• Increasing Capital Returns

Wi-Lan's new plan will also result in greater returns to owners. Wi-Lan still needs a strong balance sheet for litigation and acquisitions, but the new operating plan will enable the company to return more cash to shareholders. In the past, management stated that it wanted to return 40% of free cash flow in the form of dividends, spend another 40% on acquisitions, and use the remaining 20% to repurchase stock. In its most recent conference call, management has stated that this target is still valid. Starting in Q2 2014, management has announced a 25% dividend increase. At current prices, this increase pushes Wi-Lan's dividend yield around 6%. Given its large cash pile and reduced capital needs, there is plenty of room for further increases. Wi-Lan's board has also approved a plan to repurchase up to 10% of outstanding shares. Based on the current share price, this seems to be a good way to boost EPS. The strategic review has resulted in an increased focus on returns to shareholders.

Long-Term Financial Goals

Management announced that it hopes to more than double revenue and have $0.30 in EPS by 2018. For comparative purposes, in 2013, revenue was $88 million and the company had -$0.15 in EPS. When evaluating whether or not these goals are realistic, investors should recognize that Wi-Lan's management typically issues conservative guidance. It should be noted that these numbers are a goal, not guidance, but I still doubt that management would mention unattainable targets.

In order to meet its first goal, Wi-Lan needs to generate at least $176 million in revenue by 2018. Management supported its target by listing the expected value of several potential revenue streams. Notably, Wi-Lan has a backlog of around $300 million, most of which is expected to be collected over the next five years. Management believes that over the next five years, the company can generate an additional $200-$300 million from patents it owns relating to LTE, Digital Display, and Network Management. Several other new patents and partnerships are each expected to generate between $20-$100 million. Currently, Wi-Lan is in the midst of negotiating additional partnerships which are likely to contribute additional revenue. Partnerships are expected to comprise a major portion of Wi-Lan's revenue by 2018. Should management's estimates prove correct, Wi-Lan's revenue goal seems attainable.

Wi-Lan plans to reach $0.30 in EPS through a combination of increased revenues, higher operating leverage, and share repurchases. The revenue increases detailed above are expected to work in conjunction with higher operating leverage. Operating leverage refers to the ratio of fixed costs relative to variable costs. High operating leverage creates higher profit margins once the breakeven point is reached. Lower litigation and patent management expenses will be the key drivers behind the increased operating leverage. Using its current diluted share count, $0.30 of EPS would require just over $36 million in net income. However, assuming Wi-Lan repurchases 10% of its outstanding shares (and no other shares are issued or repurchased), the amount of net income required to meet its EPS target falls to around $32.5 million. This number definitely seems attainable if Wi-Lan is able to meet its revenue goal with an increased amount of operating leverage. However, as mentioned earlier, this revenue number is based on management's estimates, which may or may not come to fruition.

Why Such a Negative Reaction?

After reviewing the changes Wi-Lan had announced, I was happy with the steps that the company plans to take. Looking at the chart below, it is clear that the market did not share my enthusiasm. I would imagine that the sell-off was caused, at least in part, by speculators dumping shares once they realized the company would not be sold. It's tough to imagine any other group being so thoroughly disappointed by this announcement. The only other negative news came when Wi-Lan's backlog was announced at $300 million. This is a reduction of between $25-$50 million over the past two quarters, but based on the revenue projections made by management, I believe the company will more than make up for it in the future. Truth be told, I'm still perplexed by the market's reaction to Wi-Lan's recent announcement.

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With each passing month, it would seem that the case against Wi-Lan has been weakening. Following its loss to Apple, the belief was that companies would no longer be willing to sign licensing agreements with Wi-Lan. As subsequent deals were signed, talk turned to how high legal expenses would prevent Wi-Lan from being profitable. Now that legal expenses are under control, the bear case revolves around Wi-Lan being unable to generate meaningful future revenue aside from what is already in its backlog. In its most recent conference call, management gave a fairly detailed projection of a significant amount of future revenue that is not currently in the backlog. Should this new revenue begin to materialize, it will be interesting to see the next argument against Wi-Lan.

Conclusion

I believe Wi-Lan is on the right track. It has identified changes that will lead to higher revenue, less risk, and more money in the pockets of shareholders. Management clearly outlined the ways in which it plans to increase revenue, while decreasing expenses over the coming years. Some signs of what is to come could be seen in Q1 2014, and it will be exciting to see the remainder of Wi-Lan's new strategy put into place in the coming months. Management's financial goals call for significant growth in both revenue and income over the next five years. Management has set the bar high, but its updated business plan should help it reach these targets. Despite the market's reaction, the conclusion of Wi-Lan's strategic review has strengthened my belief in the company.