WI-LAN Inc.

Q3 In Line, Deals And Dividends In 2013, Buy The Dip!

WIN reported an in-line Q3 while guiding to slightly higher booked sales for Q4. WIN shares reflect basically signed deals according to our NAV and little value for upcoming signings and the future pipeline. WIN should be bought on the recent pullback for leverage to 2013 agreements.

Rev. was $21.3MM (WIN $19.9MM base business, us & cons. $21MM, $20.8MM LQ) with adj. EPS of $0.08 (us & cons. $0.08). UPSTAR was the only signing for the quarter, which along with slightly higher than expected v-chip royalties, caused the $1.4MM sales beat.

Our Q4 sales est. is now $22MM (baseline sales guidance was $20.7MM, cons. $22.5MM). Our non-GAAP op. cost estimate is $13.5MM (guidance $12.8MM - $14.5MM) and our updated EPS is now $0.07 (guidance adj. EPS $0.05 to $0.07). Higher baseline sales should come from v-chip seasonality.

We maintain our SO rating and $10 PT on our NAV of ~$5 and future signings. Little value is being given to WIN's licensing pipeline and, because of this, we believe the shares should be bought. Catalysts include: 1) LG Appeal (December 2012); and, 2) Base station trial (April 8, 2013).

Our Take On The Quarter

Wi-LAN (WIN-SO) reported an in-line Q3 while guiding baseline business sequentially 4% higher than last quarter. The higher sequential guide is due to new agreements and somewhat higher v-chip revenue, which is variable based on TVs of the licensees. Higher litigation costs come as little surprise as negotiations with television and base station manufacturers increase closer to trial. Higher litigation costs also come with the approaching Markman hearings for the handset cases. There was no change in timelines or any hints that Wi- LAN will not be able to collect on our estimated royalty rates for future deals.

Our target NAV of $10 is based on signed agreements, cash and established licensing programs. Our NAV does not take into account major licensing partnerships, which were said to be highly likely in the near future. It also excludes deals through partnerships, such as the one signed with Bomgar through 01 Communique (ONE-TSX). Finally, it excludes WIN's 4G patents and of course upside from the cash on the balance sheet that will be deployed into future opportunities. With the dividend yielding about 2.8% and an active NCIB ($1.1MM spent in the quarter with an estimated 6.4 million shares remaining), investors are being paid while they wait for these deals to finalize. We believe Wi-LAN represents a very good buy at or close to the value of signed deals plus cash with upside to our target NAV of at least $10.

Upcoming Catalysts

This list only includes companies in litigation. The number of parties Wi-LAN is in negotiation with is significantly larger.

LG and v-chip – The next major event is the LG (066570-KS) appeal that is expected to take place on December 5, 2012. A decision from the appeals court is normally expected in under three months, after which if Wi-LAN is successful a trial would take place likely before the end of 2013. This case would be a catalyst for the remaining unsigned North American television manufacturers. A win here would immediately pressure the remaining $150MM-plus (or ~$1.25/share) unsigned market participants to come to the table. With 1,400 digital TV and video display patents acquired last December, a significantly higher royalty rate is part of Wi-LAN?s longer-term plan and could be achieved, which we have not accounted for.

3GPP – This trial has been set for April 8, 2013. Earlier this year at the Markman hearing, the judge ruled all claims in favour of Wi-LAN (vs. a mixed review that allowed Wi-LAN to sign $350MM+ in its previous wireless litigation), placing the company in a position of strength. In addition to this, Wi-LAN filed a complaint in October against Alcatel-Lucent (ALU-NYSE) and Ericsson (ERIC-NASDAQ) over additional patents („298, „014, „437). It was hinted that this tactic has attracted the attention of these companies and the pace of negotiations was said to have increased. No schedule for these new cases has been set, but it is unlikely that the parties even approach a Markman hearing in this case before a settlement is reached. We expect settlements by the trial date.

Handsets – No change in the timeline for this case. The Markman hearing in February will likely be a starting point between the major parties. The handset trial is set for March of 2014. Settlements are more likely closer to the trial date in 2014.

Updated NAV Model

Our value of the opportunity is conservative and does not take into account any Gladios or LTE deals. It also does not take into account any renewals from minor deals or renewals of major deals coming due after 2014 or any value after 2016 despite many key wireless patents running until 2019. We have also discounted the opportunities by 15%.

Our estimates are based on a mix of longer-term (six-year) and medium-term (four-year) deals, which we expect Wi-LAN will begin to focus on given its much stronger and broader wireless patent portfolio. The objective of shorter agreements is to bring OEMs to the table on areas such as 3G now, leaving the less mature 4G LTE infringements to deal with in follow-on renewal agreements.

Since our last NAV update, time decay dropped the NAV by $0.18. The decrease in net cash dropped it an additional $0.15. Wi-LAN purchased $23MM in patents during the quarter for 4G, 3GPP and ETSI patents. Without this purchase, net cash would have been up $0.04 per share.