Wi-LAN’s third quarter was better than it seems, says Paradigm

Despite lower than expected revenue, Paradigm Capital analyst Daniel Kim found some things to like about Wi-LAN’s (Wi-LAN Stock Quote, Chart, News: TSX:WIN) third quarter results.

Yesterday, Wi-LAN reported its Q3, 2016 results. The company earned (U.S.) $657,000 on revenue of $16.6-million, a topline that was down 22.4 per cent over the same period last year.

“Wi-LAN delivered a solid bottom line with $9.3-million of EBITDA on revenues that were affected somewhat by the revenue variability inherent in our model,” said CEO Jim Skippen. “During the quarter we made progress on both acquisitions and licensing although we did not close any licences that boosted this quarter’s revenues materially.We could have closed one or more larger licence opportunities that were in discussions. This would have significantly boosted the quarter; however, in the long run we believed it was not in the best interests of Wi-LAN to do so because the amounts offered still did not reflect a fair value for the licences. With significant cash on our balance sheet, we can afford to wait to finalize licences only when we believe they are at a fair value. These are not lost licence opportunities; we simply believe they have been pushed out into future quarters. In the meantime, we continue to carefully manage our expense level, which is reflected in our high EBITDA margin and bottom-line profitability.”

Kim says Wi-LAN’s revenue number fell below his estimate of $20.5-million, but says the surprise was that key profitability metrics like cash EPS ad EBITDA nearly matched his forecast despite the revenue shortfall. He says this bodes well for a time when more deals happen.

“We are pleased with the quarter despite the revenue miss as it illustrates agile profitability performance in a challenged deal period,” he says. “Further, we recognize the drought is temporary, with a number of large deals in the pipe more imminent to closing. Overall, it has 60 ongoing programs, which has been very consistent for the last three quarters. WIN is a cash machine and is trading at a deep discount relative to its intrinsic fundamental value, at 2.1x 2017e EV/EBITDA versus peers at 9.7x (Figure 1). Looking at it another way, it is currently running at 32% FCF yield or 3.1x FCF (based on our 2017 forecast). We reiterate our Buy rating and C$4.50 target price, based on 10x 2017e earnings. There are no material changes to our estimates.”

In a research update to clients today, Kim maintained his “Buy” rating and one-year price target of $4.50 on Wi-LAN, implying a return of 150 per cent at the time of publication, including dividend.

Kim expects Wi-LAN will deliver EBITDA of $47.2-million on revenue of $83.2-million in fiscal 2016. He expects these numbers will improve to EBITDA of $40.2-million on a topline of $75.2-million the following year.

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