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Research Note - Quarterhill Inc. (QTRH:TSX,$2.01|BUY $4.00 TARGET) Growing Pains Continue; Strong Long Term Opportunity

This morning, Quarterhill reported Q2/22 financial results that missed our expectations. The licensing business experienced regular lumpiness while the ITS business was impacted by supply chain issues and project delays. We remain bullish on QTRH for H2/22 given the potential WiLAN sale and improvements in the ITS business.

Licensing: Licensing revenue came in at $4.6M vs. our estimate of $11.6M and $130.7M last quarter (due to the Apple win). Licensing EBITDA came in at -$1.3M vs. our expectation of $5.8M. QTRH had no updates regarding the WiLAN sale on today’s conference call, but we remind readers that we value WiLAN using 10x 2023E EBITDA, equating to $2.00/share. While the range of outcomes is wide, we think that any sale within a timely manner is beneficial to the QTRH story due to WiLAN’s extreme lumpiness and QTRH’s ability to deploy cash into growing ITS businesses at <10x EBITDA. Subsequent the quarter, WiLAN secured a license agreement with an automotive company for patents related to LTE and 5G technology used in vehicles.

Intelligent Transportation Systems: The ITS business posted $39.2M in revenue vs. our estimate of $45.7M. ITS EBITDA came in at -$4.5M vs. our estimate of $3.2M. Management highlighted that the decline was due to $2M in timing issues, $3M in supply chain delays, $3.5M from a specific project adjustment and $1M from out of period costs. While not all of these costs will fully reverse in H2, management indicated that the worst of the delays/issues are behind them and that the long-term opportunity for these projects will be highly lucrative as they reach a mature stage. On the conference call, CEO Bret Kidd reiterated that ITS is increasing pricing for new deals, the sales pipeline remains robust, win rates remain high and he expects to secure new contracts through H2/22. We are adjusting our expectations for the segment downward; we now expect ITS to retrace its Q4/21 revenue success in Q4/22. Management also outlined plans for $3M in cost savings from integrating IRD and ETC and reiterated its target 15% EBITDA margin in 2-3 years. During the quarter, IRD signed a four-year agreement with the Indiana Department of Transportation for C$10.8M for system installation and civil work. Additionally, ETC signed a ten-year contract with the E-ZPass Interoperability Hub for US$21.5M with a three-year extension option. Subsequent to the quarter, IRD was awarded a two-year $13.8M contract with New York State for the installation and maintenance of permanent traffic data collection systems. We remain very encouraged by the contract activity from the ITS segment, signing $232M in contracts over the LTM (Figure 2).

Additional highlights from the quarter include:

  • Total revenue of $43.9M vs. our expectations of $57.3M and $18.9M in the same quarter last year.

  • Gross profit of $5.8M (13% margin) vs. our expectation of $20.4M (36% margin) and $3.3M (18% margin) in Q2/21

  • Adjusted EBITDA of -$9.0M vs. our estimate of $6.2M and -$3.0M in Q2/21. This includes a $3.1M loss from the corporate segment.

  • Cash and equivalents of $130M; Quarterhill collected its settlement from Apple during Q2 and paid down $13.7M of long-term debt.

20220811 - M Partners - QTRH - Q2 Results
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