RE:RE:RE:RE:RE:RE:RE:Quarterhill 1st quarter results to be released on May 12 Hey v_g, this is quite a list. I think it's a good exercise for someone who believes in Quarterhill to respond to all of your points . . . point by point. I've copied your post.
(By the way, your subsequent posts about disappointing costs news for Wilan? My answer is that not every case works out. We knew bad news on that front was coming. And only 4 Wilan cases? Didn't they say at the AGM there are 20 cases ongoing? Perhaps you're talking about cases where there's currently litigation? But I'd think you'd want to include disputes where the two sides are talking--without litigation. If you have good prospects to settle without litigation isn't that best? Maybe Cabbie can weigh in on this.)
Okay. Here goes. Point-by-point.
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Yes, from BK's seat there has never been a better time.
He just got paid a boatload in less than 2 years after being the CEO for ETC. A Harvard MBA with Texas charm was the final piece of the renoflip to get a company like Quarterhill to overpay. As the CEO of a private equity operating firm that had a massive return, he likely was paid $5M at exit. And now he gets to re-up at Quarterhill. But he also doesn't need to work now as Quarterhill already made him rich.
REPLY - from the Management Information Circular BK's salary is US$500,000. For someone with his qualifications and experience this is NOT out of line on the high side. As of today, from SEDI, he has 475,000 options (strike price $2.70). Paul Hill started with 1.4 million. I'd say BK is being magnanimous here. My sense is he wants to do good for the shareholders, i.e., prove himself with results, before getting any bigger option grants. Sounds very honourable. Also, how much BK may have made before coming to Quarterhill is irrelevant.
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You must admit that there has been a very bizarre set of events at Quarterhill over the last 12 months.
- CEO fired.
REPLY - With acquisition of ETC the company inherited a strange situation. Bret Kidd came with ETC and he was plainly 100% qualified to be CEO of Quarterhill. He was also arguably better qualified than Paul in the field of ITS. As a result of this turn of events, the company was becoming management top-heavy. Moving HQ to Texas addresses all the too-high corporate cost issues that you (v_g) and Canaccord have been grumbling about for some time. Nothing bizarre about the CEO transition.
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-CFO walked away from 800k options priced at 2.70.
REPLY - So what? Sounds like the shareholders got a break. I'm sure John Rim did a good job. I'd guess he didn't want to live in Texas. I wouldn't either.
-Jim Skippen selling a 1/3 of his stake at 2.30.
REPLY - Again, so what? The shares were in a real estate company he has with his wife (PJ Realty). Maybe it was buying a condo. Regardless, from SEDI, PJ Realty later bought many of those shares back at a higher price ($2.54 & $2.53).
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He bought back
- Quarterhill pays a 140% more for ETC than Align Capital did a year before at peak ITS valuations. Small cap ITS firms then begin to collapse. $100million of "goodwill" shows up on the balance sheet.
REPLY - Align Capital did what private equity firms always try to do--buy a company, make it more valuable by enhancing it, then sell it for a gain. I know there were key hires. ETC got the Ohio Bridges contract before Quarterhill bought them. I'm not up on all the details but I don't doubt that the ETC Quarterhill bought was intrinsically worth a good deal more than the ETC bought by Align. Also, the landscape had changed. By summer of 2021 it was clear that the infrastructure bill was going to pass and I suspect there were clear signs the ITS environment was improving.
Let me add a key point. A month or so after Quarterhill bought ETC for C$150 million, TransCore was bought by ST Engineering for US$2.6 billion. It looks like Quarterhill, in buying ETC when they did, actually got just under the wire because if the TransCore sale had happened first it is a safe bet that the price of ETC would have gone up significantly. TransCore is surely worth more than ETC but events are showing that it is NOT worth anything like 20x as much. The people at Align were likely kicking themselves when the news came out about the TransCore sale in Fall 2021.
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-WiLan pipeline halved after losing more cases at district court than ever before. Now with the lowest litigation pipeline ever.
REPLY - Your source? Are you including disputes or discussions that are pre-litigation?
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-Delayed financial statements. Auditor picks goodwill as one major thing he tested. Auditor wasn't even a partner and look him up, he has audited some very sketchy companies that have destroyed significant shareholder value.
REPLY - So what? So what? and So what? I'm sure the auditor was sufficiently qualified. Audit firms were short staffed. There was covid. Irrelevant what other firms the auditor had audited. v_g, if you want to throw mud at the wall you should do it at home.
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-Executives earned lowest bonus payouts ever.
REPLY - Sounds like they (and the board) are being honourable. They want to do big bonuses only when there's big performance. Would you be happier if they did what happens at some companies, big bonuses even when performance is poor?
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-ITS margins collapsed.
REPLY - We've had a grand total of one quarter that included ETC for the whole quarter. Q1 coming up is the seasonaly weakest quarter for IRD, so I doubt it's going to set the world on fire. Q2 and Q3 will give us a better picture.
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-Analysts cutting ITS estimates more than half after brutal Q4 results.
REPLY - More than half? All the analysts? Time frame? ITS estimates for Q1 2022? Full year 2023? 2024? This is just another one of your throwing-mud-at-the-wall things.
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-Shareholder proposal.
REPLY - So what? Shareholders can propose whatever they want. Also, it was defeated.
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- Announces major transition into ITS. But then takes 3 months to hire a banker to sell WiLan.
REPLY - They wanted to hire the right firm and it looks like they did. Taking time may also have allowed them to negotiate better terms by letting competing firms have time to review Wilan and make their best offers.
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-John and Jim voted into the bottom 0.001% of Directors.
REPLY - That's a number you picked out of your hat. I've seen lots of cases of 20% of votes being withheld. It's not that big a deal. And no doubt in this instance a lot of the withhold votes will have come from people like yourself who, for whatever reason, have chosen to make bashing Quarterhill their life's work.
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-Cannacord cuts estimates and downgrades the firm on AGM day.
REPLY - That's their opinion. Note that you yourself wrote that the downgrade was probably due to Canaccord being left out of the Fall 2021 financing. Looks like they're just a bunch of vindictive soreheads.
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-Short positions keep increasing even in the face of an Apple settlement. Debentures are now heavily shorted.
REPLY - From a google search: "Based on an average trading volume of 32,600 shares, the short-interest ratio is currently 2.7 days.Apr 17, 2022"
2.7 days? Peanuts, especially given that almost none of these will be NOT part of a hedge. Maybe you're an unhedged short, v_g? If not, why not?. If you're true to your convictions I'd think you'd be betting your retirement on an unhedged Quarterhill
short position. Think of it. When the stock goes to $1.32 (as you seem to predict) you'll be rich.
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- John and Jim agree to leave the firm before next AGM
REPLY - So what? They've agreed it's time to move on as we move toward Quarterhill becoming pure ITS. Makes sense.
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- Chair steps down from his operating CEO role of Lendified after filing for bankruptcy
REPLY - Sounds like JG stumbled into a misuse of his own time. Probably IBM won't want him on their board. But I don't see any scandal here. Regardless, JG is on the way out soon enough.
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The unexpected Apple settlement provided a temporary respite from the focus on the corporate governance malfeasance and poor decisions. $50M in cash only covers half of the ETC overpayment.
REPLY - I've already disputed that they overpaid for ETC--especially if viewed in the context of the market at that time. As for the recent market weakness in tech growth stories? First, no one could have known in August 2021 how markets would be playing out 8 months later. Second, note that ST Engineering just recently closed on their purchase of Transcore (at 20x the 2021 price of ETC). So they seem happy enough being in this space.
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Shareholders would have been better off taking the cash themselves and buying other stocks themselves. Instead of paying $300M in cash to buy $100M of assets.
REPLY - Pardon me? Which shareholders? Perhaps you could have taken your proceeds and bought Netflix at $700 per share. Today it's around $200. Or maybe you could have bought Shopify. Quarterhill has held up not all that badly given the recent drops in tech growth names.
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ETC has been winning contracts. The EZ pass contract is great. It is just tiny. The issue is they need to win $1 billion worth of contracts to offset the goodwill on the books. They need $700M of more contracts for Quarterhill to break even. But I am not sure how many highways they are losing and if they need to win more than a Billion due to highways moving away from tolls as happened in Ontario. The $300 million of contracts was good - but that was already known and heavily priced into the acquisition.
$700 million more to go. Then shareholders can get a return and the goodwill write down risk goes away.
REPLY - $700 million? Another number pulled out of your hat. I suspect they'll move into profitability just from current contracts getting past the set-up costs plus the continued rationalizing of the business. That said, I suspect Quarterhill ITS probably in good time will get another $700 million more in contracts.
Note that NYC is currently the only city in the US developing a congesting zone system. Didn't Bret say on the AGM call that 20 other US cities are looking at the same thing? If ETC lands one of those then . . . look out. You don't want to be short. NYC's, at half a billion, will be the biggest. But any big city congestion zone pricing contract will be huge news.