Quarterhill Inc.

Good morning and welcome to Quarter Hill's Q2 Fiscal 2021 Financial Results Conference Call. On this morning's call, we have Paul Hill, President and CEO, and John Rimm, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following management's presentation, we will conduct a question and answer session, during which analysts are invited to ask questions. To ask a question, please press star 1 on your touchtone phone to register. Should you require any assistance during the call, please press star 0. Earlier this morning, Quarter Hill issued a news release announcing its financial results for the three- and six-month periods ended June 30, 2021. This news release, along with the company's MD&A and financial statements, will be available on Quarter Hill's website and will be filed on CDAR. Certain matters discussed during today's conference call or answers that may be given to 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 CDAR. During this conference call, Quarterhill will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to page 3 of the company's Q2 2021 Management's Discussion and Analysis for full cautionary notes regarding the use of forward-looking statements and non-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. Hill. Please go ahead, sir.

Good morning, everyone, and thanks for joining us on today's call. In terms of agenda, I'll start with a look at the business highlights, followed by John, who will take a look at financial results. Then we'll open it up for questions. Q2 consolidated revenue was $18.9 million. Consolidated adjusted EBITDA was negative $3 million. and we generated 1.7 million of positive cash from operations. We ended the quarter with a strong balance sheet with 122.7 million of cash and working capital of 138.5 million. In Q2, we continued to make progress on our M&A strategy, completing our second acquisition of the year, VDS. We've made considerable progress integrating both acquisitions, generating new revenue opportunities, realizing cost synergies and laying the groundwork for IRD's further expansion into Europe. I'll touch on these developments in more detail shortly. YLAN completed license agreements in Q2, but COVID-19 continues to be a headwind for some licensing discussions and litigations where in-person meetings or court schedules are being delayed. As a result, Q2, some agreements that we had planned on closing in the quarter got pushed out to future periods. Earlier this week, Wyland announced patent portfolio acquisitions and a license agreement on patents that relate to wireless technologies used in the automotive industry. So they're off to a good start in Q3. The automotive industry is a promising new market segment for our wireless patents, and we have a number of new opportunities in the pipeline. Those who have followed us for a long time know the episodic nature of Wyland's revenue. Despite the quarter variability, on a relatively consistent basis while it delivers significant annual cash flow. We expect that to be the case again in 2021. This means that we're looking for a strong second half from the business and we remain encouraged by the pipeline of agreements the team is working on. Regarding our litigation in the US with Apple, all preliminary briefings have been completed and we're waiting for the oral hearing date from the Federal Court of Appeals, which could be released any day. We believe the hearing will likely take place this fall or early in the spring of 2022. In addition, YLAN has upcoming trials with Amazon this November and with Micron in August 2022. The business is also evaluating several interesting patent portfolios for acquisition in the coming quarters. IRD had a good quarter with solid financial performance, integration of two acquisition and growth in its pipeline. So far in Q1 and Q2, SensorLine has performed to our expectations and the integration is going well. In North America, IRD is leading all sales efforts for SensorLine products and has already closed deals in New York and Indiana. IRD is currently conducting trials in other states which could result in much larger multi-million dollar opportunities that wouldn't have been accessible to SensorLine on its own. With VDS, Q2 reflected a contribution only for May and June. So far, the business is on track and the integration is going very well. BDS develops and manufactures and sells traffic monitoring devices that record driver speed and red light infractions. Theirs are currently the only radar-based product certified under new regulations in Germany that enable direct enforcement of traffic violations. This is an area of enforcement that we really like and think has significant growth potential. For example, here in Toronto, The city has installed more than 150 red light cameras along with 50 speed cameras and is the process of rolling out 50 more. I can tell you from personal experience these cameras are working. In terms of revenue synergies, IRD and BDS are working together on several opportunities in Germany. BDS is leveraging IRD's European footprint to bid on new business in countries where they have no previous sales coverage. Together, these two acquisitions demonstrate the global platform of the IRD business and its ability to identify, acquire, and grow acquired companies. IRD has initiated a further integration of its three EU subsidiaries, SensorLine, VDS, and ICOMS, to establish a more substantial beachhead in Europe. The company is open to search for a European general manager who will oversee the acquired companies and lead the expansion of IRD in Europe. We are pleased so far with the progress of the two acquisitions and we intend to complete more transactions this year. We think we can get a couple more done in 2021. We have a solid pipeline and we'd like to get some larger deals on the board this year. These could be businesses that are similar in size and scope to IRD with well-established brands and with their own M&A strategy. With attractive market tailwinds in place, we believe the outlook for IRD and the ITS industry in general is very positive. With that, I'll turn it over to John for a look at the financial highlights.

Thank you, Paul, and good morning, everyone. I'll take a look at key consolidated numbers as well as the numbers from our ITS and licensing segments separately. Starting with revenue, consolidated revenue in Q2 was $18.9 million and $38.2 million year to date. Revenue was up year over year in Q2 as both the ITS and licensing segments grew revenue, but slightly lower year to date due to a more moderate value of agreements completed in the licensing business in Q1 this year. ITS revenue is higher for both Q2 and the year-to-date period, primarily due to the inclusion of revenue from the acquired companies, as well as resilience in its core business, despite the COVID-19 pandemic still remaining a challenge in most parts of the world. Paul mentioned we are already seeing revenue synergies from the acquisitions and expect this to continue as the businesses become more integrated. Licensing revenue was up in Q2 compared to the same period last year, but down slightly year to date. Despite the headwinds related to COVID-19, YLAN continues to show it can complete agreements in a challenging environment. And as Paul mentioned, YLAN is off to a great start in Q3 with a license agreement completed on patents that relate to the LTE wireless tech in the automotive sector, which is a new business. We expect a stronger second half of the year for YLAN going forward. From a gross margin perspective, consolidated gross margin Q2 was 18% and 26% for the year-to-date period. Gross margin in the two periods was lower than last year, primarily due to lower litigation expenses at YLAN in the respective 2020 periods. Litigation payments do fluctuate based on the level of activity in the particular period. For example, in Q2 last year, litigation activity was low as the courts reacted to the initial onset of the COVID-19 pandemic. ITS gross margin was 37% in Q2 and 42% near today. The decrease in Q2 compared to last year was primarily due to the activity and nature of projects underway in the quarter and their specific margin profiles. The increase in year to date gross margin was primarily due to there being a higher proportion of product sales, which tend to carry a higher margin than in the same period last year. In terms of operating expenses, total consolidated operating expenses were slightly lower in both Q2 2021 and the year to date period. ITS operating expenses were up modestly in Q2 with the addition of the central line and BDS acquisitions. Overall, as always, we continue to keep a close eye on expenses at our corporate level and our portfolio companies. In terms of adjusted EBITDA, the ITS segment had positive adjusted EBITDA in Q2 of $2.7 million, which was down from Q2 last year. and 4.1 million for the year-to-date period, which was up from the same period last year. For both Q2 and the year-to-date period, the ITS adjusted EBITDA margin was around 15%. Adjusted EBITDA margin for ITS can, as I mentioned before, fluctuate depending on the nature of projects underway in the quarter, the revenue mix, and the seasonality that is inherent in the ITS industry. And as we've mentioned before, Q1 is typically a slower period just due to the weather. Adjusted EBITDA for the licensing business was lower in Q2 and the USA period, primarily due to the higher contingent legal and partner costs in 2021. On a consolidated basis, adjusted EBITDA was negative $3 million after corporate expenses, which generally include all our public company costs. In terms of cash flow in the balance sheet, so cash generated from operations was $1.7 million in the second quarter, and cash used in operations for the year-to-date period is $4.1 million. The balance sheet remains very, very strong with $122.7 million in cash and $138.5 million in working capital, again with no debt. We continued our quarterly dividend payments in Q2 along with our share buyback, spending a combined $3.2 million on both activities. And this morning in our earnings release, we announced details of our next dividend. The board has declared an eligible dividend of 1.25 cents per share on October 8, 2021 for shareholders of record on September 10, 2021. So in closing, we remain very well positioned financially to continue to execute on our M&A strategy. We still have a very strong balance sheet with significant cash and working capital, as well as the ability to support leverage. And we have two operating segments that we continue to believe in and that continue to generate cash annually on a consolidated basis to help support our acquisition strategy. As we've talked about before, our plan is to deploy $400 million on our strategy over the next five years. We've already made two smaller acquisitions. And as discussed on our last call, we believe that doing so could add an incremental $300 million plus of revenue to our ITS business along with $50 million of adjusted EBITDA over the next five years on top of what we're doing already. ITS revenue, in line with our strategy, comes with a more steady and predictable profile, and we believe that should result in Quarter Hill receiving a valuation that's consistent with other public ITS and IoT telematics companies that have achieved similar scale. So the net result of our strategy is to unlock that shareholder value over the next five years and remain very optimistic that we're going to execute on that. So that concludes my review of the financial results, and I'll now turn the call over to the operator for Q&A.