Quarterhill Inc. (QTRH) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for the virtual Annual General and Special Meeting of the Shareholders of Quarterhill Inc. My name is Rusty Lewis, and I am Chair of the Board of Directors of Quarterhill Inc., and I will act as the chairperson for this meeting. Let me take this opportunity to welcome those present to this Annual General and Special Meeting of the Shareholders of Quarterhill, including our CEO, Chuck Myers, and our CFO, Kyle Chriest, and members of our Board of Directors. In terms of our agenda today, we will first deal with the formal business of our meeting, as described in the proxy materials that were sent to shareholders. Following the formal part of our meeting, we will consider responding to any questions raised. [ Russel Drew ] of DLA Piper Canada LLP, will act as the Secretary of the meeting; and [ Roxanne Parsaud ] of Computershare Investor Services, Inc, will act as a scrutineer of the meeting, referred to herein as the scrutineer. I shall now request the secretary to table proof of delivery of the Notice of Availability of proxy materials, instrument of proxy and accompanying documents to the registered shareholders of the company.

[indiscernible] form received.

Proof of delivery of the Notice of Availability of proxy materials, instrument of proxy and accompany documents have been duly filed, and I direct a copy of the proof of delivery and accompanying documents to be kept by the Secretary with the records of this meeting. The bylaws of the company provide that a quorum of the shareholders is present if at least 2 persons are present who are or who represent by proxy, shareholders entitled to vote at the meeting who hold, in the aggregate, at least 25% of the votes attached to the outstanding voting shares entitled to be voted at the meeting. Management of the company has received proxies from 563 shareholders present at the meeting. I direct that the final scrutineers' report be kept by the Secretary with the minutes of this meeting. I declare that the meeting is regularly called and properly constituted for the transaction of the business. Before we consider the business of the meeting, I would like to outline the voting procedures. We will conduct each vote by way of vote cast through the LUMI Virtual Meeting platform and those submitted by proxy. If you have voted your shares by proxy prior to the start of the meeting, your vote has already been received by the scrutineer. We will now open the polls and at any time during the meeting, shareholders who have not submitted a proxy and wish to vote their shares or who wish to change their vote may do so by clicking on the voting button on the screen. The first item of business is the presentation of the audited consolidated financial statements of the company for the year ended December 31, 2023, together with the auditor's report thereon. The financial statements and the auditor's reports have been filed on SEDAR and are available on the LUMI platform's dashboard. I move to dispense with the reading of the financial statements and the auditor's report.

I so move.

Thank you, Kyle.

I second the motion.

Thank you, Dave. Motion is carried. The next item of business is fixing the size of the Board of Directors to be elected at the meeting. The management information circular, referred to as the circular, and the instrument of proxy contemplate fixing the number of directors for the ensuing year at 6. May i please have a motion to fix the size of the Board and the number of directors to be elected at this meeting at 6?

I so move.

Thank you, Kyle.

I second the motion.

Thanks, Dave. The motion is carried. We will now proceed with the election of directors. Six directors will be elected to hold office until the next annual meeting of shareholders or until their successors are elected or appointed. Kyle, may I ask you to read the nominations, please?

I nominate Roxanne Anderson; Rusty Lewis, Bill Morris, Chuck Myers, Pamela Steer and Anna Tosto as Directors of the company to hold office for the ensuing year.

I second the motion.

Thank you, Dave. No other nominees have been received in accordance with the company's bylaws, and I, therefore, declare the nominations for directors closed. The next item of business is the appointment of the auditor of the company. The circular and instrument of proxy contemplate the appointment of Ernst & Young Canada LLP as auditor of the company. May I have a motion regarding the appointment of Ernst & Young Canada LLP as auditor of the company until the next Annual General Meeting of the shareholders? And could this motion provide that the auditor's remuneration be fixed by the Board of Directors?

I so move.

Thank you, Kyle.

I second the motion.

Thank you, Dave. The motion is carried. The next item of business is the approval and adoption of the amended Quarterhill Inc, 2018 Equity Incentive Plan, referred to herein as the Equity Plan of the company, a copy of which is attached to Schedule 1 to Exhibit-C of the circular as well as the approval of the grant of unallocated awards thereunder. To be effective, the resolution approving the amended equity plan and the grant of unallocated awards thereunder must be approved by a simple majority of the shareholders' votes cast at this meeting in person or by proxy. For all of the reasons stated in the circular, the Board of Directors has recommended that the shareholders vote for the approval of the amended equity plan and the grant of the unallocated awards thereunder. May I have a motion that the ordinary resolution approving the amended equity plan and the grant of unallocated awards thereunder in the form set out in Exhibit-C of the circular be approved and adopted?

I so move.

Thank you, Kyle.

I second the motion.

Okay. The motion carries. The next item of business is the approval and adoption of the employee share purchase plan of the company. A copy of which is attached as Exhibit-D to the circular. To be effective, the employee share purchase plan must be approved by a simple majority of the shareholders' votes cast at this meeting in person or by proxy. For all of the reasons stated in the circular, the Board of Directors has recommended that the shareholders vote for the approval of the employee share purchase plan. May I have a motion that the ordinary resolution in the form set out in the circular, approving the employee share purchase plan, be approved and adopted?

I so move.

Thank you, Kyle.

I second the motion.

Thank you, Dave. The motion carries. If a shareholder or proxy holder has not yet voted, please do so now. As a reminder, if you have previously voted by proxy, you are not required to vote online. Voting is now closed. I have been advised by the scrutineer that the preliminary vote report shows that all resolutions have passed. And that those nominated as directors of the company have been duly elected as the directors of Quarterhill Inc. Accordingly, I declare the motions carried and the nominees for the Board of Directors elected. I direct that the scrutineer's report on voting being next to the minutes of the meeting. This completes the formal business to be conducted at this meeting. I will call for a motion to terminate the meeting.

I move that the meeting be terminated.

Thank you, Kyle.

I second the motion.

Thank you, Dave. I declare the formal portion of the meeting is now terminated. We would like to take this opportunity to now address shareholders' questions that we have received. So I will ask Chuck to lead that discussion. Over to you, Chuck.

Great. Thanks, Rusty. Hopefully, everybody can hear me well. Thanks, good morning, to shareholders that have joined us. As you know, earlier this morning, we issued our Q1 results and held our quarterly update conference call. If you didn't get a chance to hear the call, I'd encourage you to listen to the replay, which is available on our website. For this part of the meeting, we're going to respond to questions submitted by shareholders in advance of the annual meeting as those that we've received today on the LUMI platform. Normal cautionary notes, I'd like to momentarily draw your attention to our safe harbor statement, which indicates that some of the language used during the Q&A session may be forward-looking in nature. As you can appreciate, actual future results may differ from expectations in place today. So let's start with the first question. What is your 3-year plan for Quarterhill that you mentioned you were working on back on your Q3 conference call? The goal -- our goal is to be an industry leader in the tolling enforcement verticals. I said this before, we want to be #1 or #2 in our markets. And we think we have the foundation in place to achieve that. We also want to be an innovator in the logistics space as we move from our tolling and -- tolling and enforcement business into logistics, where we can carve a niche for ourselves and develop a third revenue-generating vertical for the business. We also talked on our year-end call to establish a presence in the European tolling market to increase our focus on technology and software development, leaning into areas like AI-driven visual technology and data mining. So we continue to focus on that as part of our 3-year plan. While I won't give specific target revenue for 3 years out, we do expect meaningful top line organic growth through this period. We'd look to complement this with M&A, assuming we have reasonable access to capital. On the margin side, based on our experience in the industry and the observations of the other industry players, we think an adjusted EBITDA margin target of 20% is achievable by the end of that time frame, and we think we're on track. Perhaps most importantly, we want to be steady and reliable generator of positive cash flows. Doing so will enable investment in the business to grow organically as well, creating optionality for M&A. Now next question. I've been a shareholder for years and Quarterhill's cash balance keeps dropping. When will you start making money again? As I mentioned, this is a huge focus of mine. There's no point being in business if you're not generating cash. In our Q1 results this morning, cash balance was down from year-end as the timing of collections for certain milestone payments in the tolling business has impacted our cash. Our working capital remains high, which reflects it as a timing issue more than anything else. It can be the case on these large projects that from time to time milestone payments lag, but we're confident we'll collect. Importantly, as Kyle said on our Q1 call this morning, we expect our cash position to improve this year as we get to the end of the year. We see that continue to grow. Revenue growth and cross control are 2 key factors that should help improve the cash in the coming quarters, and the revenue type is key, too, as we're transitioning to the large tolling projects from implementation phase into the higher-margin operations phase. In the past years, we've also overhauled our bidding process on the tolling side, which means, as we win new mandates, the margin profile of those bids should be higher and, more importantly, better protected. Third question. We've seen -- haven't seen a new tolling contract in a long time. What are you doing to replenish the projects that are moving from implementation to operations? I think, as most people know, I've been focused on making sure the business is stable and making sure that we go into new projects in a stronger position than we have in the past. Our tolling business has been winning new business in recent quarters, though it has been of the follow-on type, which we don't typically publicize along with our wins and enforcement business. A good example was the -- our add-on contract we announced in Illinois on this morning's call. And these follow-on contracts have helped us maintain our backlog of more than 400 million -- $500 million since we announced Q1 last year, while recognizing $150 million in U.S. revenue during that time. We've been active in the bidding for new customers and contracts, and we feel good about our prospects for a few wins this year. We're not going to win any business at any price as shareholders have seen over the past several years in Quarterhill can happen when you do that. And we're going to be prudent about what we do. The markets for tolling enforcement and logistics are all in growth mode. We see addressable market for us today. Three of those had $1 billion combined for this year and from the -- our serviceable market, rising to north of $4 billion in 2026, with tolling representing more than $2 billion of that. So there's plenty of room to grow here. We have a great team, great technology and feel confident that, as we win new business, those contracts will help us get towards our revenue and margin goals. Question. How big do you expect logistics to be in the next 2 to 3 years? And what does logistics contract look like for Quarterhill? I want to manage expectations here because logistics is a huge market. It means a lot of different things to a lot of people. Over the next 3 years, we see it developing gradually but steadily, generating a small amount of revenue this year as we pilot some projects and growing into a larger part of our business in the next 2 to 3 years. To add some context, our expectation there would be less than 10% of the revenue in 2 to 3 years, but a fast-growing part of the business and one that could be a candidate for M&A to accelerate our footprint and technical capabilities. An example of a project would be something we're doing right now. One of our rail logistics customers would be to grow that into intermodal terminals, ports, borders and asset management. We're providing the technology to collect, analyze and process data in real time to enhance security and screening, optimizing vehicle throughput. We think the market is in its nascent stage, driven by emerging technical capabilities. It's a logical extension of our Tolling Enforcement Solutions today that include sensors, cameras, automated vehicle ID, machine vision and AI, which will be a big focus of our business going forward. Question. We have 3 questions on WiLAN, which was sold in June 2023. And I'll ask Kyle to respond to those. Kyle, do you want to take those?

Sure. Thanks, Chuck. The 3 questions are related to the earn-out type payments and the 10% ownership position we retained in WiLAN. As background to the questions, we announced the sale of 90% of WiLAN on June 15 last year. Since we are reporting in U.S. dollars now, the value we received for the sale can be broken down into 4 parts: $36 million paid in cash, a $6.25 million earnout to be paid if WiLAN hits certain financial milestones over a set period, an $11.5 million promissory note that is also payable upon WiLAN achieving a different set of financial measures in a specific period. Essentially, this is a second de facto earnout. And as stated, we still own 10% of the business. One question we received asks how confident we are that we will receive a $6.25 million earnout and what is the timing for that. While the second question asks the same about the $11.5 million promissory note. The simple answer is that both are achievable. As you might expect, the milestones on the promissory notes are set higher. A more nuanced answer is that, at this time, we have greater confidence in receiving payment on the $6.25 million earnout, but ultimately, whether one or both or neither payout is up to the performance of the WiLAN business. There is no guarantee we will receive either payment. In terms of the timing available to collect on these and the specific target drivers, those details were not discussed at the time of sale. The third question is, is WiLAN performing as expected? And has there been any discussions about WiLAN buying the remaining 10%? As a 10% owner, we are involved in the day-to-day operations of WiLAN. So we aren't going to comment on the results beyond the comments I've already made. A sale of that stake is possible. And if such a sale were to occur, we would update shareholders accordingly.

Thanks, Kyle. I'll add a question while we didn't receive it. I think that many people may have seen an announcement that WiLAN -- at least went through a first court case where they successfully got a positive judgment against a Microsoft case. I would just caution people have asked, what does that mean for us. It means this thing is probably going to be in a court for a long time. So we don't anticipate any short-term movement on anything, while that progresses through the process. And of course, we'll update shareholders accordingly, if anything were to happen. Another question. Are you going to pay a dividend again? I'd like to say we have no plans in the future to pay a dividend. The dividend was really a legacy of the IP Licensing business, and dividends aren't common among publicly traded companies in our industry. Companies in the ITS industry tend to follow a more traditional growth-oriented model, and it requires ongoing investment in areas such as R&D, and along with organic and M&A growth activities, and that's where we expect to spend our money. Next question. The Board Chair has been buying lots of stock. When will management and other Board members do the same? I'd like to say I've been buying stock. The facts are that several Board members were buyers of meaningful positions in the past 12 months as well as members of the management team were buyers during the same period. It's important to remember that the management team is highly invested in the success of the business beyond their equity holdings. They earn their livelihood from the business. And their variable compensation and longevity is based on whether the company hits its various financial and growth targets. Also, Quarterhill has a minimum shareholder requirements in place for the Board members and named executive officers, which is not typical for many public companies. In a nutshell, requirements stay within 5 years of achieving name, office, rank each individual must own a certain percentage of their salary and equity, DSUs, RSUs, and money options, et cetera. The higher position, the greater the ownership requirement. The Board also has a minimum ownership threshold to meet within 5 years. To help facilitate insider purchases, we have recently expanded the open window for insider transactions. Previously, the window closed 2 weeks prior to the end of the quarter and then now closes right at the quarter end, just so you know for insiders, made it extraordinarily difficult for us to buy. Finally, we've taken steps today to further align employees with shareholders with the introduction of our employee share purchase plan. ESPP makes the process simple for employees to build an equity position and serves as a tool to attract and retain and motivate our team. With that, I would -- since one of our biggest buyers in the last couple of quarters has been Rusty Lewis. I might reach out to Rusty and see if he's got any comments along those thoughts of insider buying?

Yes. Sure, Chuck. Thank you. Yes. As Chuck mentioned, we're making every effort we can to make stock available to employees and to directors. In addition to the things Chuck mentioned, the directors -- many of the directors have elected to take DSUs in lieu of cash compensation for their Board participation. At this meeting, we just put in the employee stock purchase plan to make it attractive for employees. And we've opened up the window. It's been extremely difficult, frankly, for me to buy any shares. I've had 2-week windows maybe 3 times to buy stock. But as you can tell from my recent purchases, I'm a big believer in the future potential of Quarterhill. Now if you go back into history when the private equity firm owned the company, we bid and won way too many projects on the toll side, while we have a stable business on the enforcement side, the Toll business can be very difficult if you're not careful when you bid these projects. There's unrealistic schedule, there's onerous contract terms, there are very challenging scope and requirements. You think a toll road is a toll road is a toll road, but every single one is very different. And the industry is littered with companies who have tried and failed miserably trying to supply a custom-built solution that the agency has required and they try to supply what they've built. So the reality is that in -- particularly on the tolling side, trust is earned, it's not granted. And when you don't execute, it's lost very quickly. The reality is it's very easy to win these contracts. It's very difficult to execute against them. And our team is really hard at work executing against what we promised. And if we -- and as we do that, we build credibility every step of the way. So the reason that I bought so much stock is that I really believe in our people, and I love our customers. Once you get their trust and you do so by doing what you say you're going to do, they're the most loyal customers you can ever have and they just keep on buying from you. And this is going to end up resulting and it has -- Chuck and I founded a business and we're in that -- in the toll business for over 20 years. It's the largest player in the ITS business, you can get a long-term predictable recurring income with all this add-on contract work that Chuck mentioned. Now from a shareholder's point of view, look, I fully understand that actions speak louder than words and that we need a track record of generating EBITDA and growing our cash. So just like earning trust, building that track record takes some time. But I got to tell you, we're in no rush. We just don't want to win business indiscriminately. We need to choose our customers as much as they choose us. We're going to start to ramp up. You're going to see us ramping up our marketing efforts as we expand our capabilities. And we're looking to deliver very disruptive and responsive solutions, which we think can help us grow the market. So bottom line, we're in this for the long pull. We expect to win an outside portion -- or more than our fair share of the business going forward, but we're going to do it on our pace, and we're going to do it right. Chuck, back to you.

Great, Rusty. I really appreciate throwing your thoughts in there on that and actually leads to my next question. What are you doing to get the share price up? Well, first and foremost, the work we've been doing to improve our project management, elevate our bidding capabilities and increase the efficiencies in the business and reduce costs. I mean I think you could see we've done a lot of things there. I know our -- my predecessor had made significant reductions in SG&A. I think you could see from our announcements we made significant cost reductions on our COGS in the last week or so. And we're seeing favorable results in our top line growth and margin improvement. Ultimately, the best thing we could do to get our stock price up is deliver strong results, in particular, reliable and growing cash flows. We're getting more active in our outreach to the street and having attended both the ROTH Conference earlier this year and we have the CIBC Tech Conference on deck later next week. So if anybody is there happy, we'd be more than happy to meet you. The ITS sector is apparent tailwinds, and this is one where few pure-play businesses can invest of which we are one. So our recipe is simple, but tried and tested. We're going to execute on our plan, generate solid financial results and grow cash flow and be proactive in telling our story. And Rusty touched on that. We're going to get to be more proactive. I hope you can see that all by what we're doing with our consolidated play with Quarterhill and the things we're doing to get our story and really elevate our presence. While we're primarily listed in Canada today, we think we have an opportunity to expand awareness in the U.S. while our story develops and ultimately seek a U.S. listing when the conditions are right. We don't want to do it just for the sake of doing it. We like our Canadian partners. We like where we are right now and our investors, and we've had long held investors and we appreciate having them there. Next question. When will Quarterhill list on the U.S. exchange? Great how these all feed into each other. Again, a U.S. listing is something we view as a logical development for the business. We have significant operations in the U.S. and the bulk of our customers in the U.S. as well. It's probably more of a question of when, not if. We want to scale up the business before doing so. Steady top line growth. Importantly, we want to show progress on our adjusted EBITDA margins and towards double-digit territory, and we want to put the company in a position where we're really growing cash flows. We're making progress that all, but at the same time, engaging with investors in the U.S. as well as brokers and bankers and cap markets people. And we think a U.S. listing is something that would make sense for us in due course. These are our closing comments. I would just say this concludes our Q&A session. I would like to -- as I stated on my Q1 earnings call earlier, I want to give our deepest thanks to our shareholders, our longtime shareholders. We do appreciate you. We do hear you and we look forward to continuing to work with you. The analysts, we really truly appreciate the coverage and the hard work that you put into this, it doesn't go unnoticed. And to our dedicated employees, we have employees that have been here a long time. We have employees that have been through a lot of changes. I can -- I've said before, this is one of the nicest group of people I've ever worked with. And even through a lot of difficult changes, they've been spectacular. We brought on some new leadership in terms of the high level of how we manage programs and really beefing up Kyle's project financial team. So I look forward to a good productive year here, and I want to thank everybody for attending the annual meeting. Rusty, do you want to formally adjourn the meeting?

Do we want to see -- are there any questions? I guess not, right? I didn't see any pop up. So...

Yes. At this time, Rusty, no additional questions. So over to you to -- for closing remarks.

Okay. Terrific. Well, I reiterate Chuck's thanks to our shareholders, our analysts, our employees, our customers, we're making a lot of progress, and we look forward to continuing to report good results to all of you in the future. So thank you for attending today. We appreciate it. Bye-bye now.