Quarterhill Inc T.QTRH

RE:RE:Am I a downer or just reporting the facts?

[cabbieJBJ]

Socrates, mrmoribund has such a wonderful way with words and his current thesis rings positive with investors who continue to hold QTRH.  No sane investor would continue to hold an investment if the/she did not see a positive future.

That said Socrates, your skepticism regarding profitability is understandable.  The Paul Hill regime gave us the acquisition and the rosy, but erroneous, picture that profits would be almost instantaneous. It also gave investors an overpriced asset without a history of profitability - one of QTRH's cornerstone acquisition criteria.  On reflection, it would have been a good decision to bail in the glow of acquisition euphoria and watch from the sidelines. 

Next came the Brett Kidd regime. Kidd joined QTRH from the very group that put the lipstick on ETC and secured an over-valued price for Align Capital on disposition.   No grudge towards Kidd as it was Align Capital's responsibility to maximize the return on the ETC asset.  So, Kidd brought knowledge of the asset and ITS, albeit short lived, but his presence, along with Hill, was duplication at the top.  So, Hill leaves and Kidd becomes the CEO; unfortunately, under Kidd's leadership, QTRH was unable to address either the unacceptably low margins or unlock revenue or cost saving synergies from the acquisition.

As previously noted, a group of investors, led by Stephen Takascy, pushed the QTRH BoD to make management and Board changes consistent with a pure-play ITS company.  Rusty Lewis joined the Board on 03-MAR-22 and oversaw the divestiture of WiLAN, ITS asset assessment and build out of an ITS appropriate BoD, replacing John Gillberry at Chair in mid-2023.  Chuck Myers joined the Board in May 2023 and was appointed CEO in September 2023.  Both Lewis and Myers have deep roots in tolling and attendant ITS technologies, having worked together at TransCore and built the company into a profitable ITS operator.  The QTRH team build out continues with the addition of David Sparks and Joey Jayachandran to the management team in the past year and, last month, Vineet Khosla to the Board.

As one can see, mrmoribund has correctly observed that it is all about people and leadership, which brings QTRH to the present day.  I would argue that there has been sufficient evidence to support a positive perspective of the current team's ability to deliver.

Here are nine evidence-based and direction-based factors that provide degrees of comfort that the turn around is viable. 

Evidence-based factors:

• Management & Board of Directors: as noted above.
• Profitability: In mid F23, about the time of the WiLAN sale, QTRH said that the company would be EBITDA positive for the year – it was.  In F24, margins have shown modest improvement.  On the Q2 call QTRH said that EBITDA margins would approach 10% by year end.  The results through Q2 provide credibility for the year end soft guidance.  Soft guidance for F25 is into the mid teens and 20%+ in F26.
• Backlog: With a backlog of ~$500M, and 75% to 80% of F24 annual sales attributed to the backlog, there is excellent visibility on the top line for the current year and F25 and F26, without considering any new business awards.  Most all the backlog is maintenance revenue that carries margins higher than the implementation phase QTRH has experienced over the past two years.
• Improved balance sheet: Cash stood at $24M at 30-JUN-24.  The Q2’s call soft guidance said that the company’s cash position would increase for Q3 and Q4.  As of Q2, QTRH has $70M of unbilled revenue and A/R against $28M of A/P and accrued liabilities, suggesting a cash build of up to $40M.  In addition, the possibility of contingent payments (est. up to $30M) from the WiLAN sale could be an upside surprise.
• Skin in the game: QTRH has record levels on insider purchases.  QTRH’s compensation program now strongly encourages management stock ownership, thereby better aligning management and investor interests.  In addition, the market undervalues the share price, some would say significantly; albeit this is well earned, as you might say. 

Direction-based factors:

• Focus on technology: Fueled by Myers’s technology background, QTRH is moving from hewers of wood to providing value added intelligence to the ITS market.  This is a wise move, as the profitability of industry tolling and related ITS services have yet to demonstrate profitability in line with QTRH’s management goal of 20%+ EBITDA by 2026. 
• Acquisitions: The divestiture of non-core, non-tech-based assets and the acquisition of Red Fox are positive developments in the initial execution of the vision.  Management has said that tuck-ins are the priority (buy versus build decisions in most cases).  Larger acquisitions or a merger is not in the forefront until the current strategy is more mature.  The expectation is that QTRG may announce additional tuck-in acquisitions over the next 6-12 months, funded by an improved balance sheet.
• Leveraging existing assets: QTRH gathers significant amounts of data through its tolling and enforcement contracts and importantly as the I/O hub operator for most major tolling agencies east of the Rockies.  QTRH management says that tolling/enforcement agencies are asking for actionable intelligence on already collected data.  Leveraging existing assets plays a significant role in two business building initiatives:
  • Logistics: The announced pilot is underway and may open new market segments.
  • Geographic expansion: The initiative to evaluate tolling opportunities in Europe wisely makes use of existing technology and on the ground staff.
• Integration synergies: The integration of subsidiary silos under a unified QTRH brand may provide the basis for the kind of revenue synergies alluded to with the acquisition of ETC in SEP-21.

Socrates, there are fact-based signs indicate the business is headed in a positive direction; however, it is still a work in progress.  The BoD and management have been strengthened significantly – which is the people element mrmoribund refers to.  We can debate the value of the direction-based factors but will agree that they need to show measurable results.

Socrates, I believe we're on the same page, although our confidence/belief in the likely performance over the next 6-12 months probably differs - but our collective desire to see a best case outcome is probably in sync!