Wellington West....Wilan:Recommendation:Strong Buy
Gladios Partnerships Gain Traction
• WIN enters licensing partnership with Poynt and 01 Communique. While no terms were disclosed, Gladios will help fund licensing programs with patent holders in exchange for ~50% of the royalty.
• Gladios could significantly add to revenue in the medium-term.
Given the early stages in the partnerships, revenue upside could be a few years away. We do not expect significant opex from WIN in the near-term.
• Additional licensing could lead to upward guidance revisions in F11. We believe WIN will license the remaining portfolios (V-Chip, Bluetooth and 3G). Patent acquisitions/partnerships could accelerate growth.
• Reiterate Strong Buy & C$10.00 target, implying 15x C11 EPS. Catalysts for the stock are additional patent acquisitions, new licensing deals and additional partnerships through the Gladios division.
Investment Summary and Outlook
Wi-LAN’s management have proven their ability to execute on their
licensing program and have graduated to a leading patent licensing powerhouse with over 250 licensees.
Wi-LAN has signed 254 companies (including 123 V-Chip, 121 wireless, and 10 DSL) and we expect thismomentum to continue through 2011.
We expect new deals across the remainder of the portfolios (Bluetooth, V-Chip and 3G), which could lead to upward revisions to 2011 guidance.
Generally, Wi-LAN has been conservative in providing guidance and we believe 2011 will be no different. Armed with ~$193 million in cash, we believe growth could be accelerated through acquisitions.
We reiterate our Strong Buy rating and C$10.00 price target. Our DCF assumes Wi-LAN has successfully signed an additional ~$400 million in wireless revenue over six years and includes further growth in 2012 for additional licenses from the remaining Bluetooth, V-Chip and 3G portfolios.
Given the two recent strategic partnerships under Gladios are in the early stages, we have not included this into our model. Our DCF-based target assumes Wi-LAN will generate $114 million in revenue in 2011, then $130 million by 2012 and $140 million by 2013.
Our DCF-supported price target of $10.00 implies 15x our 2011 EPS estimate of .65, which is in-line with the peer group.
Gladios Provides another Avenue of Growth
Gladios IP division enters licensing partnership with Poynt and 01 Communique. The Gladios business model takes a revenue sharing approach between Wi-LAN and other patent holders who lack the expertise or financial ability to monetize their IP portfolio.
Whilst the terms and conditions of the recent Poynt and ONE arrangement were not disclosed, during the Q1 conference call management alluded to a 50/50 revenue split with Wi-LAN fronting licensing development expenses, which could include litigation costs.
Given the early stages of the recent strategic partnerships, we have not included any upside from Gladios into our model at this time.
Poynt’s IP portfolio provides WIN with exposure to location based mobile application patents. Poynt is a leading provider of mobile local search services and has three patents relating to delivering location-based offers, services and coupons to mobile smartphones based on GPS location and user profile.
The global mobile advertising market is expected to be worth $3.3 billion in 2011, growing to $20.6 billion by 2015, according to Gartner. Mobile advertising can be broken down into mobile message, mobile display and mobile search advertising.
An emerging trend in mobile application hinges on content discovery that is based on user geography.
This trend is expected to transform the traditional pull-based search to a more geographic-centric content push paradigm.
The Gladios model provides WIN with the opportunity to reap the monetization benefits from the location based mobile advertising segment without having to purchase an entire patent portfolio.
ONE’s remote access patents could provide WIN with IP monetization opportunities in remote access, web conferencing and related technologies.
In our initiating coverage report for 01 Communique titled “USPTO Ruling Sets Stage for Licensing Program, A Large Deal Could Re-rate Shares” (published in January 10th, 2011), we highlighted the royalty opportunities for ONE’s patent portfolio.
The remote access and support market is expected to be worth $671 million by 2012, according to projections by IDC and Gartner. ONE is currently in litigations with remote access market leaders, Citrix and LogMeIn, on a contingency basis with law firm Baker & Hostetler.
Therefore, IP monetization opportunities for the Gladios partnership are limited to ~30% of the remote access market. We believe the web conferencing market could provide significant opportunities as ONE has not tapped the licensing potential of this market.
The web conferencing market is expected to be worth $2 billion by 2014, almost three times the size of remote access and support market.
ONE’s ‘479 patent is limited to web conferencing software that permits remote access capabilities such as remote desktop and application sharing, as opposed to simple streaming of a web presentation.
Reiterate Our Strong Buy Rating and $10.00 Target
Our DCF-based target of C$10.00 implies 13x our 2011E EPS estimate of .65, ex the cash of $1.58 per share.
We assume a discount rate of 13% and assume the Company generates $140 million revenue in 2013 and $150 million revenue until 2016.
We have assumed a 3% terminal growth rate given the growth opportunity in the large portfolios that remain to be licensed.
We have assumed Wi-LAN begins paying cash taxes mid 2012.
Given the early stages of the recent strategic partnerships, we have not included any upside from Gladios into our model at this time.
On a P/E basis, our target implies Wi-LAN trades inline with the peer group at 15x 2011 EPS.
The stock is currently trading at 11 x 2011 P/E, versus the peer group at 15x.
Given the growth potential in the Bluetooth, V-Chip and 3G portfolios, as well as additional opportunities at Gladios, we believe Wi-LAN’s actual earnings power may turn out to be much higher, supporting a P/E multiple at least in-line with the peers.
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