FWIW From Paradigm Capital on 7/13/2011
July 13, 2011
WiLAN WIN-T, WILN-Q
Paradigm Capital
B. Richards
Event
This morning we are providing an updated analysis on Wi-LAN.
Details
? Wi-LAN has delivered a remarkable five-year turnaround and is now worth $1B (up
from $38M in May 2006).
? A landmark global Wi-Fi settlement, combined with a variety of high-profile
Bluetooth and cellular license deals, has the company on track to generate more
than $100M in annual revenue this year.
? Impressively, the company has secured more than 250 license deals since 2006.
? WIN recently listed on the NASDAQ and was added to the S&P/TSX Composite Index.
? We expect the company to continue growing its patent pool, which now stands at
more than 1,400 patents, up from 20 five years ago.
? A stunning auction of Nortel’s 6,000 patents yielded $4.5B (or $750K/patent),
highlighting the new importance of technology patents.
? Revenue has increased dramatically from $2.1M in FY06 to $50.7M in FY10 (122%
CAGR.)
? Following a recent financing of $72M (net), cash sits comfortably at $193M or
$1.58/share (up from just $4M at the end of 2005).
? We believe, the stock remains inexpensive at 10x FY11 EPS (ex-cash) versus an
average of 33x for its U.S. comparables (range of 13–67x).
? WIN has numerous new initiatives in the courts, including cases related to Bluetooth,
cellular handsets, cellular base stations, cable operators and television vendors.
? The company is actively growing its new Gladios IP licensing partnership program,
with two deals announced thus far with Poynt (PYN-V, Buy,
.25 TP) and 01
Communique (ONE-V, NR), which offer excellent upside potential.
? Wi-LAN recently doubled its annual dividend from
.05/sh to
.10/sh.
? We forecast revenue and cash EPS of $116M and
.66 for FY11 (up from $51M and
.05 in FY10), $150M and
.80 for FY12 and $175M and
.81 for FY13.
Conclusion
Overall, Wi-LAN’s present and future seem brighter than ever. The company recently
announced some of the largest deals in its history and their positive impact should be
reflected in results going forward. There also exist plenty of opportunities with a robust
pipeline of current and potential patentinfringement cases and new strategic
partnerships. The IP sector is topical, garnering tremendous investor attention and
performing strongly YTD. We maintain our Buy recommendation and our $11.00 target
price based on 15x 2011 EPS plus cash.
Background
With the appointment of Jim Skippen as CEO in May 2006, Wi-LAN has undergone a
profoundly successful transformation achieving a number of milestones along the way,
including:
? In December 2005 (just prior to Mr. Skippen’s arrival), Cisco and Wi-LAN reached an
agreement with Cisco purchasing several patents and also receiving a license to WIN's
entire patent portfolio. On April 15, Wi-LAN successfully renewed its patent license
agreement with Cisco, which included new patents added since 2005. This represents
the company’s first renewal license and avoids any lapse in coverage.
? In December 2006, Nokia licensed WIN’s entire portfolio of patents. As part of the
deal, Nokia transferred to Wi-LAN 97 patents related to telecommunications and
ADSL technologies. We expect WIN to renew the Nokia license by year-end 2011.
? Earlier this year, highlighting the five-year transformation, Wi-LAN reached a
landmark global Wi-Fi settlement. The successful suit, originally filed in November
2007 against 22 defendants, represents a major coup for the company, both
financially and as validation of its strategic focus. This settlement is expected to
generate upward of $500M over six years, and with declining legal fees going
forward, we should see accelerating earnings growth and free cash flow (see our
Research Note dated August 26th, 2010, Closing in on a Massive Windfall?).
? WIN has diligently invested in bolstering its portfolio of patents, which has grown
from 20 patents in 2006 to over 1,400 patents and patentspending. Its patents relate
to Wi-Fi, WiMax, 4G (including LTE), DSL, Bluetooth, V-Chip and mobile telephony
technologies.
? In order to fund legal expenses and grow its patent portfolio, WIN has successfully
raised over $200M (gross) in seven separate equity financings since 2006. Most
recently, the company raised $72M in February, issuing 11.4M shares at $6.60. At the
end of Q1 the company had $193M in cash, albeit WIN subsequently acquired 60
patents related to mobile telephony from Glenayre Electronics for $8M in cash.
? Remarkably, since 2006, the company has signed more than 250 license deals with a
number of key product vendors. Licensees of WIN’s patents include ASUSTek,
Atheros, Broadcom, Fujitsu, Hon Hai, Infineon, Intel, LG, Marvell, Motorola, NEC,
Nikon, Nokia, Panasonic, RIM (RIMM-Q, Buy, $72.00 TP), Samsung, Sharp and Texas
Instruments.
Gladios IP
Wi-LAN recently launched a new initiative, creating subsidiary Gladios IP. Its mandate is to
partner with patent owners to help them extract value from their underutilized patents.
With its breadth of knowledge and deep pockets, WIN will manage and fund the entire
process (identify patent infringers, launch suits and pay for litigation) in exchange for a
share of any settlement revenue (expected to be 50%). While still in its infancy, Gladios IP
could provide upside revenue potential for WIN from valuable patents that it would
otherwise not be able to acquire, while also limiting its capital exposure. The company
entered into its first two partnerships in June with Poynt and 01 Communique, and we
expect many more developments here through 2011 and 2012.
Strong Patent Portfolio
Wi-LAN has a long heritage in the wireless market with its early work around W-OFDM
(Wideband Orthogonal Frequency Division Multiplexing). Fifteen years later, W-OFDM has
become a critical part of wireless data and 4G technologies like LTE and WiMAX. Wi-LAN
was clever to acquire patent pools from a number of other early innovators in this area
and is now well positioned to exploit the merits of the technology with potential for
significant revenue upside. To date, four of the company’s patent families have generated
the bulk of revenue while more than 35 patent families have been added to the licensing
program. We believe a number of licensing opportunities exist in several large and
promising markets, including, but not limited to, telecommunications, fibre optics,
medical and white-space networking technologies.
Nortel Auction
On June 30, Nortel announced that it had sold its 6,000 patents to a consortium of six
high-profile technology companies for a remarkable $4.5B. The purchasing group
includes RIM, Apple, Ericsson, Sony, Microsoft and EMC. The price paid was 3x the
expected price and a staggering 5x Google’s stalking-horse bid of $900M. The patents
could be used for both offensive (pursuing patent infringers) and defensive measures
(fending off the claims of others). Companies like RIM have spent billions in just the last
year to license wireless technologies related to smartphones. We believe the highly
competitive auction could also trigger further M&A activity, which may involve WIN.
Nortel Patent Auction Relative Valuations:
? The $4.5B paid, values the 6,000 Nortel patents at $750K/patent.
? Wi-LAN holds a similar set of technologies, with 1,400 patents in total. At these levels,
WIN shares are worth $8.75/sh plus $1.58/sh in cash. The shares closed at $8.17
yesterday, giving the company a market cap of ~ $1B.
We would note that a per-patent dollar valuation based on other transactions is not a
realistic comparison tool but does provide us with a quick reference point and a reality
check on our other valuation metrics.
NASDAQ Listing
Wi-LAN began trading on the Nasdaq on June 1. The timing of the listing is fortuitous and
should benefit the company given recently heightened U.S. investor interest in the IP
sector. The wildly successful Nortel patent auction and seemingly daily high-profile
patent infringement lawsuits and settlements demonstrate the attractiveness of the
business model and of maintaining a robust portfolio of relevant patents. Shares of RPX
(RPXC-Q, NR), a U.S. comp and Nasdaq-listed company, are up 44% since their IPO on
May 4 while U.S. comps in general are higher than those of WIN (Figure 1).
S&P/TSX Composite Index Inclusion
On June 20, WIN was added to the S&P/TSX Composite Index, the headline index and
principal broad market measure for Canadian equity markets. The index comprises 260
members and 10 industry groups, of which the S&P/TSX Information Technology Sector
(1.71% of total index) is one and includes Wi-LAN, Celestica, CGI Group, MDA, Open Text
and RIM.
Next Catalysts
The company should remain very busy through 2011, 2012 and 2013. In the near term,
there are a number of possible catalysts for the stock, including the following:
? More licensing deals and Gladios IP partnerships
? Q2 results on August 4
? LG TV case
? Three new litigations (cellular, TV, cable)
? Further possible dividend increases
? Nokia license renewal (by year-end)
Valuation Metrics Cheap Relative to U.S. Comps
The company trades at 6.9x FY11 EV/Revenue, 10.5x FY11 EV/EBITDA and 12.4x FY11
EPS. These multiples are well below the U.S. comps for EV/EBITDA and P/E, with the
revenue multiple slightly higher than the average for U.S. comps, albeit below RPX. Wi-
LAN is significantly more profitable than the U.S. comps and is growing at a much faster
rate, which may explain the higher EV/Revenue valuation. With IP Licensing one of the
hottest sectors in technology, we believe there is significant upside for Wi-LAN given its
new U.S. listing and exposure to U.S. investors. VirnetX (VHC-N, NR) with 16 patents and
100 patent applications, is up 524% y/y following a successful patent infringement suit
against Microsoft.
Q2/FY11 Results Expected on August 4
We look for WIN to begin feeling the full positive impact of the global Wi-Fi settlements
in the quarter. With revenue from the settlements rolling in and greatly reduced
litigation expenses going forward, we look for the company to post healthy sequential
and y/y earnings growth. For Q2, we forecast revenue and cash EPS of $30M and
.18.
Forecasts
In FY12 and FY13, we conservatively forecast revenue of $150M and $175M. These are
baseline estimates accounting for previously announced settlements and regular new
business run rates, without consideration of any potential upside of big wins from new
litigations or acquisitions. While we forecast only a marginal increase in operating
expenses from FY12 to FY13 ($67.5M to $70.75M), our cash EPS estimate increases only
.01 (
.80 to
.81) as the income tax credits are depleted. With the global Wi-Fi
settlement, substantially lower litigation expenses going forward and no acquisitions, we
expect the company to generate robust free cash flow. As such, we are assuming the
company will increase its annual dividend from the current
.10/sh in FY11 to
.125 in
FY12 and
.20 in FY13. We would note that in our forecast this represents just 15% and
23% of cash flow from operations in FY12 and FY13, respectively.
Balance Sheet
The company maintains a very healthy balance sheet. Wi-LAN exited Q1 with $193M in
cash following a $72M financing, albeit WIN has spent $8M acquiring a portfolio of
patents. With no debt on the books the company has a net cash balance of $1.58/sh.
Patent Reform Update
This year, both the House and Senate have voted in favour of a bill to reform the U.S.
patent system. Given the backing of the Obama administration and the USPTO (U.S.
Patent and Trademark Office), the bill looks set to be signed into law; it would represent
the first major patent reform in 60 years. Highlights of the bill include:
? Shift from a first-to-invent to a first-to-file system (in line with most of the rest of
world).
? Change in fee structure, including fast-track billing to help process backlog.
? Amendments to the patent re-examination process, including a new post-grant
review system enabling challenges to the validity of a U.S.patent.
Overall, the U.S. patent reform seems fairly benign to WIN and does not change our view
on the company.
Risks
The company is not without its share of challenges and risks. Typical IP Licensing risks
include:
? Patent re-examinations could invalidate or limit the scope of WIN’s patents.
? Patent obsolescence and failure to acquire new patents could negatively impact
future revenue.
? Patent reform by Congress could make litigation more onerous and costly (noted
above).
? Department of Justice and other adverse court decisions could negatively impact
ongoing lawsuits and harm future revenue.
? Higher litigation expenses resulting from new patent infringement suits can
negatively impact future earnings.
? The unpredictable nature of litigation and timing of settlements can lead to lumpy
quarters.
? Patent infringement suits are time-consuming and their outcome is uncertain and
could potentially lead to investor frustration.
AI
