Waiting on WiLAN, M&A to kickstart shares
Investment Recommendation
Quarterhill announced Q2 results that came in well below expectations as the volatile WiLAN business underwhelmed. IRD, despite the recent acquisitions of VDS and Sensor Line, also fell short of our model. With that said, both are expected to rebound in H2. We maintain a SPECULATIVE BUY rating in advance of this rebound. We await the deployment of QTRH’s ~$123M cash on hand on sizable M&A targets in support of management goal of deploying $400M by 2025, and potentially positive developments from its Apple suit and upcoming litigations with Amazon and Micron. We have made reductions to our forecast reflecting a more conservative IRD outlook but with a quick recovery modelled for WiLAN. With the roll forward in our updated sum-of-the-parts analysis, our target price remains at $3.00.
Investment Highlights
• Q2 a miss on weak WiLAN results. Revenue of $18.9M (CG $35.8M; Street $31.7M) and EBITDA -$3.0M (CG +$3.0M; Street +$5.7M) was driven largely by fewer licenses closed by WiLAN during the quarter. See our earlier note here.
• Segmented outlook: • WiLAN: Q2 was impacted by the volatile nature of finalizing prospective licensees and securing court dates. Management expects a stronger H2/21 supported by its pipeline of numerous deals (including several announced in recent weeks), suggesting “significant” cash flow for the full year and in line with previous years.
• IRD: Management continues to point to post-acquisition synergies, noting some revenue and cost savings have already been realized. Sensor Line has performed as expected and has benefitted from synergies with VDS to pursue two multi-million dollar deals for which it would otherwise not be competitive. The companies are working together on several opportunities in Europe where they had no previous coverage.
• M&A focus increasingly on larger potential deals. Quarterhill closed Q2 with ~ $123M in cash. Management reiterated its target to deploy up to $400M on M&A over the next five years, which could layer up to $300M in revenue and $50M in EBITDA. Management noted it could close several more deals by the end of 2021 including the potential for a more sizable transaction. The company expects such large deals would likely be platform plays to create new inroads within adjacent ITS segments.
• Apple and other litigation updates: Management noted it could imminently receive a date for its oral hearing with Apple, which is expected to be conducted sometime between Fall 2021 and Spring 2022. The company also noted an upcoming trial date with Amazon in November regarding voice-activated assistance technology and another with Micron expected in 2022.
• Model modifications: We have scaled back our IRD growth outlook over the balance of our forecast to 2022, but with a short-term offset as we expect a sharper recovery in the WiLAN business in H2/21. We now forecast 2021E revenue of $110.2M (from $134.6M; Street $125.8M) and EBITDA of $2.9M (from $9.2M; Street $17.5M), and 2022E revenue of $142.9M (from $158.8M; Street $148.2M) and EBITDA of $11.3M (from $13.4M; Street $23.5M). We note the wide variance in 2021 EBITDA expectations reflect the ongoing volatility in the WiLAN business.
Valuation
Our $3.00 target price is 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 and at an 85% weighting to reflect time value and risk) and deduct 10x corporate overhead costs.