Underperformance is a false narrativeSaying that the company has not performed well is a false narrative.
While management/BoD can be faulted for being slow to execute the diversification strategy, that is the single most important issue facced today. Otherwise too many conspiracy theories are being floated here imo.
Mostly for the benefit of relatively new investors, I'd like to review my take on performance over the past 10 years through where QTRH is heading today.
History In recent history (let’s call it the Skippen era), shares closed at $9.03 of 17-Jul-2011. This came in the wake of several licenses on the original Wilan Wi-Fi technology (the 222 patent). With the passage of the America Invents Act on 16-Sep-2011, IP became much harder to enforce and the shares of
ALL PIPCOs fell to rock bottom levels in the ensuing years. From 2012 through 2016 shares traded down to ~$1.50 principally in the face of AIA challenges and the inability to license Apple, including adverse court decisions. In 2017, with the acceptance that a pure play IP monetization company had been unsuccessful both within the industry and at Wilan, and armed with a strong cash balance, Wilan announced a company restructure and strategic shift. In the news release on 17-Apr-2017, Wilan announced to formation of QTRH and the Wilan sub:
Quarterhill’s growth strategy will focus on acquiring technology companies in the Industrial Internet of Things (“IIoT”) segment across multiple verticals. The acquisition strategy will target companies with a broad range of products and services that capture, analyze and interpret data, and that have strong financial performance, excellent management teams, strong intellectual property underpinnings and significant opportunities to develop long-term recurring and growing revenue streams. The acquired businesses will operate independently as subsidiaries of Quarterhill. WiLAN will continue as a key subsidiary of Quarterhill focusing on patent licensing.
“Over the past several years we have considered multiple options for how to best leverage our capital to grow the business and increase shareholder value,” said James Skippen, Executive Chairman of WiLAN. “This strategy provides an ideal opportunity for us to diversify and inject new growth into the business, while addressing the “lumpy” financial performance that has come to be associated with stand-alone patent licensing businesses. Because the environment for patent licensing companies has changed so much over the past decade, we have concluded that patent licensing as a stand-alone business will not meet our long-term objectives as a public company. However, the knowledge and experience we have gained as a leader in the patent licensing industry are directly applicable to identifying promising technology businesses with a focus on the IIoT segment. We will be looking for opportunities to expand our Board and senior management team with additional M&A and IIoT experience.
“WiLAN has a very strong established brand in the intellectual property licensing industry, which we will continue to build-on. Following the change of its name to Quarterhill, WiLAN will continue the intellectual property licensing business as a subsidiary of Quarterhill. For the year ended December 31, 2016, WiLAN generated revenues of $92.9 million, earnings before interest, taxes, depreciation and amortization of $53.7 million and cash from operations of $36.8 million. The future focus will be on generating positive cash flow and consistent performance from the patent business.
“In my new role as Executive Chairman I will oversee the strategic direction and chair the Board of Quarterhill. I will also oversee operations in the patent licensing part of the business on a temporary basis while we seek a permanent leader of this important part of our business. It is expected that even after we appoint a permanent leader of the patent licensing business, I will continue to assist on a part-time basis with patent licensing operations. This fits with my own personal plans and allows an evolution in the leadership of the Company.”
In relatively short order, IRD was acquired followed by Viziya and the iComs tuck in for IRD. Then…crickets!
Under the strategic direction set by the BoD, Doug Parker was hired as QTRH CEO effective 01-Jan-2018. On 14-Jun-2018, with Parker settled in as CEO and a new CEO, Keaton Parekh, in place at Wilan, QTRH announced Skippen would retire from QTRH/WIN management, moving upstairs as Chairman of QTRH.
In 2018 Parker initiated an organizational review of Wilan and IRD to maximize performance and reduce costs. He was successful. As a result IRD went through significant right sizing and structural reorganization as did Wilan. Parekh was let go (high cost, living in Palo Alto, etc.), as were others, and Michael Vladescu, the then Wilan COO, became CEO. Significant structural and cost savings were identified at both Wilan and IRD, totally ~$6M annually.
The Good - Org. structures at Wilan and IRD were much improved under Parker’s leadership resulting in annual savings of ~$6M. I view this as Parker’s only significant accomplishment.
- While underwhelming in the absolute, Wilan outperformed other IP monetization PIPCOs in the post-AIA period.
- Wilan was first to recognize the need for a strategic change from a pure IP m monetization play to a diversification strategy, funded by IP revenues.
- Theoretically, the due diligence process put in place under Parker is sound; however, until it is executed a few times, it’s hard to move my assessment beyond ‘theoretically sound’.
- The Viziya sub was sold in mid 2020 for ~$49M at an annual return over 20%.
- Michel Fattouche rejoined the BoD after having departed during the Parker time. His expertise in 5G will prove invaluable at both Wilan and IRD.
The Bad - two lost years Let’s start with the strategy. Originally laid out by the BoD as diversification in to IIoT, the arrival of Parker led to a broadening to encompass vertical software. Constellation Software was an oft-quoted shiny object imo. The problem was that vertical software valuations were outside the parameters set by the BoD. It’s a guess on my part, but it appears that Parker was able to convince the BoD sufficiently that he could deliver within those parameters. Alternatively, he was unable to convince the BoD that the financial parameters should be broadened. He left without executing a single acquisition in almost two years at the helm.
Who’s at fault? I place the major blame at the feet of the BoD. First, Parker was their hire. Second, they approved the segment expansion (possibly re-focus) to vertical software without adequately questioning the ability to deliver within the designated multiples.
The result: two lost years.
Today Pau Hill was hired as CEO of QTRH effective 01-Jun-2020 and dove in quickly to the strategy issue. On 06-Aug-2020, we heard his first thoughts on strategy in the Q2 results news release and conference call.
"While not a radical departure from Quarterhill's strategy of recent years, our go-forward strategy has a sharper focus. Foremost, the strategy involves executing on a M&A plan. While the M&A strategy was previously on hold, when I joined in June, we began discussions around how we could leverage the strong cash position of the business and the cash flow generating potential of our portfolio companies to drive long-term shareholder value. Ultimately that discussion coalesced around a strategy intended to drive organic growth from our existing businesses and M&A-related growth focused on the IRD business and the opportunities in the ITS market."
"The ITS market has attractive growth and market dynamics with reasonable valuations and IRD is an established and well-respected player in this market, which helps differentiate us as an acquirer. IRD serves as a well-run growth-oriented platform that acquisitions can be integrated into, which also opens up the prospect of greater revenue and cost synergies. As the broader ITS industry becomes more connected, we also believe there is an opportunity to leverage WiLAN's deep technological expertise; in particular in 5G, which may become a critical enabling technology for ITS in the future."
IRD, which at the time of its acquisition, was viewed by many as over priced, has turned out to now be the cornerstone is a refined ITS acquisition focus. The strategy roadmap was presented on the conference call and can be reviewed at:
https://s22.q4cdn.com/422713964/files/doc_downloads/2020/08/QTRH_Q2-Conf-Call-Slides_08.06.20.pdf
The acquisition of Sensor Line was announced 06-Jan-2021 as the first example under a Hill-led regime.
In addition, at the Q4 conference call, Hill committed QTRH to a $400M acquisition fund over five years. When a hard number is assigned to the objective accountability and measurement increases. Mutiples to revenue based on the IRD acquisition (1X) and Sensor Line (1.3X) and rules of thumb, $400M in acquisitions should produce ~$250M - $300M in additional revenue over a five year period. That kind of growth yields a CAGR of ~23%.
Conclusion In the past, management, up to the Parker regime, was above average in light of market circumstances and unfavorable regulatory initiatives.
Hill’s action so far, suggests ACTION. He has been at the helm for
only 9 months.
As far as I can see, the only reason to sell today is an assessment that the strategy, focused on ITS is wrong or cannot provide the announced 23% CAGR. I'm not selling. Time to buy more.