M Partners reiterates Buy rating, 3.75 target This morning Quarterhill Inc. reported Q3/21 financial results that beat our expectations. The beat was driven by a more normalized quarter from WiLAN and continued growth from the ITS segment.
Licensing revenue came in at $11.4M vs. our estimate of $11.6M and $1.8M in Q2/21. Licensing EBITDA came in at $5.4M vs. our expected $5.8M. During the quarter, WiLAN signed license agreements with PSMC and with an unnamed automotive firm and acquired a portfolio of semiconductor patents. Subsequent to the quarter WiLAN signed a license agreement with Motorola Mobility regarding wireless technologies. Management was guiding for a stronger back half of the year for WiLAN, rebounding from its poor performance in H1/21. We are confident that the rebound in WiLAN financials will continue in Q4 to form a normalized 2021 (>$30M in sales).
The Intelligent Transportation Systems (ITS) segment posted $24.9M in revenue vs. our expected $21.8M and $17.1M last quarter (up 46% QoQ). ITS EBITDA came in at $4.5M vs. our estimate of $3.3M. The beat was driven by better-than-expected growth from ITS and one month of ETC revenue being included that we were not originally modelling for (the acquisition closed faster than expected). IRD has a busy quarter, in which it was awarded its fifth electronic screening system in Oklahoma, signed a four-year $4.1M maintenance contract from the state of Illinois, launched a next generation WIM Toll Controller and signed a $2.2M WIM contract from the state of Idaho. Subsequent to the quarter, IRD signed a $2M WIM contract from the state of Hawaii. On the conference call, management outlined that ETC is in final contract negotiations for three new agreements, which we expect to get announced in the coming months.
Additional highlights from the quarter include:
• Total revenue of $36.3M vs. our expectations of $33.4M and $18.9M last quarter.
• Gross profit of $15.4M (42% margin) vs. our expectation of $14.4M (43% margin) and $3.3M (18% margin) last quarter.
• Adjusted EBITDA (loss) of $7.6M vs. our expectations of $6.1M and ($3.0M) in Q2/21.
• Cash and cash equivalents of $33.9M. This does not include the $57.5M convertible debt financing or the potential US$109M windfall from the ongoing Apple trial. We are expecting a decision on the Apple trial in early 2022.
With $159M in capital now deployed on M&A this year, management is beginning to build a very credible track record, providing further confidence that management can execute on its five-year target of $400M spent in capital deployment (adding ~$50M in incremental EBITDA). On October 27th, QTRH closed its $57.5M convertible debt offering, providing QTRH additional liquidity which will be used for ITS acquisitions while the Company waits for a final decision on the Apple trial. We are maintaining our BUY recommendation and target price of $3.75/share based on a DCF model