Quarterhill Inc. (QTRH) Earnings Call Transcript & Summary

Good morning, and welcome to Quarterhill's Corporate Update Conference Call. On this morning's call, we have Quarterhill's Chair, Mr. John Gillberry; and its Chief Executive Officer, Mr. Bret Kidd. [Operator Instructions] Earlier this morning, Quarterhill issued a news release announcing several corporate developments related to today's call. This news release is available on Quarterhill's website and on SEDAR. Certain matters discussed during today's conference call or answers that may be given to your questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on SEDAR. During this conference call, Quarterhill may refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to Page 3 of the company's Q3 2021 Management's Discussion and Analysis for full cautionary notes regarding the use of forward-looking statements and an IFRS 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. Gillberry. Please go ahead, sir.

Thank you. Good morning, and thank you all for taking the time for our unexpected update in the middle of a very busy season, both from a personal and a business perspective. For those I haven't met, I am John Gillberry, the Chair of Quarterhill. And I'm joined today by Bret Kidd, our new CEO. As you saw with the press release issued earlier this morning, there are some very exciting news. And on behalf of the Board, I want to share with you some insights into the decisions that were made and the strategy we have now fully committed to. This morning, we announced that we are accelerating our transformation into a growth and operational leader in the Intelligent Transportation Systems or ITS markets by restructuring parts of the business and the making select personnel changes. Foremost, we have appointed Bret Kidd, the current CEO of subsidiary Electronic Transaction Consultants or ETC, as CEO and Board member of Quarterhill. Bret replaces Paul Hill in both capacities. We also announced we are undertaking a strategic review of alternatives for WiLAN, our IP-licensing business. In short order, we will be hiring an investment bank to conduct a review. A special committee of the Board working closely with Bret will oversee the strategic review in the coming months. With Bret as Quarterhill's CEO, the company will now operate through 2 main divisions, ETC and International Road Dynamics or IRD, with both 2 divisions reporting to him. Quarterhill will be a dominant player in the ITS with these 2 businesses at scale, being led by operations and investment veterans who have been -- who have a track record for both growth and value creation. Bret will serve as the Interim CEO of ETC until we name the new CEO, which we expect to do in short order. The next month, Bret will focus on integrating the current Quarterhill corporate offices with ETC's corporate office and ensuring that [indiscernible] Toronto and Richardson, Texas. Bret will speak to you with regards to the market opportunity. But before he talks, I think it's very important that you understand the decisions that were made and the positive impact that we believe they will have for shareholders. As you are aware, several years ago, Quarterhill embarked on a diversification strategy to shift its focus from the IP-licensing business, which although it has been a constant cash cow had lost favor with the public Our diversification strategy initially focused on trying to acquire enterprise software companies, but valuations and competition from private equity firms made this a very slow and unrewarding process. However, early on in this process, we did acquire IRD, a leader in the ITS market with an international footprint. IRD represented our entry into the ITS market. And through it, we gained a greater understanding of the size and compelling growth potential. Our growing interest in ITS led to greater focus in this area, and in recent years, as evidenced by our sale of VIZIYA, a previously held enterprise software asset, the appointment of new leadership at IRD last year, and in 2021, our M&A activity in this sector. Following up on leads from our team at IRD, we made 2 tuck-in acquisitions in 2021 into that business. And then later in the year, we were approached with the opportunity to acquire ETC. ETC fits perfectly into the strategy we developed a couple of years ago. We had been waiting for this type of business, a platform opportunity with scale to become available and we pursued this acquisition aggressively. Post acquisition, we have now, which is one of the largest ITS footprints in North America and a substantial market opportunity in front of us, both domestically and internationally. Both ETC and IRD are leaders in their field and are well positioned to grow both organically and through acquisitions. We feel the best way to take advantage of this pure-play opportunity is to drive the growth and future earnings through the operating companies led by individuals who are immersed in the industry and have a finger on the pulse of the business as well as monitoring critical changes to the technology and evolving nature of this industry. This left us with a corporate holding management structure that was expensive and redundant to the overall business strategy. That said, I do want to thank Paul Hill for the contributions he made to the business since joining us in 2020. He helped us to advance the strategy during his tenure. And on behalf of the Board, I do wish him the best in his future endeavors. Looking forward, while Bret may be new to most of you at the time of the ETC acquisition, I first met him 5 years ago when the company was was in a bid process to acquire a company [indiscernible] restructuring. Bret did not end up acquiring the business. However, this does show what a small world it is, and you never know when you're going to cross paths again with someone. I had tremendous respect for Bret during our last encounter and I was thrilled to learn that he was leading ETC at the time the acquisition opportunity was brought to us. The Quarterhill Board is very excited to have Bret and his operational experience lead through the next critical growth period in the ITS market. I will now let Bret say a few words and then I will be happy to take your questions. Over to you, Bret.

Okay. Thank you, John, and good morning, everyone. It is a pleasure to be here with you today, and it's a true honor to be leading Quarterhill. I'll keep my prepared remarks brief, touching on my background, the ITS industry and why I'm excited to lead the company. Then as John just said, we'll open it up to some questions. Quarterhill is very well positioned to succeed in ITS, and I'm grateful for the efforts of those who contribute to putting this strong foundation in place. We have 2 excellent operating companies in IRD and ETC with favorable industry tailwinds behind them and a strong balance sheet to support both organic and acquisitive growth. In terms of my background and what has led me to be here today, I have 25 years of experience leading technology services businesses in the travel, transportation and public sectors, most recently joining ETC as CEO in 2019. Prior to that, at EDS, that's Electronic Data Systems, I began in corporate strategy and M&A and then moved into P&L roles over time, leading accounts and even the travel and transportation portfolio. Later at Travelport, a $2 billion travel technology business, I led their $400 million Americas unit and their global airline IT, SaaS and analytics business unit. I've also spent time in the public sector and public sector facing roles, which included creating and leading Hewlett Packard's global public sector unit, spearheading EDS' aviation security initiatives following the terrorist attacks on 9/11, and early in my career working on Capitol Hill for U.S. Senator Phil Gramm. Mine has been a career spent in the areas where technology, transportation and the private and public sectors converge, which is very much the space that Quarterhill occupies today. And every business that I've read has required both rapid growth and significant change simultaneously, and most have had an M&A dimension. So I'm equally comfortable at the strategy table securing acquisitions or as a hands-on operator and adaptive building organizations for scale and executing on that potential. And ITS is an area where I see tremendous opportunity. In fact, after my nearly 3 decades in the IT services sector, I can say and have said many times, that I've never seen more opportunity in a single industry. ITS is already a very large market, and the growth outlook is significant with the industry projected to grow worldwide from $45 billion in 2020 to $90 billion in 2025, which represents a 15% CAGR. As most of you know that the industry has significant tailwinds. Governments face massive declines in traditional infrastructure funding sources and returning to tolling and other forms of mobility or fees to build those gaps. At the same time, advances in mobility technology are enabling public policies around congestion management, safety and environmental sustainability in ways that weren't possible just a few years ago. These same technologies are improving convenience and choices for consumers and businesses with even smarter vehicles and mobility as a service models that enable transportation to be purchased exactly how and when it's needed. Going forward, I will focus on integrating the Quarterhill and ETC head offices and work closely with the teams at IRD and ETC to ensure continued rapid growth both through acquisition and organically via their multibillion-dollar pipelines. And in speaking to that -- the last point, Quarterhill's M&A strategy remains the same. We will continue to source attractive tuck-ins for the ETC and IRD businesses. while also identifying complementary platforms that advance Quarterhill's ITS strategy. ETC and IRD will continue to operate as separate organizations with unique branding, M&A objectives and the like, but we will continue to build on the revenue and operational synergies between the 2 businesses that are already in progress. The collaboration between the 2 companies is an area that has me really excited about the future because I think there are tremendous things that we can do together going forward. In closing, I look forward to the challenge ahead and to the opportunity to lead Quarterhill at this particular phase of its evolution. We already have 2 strong operating companies in IRD and ETC, industry growth tailwinds behind us and an opportunity to create a unique public vehicle focused on ITS. With Quarterhill's position and resources combined with the broader opportunities in ITS, we were only just beginning. So with that, happy to turn it over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Doug Taylor with Canaccord.

Yes. I'd like to start by asking if you could shed any additional context or color around the departure of Paul Hill here. I mean the strategy you've spoken about here today seems consistent with that under Paul. So it does appear rather abrupt. Any other context you can provide there?

Yes. That is a good question. We knew that this question was coming at us. But I think you hit the nail right on the head. This is a strategy that is completely consistent with where Paul has been heading for the last year. And one of the things that we firmly believe in this is that once you have the strategy firmly -- your arms wrapped around it and it is firmly baked, you have to act on it. And so the timing was -- I mean, I'll say the clock probably started ticking on timing with the acquisition of ETC. We wouldn't have made this move without the acquisition of ETC. We needed to scale, we needed Bret. We needed the, I would say, the whole leadership team that's underneath Bret, which is very, very deep and very, very And this just really kind of made it happen. So very much along the path that Paul was heading in many ways. And no matter what has happened, I think people would say, "Well, why now?" Why now is because we can do it now and we understand the strategy and we are laser-focused on it.

Okay. You've got -- I mean, I think you mentioned the intention to kind of thin out the overhead layer, which may be in a world where these 2 businesses are now in their separate ownership is maybe redundant or something like that, but maybe you can help us think about -- because a bunch of that overhead would have, in my mind...

I lost you there. Operator, [indiscernible]? Can we come back to Doug, operator?

Mr. Taylor, your line is now open. Please proceed, Mr. Taylor.

Can you hear me?

Yes, I can hear you now, Doug.

Okay. Apologies for that. Next question was, I mean, I think in response to -- you made some comments in your prepared remarks about the overhead layer and a bunch of that, I think, would have come through WiLAN. Can we talk about how we should think about the overhead costs going forward as we start to contemplate what this business looks like with WiLAN potentially under separate ownership?

Yes, I don't have the number for you, Doug, which I know that you're looking for and digging for. I can tell you that the current expectation is that we're going to maintain 2 offices. And you have to break it down this way, the operational focus of our business shifts down to the operations of the company, which is down at Richardson, Texas, the big platform business. Our capital base, our shareholder base, our accounting and finance base, all still with no current plan to change any of that. So it's not like you're going to see a massive sweep. And I think it's really important, it's really important to understand and take away that this was not a move that was made for based on cost savings or gross synergies between a corporate office and an operational office. It was based on the fact that we believe we're going to drive much, much greater value by letting guys who are in the market drive the businesses forward without having an extra layer between the operations and essentially the Board and the shareholders. So that's one thing. We haven't started the strategic review of WiLAN yet. But obviously, we're out and public with the fact that we are going undertake one. And so I would imagine by the time that we report our year-end numbers, in Q4, we will have much more information on that process, what it might mean from a sort of a numbers perspective.

Okay. And then maybe a question for Bret. I mean you are a new face to many of the investors. You seem to have a view that's consistent with the prior strategy. But perhaps I'll ask you to maybe go a little further and talk about what you'd see as M&A priorities within the ITS segment. I'm sure you have your own view on what you think the most attractive areas within that broad umbrella are as you execute on the M&A strategy going forward.

That one's for you, Bret.

Yes. Thank you for the question. I can speak especially towards what we've been looking at, at ETC so far, but I think that there's extensions of that into IRD as well. And really, it's in several categories, we've been looking at opportunities, and we've already been pursuing some of these with the Quarterhill team in the last few months since ETC has been acquired. We're looking for opportunities that expand our scale, especially in regions or areas of the business where we may not have as much representation currently. Also technologies, which we'll enhance, although we're wanting to make sure that the businesses are revenue generating and profitable. But at times, you can find opportunities, which enhance your technology and your capabilities in that way. And then the third area really is assisting with diversification and extension into adjacent markets. especially those markets where there is leverage off of the IT or other assets and resources that we currently have. So there's -- those are several things. And we found a wealth of opportunities and across those, sometimes they hit more than one of those categories and certainly across those there numerous ones that we're pursuing, and we do expect some more progress on that front in 2022.

[Operator Instructions] Your next question comes from Steven Li with Raymond James.

A couple of questions for me. First, I want to clarify your earlier comment. So on the potential cost savings with the consolidation of ETC and corporate offices, is it going to be material enough to impact your profitability?

In the short term, Steven, the answer to that is -- And, well, short term being 2022, to a smaller extent. I mean so far the only personnel changes that we've made to date is with respect to Paul Hill. And if you want to know what that impact is, you could take a look at last year's circular and such as what his annual cost of the business was and say, okay, there was one cost savings to the business. Other than that, we haven't made any decisions on any other changes or planning to make any changes to the current structure. I mean Bret is literally 1 day in the job and does deserve some time in to sort out. And I do think that we can provide some better color on that on the call following our year end numbers and our 4th ] quarter numbers.

Okay. Got it. That makes sense. And then my other question is on the timing of the WiLAN review. We're still willing to see on the Apple case, would that not mean any review would be incomplete without knowing an outcome on Apple? Or was there a trigger for the review?

Yes. I don't think Steven. And this is something that we've spent considerable time thinking cloud and looking at and discussing as you know, as we followed the Apple case, you've already confirmed that there's been infringement. What hasn't been confirmed is the level of damages. So we'll conduct a review. We're going to launch it, and then we'll see what happens with regards to the possible with WiLAN. And I think we did try to express this in the press release, but we do think that there is a broad range of potential outcomes for a lot. And whatever we think might happen with Apple, will be feathered into that discussion and into that valuation.

Got it. Was an external trigger for the review?

I'm sorry?

Was there an external trigger for the review?

For the strategic review, the real trigger is the fact that we have decided -- make this a very, very solid strategic decision to move into a pure play in the ITS industry sector. And as soon as we've announced that and if we're true to ourselves, we're saying, WiLAN is just to not fit into this equation. We have to run a review and find out what the right alternatives are for that business.

Your next question comes from Nicholas Cortellucci with M Partners.

Congrats, Bret on the new promotion. Nice to meet you. I just had a question about M&A. So is the plan still to allocate the $400 million towards ITS M&A over the next 5 years? And if so, how rapid do you think you're going to be able to do that?

Yes. So it's a good question. We did think it would become -- like we haven't changed any of the strategic plans for the ITS business industry sector. And that number of $400 million, I know that Paul has been quite public about -- talking about that level of investment. That level of investment is still part of our long-term strategic plan and is feathered into the strategic plan. How soon is that to get deployed? That comes entirely dependent upon the opportunities that are in front of us and when -- and if we can take advantage of those opportunities. So all I can say to you is that there's been no massive change from that overall business strategy and . And Bret is very excited about the M&A opportunities. And I think this is worth noting the M&A activity that we've encountered today or that we've taken advantage of today have bubbled up through the [indiscernible] -- through -- essentially through IRD, as you well noted [indiscernible] our tuck-in acquisitions. And an ETC came with a pipeline of M&A opportunities as well. So we have an M&A team. They're active, they're busy, and we have a pipeline of opportunities, and we're not getting off of that process right away. So -- but I can tell you how quickly it will be deployed until we work through the pipeline.

Your next question comes from Todd Coupland with CIBC.

I just wanted to circle back to the timing, it seems abrupt. It doesn't seem like an orderly transition. I'm just wondering if you can assure us that the financial results of IRD and ETC are hard tracking to your prior expectations and this change did not have anything to do with the missed financial targets?

I can absolutely confirm that for you, Todd. I mean, you're saying it's not an orderly transition. But what we do have is we have really strong professional management at the heads of both those businesses. They are doing what they can do. And they are building their businesses in accordance with their plans and the objectives that were laid at the Quarterhill Board last year. So this is not about missed objectives, this is not about CEO performance. This is about spinning the company into a pure-play ITS business and people who understand that business or emersed in that business, run it, grow it and expand it. And -- That's it. I mean, that's really been divesting or just trying a strategic review to find out what is the best option for WiLAN, which now is [indiscernible] with the recent press release.

Okay. And so Paul Hill, when he joined as CEO a year ago, he came with the view that it was not a long-term opportunity or that's just the evolution, and you guys decided that, and as a result, that didn't work? And so he moves on immediately rather than consulting for the transition?

Yes. I mean -- I was with Paul last night. I'll absolutely -- I'll use the term endorses, but I'll say [indiscernible] for this strategy to take effect. I mean, we couldn't do what we're doing right now without acquisition of ETC. ETC [indiscernible] in the platform by which to make a full-fledged pivot into the ITS industry sector. And this is proved from what was once a pure-play IP-licensing business through a diversification strategy into software enterprise now into another pure-play business. It's a bit a relay race, right? And [indiscernible] has been past 2 or 3 times through the course of this process. And now it's with Bret. Paul is a [indiscernible], as you all know. And Paul is to continue to be a shareholder of the company. So it's not -- this is not about Paul's performance, and I don't want to leave anybody with that impression.

Okay. What's the termination value of releasing Paul?

Yes. I can't release that information at this point in time, Todd. I just can't. [indiscernible] contract made public. And I would absolutely need Paul to say anything in public before I can give you that information. I can tell you that all the facts related to Paul's termination will be captured in this current fiscal period. I think I can say that.

Okay. And then just last question. I mean, WiLAN prior to -- I think this is right, change in Quarterhill went through a strategic review and didn't find a buyer for the patent back then. What's your impression of changing market conditions and the opportunity for a sale or going private now versus when that went on several years ago?

Yes, it's a good question. And this is something that we did spend obviously some time on and got some thought -- independent for the thought input on. A couple of things are different. When we put WiLAN through a strategic review, and it was several years ago, we were a pure-play IP licensing business, we really were. And so we haven't moved along our diversification strategy. So that in itself makes WiLAN look at through different lens now that it is a subsidiary under a holding company that has decided to essentially delayer [indiscernible] company's concept and become a pure play in the ITS industry sector. So I think that there's -- it's going to get looked at from a -- from that perspective. Number two, and probably more importantly, there's a lot of capital in the market and I would say private equity and pension markets right now that are looking for companies that can consistently year-over-year generate cash flows and are not subject to the quarter-by-quarter reporting. WiLAN has been sort of hammered with over the last little while. So we think that there's sort of market dynamic in place that people will look at this and go, you know what, this does have a good cash flow record to it. And it continues to have a good portfolio of IP license -- IP patents. There's patents in their portfolio. So if you can put WiLAN into a vehicle that doesn't have to have a quarterly reporting case to it, it belongs to some place that wants that kind of capital in their business. So we take a look at both activities and say like, you know what, this is a good time to do this. So that's another reason for the timing of everything as we think that going into 2022, we will find a high level of activity around the strategic review for WiLAN.

Okay. And is it fair to say that this decision on WiLAN -- let me ask me an open ended question. Has Quarterhill been approached by PE interest for WiLAN and that's in part a catalyst for the decision?

The answer to that is no. I suspect now that the press release is out, that my inbox will start to get filled up.

As we have no further questions at this time, I will turn the call over to Mr. Bret Kidd for closing comments.

All right. Very good. Well, it's been a pleasure visiting with John this morning. I look forward to the opportunity to meet each of you in whatever way we're allowed to meet these days, but look forward to connecting certainly going forward. I appreciate your participation in today's call. And look forward to, again, spending more time with each of you being able to share more about the exciting future of both of these businesses as we go forward. In the meantime, I hope that everybody has a wonderful holiday season and a happy '22.

Yes. So everybody on the call, thank you as well, and best wishes for the holiday season, and we will be connecting with all of you shortly, I think.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.