterhill stock since I joined in June. One of the most common questions we get about the WiLAN business is regarding the status of its litigation with Apple. There were a couple of key developments in 2020. In January 2020, we announced that WiLAN won a second jury verdict against Apple in the U.S. District Court Southern California. In the verdict, WiLAN was awarded $85.23 million in damages. In June, WiLAN was issued final judgment in that trial for an amount totaling USD 109 million, which included interest charges. As expected, Apple filed an appeal and WiLAN has cross-appealed. In terms of next steps, both sides have filed their opening briefs in the appeals process. Each party is now preparing to file a response to the opening briefs. Apple's is due April 23 and ours approximately 3 weeks later. Following that, a date will be set for an oral hearing before a panel of the Court of Appeals for the Federal Circuit. The hearing is expected to be held sometime in the fall of this year. A decision can come any time up to about 6 months after the hearing. 3 months is a bit more typical. Time lines are subject to change as COVID is still a wildcard, but the case continues to move forward. Now I'll pass it over to John Rim to look at a few financial highlights for 2020.

Thanks, Paul, and good morning, everyone. Just want to remind everyone that all the numbers that I'll be speaking about today are in Canadian dollars unless otherwise stated. On a consolidated basis, 2020 was a solid year for Quarterhill. We had consolidated revenue of $145 million and adjusted EBITDA of $31 million or a margin of 21%. From a balance sheet perspective, we ended 2020 with a significant working capital balance of $160 million and no long-term debt. Our balance sheet reflects the consistency of our portfolio of companies and generating cash flow, which will continue to play an important part in funding our M&A strategy, which Paul will discuss later. Digging down into a little bit more detail for both of our businesses. We're really pleased to report that both portfolio of companies, IRD and WiLAN, again had solid results in 2020 despite the challenges presented by the COVID pandemic. With respect to IRD, 2020 certainly demonstrated the resiliency of IRD's business as it achieved stable revenues and margins relative to prior years. COVID did present some challenges to our international business within IRD given the travel restrictions, but IRD's North American business was very strong throughout 2020 given the company's solutions were deemed essential services in many U.S. states. IRD continues to be a very well-respected global company within the ITS industry and is an ideal platform for us to build on our M&A strategy. Moving to WiLAN. In 2020, WiLAN continued its track record of generating strong revenue and cash flow on an annual basis. And similar to IRD, COVID did pose some challenges during the year in terms of litigation time lines given the inability to hold face-to-face licensing and business development meetings. But again, we're pleased that WiLAN still delivered strong results despite COVID. With the experienced team we have at WiLAN and the strong patent portfolio that we added on to in 2020, we look for WiLAN to maintain its historical track record of strong margins and cash flow in 2021 and beyond. So with that, I'll pass it back to Paul.

Thanks, John. Now I'd like to explain our strategy, which I'm so excited about. The strategy at a high level hasn't changed from what I outlined on our year-end call last month. However, the market tailwinds have improved significantly. Frankly, there couldn't be a better time to be in the ITS industry. When I joined last year, job 1 was to establish the go-forward strategy for the business. I reviewed our 3 businesses and determined that the combination of IRD's strong position in the ITS industry, along with attractive market dynamics, meant this was where we should focus our strategy, as an aggregator in the ITS market. The plan is to harvest the cash from our operating businesses and to build out our ITS portfolio over time. The result will be more reliable growth in earnings, and we believe shareholder value and the higher stock price will follow. ITS is the use of technology to improve the way people and goods move through transportation infrastructures. It makes that movement safer, more efficient, better for the environment and less costly. It also creates new revenue opportunities for governments. When you build a new road, by definition, you need to invest in ITS technology. ITS is a large, stable and growing market. Annual spend on ITS is forecast to double in the next 5 years from $45 billion to about $90 billion, growing at 15% a year. The road segment where we play is about half of that. It's about $23 billion today and expect it to grow to about $47 billion in the next 5 years. In recent months, the tailwinds supporting this growing market opportunity have only gotten stronger. What's in the news right now is the announcement of significant new infrastructure spending. A few weeks ago, President Biden and his Transportation Secretary, Pete Buttigieg, pledged $2 trillion in infrastructure spending over the next 10 years, with approximately $900 billion earmarked for transportation. This market tailwind gives us excitement about the potential for our ITS business. The combination of massive new infrastructure spending and governments' need for new sources of revenue to pay down record debt from the COVID crisis is creating ideal conditions for expansion in the industry. So what types of businesses are we looking for? The initial phase will focus on acquisitions in the 5 road segments you see here. We're looking at tuck-in acquisitions such as Sensor Line that will help grow the IRD business. We're also looking at larger businesses that will help us achieve scale more rapidly. Longer term, you'll see us looking at adjacencies to ITS, which might include investments in smart cities. This is a natural evolution of the business as these are tech-enabled markets and are very similar to ITS. There are many enabling technologies that make ITS and smart cities possible, but 5G is the most important. 5G is a standard where WiLAN has expertise and can play an important role. Based on our existing cash, the annual cash generation of our businesses, access to low-interest financing, our target is to invest up to $400 million over the next 5 years to scale our ITS business. Meeting this target will depend on a number of factors, including sourcing appropriate opportunities. We are confident given our significant financial resources and our growing pipeline of M&A opportunities. We have a differentiated strategy, and we're well positioned to execute. IRD operates in many countries and it's a very well-respected brand. Our industry connections allow us to get access to opportunities that others may not be aware of. Our existing ITS platform, which includes IRD, iCOMS, Sensor Line and PAT Traffic means we can achieve additional business synergies that can drive higher returns, plus this ITS expertise makes integrations less risky. We are ITS experts, not just financial acquirers. We can win more deals since we are viewed as an appealing home for sellers. Our strong balance sheet and proven team are 2 other areas of strength that give us confidence in our ability to execute and get deals done. While we are keen to deploy our capital, we will be patient and disciplined buyers. We'll pay reasonable valuations and look for businesses with top line growth and positive cash flows that can fill out our product offerings and potentially give us geographic expansion. We'll also look for depth in management. As we execute on the M&A plan, we expect a greater proportion of Quarterhill revenue and cash flow to come from ITS. This more stable financial profile will attract greater investor interest. And we believe investors will be willing to pay a higher multiple in line with other ITS companies due to our scale, stable revenue and cash flows. This concludes our investor update, and we'll open it up for questions.

Thank you, Paul. We did get a number of questions in, so I am going to read these questions as they've come in, pretty much verbatim. And then I will pass them off to who the appropriate answer should come from. So here's the first question that has come in. And it is, how many litigations does WiLAN have ongoing? Paul Hill, I'm going to let you field this one.

Yes. Sure, John. We have a number of current negotiations in our pipeline, and the pipeline is quite robust. Some examples that are in progress, the Apple case that we talked about obviously. And in January, we initiated litigation in Germany regarding application processes with Apple. We have Motorola related to wireless. We have Micron regarding semiconductor memory technologies. We have AMD related to semiconductor memory interface and power management technologies. And we are replenishing our patent portfolio on a regular basis as we announced a couple of acquisitions recently. And we have about 4,800 patents today. The other thing I would say is we continue to invest in new patent partnerships as well in the partner model.

Thank you, Paul. The second question is, with all this cash, why don't you raise the dividend? Will you renew the NCIB? I look at this question as really a capital allocation question. So John Rim, maybe I'll let you field this one.

Sure, John. I'm happy to field that. With respect to our dividend, our focus is really on deploying our funds in M&A where we feel we can drive the greatest increase in shareholder value. In addition to the significant tailwinds in ITS as a whole, we believe, as Paul mentioned, as we scale our ITS business, our overall revenues and cash flows will grow and become more predictable. And as Paul also mentioned, we believe that this will lead to market valuations consistent with other public ITS businesses at scale and therefore, unlock value. With respect to our buyback, just wanted to remind everyone that our current NCIB program remains active and will be until early August. As we've previously communicated, we believe the NCIB gives us an opportunity to buy back shares when we feel the shares are trading out of price ranges that don't fully reflect their underlying value. And therefore, it does represent an effective use of cash. Finally, the NCIB is set to repurchase more shares at lower prices. And in Tuesday, we purchased approximately 2.5 million shares outstanding when we started the program. So we will continue that program until the early August of this year.

Thank you, John. The next question, it's kind of long here, but I'll read it off. It says the average tenure of the 3 longest-serving board members is about 15 years and does not appear that any shareholder value has been delivered over this 15-year period. Why are there no terms for Board members? And why has the Board not already undergone a very substantial renewal? So this is a very pointed question. So let me jump on this one and give you some thoughts on this. So first of all, I think the math might be slightly off, but I take the point in terms of tenure on the Board. You all have seen that with this year's circular, we have refreshed the Board. We've added a brand-new member on the Board that has both transportation experience and M&A experience and very specifically, M&A experience in the transportation industry. The Nomination Committee is constantly looking for people that can continue to add value to this Board. I think more importantly, what the shareholders should be looking for are Board members that are engaged, are smart, are vested and very importantly, active in this business. And that's what we have around the Board table today, people who are constantly working with the shareholders' best interest and have knowledge of the businesses and industries that we are participating in and have invested in the business personally in cash and have the same sort of general interest as the shareholders do. Tenure is something that we do look at. But it is just one of a lot of criteria that we look at with respect to Board members. The next question that came in says, and this kind of follows on the last one, what are your plans for expanding the Board's expertise in ITS? I've just touched on this, but you've noted that we have added Anna Tosto into the Board mix, who does have experience in ITS, very specifically in M&A, and we are very pleased to have Anna join the Board and bring some new thoughts, new ideas and some industry experience to the Board table. And as I've mentioned before, we are regularly looking at candidates. And if we do see qualified candidates that can add value to this Board, the nomination committee will engage with those individuals. The next question -- so we have a bunch of questions here that are coming in on the sort of the governance side of the equation. It says, why did you hire Kingsdale as an adviser for this year's AGM? So Kingsdale was hired to assist with proxy solicitation in order for us to achieve quorum. A majority of our shareholders are retail investors, which can result in lower voter turnout. And we do need 25% in order to reach quorum, and this is a fairly high hurdle. I think it's important for shareholders to know that increasing our institutional ownership is part of both our near- and long-term objectives. And this will change as we get that institutional ownership up in the organization. The next question says the average Board compensation in respect to 2019 and 2020 was approximately $1.1 million. Board compensation seems very excessive given the corporate's market capitalization, which cash is a very significant component and the Board's corporation -- or the corporation's performance. Why are Board fees not cut significantly in order to better align with the corporation's market capitalization and failure to deliver value for shareholders over the long term? So this is sort of, once again, a compound question, but let me talk to Board compensation a little bit. First and foremost, I think that there are a lot of things that drive the corporation's market capitalization, and the Board compensation is not necessarily completely aligned with that. If you want to attract high-quality, engaged, smart, industry knowledgeable people to your Board, you're going to have to compensate them to a competitive level. And that's the same with virtually every private -- or public company that is listed. And so I think that our -- we do regularly look at Board compensation. We regularly mark it against peers in the industry. We have some outside consultation on this constantly. And we would say that our Board is compensated in the same sort of range as all of our peer groups would be. I think that $1.1 million also probably takes into consideration noncash Board compensation. So the Board probably hasn't been compensated in cash to that extent. And I would also add that all of our Board members have made investments, cash investments and are vested significantly in the company as well. So I don't see that our Board compensation is out of line with our peers and with the industry. And I do reiterate once again that you have a very engaged, a very smart and a very professional, hard-working Board. And in order to get that kind of activity out of a Board, you have to compensate them accordingly. Okay. We've got one coming up for you, Paul, here. It says you are looking to deploy $400 million over 5 years. Is that back-ended? Or could we see some big deals this year? Paul Hill, you have to jump on this one.

Okay, John. Thanks. Well, as I mentioned in my remarks, building the M&A pipeline has been one of my absolute top priorities. And I am happy with the progress we're making and the diversity of opportunities that we've developed so far. And I can say we are looking at deals of all sizes. We've announced Sensor Line tuck-in acquisition, but we are looking at deals of all sizes. The pipeline, combined with our financial resources and also the fact that we have access to low-cost capital, just makes me confident that we can achieve this target of $400 million over the next 5 years. It's hard to say right now what the specific profile of those deals will be, but I am confident on the target. Execution is everything, as we know, and we're off to a good start in January with the Sensor Line deal. And I can say, I believe 2021 is going to be a successful year on the M&A front.

Thank you, Paul. That is all the questions that have come in through the appropriate channels. If any shareholder or proxy holder has sent in a question during the course of this AGM via e-mail, we will make sure that those questions get to our Investor Relations department. And to the extent that they are appropriate questions, you can expect us to respond to them over the next few days. This concludes all matters before our annual meeting, and I now declare the annual meeting adjourned. I would like to thank everyone for attending today's meeting. We look forward to reporting back to you on some of the developments that we discussed today. As indicated in our press release earlier this week, our Q1 2021 results will be issued on May 6 with details of our quarterly call to follow on that date. On behalf of the Board of Directors and the broader team at Quarterhill and our subsidiaries, we hope that you and all of your loved ones will stay safe and healthy. Thank you again. Goodbye.