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Good morning and welcome to Quarterhill's Q2 2020 Financial Results Conference Call. On this morning's call, we have Paul Hill, President and CEO; and David Cortens, Interim Chief Financial Officer. [Operator Instructions]Earlier this morning Quarterhill issued a news release announcing its financial results for the 3 and six-month periods ended June 30, 2020. This news release, along with Company's MD&A and financial statements, will be available on Quarterhill's website and will be filed on SEDAR. 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 made available on SEDAR. During this conference call, Quarterhill will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS adjusted EBITDA is defined in the company's quarterly and annual filings that are made available on SEDAR.Please note that all financial information provided is in Canadian dollars unless otherwise specified. I would now like to turn the meeting over to Mr. Hill. Please go ahead.
Good morning everyone and thanks for joining us on today's call. It's a pleasure to speak with you. It's an important time here at Quarterhill and I'm very excited to be leading the team. I'll start off with a look at recent business activity, followed by an update to our strategy. After that, Dave will take a more detailed look at some of the key numbers for the quarter, and we'll open it up for questions. Please note that during my strategy discussion, I will refer to slides, which will be available on the webcast.Q2 saw lots of activity at Quarterhill. We announced the sale of VIZIYA, the appointment of Dr. Michel Fattouche to the Board in an SIB to purchase up to 20 million Quarterhill shares. We also announced final judgment in our trial versus Apple, a new CEO at IRD and the completion of the SIB. Today WiLAN announced the license agreement with Kingston Technology and we launched a new NCIB.Since joining, I have spent my time getting to know the IRD and WiLAN businesses. I have met the equity analysts and many shareholders and have mapped at our growth strategy. Before getting into these items, a few words on Q2. Consolidated revenue was CAD16.8 million and adjusted EBITDA was negative CAD2 million. We ended the quarter with cash and equivalents of CAD143.1 million. Results reflect, steady performance with IRD as well as variability inherent in the business model at WiLAN. As most of you know, WiLAN performance over a longer timeframe is a more accurate gauge of its potential, compared to looking at the business on a quarterly basis. While WiLAN had negative adjusted EBITDA in Q2, it had positive adjusted EBITDA in 5 of the last 7 quarters.Looking at the business unit, I'll start with IRD, financial and operational performance at IRD remains healthy, and its outlook is promising. COVID-19 has had an impact on our international business. But overall IRD's order book is strong. In the US, IRD has been deemed an essential service and the business continues to enjoy strength there.IRD Is helping cash-strapped governments, drive efficiencies and improve revenue collection, which is a value proposition that resonates, even in this pandemic. On June 1, we announced Rish Malhotra will be taking over as CEO of IRD, replacing Randy Hanson, in a planned succession. Rish has deep knowledge of the ITS industry and he has led many of the key functions at IRD over the years, is the perfect choice to lead IRD right now. I want to thank Randy, for his many years of service and wish him the very best in his retirement.Looking forward, COVID-19 is likely to have some impact in terms of delays in the timing of orders or delivery of material. But overall, the outlook for IRD remains positive. It's pipeline is robust, and order intake was higher in Q2 than in Q1, which bodes well for the periods ahead.With WiLAN the impact of Q2 of COVID-19 was primarily due to closures of courts in the US, as well as an inability to hold face to face meetings to conclude agreements. Some deals may be delayed as was the case in Q2, but they are not lost opportunities. They remain in our plan for completion. Our recent deal with Kingston Technology is an example of a planned Q2 deal that slipped into Q3.WiLAN is relying on video conferencing to move deals forward until travel restrictions are lifted. Many court houses remain closed in the US. However, some cases are now moving forward by holding hearings via video conference or with in-person hearings with additional safety measures. Should this trend continue, it could bode well for the remainder of the year.During Q2, WiLAN received favorable update in its litigation with Apple, following a jury verdict on January 24 of $85.23 million, the court ruled on June 2016 and all post-trial motions and entered final judgment in favor of WiLAN. The judgment maintained the full jury verdict and denied Apple's motions for retrial or lowering the damages award.The court also awarded WiLAN an additional amount of $23.75 million, and pre-judgment interest bringing the total to $108.98 million. WiLAN is entitled to interest from June 16, 2020, until the date the final judgment is satisfied. As expected, Apple filed its appeal on July the 15 and while filed a cross appeal on July 28. WiLAN will work with its legal counsel to optimize its arguments for the appeal process. Details of both Apple's appeal and WiLAN's cross appeal will be revealed sometime in the fall when initial briefs are presented. As discussed in our Q1 call, VIZIYA was sold to Prometheus Group for just under CAD50 million. VIZIYA is a promising young company, however, this transaction was easy to get behind.They crystallized the significant return for our shareholders and further strengthened our balance sheet. Our strong cash balance increases the number of options available to us to drive long-term growth of the business. I'll now take a look at some other corporate developments. I'm currently leading the search for a full-time CFO and this is progressing very well. We have narrowed the candidate field and we expect to have an announcement on this in Q3.Upon the completion of the SIB, in July we deployed approximately CAD5.8 million to purchase approximately 2.7 million common shares. While we did not use the entire CAD20 million allocated to the SIB, those unused funds remain on our balance sheet and can now be used for other purposes. We have expressed our intent to pursue other opportunities to return capital to shareholders and accordingly we announced today a new NCIB to purchase up to 11.3 million shares or 10% of our public float.I'd now like to take a few minutes to discuss why I'm so excited to be part of the Quarterhill and what our strategy will look like going forward. As many of you know, I've been in the tech industry my entire career which spans something like 30 years. I've had leadership roles in just about every area of an organization. I spent the past 2 decades running businesses, acquiring and selling companies and working at the Board level.This background is important in understanding why I think I'm well suited for this job and why it appealed to me so much. At Quarterhill I saw an opportunity to broaden my skills and experience, mentoring CEOs, acquiring, integrating and growing businesses. Rounding out the appeal Quarterhill provides a public company platform and has a strong balance sheet to support a solid business plan.While not a radical departure from our strategy of a few years ago, our go-forward strategy has a sharper focus. The strategy relies on organic growth from WiLAN and IRD as well as inorganic growth through acquisitions. The M&A program will focus on the IRD business in the market it operates in called ITS.Slide 2 of the handouts provides a high level summary of our strategy in the business. In it, we position Quarterhill as a growth-oriented company in the IP and ITS industries pursuing an acquisition strategy to capitalize an attractive trends in ITS and it's adjacent markets. So why focus on the ITS space, there are several reasons outlined in slide 3. ICS as attractive market dynamics. Governments are feeling the pain of shrinking revenues and they are under pressure to expand services and enhanced safety. ITS products such as Weigh-in-solutions at IRD help drive efficiencies, improve safety and capture revenue opportunities.Valuations in ITS are much more reasonable than enterprise software, our ability to get deals done, a good valuations improves by focusing on ITS. IRD's positive reputation in the ITS space helps us differentiate as an acquirer during a competitive bidding process. We will be viewed as a safe home for many of the companies we are targeted. IRD serves as a well-run platform that acquisitions can be integrated into and synergies captured as a result. And as the ITS industry becomes more connected, there is an opportunity to leverage WiLAN deep expertise in 5G. 5G will be a critical enabling technology for ITS in the future.So how do we proceed along this path? Slide 4 provides the strategy road map. The ITS industry includes road, rail, aviation and maritime systems. It's a very large market of over $50 billion per year. Our initial focus is on-road systems, IRD's, market and it is comprised of 5 sub-segments. CVO stands for Commercial Vehicle Operations. ATM now stands for Advanced Traffic Management Systems. ATIS for Advanced Traveler Information System. APTS for Advanced Public Transportation Systems and finally there is pricing systems which would include things like tolling technologies.The initial phase of our strategy will focus on acquisitions in these 5 segments, 4 of which IRD already operates in. We will initially focus on tuck-in acquisitions that will help grow the IRD business and build a track record for successful integration. In the second phase, you will see us seek out larger ITS opportunities. They could be standalone businesses reporting the Quarterhill where they could be plugged into IR&D, this could be in the road segment or in other ITS segments such as rail. Longer term, you'll see us looking at adjacencies to ITS, which might include investments in smart cities or so called smart spaces. This is a natural evolution of the business. They are tech enabled markets very similar to ITS. Across the bottom of the slide, you'll see enabling technologies. These technologies make connected ITS as possible. 5G is one of the most important enabling technologies and as a standard where WiLAN had deep expertise and can play an important role.So, we plan to follow a phased approach that begins with tuck-in acquisitions and evolve to larger acquisitions in ITS. And finally into adjacent tech enabled markets such as smart cities and smart spaces over time.Slide 5 illustrates the global opportunity for our near term focus. ITS road systems is significant today at CAD25 billion and is growing at a healthy CAGR of about 6%. The market opportunity refers only to the road segment, which is about 50% of the ITS market. So there's lots of runway for future growth.Finally, Slide 6 speaks to the future trends in ITS. As governments grapple with reductions and capital budgets and evolving trends is for them to shift to DaaS or SaaS models, data as a service or Software as a Service. Several opportunities exist to build and acquire technologies, which include AI and machine learning.We will see increased connectivity, driven largely by 5G between vehicles, pedestrians, devices and infrastructure. And cyber attacks create risk for all connected technologies, there will be several investment opportunities to bolster security in ITS.In closing, we are focusing our M&A strategy on ITS with its attractive growth dynamics, reliable revenue stream, reasonable valuations and existing market credibility with IRD. Longer term, we will look to invest in adjacent markets, building from a bigger base and by leveraging WiLAN expertise in some of the core enabling technologies such as 5G.Execution of this strategy will make ITS, more material to our financial results. Over time, helping to generate more predictable revenue streams and ultimately attractive shareholder returns. With that, I'll turn it over to Dave to look at the Q2 numbers.
Thanks, Paul. Good morning, everyone. As I did on the last call. Just to remind you that our financial results are now reported in accordance with IFRS standards, that we now report in Canadian dollars. Both 2020 and 2019 results reflect this.The Q2 was the sale of VIZIYA, financial statements for the 3 and 6 months period ended June 30, 2020 and for the respective comparison periods in 2019 have been prepared to reflect continuing operations and therefore excludes results during those periods from VIZIYA.Q2 and year-to-date operating results from VIZIYA for 2019 and 2020 are reported as net income or loss from discontinued operations in accordance with IFRS 5 standards. I'll start off the quarterly review with a look at revenue in more detail. For the quarter and year-to-date period, revenue was down due to the variability in the patent license model at WiLAN.Virtually, all of WiLAN's licenses are one-time in nature and accordingly significant fluctuations in revenue, gross margin and adjusted EBITDA will result when the volume or dollar value of license changes from one period to the next. This was the case in Q2 as there was a greater volume in value of agreements closed in Q2 of the prior year. Year-to-date, while on revenue is CAD10.5 million.IRD's revenue was down more modestly and mainly attributable to COVID-19 issue. Recurring revenue was CAD5.6 million in Q2, which is mostly generated by IRD. So far in 2020, IRD has maintained at 100% renewal rate on all term maintenance contracts. The reason for the year-over-year difference is a timing factor reflecting on the underlying work from those contracts is completed. Gross margin was 25% in Q2, down from 46% last year, which was the result of the factors impacting revenue we just discussed. Gross margin at IRD was up at 42% compared to 36% in Q2 last year. This year, IRD cost of sales benefited by approximately CAD600,000 resulting from the Canada Emergency Wage Subsidy Program or CEWS program related to COVID-19.Excluding that, IRD margins were still strong at 38%, WiLAN cost of sales, also had a CAD250,000 benefit from the CEWS programs. Excluding special charges from 2020 and 2019, operating expenses declined by CAD2.1 million in Q2 and by CAD3.6 million for the 6-month period this year compared to the same periods of last year.In addition to ongoing efforts to manage costs closely, IRD generated a CEWS benefit of approximately CAD100,000 in Q2, which is reflected in these operating expenses. Adjusted EBITDA on a consolidated basis for Q2 was a negative CAD2.1 million, down from last year due primarily to lower revenue at WiLAN. It was Paul mentioned earlier, we looked at with the broader base, WiLAN has had positive adjusted EBITDA in spite of the past 7 quarters, and has slightly positive adjusted EBITDA for the year-to-date period.Regarding VIZIYA results for Q2 2020, net income discontinued operations was CAD14.5 million which included a CAD17.7 million pre-tax gain on the sale of the company. Cash used in the continuing operations in Q2 was CAD4.3 million. Cash and cash equivalents and short-term investments at quarter-end were up significantly from year-end and from the end of Q1 due primarily to the sale of VIZIYA in Q2. Cash and cash equivalents increased at CAD143.1 million at June 30, 2020, up from 87.9 million at 2019 year-end. Of note, purchases made under she NCIB what would be expected in our Q3 financial statement. Overall, our balance sheet provides a solid foundation from which we can pursue our growth strategy, and it gives us great optionality as we pursue plans to grow organically and through acquisition.And finally, in Q2 we declared dividends of CAD1.5 million paid early in July. And this morning in our earnings release, we announced details of our next dividend payment. The Board of Directors has declared an eligible dividend to CAD1.25 per share tabled on October-9, 2020 for shareholders of record on September 11, 2020. This concludes my review of the financial results and I'll now turn the call back to the operator for questions.
[Operator Instructions] And there is a question from the line of Doug Taylor.
The following questions have been asked with a couple of different iterations of management teams over the years. For those of us who follow the Quarterhill and WiLAN stories, but I'm going to still ask some of you again and just to get your perspective. First, I mean you've detailed a bit of a shift in direction of where you're going to be focusing your M&A efforts. I just want to understand, I mean are you starting from a standing start did IRD, or Quarterhill have a stable of potential targets that they were already speaking to? And I guess I'd ask how, what sort of timetable can we expect for you to be able to start delivering on this new strategy?
Yeah. Thanks, Doug. Good question. Yes. The M&A pipeline is very strong. I've been here at a healthy pipeline. It had already very much of an idea of focus to it. We're also working quite closely with Rish, the CEO of IRD along with our core dev team as a sort of ear to the ground. Rish has very, very strong relationships in the industry. And so, yeah, I'm quite confident we can execute in relatively short order. The challenge obviously these days with M&A is around COVID, DD is a little bit more challenging. We can really travel, especially for international acquisitions but, yeah, I'm quite optimistic about getting some deals done in a reasonably short time frame, meaning in the next couple of quarter.
You talked about 5 subsegments within the ITS sandbox that you plan on playing in the near term or any of them in particular more attractive or less and for what reasons?
Well, we're very strong in Commercial Vehicle Operations. That's where IRD's biggest strengths lie and in particular and enforcement technologies. So they have weigh-in-motion Technologies. So that's an area that we continue to want to bolster. I'm very interested in pricing systems, tolling in particular and we have capability in tolling through our iCOMS group and through IRD as well, but looking for other assets in tolling.As governments load up with debt, they're going to be looking for new sources of revenue and tolling is a very logical area for that. And so, those are probably the 2 most attractive areas within that. I'm also interested in even branching out beyond roads in 2 things like rail. There's a lot of technology in rail right now that we think our natural adjacencies to what we already have.
Sure. You mentioned the potential for connectivity between the 2 -- the WiLAN business and the ITS industry, particularly around 5G, but last year for your perspective on longer term whether you think, I know it's a sensitive question whether WiLAN is a critical part of the future of Quarterhill in your perspective or you could monetize that asset in some way whether you'd consider partnering with it?
No, it is absolutely critical to our strategy. I mean at a fundamental level, it's kind of limited partner in a sense that it's providing most of the cash to fund the M&A strategy. And so this is a strategy on kind of used to where you have very strong cash generation business that's funding and M&A strategy and an organic growth strategy. We have got a Cognos if you remember back in the days that Cognos we had the original, very profitable application development tools business that really funded the growth of the business intelligence group, which became over time a larger part of the business. So it's the same basic philosophy here, but I am also looking for opportunities to leverage the expertise of WiLAN because we absolutely see this connected ITS as a big opportunity and that extends in the smart cities in some of these other areas and 5G is really critical to that, wireless in general is critical to that. So that's one sort of key area of expertise and as we acquire these companies, they will have their own intellectual property that could also be monetized. So now, they're playing a critical role in the strategy.
One more question from me, I mean the SIB was put in prior to your appointment, if my memory serves correctly and didn't get the uptake that it potentially could open perhaps that's a good thing. Can I get your perspective on capital return to shareholders on the debate between SAB, NCIB dividends, M&A, any update on your perspective in the perspective of the company there?
Yeah, I mean first of all, I think the under subscription of the SIB was generally a vote of confidence. We had heard from some shareholders that they were looking for an opportunity and we put the SIB out and it was widely under subscribed, I would say. And I think that was a function of we've had a lot of news and I think people are starting to understand the strategy and are interested in a long-term hold. So, I think it was generally a vote of confidence. Yeah, I think our general philosophy is to put most of our capital work for M&A,. We see much more growth opportunity and a more positive effect on share price over time by investing through M&A. We don't believe we're going to do anything with the dividend to change the dividend at this point. We do see -- we do believe there might be opportunities to consolidate the shares right with the NCIB if it continues to trade at what we consider to be lower volume. So, I think that's going to be what you're going to see as much more of a focus on M&A as our priority.
Okay. And then, I mean, as an M&A is the priority, maybe I think it'd be helpful if you share with us what financial metrics you focus on when you look to, you know, when you're looking for a successful closing on an M&A target?
Well, the kinds of targets we're looking for are, profitable growth companies with strong management teams. We're not exclusively going to be a financial buyer, although we'll have a lot of financial plan. We will be looking for strategic opportunities to get to market faster, to get the geographies faster, we will be looking for synergies, especially with the tuck-ins with the IRD business. In terms of pricing, kind of in that single-digit EBITDA multiple range is kind of the range we'd be looking at with IRR paybacks in kind of mid-teens. It's kind of what we're thinking, but it will be case by case. I mean some are little bit more strategic and some are little bit more financial that should give you a sense for where we are looking.
Your next question comes from the line of Todd Coupland with CIBC.
I had a follow-up on capital allocation. Roughly how much cash would you required to run the remaining businesses.
I think it's the models we're working with internally are in the range of CAD50 million, CAD50 million to CAD70 million, CAD70 million being more on the conservative side, but we think we need in the range of CAD50 million., You want to make sure that you have a strong balance sheet to be able to play a longer game, especially on some of the bigger litigations, that we are involved in. So, we think CAD50 million range is about the right number.
Okay and then just, as I think about our cost structure and run rate revenue if WiLAN closings are going to get stretched out because of COVID, is this quarter both for IRD in the cost structure --representative until some of those defer all start to loosen up?
Well, it's hard to comment on WiLAN because of the situation with the US courts and that could change very quickly. We're even as I said in my opening remarks we're already seeing some courts opening in some ways to get through that process. So it's better now already than it was even 2 months ago.But it's a business, as you know, that is a bit harder to predict. I think yes, on the IRD side as I said earlier, the order book is very strong. So I think, I'm feeling quite good about that business. I think what you saw this quarter is a little bit of a COVID effect, but not much. We had a couple of examples where we had some challenges getting product shipped and there was some effect from that in getting crews on to sites, but again that's a little better now than it was even if you weeks ago.
I mean I think, I did, Paul, just to add to that, I mean, I think part of Todd's question in terms of the burn rates and the run rate, I mean it's a fairly predictable and stable sort of in a run rate on SG&A and R&D spend right now. There's obviously been some benefit to the queues program in the quarter, but offsetting that is we got some sort of one-time sort of technology and this is underway that will be offsetting that. So, I think you could call is a fairly good proxy for the sort of current burn rates if you will, right?
Yeah. I agree.
Great, thanks for that color. And then my last question is just on Apple in terms of timeline and key milestones. How should we -- what should we be watching for over the next quarter or 2?
Well, you saw there is they appealed and we appealed. What happens is, briefs are filed in the fall and reply briefs follow that. We think if it gets to a court date that would be likely in the spring of 2021. All of these are quite frankly, Todd, are subject to COVID the fact right. But I guess our best guess is spring of 2021, is this sort of the timing of a court date, the actual trial date would be more like fall and so if you play all that out, to me it looks to be sort of an eventual outcome, somewhere in that late 2021, early 2022 somewhere in that range.
Okay. And have we passed, other than the court date, I guess the replies in the fall. So, once we get past that then either court or settlement would be the...
I mean, federal settlement can happen at any time, of course, but yes you're right, there is really no detail to speak of in the appeals right now that the detail actually has revealed in the briefs that are filed in the fall of this year.
[Operator Instructions] Your next question comes from the line of Gavin Fairweather with Cormark.
Just in terms of the ITS segment, you kind of talked about the 5 different road, subsegments, some are more related than others. So I guess I'm just curious in the market do you typically see that the government body will have 5 different point solutions or are you seeing kind of bundled opportunities and bundled RFPs coming to market?
What? Sorry, bundled RFPs across the 5 segments?
Yeah. Across the 5 different kind of sub-segments within road.
No. They tend to be clustered within the segment, right. So, I think as you look at the types of companies we would be looking at for M&A, if you look at IRD, its primary focus is in the CVO area, the Commercial Vehicle Operations area. We do some adjacent work in tolling, for example, which is the pricing segment, but there are fairly large companies that focus almost entirely on tolling and they do everything required in the tolling vertical.So typically when you see a larger RFP coming out, it would be centered around CVO or toll and not both and so as you sort of play this strategy forward, you can imagine the situation where we might have a number of sister companies that are kind of aligned loosely toward these verticals as opposed to one big ITS business so that they have a degree of focus on these verticals.
Got it. That makes sense. And then just on the WiLAN side, I mean you talked about the court being closed and I understand that's a fluid situation, but curious if that's also kind of impacted your ability to negotiate license deals kind of outside the court?
Yeah, though honest answer is it can slow it down, I mean when you're in these negotiations Kingston deal we announced for example was a deal that we were before COVID very confident to close in Q2 and it was for this very reason, right. It was difficult to get a hold of people, a lot of these negotiations are done in person typically, and so it takes a bit longer when you're doing everything by video conference. Sometimes, it can be challenging right to move things along more quickly. So that is definitely a factor. it's not just the courts. It's -- when we are negotiating a settlement those things can be a bit slower.
As we have no further questions at this time, this concludes Quarterhill's Q2 2020 financial results conference call. You may now disconnect. Thank you.
Bye.