Wi-Lan Management Discusses Q1 2013 Results - Earnings Call Transcript

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Justin Kew with Cantor Fitzgerald.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division
So Jim, just on the litigation expenses, so the guidance were lower -- sorry -- yes, the litigation this quarter was lower than guidance, the 12.2 versus 13 to 14.4. And then also next quarter sequentially is going to be lower at 10 to 12, down from 12.2. How does that kind of line up with the litigation catalyst -- or not catalyst, but the trials that we have upcoming?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Well, the first trial starts in July, which is the following quarter or the next quarter so -- but there's a lot of work that goes into it. I'm trying to -- maybe you can give me a little bit more help what you're looking for.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division
Okay, well, I guess it was 2 questions. The first question is litigation expense for this quarter was lower than the guidance range, number one.

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Yes.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division
So what is the delta there...

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
What happens in that, Justin, is we have -- we pay most of our own law firms based on the hours they spent, and it's very, very hard to predict with this number of litigations exactly what that's going to be because there's all kinds of permutations and combinations that can occur that will cause fees to be a little bit less or a little bit more. And then when you have multiple litigations, that effect becomes even more compounded and profound. So I would be surprised if any estimate that we have is ever exactly met. It is just that, an estimate, and sometimes, it's going to be a little bit more, and sometimes, it's going to be a little bit less. I think we try to be conservative. So generally, we're hoping that we've been conservative and that it won't be more, although there's no guarantee on that. There's not much more to it than that. It's just that at the end, when we do our guidance, we -- in our forecast for the business, we look at all the litigations. We look at the activity. We talk to our law firms. We add it all up, and we come up with a number that we think is going to be the number. So there's nothing mysterious that's in that. The only thing, I guess, I could say to you is that there are no trials or Markmans in Q2, and so that is somewhat of a factor. But there is preparation for trials going on in Q2, and that ends up being a lot of work. And hopefully, that helps a little bit.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division
That's very helpful. Second question, Shaun, just on the accounts receivable with -- can you just give me -- give us a bit of color? You said that it's all being collected, so I guess, AR should come down to kind of historical level going forward?

Michael Shaun McEwan - Chief Financial Officer
Correct.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division
Okay, and can you give us a bit of color on what those were...

Michael Shaun McEwan - Chief Financial Officer
I can tell you there were 2 agreements that were paid within days on quarter end, but they weren't here on quarter end so they end up looking like a bit of cash consumed.

Operator

Our next question comes from the line of Daniel Kim with Paradigm Capital.

Daniel Kim - Paradigm Capital, Inc., Research Division
Jim, wondering if I can delve a little bit deeper into this recently announced Panasonic deal. Wondering if you can just explain the implications here with regards to the DTV and/or the V-Chip program. So if you look at Panasonic, I believe one of the fourth-largest player within the television space, so obviously, good for the DTV side. I believe this is probably the biggest blue chip customer you signed in that area. So that's my first question in terms of what else you're seeing in terms of ramp up on that side of the business. And secondly, as it relates to V-Chip, this is the first significant player we've seen signed since LG. So number one, wondering where this sits with other new potential licensees and/or renewals from existing licensees, please.

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Well, we view the Panasonic licenses a very positive development. We think the rate is a fair rate, and one that we'd be willing to accept from other licensees so that's good. You're right, they are a relatively large, well-known brand, so that's good. I think that they were very influenced by the technologies in our portfolio over and above the V-Chip technology when they saw what we've been able to do with the portfolio and the number of technologies we added, and we're happy about that. They were very keen on having a license to the entire portfolio. And as far as other licensees go, it's early days because we just announced this deal a day or 2 ago, but there's no doubt that it should have a positive impact on our ability to sign deals with other licensees because it demonstrates to them that a large well-known company is willing to take a license to the portfolio, and it makes it easier for the next licensees just by taking a portfolio of that licensee.

Daniel Kim - Paradigm Capital, Inc., Research Division
In terms of what you're seeing for renewals, are any upcoming in terms of material number on the V-Chip side?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
There are no renewals on the V-Chip because all the licenses on the V-Chip are basically for the life of the patent and those -- that's a unique program, which was started by Tri-Vision, the company we bought. We, more or less, continued the program, although we changed the license agreement somewhat, and the -- you basically get a license to the V-Chip family for the life of the patent, and that's all the license covers. So there's no renewal. It goes for the entire life of the patent. What we found is everyone's still paying us under those licenses. What we've seen, though, this quarter is a bit of a drop across all the TV suppliers. So I think what's going on is partially attributable to seasonality and maybe partially attributable to just lower TV sales. Sales are down a bit, and I think we're kind of at the thin edge of the wedge because we get these reports right after the quarter ends. So even before Gartner Dataquest gives us kind of inflow. But I think what we're going to see is that TV sales are generally down a bit in the first quarter, and that's typically the weakest quarter as well.

Daniel Kim - Paradigm Capital, Inc., Research Division
Okay. And sorry, just one last question, if I may, related to that. Given Panasonic was signed in the second quarter, I presume now you may have a bit of a departure from past practices, whereby you're no longer receiving so-called bulk payments from some of these smaller-ish players where you recognize, say, $1 million, $2 million, $3 million from licensees per quarter. So even though you signed numerous licensees in Q1 and you have Panasonic in Q2, I presume that what you're doing is likely recognizing these fixed payments over multiple years. Is that a correct assumption?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Well, yes, it is correct that we are spreading out payments from all licenses as a general rule. It won't always be exactly like that, but generally, that's true. Another thing is that we don't recognize, for instance, pending royalty payments. So with the Panasonic deal we're running royalty, we wouldn't recognize any revenues from that until we get the royalty report. That's another thing you have to factor in when you're evaluating this kind of a deal. And of course, given that we just signed the deal 2 days ago, we wouldn't have any reports of that nature if that were part of the deal. So the remaining factors that go into it so hopefully that helps you a bit, Daniel.

Operator

Our next question comes from the line of Todd Coupland with CIBC.

Todd Coupland - CIBC World Markets Inc., Research Division
Just a question on cash and a question on litigation expense. So you're going down this quarter a little less activity. Is it fair to say that Q3 will still be roughly the peak quarter in terms of litigation expense given all the trials that will fall into that quarter?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
It's a good -- it's always hard to estimate this, but right now looking at it, I would say that would be a fair estimation, but there are many variables that can happen. And as I mentioned, people are working pretty hard to try to get these things settled. And if they do settle, it's going to dramatically impact both the top -- both the expense line and the revenue line. But if nothing sells, which is a possibility, then it's probably fair to think that litigation expenses will go up in the quarter.

Todd Coupland - CIBC World Markets Inc., Research Division
Okay. And on the cash, so Shaun, if I understood you correctly, you basically said you got a piece of the 10 back post the quarter. So should we think about the burn is basically the dividend or roughly $5 million? And how do you think about that over the course of this year? I mean, obviously, you don't want to be burning into your cash every quarter to pay out the dividend. So give us your thoughts on that.

Michael Shaun McEwan - Chief Financial Officer
So first, if you look at adjusted earnings roughly being the cash generated by the operations, parking any changes in receivables and payables, the reality is when we're at a marginal or loss of $1 million to a profit of $1 million, you're not generating a lot of cash, right? So the realities are burned. It's quite likely going to be attributable to the dividend, as well as any share buybacks. And in particular, the first quarter, we only launched the buyback in mid-March, but we did generate $656,000 in share acquisitions. So those 2 things are combining to generate the cash burn and borrowing any, as Jim said, settlements and license agreements are going to dramatically change either the revenue or the expenses or both. The reality is that's what it kind of looks like for Q2 and potentially into Q3 as well.

Todd Coupland - CIBC World Markets Inc., Research Division
Okay. But I presume the objective here is you'll see -- if your plan unfolds, you'll see some agreements settled off 1 or 2 or several of these trials and then you should have a step-up in the business and dramatically reduce that burn? I presume that's the thinking.

Michael Shaun McEwan - Chief Financial Officer
Well, if you roll the clock back to 2011, I think the leverage that is in this business was evident when we generated sort of a 72% to 76% operating margin, which generated almost the same number in positive cash flow. So to the extent that our plans unfold the way we anticipate, that leverage will be reexperienced.

Operator

[Operator Instructions] Our next question comes from the line of Eyal Ofir with Clarus Securities.

Eyal Ofir - Clarus Securities Inc., Research Division
First off, can we just touch base on the Panasonic deal again? I understand that based on what you're seeing, it's probably not included in your guidance. Maybe, first of all, confirm that Panasonic is not part of the $17.5 million guidance. But also, I imagine that there would have been some catch-up payment to be made by Panasonic on historical TV. So I was just wondering if you guys get any onetime payment at some point in time or if you guys have bundled that into the ongoing royalty stream.

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
We're just debating who's going to answer that question, Shaun or me. But, okay, well, so first of all, we didn't say that there wasn't some amount in the quarter from Panasonic. But we aren't going to confirm one way or another. But it is a bit of a unique license. I will say that, and then it does have -- there's a fixed payment part and a running royalty part. So just to take that into account. Secondly, what's...

Michael Shaun McEwan - Chief Financial Officer
Didn't we answer both questions?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Yes, I guess. Is that really the answer to both your questions?

Eyal Ofir - Clarus Securities Inc., Research Division
Yes. So the fixed component, is that something that you will see in Q2? Or is that something that could also be in multiple quarters?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Multiple quarters.

Eyal Ofir - Clarus Securities Inc., Research Division
Okay, that's helpful. And then just, Jim, talking about the current in litigation, obviously, there's only so much you can say. But you've gone through mediation with Apple and some of the other parties. I'm assuming that that's already concluded. You're obviously going on...

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
It's actually continuing. There was a court order after we got a Markman ruling in the Apple case, which we thought was a very positive Markman ruling for us. The judge ordered that the parties would continue, but have another court mandated mediation so...

Eyal Ofir - Clarus Securities Inc., Research Division
Okay, so that's still ongoing then?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Still ongoing, and really, it shouldn't surprise anyone that there are many discussions ongoing right now. And the way I find this business often works is the parties are -- can be fairly part -- our part and at the very end, they converge in the middle. So it's not like you get close to the middle and then you stay there, you stay at fair ways apart, and then you -- all of a sudden both move quite a bit and you get to the middle and you get a deal done. So there's lots of stuff going on. It's very important that the other side believes that we are fully prepared to litigate, and we are fully prepared to litigate. We're very confident in our position, and we're not going to compromise. So we convey that message, but we're always ready to transact if the amount is fair. So that's the dynamic, and people are traveling and talking with licensees all the time.

Eyal Ofir - Clarus Securities Inc., Research Division
Okay, so I guess, theoretically, we can hear of announcements at any point in time.

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Anytime.

Eyal Ofir - Clarus Securities Inc., Research Division
The other question I have for you guys was around the BT agreement partnership, I should call it. So obviously, DRM was the first application though. Is there any ongoing discussion with BT in terms of extending those out to other patented players?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
I really can't disclose the clock, what's going on there. I would say though that with any large company where we sign a license for a limited subset of the technology, we generally are trying to leverage that to get a bigger subsection of your technology. So as a general rule, that's what we try to do.

Eyal Ofir - Clarus Securities Inc., Research Division
Okay. So that's helpful. Final question for me just for Shaun, on the guidance again, sorry, talk about how you didn't receive some royalty reports, and that's why the guidance is also lower. There's a little bit seasonality aspect of it, but how much of it was or maybe you can give us some indication, how many royalty reports based on volume have you already received and how many of them have you not?

Michael Shaun McEwan - Chief Financial Officer
We have 268 licensees, but I couldn't tell you exactly the number that has or hasn't been reported. But I can tell you that, historically, even if you look at last quarter, we had a guidance of 18.1 We finished the quarter at 18.4. Clearly, a few more reports came in after we provided our guidance. I would anticipate and hope we're in the same position, although, clearly, there's no promises of that. All of the big guys that we would expect who will have reported by now have reported. So we feel pretty comfortable that we've got the number correct in terms of -- at least the numbers.

Eyal Ofir - Clarus Securities Inc., Research Division
Okay. And then you also get the Panasonic royalty report, which we'll have to assume maybe you're incorporating some fixed payments from them into your guidance, but not the actual royalty stream.

Michael Shaun McEwan - Chief Financial Officer
I think Jim's already answered that one.

Operator

Our next question comes from the line of Robert Young with Canaccord Genuity.

Robert Young - Canaccord Genuity, Research Division
The 3GPP case that you said is in July, is that more precision around when that's going to happen? Or is there still some uncertainty there, I mean, more than usual with respect to potential for delays?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
The date schedule is the first week of July. Actually, I don't remember if it's July 1 or the first week. It may actually be July 1. But what we find will happen in this type of thing. There'll be jury selection and other things going on. It may move a day or 2, but at this point, at least, we very much anticipate that that's when the trial's going to be, but judges are people, and there are many reasons why something would come up for them that causes them to move the trial date so -- but at this point, we have no reason to believe it won't be July 1.

Robert Young - Canaccord Genuity, Research Division
Okay, and it seems as though the period between, say, July and November is going to be an extremely busy period for you. I was wondering if just -- are there any capacity concerns for WiLAN? I understand that you offset some of that with outside litigation professionals, but do you have the ability -- if this gets all squeezed into a tighter time frame, if 3GPP gets delayed a little more, do you have everything in place to handle all that?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
We -- as far as prosecuting our litigations, we have very good firms. They're well staffed. I have no doubt that they can prosecute them without -- with some oversight, but limited oversight. When it comes to license negotiations, we typically always handle those internally, but we have lots of bench strength in the company that has experience now in negotiating licenses, and so I think we're okay. But I do spend a lot of my time thinking about this and trying to figure out what we can do to add additional bench strength there. We are recruiting right now to get some more people that help us in litigation management, but I think we're okay.

Robert Young - Canaccord Genuity, Research Division
Last question, if I may, just on the MediaTek, it's limited to North America. I was wondering why limited to North America. Is there an opportunity to expand outside of North America in terms of the plan?

James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director
Yes, there's definitely an opportunity to expand outside of North America. I think that they felt there was urgency in dealing with just North America. We accommodated that, but there's no reason to think that we wouldn't be pursuing a much broader license, not only in jurisdictions beyond North America, but on technologies that are not included in the license.

Operator

Mr. Burns, there are no further questions at this time. I'd like to turn the floor back to you for closing comments.

Tyler Burns - Director of Investor Relations
Thank you, operator. This concludes WiLAN's First Quarter 2013 Financial Results Conference Call. A replay of this conference call will be available until 11:59 p.m. on August 8, 2013. Instructions for accessing the replay of this conference call can be found on the news release that was issued earlier today and that is available on WiLAN's website. Thank you for attending.

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