WiLAN Inc.
Near Term: BUY, Long-Term BUY
WIN:TSX
Current Price: $5.60
Industry: Technology - Intellectual Property
Teaser: IP Patent Company Posts Strong Q3, Revives Near-Term Outlook Lower,
Weakness is Long-Term Opportunity – Maintain Rating
Industry: Technology - Intellectual Property
Recommended: August 2011
Recommendation Price: $5.66-$6.99
Current Price: $5.60
Market Cap: $691,960,320
Shares Outstanding: 123,564,343
Fully Diluted: 131,348,294
Founded in 1992, WiLAN is a leading technology innovation and licensing company.
WiLAN has licensed its intellectual property to over 250 companies worldwide. WiLAN
has a large and growing portfolio of more than 1400 issued or pending patents.
Inventions in the company’s portfolio have been licensed by companies that manufacture
or sell a wide range of communication and consumer electronics products including 3G
cellular handsets, Wi-Fi-enabled laptops, Wi-Fi/DSL routers, xDSL infrastructure
equipment, WiMAX base stations and digital television receivers. WiLAN has licensed
patented technologies including companies such as ASUSTeK Computer Inc., Atheros
Communications Inc., Broadcom Corporation, CSR plc, Fujitsu Microelectronics
America Inc., Hon Hai Precision Co. Ltd., Infineon Technologies AG, Intel Corporation,
LG Electronics, Inc., Marvell Semiconductor Inc., Motorola Mobility Holdings Inc.,
Motorola Solutions Inc., NEC Corporation, Nikon Corporation, Nokia Corporation,
Panasonic Corporation, Research In Motion Limited, Samsung Electronics Co. Ltd., and
Sharp Corporation.
FINANCIAL HIGHLIGHTS & KEY AREAS OF GROWTH
WiLAN was recently recommended in August of 2011, when the stock traded on the day
in the $5.66-$6.99 range. Today, with its shares in the $5.56 range, we review the
company’s recently released Q3 2011 results. On November 9, 2011, WiLAN reported
that revenues increased 158% to $27.8 million from $10.8 million in the three month
period ended September 30, 2010. In increase was due in large part to the successful
signing of a series of patent licenses over past couple year and, in particular, licensing
agreements signed early this year with tech giants such as Intel and LG Electronics.
In the third quarter, the top ten licensees accounted for 80% of royalty revenues as
compared to more than 84% of royalty revenues for the three months ended September
30, 2010. WiLAN generated adjusted earnings of $22.8 million or $0.18 per share, as
compared to adjusted earnings of $903 thousand or $0.01 per share, in the three month
period ended September 30, 2010. GAAP earnings were $7.3 million or $0.06 per share,
as compared to a GAAP loss of $6.0 million or $0.06 per share, in the three month period
ended September 30, 2010.
Q3 2011 patent licensing expenses totaled $1.6 million as compared to $1.0 million in the
three month period ended September 30, 2010. The increase in expenses for the three
months ended September 30, 2011 over the comparative period is primarily attributable
to the costs associated with the brokerage revenue recorded in the period, and third-party
royalty payments related to royalty arrangements. Litigation expenses amounted to $1.2
million in the third quarter of 2011, as compared to $6.7 million in the three month period
ended September 30, 2010. The decrease in litigation expenses was a result of the various
settlements the company entered into during the first quarter of fiscal 2011.
FAILED MOSAID TAKEOVER BID
On August 17, 2011, WiLAN announced its intention to make an all-cash offer to
purchase all of the issued and outstanding common shares of MOSAID for CDN $38.00
per MOSAID common share. On October 19, 2011, WiLAN announced an increase to its
offer to $42.00 per MOSAID Share. MOSAID announced, on October 27, 2011, that U.S.
private equity firm, Sterling Partners, had offered $46.00 per MOSAID Share to acquire
MOSAID. On November 1, 2011, the offer expired as the initial take up of 66% of the
outstanding MOSAID shares was not achieved. WiLAN elected not to take up the
MOSAID Shares that were tendered to the offer. As a result of the offer expiring, the
maturity date of the Debentures will be January 31, 2012. WiLAN will be required to
repay in cash the aggregate principal amount of the outstanding Debentures and accrued
and unpaid interest.
As a result of the offer to acquire MOSAID and the related financing, WiLAN expects to
incur total charges of approximately $14 million, consisting of commissions on the
Debentures, interest on the Debentures, legal, accounting and professional advisor costs,
and certain other charges. These charges will be partially incurred in the third quarter of
2011, the fourth quarter of 2011 and the first quarter of 2012. After giving effect to the
expected gain on the sale of the MOSAID Shares previously owned by the company, the
net costs of the Offer to acquire MOSAID is expected to be approximately $10 million.
Broadly speaking we were pleased with WiLAN’s decision not to get into a bidding war
with Sterling Partners, and up their bid beyond the $46 range. As we stated in our initial
update on the bid, while we believed the two entities would be a good fit, for WiLAN the
fit was not good at “any price”. There was a limit to which we believed WiLAN’s bid
should not exceed and that range was $45. Below this range we found the rough numbers
to be accretive in the near-term, with the potential for strong long-term accretion. Beyond
this range, we believed the acquisition would not be accretive to earnings near-term (1-2
years) and would only potentially be accretive long-term. As good stewards of the
company’s capital we are pleased the management chose to back away and will not look
to employ the capital to more profitable endeavours.
A strong financial position is an important underpinning for WiLAN’s success. As at
September 30, 2011, the company’s net cash, comprised of cash and cash equivalents and
short-term investments totaled $197.0 million, representing an increase of $87.4 million
from the net cash position at December 31, 2010. During the third quarter of 2011, the
company generated $1.8 million from operations and paid $3.1 million in dividends to
shareholders. The company’s cash equivalents and short-term investments include Tbills, term deposits, GICs and other marketable securities.
Financial Guidance
The disappointing item that was revealed in the Q3 conference call was WiLAN’s
revision of its fiscal 2011 financial guidance based on revenues booked to date and
current business indicators. Revenues for the fiscal year ended December 31, 2011 are
now expected to be in the range of $105 million to $110 million (from $110-$115
million). Adjusted earnings are now expected to be in the range of $70 million to $75
million or $0.58 per share (from $75-$80 million). The lower guidance comes largely
from an expected slowdown in sales from the company’s licensed dish TV customers
who use its V-Chip technology to filter out inappropriate programs. V-Chip technology
was legislated by former U.S. President Bill Clinton in 1996 and has been available in the
U.S. and Canada since 1999. Tri-Vision, which was acquired by Wi-Lan in 2007,
partnered with the developer for commercial production. About 50-55 percent of its
revenue comes from this segment. As internet-based TVs creep into the market, dish TV
purchases are going to slowdown. The market should still provide solid cashflows for the
forseeable future, just at a slowed rate. We will monitor this.
Despite this, the WiLAN licensing team is actively working on a number of potential
licensing transactions that could close between now and December 31, 2011. There can
be no assurance that any such licensing transactions will close. WiLAN remains
committed to negotiating license agreements that are in the best long-term interests of the
company and its shareholders. Accordingly, WiLAN will continue to focus on obtaining
the best possible terms under its agreements, rather than on the timing of agreement
closure.
CONCLUSION
Broadly speaking we were happy with WiLAN’s Q3 results which met the street
expectations and showed the tremendous growth the market was looking for from the
company’s recently signed licensing deals. However, we were disappointed in the nearterm to see the companies guidance for both revenues and earnings lowered for the year
as sales from its licensed dish TV customers are expected to slow in Q4. The long-term
effects of this slowdown are not completely known and that uncertaintly, coupled with
the broader market volatility has hit the stock.
Having said this, management has stated on numerous occasions that it could likely enter
into a number of long-term licensing agreements right now, but is holding out patiently
for better terms (higher licensing fees and longer terms). While the strategy could impact
the short-term, the long-term affects in terms of shareholder value should be positive if
management executes properly. The team has shown the ability to execute effectively in
the past and we will remain confident at this stage that they will be able to over the next
6-24 months. Over that time, we will wait patiently and collect the decent quarterly
dividend of $0.025 per share (current yield of 1.8%), with potential upside while we wait
for the licensing deals to develop and the market to settle down.
Fundamentally, with around $197.0 million, or $1.60 per share, in the bank and no debt,
at $5.60, the market is currently asking you to pay around $4.00 ($5.60-$1.60) for the
enterprise or business of WiLAN itself. This amounts to 9.65 times 2011 estimates, or
6.89 times estimates with the cash stripped out. Given the growth rate and the potential
for significant additions to its licensing revenues over the next 3-24-months via
acquisitions or its existing portfolio, we view the recent drop as a long-term opportunity.
At 9.65 times 2011 earnings estimates, or 6.89 times estimates with the cash stripped out,
WiLAN is trading at a significant discount to the 21 times plus earnings that its closest
rival and comparable MOSAID was recently bought at. WiLAN has a strong cash war
chest to deploy and we expect management to make purchase in areas the market is not
currently focusing on in an attempt to create long-term shareholder value at reasonable
prices. Ultimately, as the patent portfolio and cash flow streams continue to build,
WiLAN may look attractive as a takeover target itself. As such, we maintain our near and
long-term BUY rating on WiLAN and maintain its position on our Focus BUY list.
For those who are nervous about buying any new stocks in the current macro
environment, we suggest utilizing our strategy of layering into the stock. Select the
amount you wish to allocate to buying the company within your Small-Cap Portfolio
($10,000 for example) and buy half your position at current levels with the goal to add
the other half of your position when the markets appear to have calmed to some degree. If
the stock has dropped due to uncertain broader markets, you will have a lower average
price in a solid mid to long-term company. If the stock goes up a significant degree, we
will advise to HOLD and you will still hold a half position in a solid company.