Ottawa’s Quarterhill shakes up WiLAN ranks as revenues plunge

Doug Parker
Quarterhill CEO Doug Parker (file photo)

The volatile nature of its patent licensing business helped drive Ottawa-based Quarterhill back into the red in fiscal 2018, but the firm said Thursday that new growth opportunities combined with aggressive cost-cutting measures should set the stage for a turnaround in 2019.

Quarterhill (TSX:QTRH)(NASDAQ:QTRH) – which branched out from its original patent licensing focus into the industrial Internet of Things space with a pair of acquisitions in 2017 – reported overall revenues of $77.4 million for the 12-month period ending Dec. 31, 2018.

That’s down substantially from the $134.7 million it booked a year earlier, but that decline comes with a caveat: the firm’s top line often fluctuates due to its patent licensing division’s reliance on litigation wins and out-of-court settlements.

Quarterhill’s 2017 numbers, for example, were buoyed by a huge third quarter in which it generated more than $72 million in revenues, a feat it was unable to duplicate last year.

The company posted a net loss of $49.1 million for the 2018 fiscal year, compared with a net profit of $10.2 million a year earlier – a drop Quarterhill blamed largely on the plunge in patent licensing revenues.

Commenting on the firm’s “lumpy” earnings results, Quarterhill CEO Doug Parker told analysts on a conference call he “remains bullish” on the long-term prospects of its patent licensing arm, known as WiLAN.

Parker said the division cut a third of its workforce in 2018 and recently replaced former WiLAN CEO Keaton Parekh with longtime senior executive Michael Vladescu in an effort to “streamline” its management team.

Noting the fourth quarter was WiLAN’s strongest in fiscal 2018 with revenues of $10.6 million, he said new patent licensing deals with U.S. tech powerhouses such as Cisco Systems and OmniVision Technologies have set the division up for a solid 2019. In addition, WiLAN announced Wednesday it’s signed a new licensing agreement with South Korea’s SK hynix, the world’s third-largest semiconductor firm.

"The pendulum is shifting a little bit more positively to businesses like ours."

“I don’t think it’s a material sea change, but I think the pendulum is shifting a little bit more positively to businesses like ours and others in the (patent licensing) space,” Parker said.

Quarterhill is also hoping a final settlement in an ongoing patent infringement case against Apple will bolster WiLAN’s earnings.

Last August, a U.S. jury awarded WiLAN $145-million in damages from the tech giant. But in January, a California court gave WiLAN two options: either accept reduced damages of $10 million or agree to a new trial to determine a settlement.

The firm chose to go back to court, and Parker said he’s hopeful the original settlement will be restored.

“We’re confident in our position and the quality of our patent portfolio and if required, we look forward to presenting our damages case to a new jury later this year,” he said.

Transportation technology

Quarterhill’s portfolio also includes two other companies: transportation technology firm International Road Dynamics and Viziya, which develops software to enhance ERP-based asset maintenance systems such as Oracle products. The two entities combined to produce 73 per cent of Quarterhill’s overall revenues in 2018.

Parker said IRD gained momentum as the year went on, posting fourth-quarter revenues of $12.5 million – up 16 per cent over 2017 – and landing contract renewals with key clients in Arizona and South Dakota. While Viziya’s fourth-quarter numbers were down from 2017, Parker said it is making “good progress” toward new partnerships with SAP and Oracle and plans to bolster its cloud-based software offerings in 2019 in a bid to expand its market reach.

Quarterhill’s overall revenues in the fourth quarter were up 12 per cent to $25.4 million. The firm posted a net loss $19.9 million in the period, which the company attributed mainly to $16.6 million in goodwill charges related to its acquisition of IRD.

In its earnings statement Wednesday, Quarterhill said it expects “continued momentum” in 2019. Although it does not usually issue quarterly guidance statements, the company projected revenues of between $33 million and $36 million for the first three months of the new fiscal year.

An acquisitions specialist who was hired in late 2017 to spearhead Quarterhill’s M&A strategy, Parker said the firm is eyeing a “growing pipeline of opportunities” to add to its stable of companies.

“While there are no certainties, we would expect (M&A) activity to pick up this year,” he told analysts, adding Quarterhill has been scrutinizing dozens of potential targets. “We’re going to be disciplined financial buyers, but when we find the right deal and align on terms with the seller, we’ll move quickly to complete it.”

Quarterhill shares ended the day up a penny, or less than one per cent, to $1.35 on the Toronto Stock Exchange Thursday.