Quarterhill Inc. (QTRH) Earnings Call Transcript & Summary

Hello and welcome to the Annual General and Special Meeting of Shareholders of Quarterhill Inc. Please note that today's meeting is being recorded. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of same. If you disclose personal information of another person in today's meeting, you will be deemed to represent and warrant to Computershare and the corporation that you first obtained all required consents for the disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure. It is now my pleasure to turn today's meeting over to Rusty Lewis, Chair of the Board of Quarterhill. Rusty, the floor is yours.

Good morning and thank you, everyone, for joining us for the virtual Annual General and Special Meeting of Shareholders of Quarterhill Inc. My name is Rusty Lewis and I'm Chair of the Board of Directors of Quarterhill Inc. and will act as 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, our Interim CFO, Morgan Demkey and members of our Board of Directors. In terms of our agenda today, we will deal first 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. Amanda Vogeli of DLA Piper Canada LLP will act as the Secretary of the meeting. And Roxanne Parsaud of Computershare Investor Services Inc. will act as the scrutineer of the meeting. 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.

I confirm receipt.

Proof of such delivery has been tabled and I direct a copy of the affidavit of mailing to be kept by the Secretary with the minutes of this meeting. Item 3. The bylaws of the company provide that a quorum of 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 proxy from 504 shareholders holding a total of approximately 38.9% of the outstanding voting shares of the company. The scrutineer has confirmed there is a quorum of the shareholders present at the meeting. I direct that the final scrutineer's 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 business. Before we consider the business of the meeting, I would like to outline voting procedures. We will conduct each vote by way of vote cast through the virtual meeting platform and those submitted by proxy. If you had 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, registered 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 presentation of the audited consolidated financial statements of the company for the year ended December 31, 2024, together with the auditor's report thereon. The financial statements and the auditor's report have been filed on SEDAR and are available on the virtual meeting platform's dashboard. I move to dispense with the reading of the financial statements and the auditor's report.

I so move.

I second the motion.

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 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.

I second the motion.

Motion carries. We will now proceed with the election of directors. Six directors will be elected to hold office until the next Annual General Meeting of shareholders or until their successors are elected or appointed. Morgan may I please ask you to read the nominations.

I nominate Asha Daniere, Pat Deon, Rusty Lewis, Chuck Myers, Robin Saunders and Steve Smith as directors of the company to hold office for the ensuing year.

I second the motion.

No other nominees have been received in accordance with the company's bylaws and therefore, I 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 auditors 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 Shareholders. And could this motion provide that the auditor's remuneration be fixed by the Board of Directors.

I so move.

I second the motion.

The motion carries. Thank you. Okay. The next item of business is the approval of the equity plan resolution in form set out in Exhibit C to the management information circular of the company dated April 1, 2025, approving an amendment to the company's 2018 equity incentive plan. The purpose of the amendment is to increase the maximum number of common shares that may be issued for all purposes pursuant to the equity plan from 10% to 12% of the total number of common shares of the company issued and outstanding from time to time, calculated on a nondiluted basis. To be effective, the equity plan resolution 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 shareholders vote for the approval of the equity plan resolution. In the event the equity plan resolution is not approved by shareholders at the meeting, then the amendment proposed therein will not come into force. And Quarterhill will be able to continue granting awards under the equity plan unamended until May 13, 2027, when approval of unallocated entitlements under the equity plan will expire. May I have a motion that the equity plan resolution in the form set out in Exhibit C of the circular be approved and adopted.

I so move.

I second the motion.

Thank you. The motion carries. If a shareholder or proxy has not yet voted, please do so. 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 be annexed 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.

I second the motion.

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 may have received. I will turn this over to Morgan and Chuck Myers, our CEO, to address any questions that the shareholders may have.

Great. Thank you, Rusty and good morning to all the shareholders that have joined us today. For this part of the meeting, we will respond to the questions submitted by the shareholders in advance of the annual meeting as well as those we've received today on the Computershare platform. 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. With that, let's start with the first question. What are you doing to get the stock price up? Okay. Let's get right into it. It's an important question and we understand the stock performance is the top priority to our shareholders. So what are we doing about it? Over the past 18 months, we've been executing a comprehensive business turnaround focused on several key areas. We strengthened our operational foundation by improving project management practices, enhancing our bidding capabilities, increasing business efficiencies and optimizing costs. These fundamental improvements yield tangible results in our top line growth in 2024 and we expect them to make a positive impact on margins in 2025. We still have work to do in our turnaround but we are confident in our strategy and our ability to execute on our growth plans. We believe the consistent strong financial performance is the most reliable path to stock price appreciation. Specifically, we're focused on delivering steady and growing cash flows, which are ultimately key to driving shareholder value. In parallel, we are increasing our visibility with investors. In the past 12 months, we participated in several conferences, ROTH Capital, CIBC, Gateway and we'll look for opportunities to continue this activity in 2025. The bottom line, our strategy is straightforward but proven, execute our business plan effectively, generate solid financial results, grow our cash flow and proactively communicate our story to investors. While we're primarily listed in Canada today, we see significant opportunity to expand awareness in the U.S. market as our story develops with the potential to pursue a U.S. listing when the conditions are up. I think I'll turn the second question over to Morgan.

The next question is -- question 2 is, when will Quarterhill start generating positive cash flow? This is a huge focus of ours. As I said before, there's no point being in business if you can't generate cash. The operational improvements we've implemented, we believe we are on the path to consistent positive cash flow. On our last quarterly call, we discussed 2 specific legacy contracts that are currently being discussed. We expect cash flow to become more consistently positive once these negotiations are completed, which represents a critical milestone in our financial evolution. Additionally, as we complete the acceptance phases of these 2 contracts, we anticipate receiving the final milestone payments, which will further strengthen our cash position in the near term. It's important to highlight 3 additional factors that will contribute to our cash flow performance. First, we've adjusted our bidding approach for new projects. All new contracts are now being structured with expectations of cash flow neutrality through the implementation phase, which represents a significant improvement over our historical approach. Second, our business does experience some seasonal variation in cash generation. We typically see stronger cash position in the second half of the year. So shareholders should anticipate this pattern continuing. Third, the operational efficiencies we've implemented are reducing our cash burn on existing projects while improving margins on new work. In summary, the combination of contract renegotiations, milestone payments, improved bidding practices and operational efficiencies position us to achieve consistent positive cash flow in the future, with increasingly stronger performance expected in the second half of this year. Over to you, Chuck.

Thank you. I'll take our third question. Why are there so many changes to the Board this year? We are indeed seeing an evolution of our Board structure with 4 current directors not standing for reelection and 2 new nominees joining, which brings our total to 6 directors following the annual meeting. The changes in our Board composition reflect the natural evolution of Quarterhill as we continue the strategic transformation. Over the past 18 months, our business has undergone significant changes, focusing intently on our core ITS operations and technology development initiatives. Several of our departing directors joined when the company had a very different business focus and market position. They provided valuable guidance through important transitions and we are deeply grateful for their contributions. As we move forward, we're seeking to build a Board with more specific expertise directly relevant to our current business priorities and future direction. While we may increase the size of the Board in the near future, for now, our streamlined structure aligns with industry benchmarks for companies of our size. This approach enhances our ability to move quickly while maintaining robust oversight and strategic guidance. We are confident that these Board changes will help accelerate our business transformation and ultimately create greater value for our shareholders. I'll go to the fourth question. The Board has been buying stock over the past year. Will the new Board members and senior management do the same? Share ownership across our leadership team, including myself, other directors and the Chair, has increased over the past year. It's worth noting that all Board compensation last year was made in equity rather than cash, which not only preserved liquidity but also deepened alignment with shareholder interests. Quarterhill maintains formal share ownership requirements for both Board members and named executive officers. These guidelines stipulate that within 5 years of appointment, executives must accumulate equity equivalent to a specified percentage of the base salary. The ownership threshold increases with position seniority, ensuring they're making the most impactful decisions with greater skin in the game. Similarly, all Board members must meet minimum ownership requirements within 5 years of joining the Board. To facilitate insider participation, we expanded the open window period for insider transactions in 2024. Previously, the window closed 2 weeks prior to the quarter end and now remains open until the actual quarter end date, providing additional flexibility. Additionally, last year, we introduced our employee share purchase plan, which simplifies the process for our employees at all levels to build equity positions in the company. Beyond just encouraging ownership, the ESPP serves as a valuable tool for attracting, retaining and motivating talent throughout the organization. While we can't predict individual investment decisions, these structural changes collectively support increased equity ownership across our leadership team and employee base. I'll turn question 5 over to Morgan.

Thanks, Chuck. How are tariffs impacting the business? We're closely monitoring the tariff situation, which remains fluid and subject to frequent shifts Overall, we don't anticipate a material impact on our business. In our assessment, approximately 10% to 15% of our revenues could potentially be affected by tariffs through increased material costs. For components sourced outside the U.S. that might be impacted. We benefit from long-established supplier relationships that provide some insulation from immediate effects. We're also evaluating alternative material sources where appropriate. On existing contracts, we'll work with customers to reprice agreements where possible. For new contracts, we're proactively building in provisions to address potential tariff impacts. Some of our proprietary products manufactured in Canada are shipped to the U.S. However, they incorporate U.S. made components, which lessen the tariff impact. If tariffs remain in place longer term, we have several mitigation strategies available, including enhancing our supply chain with alternative sourcing and negotiating pricing adjustments with customers. We're confident in our ability to adapt to these evolving trade conditions without significant disruption to the business. Chuck, I'll pass it over to you.

Thank you. Our sixth question today is, would it make sense for Quarterhill to list on a U.S. -- a senior U.S. exchange given the current political economic environment and tensions. A U.S. listing represents a logical next step in our corporate evolution. Given that a significant portion of our operations and customer base is in the U.S., establishing a presence on a bigger U.S. exchange aligns with our business footprint. For us, it's more of a question of when, not if. Our approach is to first build additional scale in the business before pursuing this initiative. Specifically, we're focused on demonstrating steady top line growth while progressing towards double-digit adjusted EBITDA margins and establishing a track record of growing cash flows. We're making meaningful progress towards these objectives. Simultaneously, we're actively engaging with U.S.-based investors and investment dealers to build relationships and visibility in that market. Based on current trajectory, we believe a U.S. listing may be appropriate for Quarterhill in the next 2 years -- 2 to 3 years. I'll turn the next question over to Morgan.

The seventh question, will WiLAN any dividends this year? Are you going to get paid for the earnout? Regarding WiLAN, we continue to maintain our 10% ownership stake in the business, which entitles us to 10% of any dividends distributed by the LP that owns it. In Q3 2024, we received a $3.8 million dividend payment. This was the first dividend we received since the sale of our majority interest. As a minority owner, without involvement in day-to-day operations, we aren't able to provide specific forecast about WiLAN's ongoing results or dividend policy. It's important to note that the LP has discretion over both the amount and timing of dividend distributions and they may choose to retain earnings rather than distribute them in any given period. Regarding the earnout potential, there are 2 possible milestone-related payments set at different performance levels. Both are achievable, though we currently have greater confidence in receiving the first milestone payment based on our current business trajectories. The ultimate payout of either or both earnouts depends entirely on WiLAN's business performance. There are no guarantees that we will receive either payment. The specific performance metrics and time frames for these potential payments were not publicly disclosed at the time of the sale as per the agreement terms. Chuck, I'll pass it back to you.

Thanks, Morgan. My eighth question. The tolling contract with ACTC announced in January was a nice win for the business. Can we expect more large tolling wins in 2025? Our tolling business continues to secure new business consistently, though much of it comes in the form of follow-on contracts that typically aren't publicized. These follow-on wins, combined with our success of our enforcement business enabled us to maintain a robust backlog of approximately $500 million throughout the past year while generating more than $150 million in revenue during that same period. We've intensified our participation in competitive bids for new customers and contracts in recent quarters and we remain optimistic about our potential to secure meaningful wins this year. That said, we maintain a disciplined approach to pricing. We won't pursue business at any cost, as shareholders have witnessed the consequences of that strategy in previous years. With our industry-leading team, advanced technology platform and strong market position, we are confident that new business wins will contribute to both revenue growth and margin expansion over the coming years. Our focus remains on securing contracts that align with our strategic objectives and financial targets rather than simply increasing contract volume. I'll go to the ninth question. What is the new technology platform you've spoken of? How will it help the business? And what is the role of AI in Quarterhill's future? It's a good question. It's something I've discussed on prior quarterly calls. In a nutshell, we are transforming from an integrator to a software-focused company. And we're doing it through a new platform built on a microservices architecture. This approach allows us to develop, deploy and scale components independently, enhancing our agility and market responsiveness while improving our ability to maintain solutions over the time. This isn't an overnight transition but ultimately, this strategic shift should drive higher margins create defensible proprietary offerings and enable reoccurring revenue streams. The platform will support both tolling and enforcement business while facilitating expansion into new verticals. AI is already integral to our operations but will become increasingly significant. Our AI strategy focuses on 2 key areas: visual technology applications, vehicle identification and classification and data mining and analytics, both capabilities have strong and promising applications across our business units and align with our customer demand for innovation. To accelerate this transformation, we formed a Technical Advisory Committee with AI leaders such as Bobby Parikh and Vineet Khosla, who bring experience from Uber, Google and Apple. Their expertise guides our integration of advanced AI capabilities throughout our offerings as we develop next-generation solutions to drive greater value for both customers and shareholders. And with the questions over, my closing comments, this concludes our Q&A session and all matters before our annual meeting. I'd like to thank the shareholders who took the time to send us their questions and I now declare the annual meeting adjourned. Please note that we will report our Q1 2025 results on Thursday morning with our Q1 conference call at 10:00 a.m. Eastern Time. Details on how to participate can be found in the IR section of our website and I encourage you to all tune in. On behalf of the Board of Directors and the broader team at Quarterhill and our employees that are substantive and important to our business and our subsidiaries, thank you again for attending today's meeting.

This concludes the meeting. You may now disconnect.