WiLAN Reports Second Quarter 2012 Financial Results

--  Increased quarterly dividend by 16%.
--  Revenues of $20.8 million, exceeding our guidance of $19.7 million.
--  Adjusted earnings(i) of $10.1 million, or 8 cents per share, exceeding
    our guidance of $9.1 million.
--  Three licenses signed including one with Bomgar Corporation, the first
    license signed by WiLAN and partner 01 Communique, which settled
    litigation launched in January 2012.
--  Markman order issued in 3GPP litigation.
--  United States Patent and Trademark Office confirmed the validity of all
    the claims in WiLAN's U.S. Patent No. 5,828,402 and allowed more than 30
    new claims.
--  Returned $6.9 million to shareholders in dividend and share buyback
    payments.
--  Generated $12.3 million in cash from operations; held cash and cash
    equivalents and short-term investments of $191.1 million at June 30,
    2012.

"WiLAN delivered strong revenue and adjusted earnings in the second quarter of 2012," said Jim Skippen, President & CEO. "The Company signed three new licenses during the quarter which contributed to our revenue exceeding guidance. Our adjusted earnings of $10.1 million or 48% of revenue, also exceeded guidance and demonstrates the profitability of our business model."

Added Skippen, "With the strong financial performance of our business and the confidence that we have in the future, we are investing more of our free cash flow at this time in dividend payments to shareholders. As financial conditions permit, we plan to continue to consider the possibility of future dividend increases on a regular basis."

"We are very pleased that our Gladios IP team, and partner 01Communique, signed their first license. The agreement, with Bomgar Corporation, is an important step in what we believe will be a very successful licensing program. Another positive development in our business was the validation of our U.S. Patent No. 5,828,402 by the United States Patent and Trademark Office strengthens our Digital TV licensing program," said Skippen.

Eligible Dividend

The Board of Directors has declared an eligible dividend of CDN $0.035 per common share to be paid on October 5, 2012 to shareholders of record on September 14, 2012.

Second Quarter 2012 Revenue Review

In the three month period ended June 30, 2012, WiLAN generated revenues of $20.8 million, as compared to $27.4 million in the three month period ended June 30, 2011. The increase over guidance is due to the signing of additional license agreements with payments occurring in the quarter. For the three month period ended June 30, 2012, the top 10 licensees accounted for 86% of revenues, whereas the top 10 accounted for 79% of revenues in the three month period ended June 30, 2011.

Second Quarter 2012 Operating Expense Review

In the three month period ended June 30, 2012, cost of revenue expenses totaled $7 million as compared to $6.4 million in the three month period ended June 30, 2011. The increase in expenses for the three and six months ended June 30, 2012 is primarily attributable to an increase in compensation costs as a result of increased staffing levels, and amortization expense as a result of patent acquisitions we completed during fiscal 2011, partially offset by a decrease in third-party royalties.

 

                                      Three months ended    Six months ended
                                    ----------------------------------------
                                      June 30,  June 30,  June 30,  June 30,
                                          2012      2011      2012      2011
                                    ----------------------------------------


Cost of revenue                      $     864 $     884 $   2,157 $   1,744
Amortization of patents                  5,922     5,322    11,851    10,328
Stock-based compensation                   236       167       460       293
                                    ----------------------------------------
                                     $   7,022 $   6,373 $  14,468 $  12,365
                                    ----------------------------------------

Research and Development costs, inclusive of the costs related to the management and maintenance of the Company's patent portfolio as well as the costs of its research efforts increased over the comparable period last year principally as a result of increased level of staff and increased costs associated with the size and breadth of our patent portfolio.

 

                                     Three months ended    Six months ended
                                   -----------------------------------------
                                     June 30,   June 30,  June 30,  June 30,
                                         2012       2011      2012      2011
                                   -----------------------------------------


Research and development            $   1,874  $   1,489 $   4,277 $   2,778
Depreciation                              112         51       216        75
Stock-based compensation                   (6)        97       258       247
                                   -----------------------------------------
                                    $   1,980  $   1,637 $   4,751 $   3,100
                                   -----------------------------------------

The $4.8 million invested in research and development in the first six months of fiscal 2012 included patent administration cash expenses of $2.1 million and technical research and product development cash expenses of $2.2 million spent across two separate technology and product development initiatives. The investment in technical research and development in the first six months of 2012 was more than double the investment made in the comparison period last year.

Considering the significantly higher investment that would be required to move the product development initiatives towards becoming full-fledged product companies, WiLAN made the decision in the second quarter of 2012 to streamline our efforts to focus on technical research for the purpose of generating patents. This change reduced the number of staff working on technical research and product development by approximately 50%, which resulted in a restructuring charge of approximately $418,000 being incurred in the second quarter. With this change, the Company expects its technical research expenses to remain below $2 million per year for the foreseeable future.

Marketing, general and administrative ("MG&A") expenses represent the cost of litigation and all corporate services. For the three months ended June 30, 2012, MG&A expenses amounted to $9.2 million or 44% of revenues as compared to $5.7 million or 21% of revenue for the three months ended June 30, 2011. The increase in spending for the three months ended June 30, 2012 is primarily attributable to an increase in litigation expenses partially offset by a decrease in incentive costs.

 

                                      Three months ended    Six months ended
                                    ----------------------------------------
                                      June 30,  June 30,  June 30,  June 30,
                                          2012      2011      2012      2011
                                    ----------------------------------------

Marketing, general and
 administrative costs                $   2,353 $   2,177 $   4,810 $   3,911
Litigation expense                       5,839     2,276     9,697    13,642
Incentive costs                              -       548         -     1,072
Asset write-off related to
 restructuring                             209         -       209         -
Depreciation                               137       109       272       199
Stock-based compensation                   646       581     1,213       991
                                    ----------------------------------------
                                     $   9,184 $   5,691 $  16,201 $  19,815
                                    ----------------------------------------

For the three months ended June 30, 2012, litigation expenses amounted to $5.8 million compared to $2.3 million for the same period last year. The increase in litigation expenses is attributable to increased level of discovery activities in patent infringement litigations in the U.S. District Court for the Eastern District of Virginia, prior to its settlement, and the U.S. District Court for the Southern District of Florida, extensive preparation for the claims construction hearing, that took place on April 26, 2012, in our action against eight major companies including Alcatel Lucent USA Inc. and HTC Corporation before the U.S. District Court for the Eastern District of Texas with respect to four of WiLAN's U.S. patents, and activity in the appeal of the summary judgment ruling in our litigation involving LG.

At June 30, 2012, the Company's net cash, comprised of cash and cash equivalents and short-term investments, totaled $191.1 million, representing a decrease of $242.6 million from the net cash position at December 30, 2011. The decrease is primarily attributable to the repayment of the remaining aggregate principal amount of the outstanding Debentures and accrued and unpaid interest totaling $233.2 million and the repurchase of common shares under the normal course issuer bids totaling $14.6 million. The Company's cash equivalents and short-term investments include T-bills, term deposits and GICs.

During the second quarter ended June 30, 2012, the Company generated $12.3 million of cash from operations and returned $6.9 million to shareholders in share buyback and dividend payments.

Second Quarter 2012 Earnings Review

In the second quarter ended June 30, 2012, WiLAN generated adjusted earnings of $10.1 million or 8 cents per share as compared to $20.8 million, or 17 cents per share, in the comparative period.

The Company's GAAP earnings amounted to a loss of $0.1 million, or nil per share on a basic level, in the three month period ended June 30, 2012, as compared to GAAP earnings of $10.3 million, or 8 cents per share on a basic level, in the same period last year.

The decrease in adjusted and GAAP earnings between the reporting periods is primarily attributable to lower revenues and higher investment in litigation for the purpose of driving future revenue growth.

Third Quarter 2012 Financial Guidance

For the third quarter 2012 ending September 30, 2012, the Company expects revenue to be at least $19.9 million. This revenue guidance does not include the potential impact of any new agreements that may be signed during the balance of the third quarter of 2012 or the potential impact of any royalties identified in audits conducted by the Company. Operating expenses for the third quarter are expected to be in the range of $10.6 million to $12.6 million of which $5.5 million to $7.0 million is expected to be litigation expense. For the third quarter of 2012, and assuming no additional agreements are signed, adjusted earnings are expected to be in the range of $7.5 million to $9.5 million.

The above statements are forward-looking and actual results may differ materially. The "Forward-looking Information" section at the end of this press release provides information on various risks and uncertainties that the Company faces. Additional information identifying risks and uncertainties relating to the Company's business are discussed in greater detail in the "Risk Factors" section of WiLAN's AIF for the 2011 fiscal year dated March 9, 2012 (copies of which may be obtained at www.sedar.com or www.sec.gov). Financial guidance is provided to assist investors and other interested parties in understanding WiLAN's performance. The reader is cautioned that using this information for any other purpose may be inappropriate.

The Company's revenues result primarily from the licensing of intellectual property which, by its very nature, is directly affected by the timing of the closure of license agreements, the nature and extent of specific licenses including actual rates, product sales by licensees which can be subject to seasonality as well as overall market demands and the timeliness of the receipt of licensee royalty reports. In addition, certain revenues may be of a one-time nature.

The above guidance for the three month period ended September 30, 2012 reflects our current business indicators and expectations and is subject to fluctuations in foreign currency exchange rates. Due to their nature, certain income and expense items, such as significant settlements from companies involved in current enforcement actions, brokerage opportunities, new significant litigation or defense actions that could arise during the quarter, losses on asset impairments or realized foreign exchange losses cannot be accurately forecast. Accordingly, we exclude forecasts of such items from our guidance. Actual revenues reported may exceed the guidance provided due to the receipt of royalty reports, signing of new license agreements and completion of licensee audits, all after the guidance is provided.

WiLAN's imperative is to negotiate the best possible license as measured over the long-term and accordingly, the timing of actual license signings may vary from that forecasted. Actual results may vary materially from the guidance provided as a consequence of the above noted factors.

Conference Call Information - August 2, 2012 - 10:00 AM ET

WiLAN will conduct a conference call to discuss its financial results today at 10:00 AM Eastern Time (ET). WiLAN CEO, Jim Skippen and CFO, Shaun McEwan will be on the call.

Calling Information

A live audio webcast will be available at http://www.investorcalendar.com/IC/CEPage.asp?ID=169149