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Message: Fraser Mac's analysis ... $9.25 target
WiLAN Means Business - Company has Stepped up Litigation Efforts
WiLAN reported Q3 FY2012 results yesterday which included revenue of $21.3M and EPS of $0.08, in line with expectations and our estimates. The year over year decline in revenue ($21.3 vs. ~$28M) is attributable to timing of fixed payments given one time payments made last year.
For the fourth quarter FY2012 management provided revenue guidance of $20.7M in revenues and adjusted earnings within the range of $6.2- $7.9M (~$0.05 to $0.065). Note that guidance provided by the company, accounts for revenue booked thus far. We also note that the stock price decline yesterday is somewhat attributable to lower year over year guidance, as the street expected a slight bump from potential new license agreements.
On the conference call management remained very bullish in regard to outlook and revenue visibility, even stating that it is possible to more than double revenues over five years while citing that this is achievable from solely its TV and display and wireless programs. We believe that significant headway has been made in regard to launching litigation often on multiple fronts against defendants. This combined with the active strengthening of the company’s patent portfolio, increasing depth via acquisitions combined with additional claims and validity confirmation by the US PTO should generate significant returns. Although we believe in order for the current stock price to meet our target and remain inflated at near the $9.00 plus level the macro environment has to heat up to companies operating in the patent portfolio space, ie. An increase in patent acquisitions and an increase in overall peer multiples.
RECOMMENDATION
We have adjusted our estimates to reflect Q3 actual results and Q4 guidance. We have also adjusted our FY2013 estimates on the back of marginally increased litigation expenses as the company ramps up litigation activity significantly. Our 2013 revenue estimate is maintained and EPS declines to $0.54 from $0.58 previously. Our target price of $9.25 per share is maintained, driven off our DCF valuation. With cash of ~$173.2 million ($1.43 per share) we continue to believe the stock is compelling in regard to valuation metrics trading at 9.3x price/ FY2013 earnings (6.6x when adjusting for cash). We reiterate our Strong Buy recommendation.
UPCOMING CATALYSTS
Settlement of litigation, signing of a license agreement, acquisition of additional patents and the partnership with a large strategic.
Q3 Results
WiLAN reported Q3 results marginally ahead of their own guidance on a top line basis and coming in line with both consensus expectations and our estimates on both revenue and profitability. We note that both revenue and profitability were down on a year-over-year basis, attributable to lower revenue due to onetime payments compounded by an increase in litigation expenses ($7.1M in Q3 FY2012 vs. $1.2M in Q3 FY2011). We have tabled actual results versus our expectations, consensus estimates and prior year results in the table below.
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Exhibit 1: Q3 FY 2012 Results Q3 2012A
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Q3 2012E
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Q3 2012C
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Q3 2011A
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Total Revenue ($M)
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$21.3
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$20.7
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$21.0
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$27.8
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Adjusted EPS ($)
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$0.08
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$0.075
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$0.08
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$0.18
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Within the quarter WiLAN signed a licensing partnership agreement with SENSIO Technologies Inc., acquired 150 and 40 patent and patent applications from Alvarion and Siemens, respectively and moved forward litigation with Apple, HTC+ by ~6 months. Overall, we believe that the company is well positioned to execute on its strategy of growing the business.
Subsequent to the quarter end WiLAN launched four new litigation matters against Toshiba (TV and display technology), LG Electronics (digital TV and display technology), Alcatel-Lucent and Ericsson (LTE) and Hon Hai (VChip).
Outlook
On the conference call management remained very bullish in regard to outlook and revenue visibility, even stating that it is possible to more than double revenue over five years and citing that solely TV and display and wireless programs can achieve such. Below we provide an update on several key areas of growth for WiLAN.
Upcoming Litigation:
Management provided an update on upcoming litigation cases. Post quarter end the company launched new litigation cases as touched on above. Alcatel-Lucent and Ericsson are currently existing defendants in WiLAN’s 3GPP (HSPA Case) scheduled to go to trial in April, 2013. The depth of their patent portfolio allows WiLAN to go after defendants citing multiple patent breaches. This strategy affectively places pressure on defendants to come to the table and settle rather commence litigation on multiple cases. (See Appendix A for breakdown of current ongoing litigation cases)
Management provided specific dates for upcoming litigation matters. In the company’s ongoing litigation against LG in regard to its key VChip technology, the appeal hearing has been scheduled for December 5th, 2012, when oral arguments will be heard by a panel of three judges. Although WiLAN’s management stated they are hopeful a decision will be made within 90 days or less, it could take longer.
In regard to the new litigations launched against Alcatel-Lucent and Ericsson and LG and Toshiba, respectively, all cases are in an initial pleading stage and it will take up to 6 months before moving onto the next stage.
Patent Acquisitions:
Management continues to look for patents that ultimately provide greater depth to their portfolio. The patents acquired from Siemens are related to telecommunication network management and mobile multimedia (acquisition of more than 40 patents). Post quarter end WIN also acquired ~150+ patent and patent applications from Alvarion (NASDAQ: ALVR; $0.46, Not Rated) for $19M. We believe the patents from Alvarion, an Israeli based wireless company significantly strengthen WIN’s 4G patent portfolio, given Alvarion’s strength in the WiMAX, 4G and LTE patent arena. Management commented to this affect citing their "LTE portfolio is a very important portfolio." We believe WiLAN has been disciplined at slowly acquired key patents from smaller companies on the forefront of 4G research and inevitably this discipline should pay off for shareholders.
Conclusion
We have adjusted our estimates to reflect Q3 actual results and Q4 guidance. We have also adjusted our FY2013 estimates on the back of increased litigation expenses as the company ramps up litigation activity significantly. Our 2013 revenue estimate is maintained and EPS declines to $0.54 from $0.58 previously. Our target price of $9.25 per share is maintained, driven off our DCF. With cash of ~$173.2 million ($1.43 per share) we continue to believe the stock is compelling in regard to valuation metrics trading at 9.3x price/ FY2013 earnings (6.6x when adjusting for cash). With upside of 85% to our target we reiterate our Strong Buy recommendation.
Strategic Partnership with OEM: In regard to the signing of a strategic partnership with a large OEM management stated that they continue discussions with a number of companies that own portfolios of thousands of patents and are looking to further monetize such.
Overall we continue to believe that WiLAN offers a compelling investment opportunity, albeit for investors with patience and an understanding over the overall patent portfolio space. Ultimately with the company having launched litigation on multiple fronts against several defendants we believe that a positive outcome is probable and possible. We urge that investors have faith in the story given the time frame associated with achieving larger settlements.
3 Recommendations
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