Canaccord on Q4Investment Recommendation Following its Q4 results, Quarterhill shares are trading down 6% today, highlighting the ongoing quarterly volatility we have come to expect with the company’s WiLAN business. We remain focused on the potential upside from the company deploying its cash on hand (~$135M) on accretive M&A to diversify its revenue base and stabilize against its patent business’ quarterly swings. Management hinted at more M&A to come in 2021 as part of a potential $400M capital deployment strategy over the next five years. We are making only small adjustments to our forecast, and our target price remains $3.00 (unchanged) on our rolled forward sum-of-the-parts valuation (including 1.9% dividend yield). We maintain a SPECULATIVE BUY rating.
Investment Highlights - Q4 a miss on volatile WiLAN. Quarterhill reported Q4 results that fell short of expectations on revenue ($18.1M vs. Street $29.2M) and EBITDA (-$6.1M vs. Street $5.6M) due to its WiLAN business. See our earlier note here.
- WiLAN: The company noted COVID-19 delays on its WiLAN business appear to be softening, with the company resuming more meetings with potential licensees. We note the announcement of a license agreement with LG so far in 2021. Regarding its ongoing Apple suit, each side is to present rebuttal arguments in around a month following opening appeal remarks in late 2020. The company still expects a final judgement in Fall 2021.
- IRD: The company noted overall backlog reached historic levels ending 2020. However, COVID-19 has been impacting some new IRD business, mostly in international projects, offsetting higher recent sales activity with US customers. The company noted its Sensor Line acquisition is integrating well and successfully leverages IRD’s sales and distribution channel to better ramp its deal pipeline.
- Management to be more active on M&A in 2021. The company noted its deal pipeline remains healthy within the Intelligent Transportation Systems market and is seeing strengthening market opportunities for the space. Management expects 2021 to be a more active year for M&A deal flow (currently ~$135M in cash or $1.18/ share), particularly to extend IRD into new markets. The company specified it is targeting up to $400M in M&A-related deployment over the next five years to scale its capabilities across road and related subsegments, and potentially into adjacent rail along with marine and aviation segments. The company views the US federal government’s renewed focus on ramping infrastructure investment (with roads historically accounting for ~50% of infrastructure spend) as supporting demand for new ITS technologies and revenue sources to reinvigorate public finances, especially coming out of the pandemic.
- Model modifications: Our updated model reflects only minor changes to our nearterm revenue and cost outlook. We now forecast 2021E revenue of $137.2M (from $137.4M; Street $138.4M) and EBITDA of $8.9M (from $8.1M; Street $23.1M). We have introduced our 2022E forecast for revenue and EBITDA of $158.7M and $13.4M, respectively. We note the wide variance in 2021E EBITDA expectations reflects the ongoing volatility in the WiLAN business.
Valuation Our $3.00 target price continues to be driven by ~10x EBITDA for IRD and ~6x for WiLAN. We also include prospective cash from the significant Apple win (US$109M less assumed 30% fees at an 85% weighting to reflect time value and risk) and deduct 10x corporate overhead costs.