Research Note - Quarterhill Inc. (QTRH:TSX,$1.58|BUY $4.25 TARGET) - Transition Continues Marching Towards Completion
This morning, Quarterhill reported Q3/22 financial results that missed our expectations. The licensing business continued to experience lumpiness, and the ITS business continues to be impacted by inflationary pressures, supply chain issues and project delays. We are maintaining our positive outlook into Q4/22 and beyond as details surrounding the licensing deal with Micron will come to light in Q4, and high margin maintenance revenue is expected to accelerate into H2/23.
Licensing: Licensing revenue came in at $0.2M vs. our estimate of $11.6M and $4.6M last quarter. Licensing EBITDA came in at -$3.7M vs. our expectation of $5.8M. QTRH had some updates regarding the WiLAN strategic review ale on today’s conference call; management expects the strategic review to be on the longer end of the expected time horizon. We remind readers that we value WiLAN using 10x 2023E EBITDA, equating to ~$2.00/share. During the quarter, WiLAN entered a license and settlementagreement with Micron Technology, Inc.; the agreement includes a settlement and dismissal of all pending patent litigation with Micron in the US and China. Details are expected Q4/22.
Intelligent Transportation Systems: The ITS business posted $46.4M in revenue vs. our estimate of $44.9M. ITS EBITDA came in at $1.1M vs. our estimate of -$0.9M. The supply chain and inflation cost challenges continue to work through and management has provided some insights guiding expected EBITDA margins to improve into 2023 and especially H2/23; these margin improvements will come on the heels of project transitions from implementation io maintenance. On the conference call management explained implementation gross margins can be expected at 10%-15% whilst maintenance margins can be expected at 30%-50%. The sales pipeline remains robust and management plans a targeted and significant sales push for ITS into 2023. We are revising our ITS segment expectations upwards on the outlook for a sales push. Management also reiterated 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 was awarded a two-year $13.8M contract with New York State for the installation and maintenance of permanent traffic data collection systems. Additionally, IRD was awarded a combined value $3.3M in contracts for advanced E-Screening systems that incorporate IRD’s Tire Anomaly and Classifications System. The two contracts were signed with South Dakota Department of Transportation, and the Nebraska Department of Transportation. We remain very encouraged by the contract activity from the ITS segment, signing CAD$254.3M in contracts over the LTM (Figure 2).
Additional highlights from the quarter include:
Total revenue of $42.4M vs. our expectations of $56.6M and $36.3M in the same quarter last year.
Gross profit of $8.8M (21% margin) vs. our expectation of $15.7M (28% margin) and $15.4M (42% margin) in Q3/21
Adjusted EBITDA of -$2.7M vs. our estimate of $1.8M and $7.6M in Q3/21.
Cash and equivalents of $74.2M