Still lots of Juice Left
The company reported Q1 results which were in line with our expectations.
Highlights from the conference call and outlook are:
? Regarding on-going litigation matters LG? V-Chip will likely be the first out of the gate. LG is reneging on an agreement which they had previously signed. Given LG? market share we expect the figure will be in the US$50-$55M range. The case may be decided on a „ummary judgement?basis, given its merits. In turn the decision may come sooner, thus avoiding the costs and time delays associated with a trial.
? We expect the LG settlement will likely trigger the top TV OEMs (who are in a wait and watch mode) to license V-chip technology. We expect this cumulative settlement to be in the range of US$120- $150M.
? The bluetooth trial against TexasInstruments has a discovery conference scheduled next month, although the trial (if both parties go through all the 15 rounds of the bout) could take ~2 years. We see a significant probability of an earlier settlement, given that several top tier names in the Texas case already settled with WiLAN in January/February.
? Potential revenue exists with companies such as Apple, Sanyo and Kyocera who have yet to sign licenses. WIN? portfolio has grown to 1300 patents, including 320 patents acquired from Motorola. A deeper portfolio means the demonstrability of multiple breaches by the plaintiff (WIN), increasing the possibility of a win and pressure for the defendants to settle.
? WIN is flush with cash of US$193M at quarter? close. We expect another ~US$50M prior to the end of 2011 due to the dramatic decrease in litigation expenses from a US$11M+ level, per quarter, to US$3M level. Needing only US$100M to demonstrate balance sheet strength, WIN will have US$150M to play with in making acquisitions – a square in which the company is active. They are evaluating several opportunities and we expect that any acquisition to have „icenses and cash earnings?thus making it near accretive and strategic in nature. Given WIN? acquisition philosophy, at least US$250M in future settlement potential would be a very conservative assumption.
Conclusion and Recommendation
? WIN? management has delivered a string of successes and has executed consistently thereby surpassing street expectations. By following a low risk approach to growth they have essentially protected investors equity for the past 5 years, since its IP incarnation. There is significant runway left before the company matures on the growth path. The bottom line looks set to inflect just based on the dramatic decrease in litigation expenses as described above. We expect this growth alone to deliver additional EPS in Q2 FY 2011 onward. We are still working on an organic growth model despite that fact that a significant acquisition, of a portfolio or a company, is evident. With our organic model, and using an ultra-conservative multiple of ~12.0x 2011 adjusted EPS estimates of ~US
.70, adding ~US$1.60 in cash, one easily reaches a $10/share. Our comparison is even more compelling at 2012 adjusted EPS levels of US$1.02. Investors should note that with modest fixed opex and ability to scale much higher with the current headcount, WIN only has to add additional revenues of ~US$38M (net of litigation expenses) over 2011 levels. This level can be easily achieved with any one settlement, such as LG. We reiterate our Strong Buy and $10.00 per share target price.
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