© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Quarterhill's Fourth Quarter and Fiscal 2019 Financial Results Conference Call. On this morning's call, we have John Gillberry, Chairman of the Board; and Dave Cortens, Interim Chief Financial Officer. [Operator Instructions]Earlier this morning, Quarterhill issued a news release announcing its financial results for the 3- and 12-month periods ended December 31, 2019. This news release, along with the 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 U.S. GAAP. 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 U.S. dollars, unless otherwise specified. I would now like to turn the meeting over to Mr. Gillberry. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you for joining us on the call today. It's a pleasure for me to be here today and to be joined by Dave Cortens, our interim CFO. I'll start things off with an update on recent developments, followed by an overview of our business activity for the year. Dave will then provide a more detailed look at some of the key financial numbers. After which time, we'll open it up for questions. 2019. At a high level, 2019 was a year characterized by strong growth as all 3 portfolio of companies grew revenue and adjusted EBITDA year-over-year. On a consolidated basis, revenue was up 90%, and adjusted EBITDA was $40 million compared to a negative $10.6 million in 2018, a more than $15 million improvement -- a $50 million improvement. Cash from operations were $7.5 million and cash on balance sheet at December 31, 2019, was $68.6 million, up from $67.3 million at the end of 2018. Our cash balance has increased significantly since year-end due to the collection of certain receivables from patent license agreements signed in Q4. As of the call today, it stands at roughly $90 million, which, of course, is subject to change by quarter end. In summary, Q4 was a strong close to a very successful year, and the momentum from 2019 and the strengthening of our balance sheet means we are well positioned to execute on our strategy in 2020. The CEO search. As we indicated on the last earnings call, the process for a new CEO is well underway. We have 3 Board members focused on working hard on this task, and we have retained a top-tier search firm to assist in the process. I can report that we've reviewed the resumes of many candidates that have been brought forward by the search firm, and we have met in person with a number of these individuals. Next week, we are scheduled to meet in person with another group of candidates. Once these meetings are concluded, I think that we will be in a position to shortlist candidates very quickly and start engaging in discussions that will lead to an announcement, hopefully, in the early spring. If this is the case, then the process of replacing the CEO will have taken approximately 6 months, which we believe is in the normal time frame for a search of this nature and very consistent with the messaging we've previously provided. In the interim, it's business as usual with each of our 3 portfolio of companies being led by talented and experienced CEOs reporting directly to the Board of Directors. Moving on to other recent developments and a look at each of our portfolio companies as announced on January 24, WiLAN won a second jury verdict against Apple in the damages trial held in the United States District Court for the Southern District of California. In the jury's verdict, WiLAN was awarded $85.2 million in damages. It is important to understand that this was a retrial for damages only, and a previous-related trial verdict rendered in August 2018, the jury found that Apple infringed on the patents in question and awarded WiLAN $145.1 million in damages. However, in a subsequent post-trial hearing after the 2018 verdict, the quarter firm that the jury's finding -- a firm that jury's finding of infringement that gave WiLAN the option of accepting a lower damages amount of $10 million or another trial on damages only. WiLAN selected the latter option being the damages-only trial that was just completed. What is also important to note that in both jury trials, the jury awarded WiLAN the full amount that are being owned by Apple. Because of certain rulings in the 2018 trial, which was presided over by the same judge as the January 2020 trial, WiLAN was not able to seek $145 million -- $145.1 million in the damages retrial. Nevertheless, WiLAN has reserved the right to seek to higher damages award, should it choose to do so in appeal. Some other key facts pertaining to this case are: one, this damages awards applies only to the iPhones at issue in the 2018 trial, which are the iPhone 6 and 7 models. WiLAN believes Apple may be using the same technology covered by those 2 patents that were found to be infringed upon in iPhones, 8, 10 and 11 models. WiLAN is determining its option on asserting these 2 patents against later model of iPhones. Two, Apple may appeal this recent verdict as well as or in addition to the 2018 infringement, validity or damages verdict. However, WiLAN also has the option to appeal discarding original damages award and could seek to have the Court of Appeals for the Federal Court restore the original damages of $145.1 million, which the jury granted to WiLAN in 2018. And third, other major cellphone makers are licensed to these patents, and Apple has been the only one to challenge these patents all the way through to trial. Obviously, we are very pleased with the jury's decision and believe that it reflects the strength of WiLAN's patent portfolio and the reasonable approach takes in its licensing and litigation activities. The next step in the Apple case is, where both sides can file post-trial motions, which generally highlight perceived issues during trial, seeking remedy from the court. Unless the District Court wants a retrial, a final district court judgment will be entered into with the jury's verdict on a district -- or a district court modified jury verdict. Once the district court judgment is entered, both sides will have 30 days to file an appeal with the Court of Appeals for the federal circuit on any of the rulings in the 2018 or 2020 trials. This favorable outcome in the Apple damages trial comes on the heels of a strong year for WiLAN business with significant year-over-year increases in both revenue and adjusted EBITDA. WiLAN finished 2019 in a strong fashion with wireless licenses signing Q4 with LG as well as new Polaris transactions with CXMT. As WiLAN's successful strong track record suggests, by continuing to focus on its licensing and partnership strategies, the business can deliver significant cash flows. 2019 demonstrates that our patent licensing business is alive and well and remains a very important component of our portfolio. In 2020, we look for this type of performance from WiLAN to continue, and our plans call for continued growth from this business unit. Looking now at IRD. IRD had a strong finish and a solid year with revenues and adjusted EBITDA, both at record levels for the company. IRD continues to assert itself in the ITS industry as a leading systems integrator and solution provider with its own well-respected suite of proprietary technologies and related products. IRD's results in 2019 were driven by growing project activity and, in particular, strength internationally with several new projects in Europe and Africa. We believe the prospects for IRD remains solid, and we continue to invest in this business to support the development and rollout of new products to enhance its unique problem-solving capabilities while also seeking opportunities to accelerate growth through tuck-in acquisitions. As with WiLAN, the plan for 2020 calls for organic growth at IRD. To drive that growth, IRD will look at leveraging the growing interest in some of its new products, such as VectorSense and Vehicle Information in Motion as well as its growing pipeline and order book, both of which began 2020 at higher levels than a year ago. Looking at VIZIYA. 2019 was also the biggest year ever for VIZIYA. VIZIYA delivered significant year-over-year growth in 2019 that was primarily driven by an enterprise software license agreements signed in Q3. We think that this transaction demonstrates the potential that VIZIYA has to compete for and win large enterprise opportunities. While we don't expect this type of transaction to occur on a quarterly basis, we would look for this to be a catalyst for further large enterprise sales and partnership opportunities in the future. VIZIYA has proven adept at servicing customer opportunities, both large and small and at building out its partnership relationships in order to offer its services, both on a traditional software license basis and/or on a software-as-a-service basis via its cloud offering. In Q4, we appointed Paul Sunderland as Interim Chief Executive Officer of VIZIYA. We believe that Paul's experience in managing software sales and development for some of the world's leading engineering and construction projects will be a great asset to VIZIYA at this stage of its evolution. VIZIYA has a reputation for customer-centric service founded on its asset management workflow expertise, world-class customer support and technology innovation. Under Paul's leadership, Quarterhill remains committed to these core principles and will support VIZIYA to further enhance its customer experience and capitalize on its growth potential. Our plan for 2020 calls for organic growth of VIZIYA, and we also continue to seek opportunities for tuck-in acquisitions for this business. On the M&A front, as discussed on our last call, our M&A team continues to move forward on its mandate to identify and pursue acquisition opportunities that fit with our diversification strategy and/or add incremental value to our platform businesses as tuck-in acquisitions. We do have a robust pipeline of stand-alone and tuck-in opportunity, and the team continues their diligent efforts to advance the most promising opportunities towards completion. For new platform opportunities, we remain on the main acquisition criteria we've previously discussed, such as recurring revenue, positive EBITDA, predictable cash flows, a committed management team and organic growth potential. In addition, we will remain patient capital allocators and disciplined on valuation. Realistically though, until a new CEO is in place, we would most likely see tuck-in type transactions versus a new stand-alone platform to the portfolio. In particular, we continue to see some compelling opportunities in the ITS space. In summary, 2019 was a solid year for each of the individual portfolio companies as well as for the consolidated Quarterhill business. The cash flow generated by our business has further strengthened our balance sheet, thus improving our prospects for M&A activity and providing a strong foundation to support Quarterhill's momentum in 2020 and beyond. With that, I'll turn it over to Dave to take a closer look at the numbers.
Thanks, John, and good morning, everyone. I'll start off with a look at revenue in more detail. For fiscal 2019, consolidated cordial revenue was $146.7 million, an increase of more than 90% from last year. This increase was driven by higher revenue in all 3 portfolio of companies and in particular, by WiLAN, which generated $79.8 million revenue compared to $20.8 million last year, a 280% increase. For IRD and VIZIYA, revenue increased in 2019 by 12% and 43%, respectively. All 3 portfolio companies grew their revenue year-over-year in Q4 as well. Of note, on a revenue segment basis, the license revenue was up more than 270% for the year, arriving at $87 million versus 23.5%, led primarily by WiLAN, but also by VIZIYA. Systems revenue, which arises out of our IRD business was $36.1 million versus $29.2 million, and that's driven by project successes in both our domestic and international markets. Recurring revenue was relatively flat at $21 million as compared to last year's 21.9%, and a large portion of this revenue comes from IRD as well. But throughout 2019, IRD achieved 100% renewal rate on all term maintenance contracts with some opportunities for upside in 2020 as a result of over and above provisions in these contracts, which provides for additional system upgrade projects. As John has indicated, we are planning for top line growth in 2020 with the variability in WiLAN being the biggest variable in achieving for this goal due to timing. Stronger revenue performance in 2019 led to stronger gross margin, both on a consolidated basis and individually by portfolio company. Consolidated gross margin for 2019 was 50% compared to 24% last year. WiLAN's gross margin was 50% versus 32% in '18; IRD was 36% versus 34% in 2018; and VIZIYA was 91% versus 88% in 2018. Operating expenses for 2019 were $57.8 million compared to $77.3 million in 2018. The 2018 number included a noncash impairment loss of goodwill of $16.1 million. SG&A costs rose about 10% on the year primarily reflecting investments to support our growth activities in all operating segments. R&D expenses rose 44% on the year as investments were made with IRD and VIZIYA to support the next generation of products. Adjusted EBITDA improved by more than $50 million on a year-over-year basis from negative 10.6% in 2018 to $40 million in 2019. Stronger adjusted EBITDA performance in 2019 reflects improved operations from all 3 portfolio companies. As evidence of the ability of the diversification strategy to drive incremental value, IRD and VIZIYA accounted for $10.2 million of the 2019 adjusted EBITDA, with WiLAN accounting for the remainder close to $30 million. Cash used in operations in Q4 was a negative $1.8 million compared to cash generated from operations of $9.1 million in Q4 '18. Cash used in operations in Q4 reflects the working capital adjustments of $12.4 million primarily related to the timing of collections for certain patent license agreements that were completed in the quarter. As John mentioned, the majority of these payments were subsequently collected in Q1 2020, so our cash balance today is approximately $90 million, which is notably higher than it was at year-end. Cash generated from operations for the full fiscal year was $7.5 million positive compared to cash used in operations of $8.8 million in fiscal '18, benefiting -- which reflects the benefit of improved financial performance for all the companies. Turning to the balance sheet. We ended 2019 with $68.6 million of cash and cash equivalents, up from $67.3 million at the end of '18. From a working capital perspective, we had $86.5 million of working capital at year-end compared to $64.1 million of working capital at the end of 2018, which gives us lots of dry powder from which to pursue our diversification strategy and support the growth of our existing portfolio companies. And finally, during 2019, we paid dividends of $4.5 million. This morning in our earnings release, we announced details of our next dividend payment. The Board of Directors has declared an eligible dividend of CAD 0.0125 per share payable on April 3, 2020, for shareholders of record on March 20, 2020. This concludes my review of the financial results, and I'll now turn it back to the operator for questions.
[Operator Instructions] Your first question today comes from the line of Doug Taylor of Canaccord.
I appreciate a pretty thorough overview of the state of the union here. I'd like to drill down into the WiLAN segment a little. First, can you talk through the IBM patent purchase and your expectations around that family of patents and relative size, magnitude? Any change to the outlook as a result of that purchase?
Doug, and thank you for being on the call. Thank you for the question. You're not going to like the answer very much because we are significantly restricted in terms of talking about the IBM transaction because of confidentiality that's been built into that. I can tell you that the patent portfolio is predominantly around the semiconductor space, but that is pretty much all I can talk to you about at this point in time with regards to IBM.
All right. Maybe I'll try it a different way. Maybe I'll get the same answer. Would you say it's a material change in the size of the patent portfolio or prospects versus where you were going into that?
I'm not sure it's a material change in the size of the patent portfolio. And you're kind of boxing me into a very awkward corner here, Doug, because I really can't talk about it because of the nature of the agreement.
No problem. You previously talked about near-term patent licensing opportunities with a number -- and these are open litigations. You've mentioned the Canadian telcos, and there are a number of others. Now some of those seem to have come to fruition here in the last few months and quarters. Can you update us on the state of the outlook for open patent litigations, kind of outside of the Apple trial, which is obviously a large and very material one on the side, but outside of that one?
Well, suffice to say that the predictability of anything that's in litigation has got a time element to it and somewhat of an unpredictable element to it as well. I mean WiLAN has consistently, and I think they're very successful over time, worked towards settlements as opposed to having these litigations to run full course. All I can kind of give, Doug, is that we are looking to have growth in that business unit year-over-year, and there are lots of things in play that's going to drive that kind of outcome. Some of them are in litigation, some of them are just active negotiation on licensing.
Well, that's helpful. And would you say that you're expecting year-on-year growth, Apple outcome aside, ignoring that impact?
That would be correct.
[Operator Instructions] Your next question comes from the line of Andrew Hood of M Partners.
The first thing I'm wondering about, I'm just wondering if there's any cost savings, less to capture, maybe on the Quarterhill level you guys have mentioned beyond that fiscal 2018 restructuring program. I guess including that NASDAQ listing, how much you guys think you could save?
Yes. I mean we're still -- obviously, again, we see, obviously, material benefit coming out of that delisting exercise. And so yes, there's more to come. I would argue on that front. But as we always know, cost structures can change as we move towards a new staffing and new growth initiatives. So there could be pluses and minuses in the future as well along the way. But definitely, there's still more savings to come, and we fully expect to realize those through 2020 as a result of the delist.
Okay. Just shifting to the VIZIYA business, you guys have said over the past year, you're shifting more towards getting these larger corporate contracts and maybe less frequent than you would have seen in the past in terms of like getting these smaller contracts. What kind of pace on new contracts are you expecting this year?
What kind of pace are we expecting on new contracts? So Andrew, I think you understand that, and we've talked about this that when you're negotiating on an enterprise license contract, there's just a lot of things in play, which is everything from budgeting from the customer side to negotiating pricing and the fine points on an enterprise license agreement. And there's usually an RFP process in place as well. So having that being said, as the backdrop, I mean I can tell you that the VIZIYA pipeline of opportunities is -- looks pretty good. And now SASL was an exceptionally large transaction that took place in the third quarter, but there is good opportunities for other enterprise license deals that we may see kind of each quarter, but probably not to the magnitude of SASL.
Okay. And then on the IRD business, I was hoping you guys could comment a little bit on your expectations there globally. I'm also wondering just if there's any effect of the coronavirus or global economic uncertainty in general. How you guys think that could impact your business there?
All right, John...
So I'll tell you that the answer to that is we do not know yet. Obviously, it's a concern. It's something that we've got our eyes on. We do have clients in pretty much every jurisdiction that seems to be affected. And so we're monitoring it, and we're looking at it and we're keeping close tabs on it. But it's just too early for us to say that is going to have an impact or what that impact is going to look like.
Okay. But then, I don't know much you could say here, but you have another situation yet where someone's had to maybe cancel or postpone a project because of this?
Not yet.
Okay. Just a clarification, you have $90 million in cash currently after those collections?
That is correct.
Okay. And then just a couple of more questions. On that Apple trial, I'm not sure if I just missed this in your commentary, but how much time approximately do they have until they can appeal? Or sorry, until the time is up on an appeal?
There's a 30-day period that sort of we're in now, then that goes back, I think, to the court. And it may be easier. I did read through a lot of stuff on that, Andrew, but it may be easier that if we actually gave you sort of kind of a written out time line of order of events that could happen in that process. But I think it's important to understand that this is not something that is going to resolve itself quickly, at least I don't believe it will. There's just a lot of processes that Apple can take and a lot of processes that we can take in order to get to the conclusion. What I think I want you to take away is that we have got good momentum in this thing, and we've got a couple of really, really strong strategic wins behind us as we move to the next phase of this process.
Okay. And then also just as you guys mentioned, the possibility of infringement on the 8, 10 and 11. What would the process be like that on that? Is that a whole new trial kind of same sort of length of trial as the original trial or what would happen there?
It's difficult to say. I'm not sure we've actually got the final determinations in terms of how the patents read on those particular devices. So it's just too early to comment on that. And there's always the possibility that licensing arrangement can be arranged and entered into before anything else happens through a court process.
Okay. And then my last question, just on the overall patent portfolio. Obviously, you made the acquisition of those IBM patents. Do you sort of have an idea of how many patents you'd like to acquire this year versus divestitures maybe?
So the honest answer to that is no. We will continuously look at the acquisition of patents where they make sense, and we'll sunset patents where we just don't see that there's going to be any kind of long-term value to them. In the ordinary course of business, that's the business of WiLAN.
Right. But maybe you kind of divested the bulk of times you maybe thought weren't very economical? Would that be fair to say?
Well, we ceased paying maintenance on them and certain things of that nature. If they just don't look like they're going to have long-term value to us.
As we have no further questions at this time, this concludes Quarterhill's Q4 Fiscal 2019 Financial Results Conference Call. You may now disconnect your line. Thank you.