Wi-Lan (WILN) is a patent monetization company, that has successfully licensed its patents to over 265 companies, and has over 3,000 pending or issued patents. With this size and strength of its licensing program comes the interesting scenario as to whether or not it is one of the safer bets in the patent monetization industry. While we all know that no bet in anything (but especially in patent monetization) can be considered a sure thing, Wi-Lan has had a successful licensing campaign. Wi-Lan has a variety of very successful patents and solid financials, which should help to entice long term investors.
RE37,802 Patent
One of the most important (and in my opinion valuable) patents in Wi-Lan's portfolio was one of the patents recently licensed through Dell (DELL) through a settlement of litigation. This patent is RE37,802, which is entitled "Multicode direct sequence spread spectrum". The reason that I believe that this patent is so important is the fact that it has a priority date of March 31,1992. This early priority date will help to render obviousness and prior art a moot point, as it will be very hard to argue that the invention was conceived prior to the priority date. With the priority date being so far back, and the patent being referenced by 44 other patents, the RE37,802 patent can truly be considered a pioneer patent. Notice the RE before the patent number, this simply means that it was reissued. For a full discussion of the implications of a patent being 'reissued' I would recommend checking out the following information.
This patent has been an active part of the Wi-Lan patent litigation aresenal since Nov 1, 2007 when Wi-Lan sued 22 different companies. This patent has withstood the test of time, and has resulted in many different licensing agreements including Intel (INTC), Netgear (NTGR), Lenovo, and of course the recent Dell settlement as key settlements involving the RE37,802 patent. Clearly, this patent has been quite successful for Wi-Lan as a company, and we can only expect for it to continue being successful due to Wi-Lan's positive Markman hearing involving the patent versus Hewlett-Packard (HPQ), Dell (which settled as mentioned earlier), HTC America (HTCKF), and Sierra Wireless (SWIR).
In the recent litigation of the RE37,802 patent it is likely that some of the other Defendants will choose to simply license the patent, rather than go through the process of litigation. This patent has withstood the scrutiny of judges and jurors before, and the favorable markman hearing should make it easier for Wi-Lan to prove infringement of its patents by the Defendants. The Defendants in this case, given the history of the patent, and the fact that Dell just chose to settle, I would expect for many if not all of the remaining Defendants to settle the claim with Wi-Lin in the near future. The significance of the Dell settlement, with Dell being one of the bigger, if not the biggest company, in the list would leave the other Defendants high and dry if they chose to go to a trial. Dell wanted to try to minimize its risk in the face of Wi-Lan's IP position, expect other Defendants to do the same.
Patent 5,282,222
Another piece in Wi-Lan's arsenal that is usually used in tandem with the RE 37,802 patent mentioned above is the 5,282,222 patent entitled:"Method and apparatus for multiple access between receivers in wireless communications using OFDM spectrum." The abstract helps to give us a much clearer view of what this patent really covers; the abstract starts out with:"method for allowing a number of wireless transceivers to exchange information (data, voice or video)with each other." The broad claims made in the abstract and subsequently the patent help to point out just how valuable this patent can be for Wi-Lan. This patent is once again being used in Wi-Lan's litigation against Dell and the other Defendants as mentioned above. This patent also has a colorful history of creating big settlements for Wi-Lan, for example its settlements of 2011 litigation, where it settled with Marvell Semiconductor, Netgear Inc. , 2 Wire, Belkin International, Lenovo and Westell Technologies.
What makes this patent so valuable is similar to the RE37,802 patent mentioned above, is the fact that it has a very early priority date: March 31,1992. This makes it a patent that pre-dates a large amount of patents that could be held by Defendants or other parties. Furthermore, this patent is truly a patent that helped to break new ground in its field, having been referenced by 323 other patents. This patent has withstood the test of time, and has become a very valuable patent in Wi-Lan's playbook.
Financial Position
Wi-Lan is in a solid financial position, with the possibility to return hundreds of millions of dollars to investors. According to Wi-Lan's website:
"Since focusing its business on generating annual revenue from licensing intellectual property in 2006, WiLAN has increased revenue from under $2 million to more than $88 million in 2012. That works out to a compound annual growth rate of greater than 90%."
While that sounds impressive, I would not invest in this stock based on a continuing 90% compound growth rate going forward, as it is not very likely to happen. However, the company still has solid financials. Unfortunately, according to company guidance it does not appear as though the company will meet the average analyst earnings estimate for the second quarter of the year. However, do note that in its estimate Wi-Lan assumed not receiving any additional revenue from licensing deals in the second quarter. This would be rather conservative given the history of Wi-Lan producing settlements for its Intellectual Property Portfolio. Now, with this in mind lets dive into the first quarter numbers and then we can look at the future drivers of growth for this stock.
For the first quarter of this year Wi-Lan had:
Wi-Lan Earnings
| Revenue |
$18.4 million |
| Adjusted Earnings (non GAAP) |
$1.3 million (1 cent per share) GAAP is loss of $6.4 million or (5 cents per share). |
| Cash & Cash Equivalents |
$167.2 million |
Some key idea about the first quarter is that revenue came in ahead of company guidance, as well as Adjusted Earnings came in ahead of company guidance. With $167.2 million in cash, it should allow for Wi-Lan to acquire the next generation of patents that it will need if it wants to stay ahead in the patent litigation game. Also of note is this little comment from the CEO: "working within the capital allocation model, WiLan returned $4.9 million to shareholders in dividend and share buyback plans."
This statement is quite important and can represent another driver of long term growth for the company. Receiving dividend payments and share buyback plans should over the long term help to increase the value of the company's remaining shares. This could help to create significant value for shareholders long term.
Also, the company is undervalued given future PE Ratios
For the 2013 year, you can clearly see that Wi-Lan appears to be overvalued. However, with a long term outlook of 7.52 PE next year, and 4.90 PE the year after that, it appears as though long term Wi-Lan is undervalued. The long term outlook for this stock is bright, and it should be able to continue producing substantial revenue, as well as continue with its share buyback and dividend program. The company does appear to be undervalued long term just based on financials. The company could become even more attractive as in the short-term share prices can be expected to drop even more. Also, with no debt the company's position in the IP litigation sector appears to be safe. How is this company going to be able to drive growth going forward?
Future Drivers of Growth
There is a large amount of medium to long term upside possible in Wi-Lan. It has six trials coming up in 2013, which will represent significant catalysts for investors. These trials would have the potential to drive future growth not only for the rest of 2013, but for years to come. Wi-Lan makes its revenue licensing patents, and with the exception of one trial, all of these trials are going to be IP infringement trials. However, I do not expect all six of these cases to go to trial, and expect instead for a few of the cases to settle outside of court, which would decrease Wi-Lan's litigation costs and help it to beat its revenue estimates.
Furthermore, this litigation should only increase with Wi-Lan's presence in LTE stating on its company website that:
Today, through a series of patent acquisitions involving pioneers in the development of broadband wireless data systems, the company has established a portfolio of over 15 distinct patent families that it believes are essential to implementing parts of the LTE standard. WiLAN also remains an innovative player in LTE R&D through its wholly owned subsidiary Cygnus Broadband.
The key term here is "essential to implementing parts of the LTE standard". This phrase would suggest that anyone who currently has the LTE standard is infringing upon the patents of Wi-Lan, as without infringing upon Wi-Lan's process there would be no way to achieve the LTE standard. Wi-Lan has already had some settlements in the fields of LTE standards, and continues to actively pursue litigation in that arena.
The company has also been active in licensing its portfolio of wireless patents, as well as its Digital TV and Broad Display patents (which just recently initiated a settlement agreement with Panasonic.) These patent portfolios should help to drive long term growth as the company acquires more patents and initiates patent litigation proceedings versus more Defendants.
Conclusion
There is a lot to be excited about in terms of the long term outlook for Wi-Lan. Wi-Lan has many licensing agreements, and its IP portfolio has the opportunity to continue to drive growth for its shareholders. If an investor is not concerned about the short term in the earnings miss recently, then this could be a very nice time to pick up shares. With the P/E ratio very skewed over the next couple of years Wi-Lan has the opportunity to provide investors with significant value.