Batter Up; WiLAN Preps for Trial(S)+
EVENT
WiLAN reported Q4 FY2012 results yesterday, which were relatively in line with
their guidance for the quarter, our estimate and consensus expectations.
DISCUSSION
Quarterly Results In Line with Estimates: The company reported revenue of
$21.2M and adjusted EPS of $0.06 which came relatively in line with our
estimates for revenue of $20.7M and EPS of $0.065 while consensus estimates
stood at $21.6M and EPS of $0.066.
All the right moves; Dividend Increase + NCIB: With the quarterly results
announcement management announced an increase in the dividend to $0.04 on
a quarterly basis ($0.16, annualized), a bump of ~14%. Overall the increase
illustrates management’s confidence in the earnings visibility going forward, a
positive sign given the upcoming litigation activity over the next few months.
Additionally the company announced a NCIB, whereby the company will be able
to purchase up to ~10% of the public float. The NCIB will commence on March
11/13 and expires one year later.
Batter up; WiLAN Goes to Trial: While WiLAN has yet to go to trial in its history,
(alternatively preferring to settle outside of judicial system) the company is
scheduled for six trials this year. Trials are all consuming of not only human
capital but monetary funds. For the first quarter the company anticipates
litigation expenses to be in a range of $13-$14.4M. While investors may look at
this cost as high we note that the management’s goal is to obtain a 6-8x return
on litigation expenses and will only launch litigation if it believes there is a high
probability of success attached to the outcome. We have outlined the upcoming
litigation cases in exhibit 1.
Guidance Range: The company provided guidance for Q1/13, including revenue
of $18.1M and adjusted earnings expected to be between a loss of $2.2M and
breakeven.
RECOMMENDATION
We have tweaked our FY2013 estimates, incorporating Q1 guidance and
increased litigation expenses for Q2 and Q3, given the increase in litigation
activity. We should note that the litigation expenses are a worst case scenario
and if WiLAN is successful at settling some cases prior to the trial date,
profitability may increase substantially. Our revenue estimate remains relatively
intact with EPS declining from $0.31 to $0.18 for the year. With cash of ~$176.9
million ($1.46 per share) we continue to believe the stock represents compelling
value in regard to the metrics trading at 7.5x price/ FY2014 earnings (4.9x when
adjusting for cash). We believe buying the stock will prove to be advantageous
for investors whom are both patient and understand WIN’s patent portfolio
space. Following the changes to our model we have tempered our target price to
$7.15 (from $7.25 previously). We continue to reiterate our Buy
recommendation.

Outlook
On the conference call management reiterated their view that patience for investors will be rewarded, given that management will only sign agreements they deem fair for WiLAN. The company continues to pressure licensees by launching multiple litigation cases in regard to multiple patent infringements. This strategy has ultimately lead to a substantial flurry of near term litigation activity, with some cases file for in the fall/2012, already having a trial date scheduled, such as the Digital TV Case against Toshiba.
An update was provided in regards to the key V-Chip case against LG, in which the Federal Circuit Court of Appeal issued a ruling affirming the lower court order that LG did not infringe on WiLAN’s patent (December 11, 2012). In January WiLAN put forth a request for an “en banc” rehearing (reconsideration of a court decision) and in February the request was denied. The company has decided to move on from the case and continues to pursue other litigation matters against LG on the digital TV front. While we were hopeful that the outcome would favour WiLAN (especially given the strategic importance of its key 402 patent) we believe that at some point the company must move forward, especially in light of the multiple court rulings and appeal verdicts, thus reducing the probability of future success in a higher court.

Management remained bullish on the call and positive in regard to the company’s upcoming prospects and execution of its business strategy, stating advanced negotiations remain on going. In regard to its Gladios subsidiary the company has signed 12 partners, which speaks to a recent increase in smaller size companies looking to monetize their patents.
Guidance of $18M for Q1 is a reduction on both a quarter-over-quarter and year-over-year basis. Ultimately the nature of some of WiLAN’s signed contracts are front end loaded and/or there were some onetime payments. While investors may be fearful of a continuing decline, we confirm that based on revenues booked there is a declining revenue component to the baseline business. However upside remains based on new license agreements and the potential positive outcome of on-going litigation.
We have illustrated in the exhibit below, the historic increase in litigation expenses in the H2 FY2010 and Q1 FY2011 time frame which resulted in a number of large license agreements with established players including Atheros, Broadcom, Intel, LG and Motorola with revenues in the range of a few hundred million+. Subsequently the stock price rose to the ~$9.50 level. We note that since late 2010 and early FY2011, the industry has slowed somewhat with a reduction in the number of patent acquisitions ($ value/ patent) combined with increasing speculation of “patent trolls” and further scrutiny by the ITC and FTC into the business model/ case. With each case WiLAN launches there are countless variables including patents in dispute, strength of the patents, number of claims being disputed, defendant’s cash position and opportunity cost, geographic location of the case, judge, experience of judge, both parties willingness to settle outside of court, etc. It is very difficult to predict the outcome of these cases but if history is any indication guided by a capable management team, we believe that the probability of success for WiLAN, given the upcoming litigation activity is high.

CONCLUSION
We have tweaked our FY2013 estimates, incorporated Q1 guidance and increased litigation expenses for Q2 and Q3, given the increase in litigation activity. We note that the estimate of litigation expenses are a worst case scenario and if WiLAN is successful at settling some cases prior to the trial date, profitability may increase substantially. Our revenue estimate remains relatively intact with EPS declining from $0.31 to $0.18 for the year. With cash of ~$176.9 million ($1.46 per share) we continue to believe the stock represents compelling value in regard to the metrics trading at 7.5x price/ FY2014 earnings (4.9x when adjusting for cash). We continue to believe holding the stock will prove to be extremely advantageous for investors whom are both patient but understand WIN’s patent portfolio space. Following the changes to our model our target price reduces to $7.15 from $7.25 previously. We continue to reiterate our Buy recommendation.