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Wi-LAN’s Valuation Looks Compelling Going into Q1 Earnings

Wi-LAN CEO Jim Skippen.

Wi-LAN CEO Jim Skippen.
Wi-LAN CEO Jim Skippen.
I have been sitting on the sidelines and watching Wi-LAN (TSX:WIN) for a while now but think it may be time for investors to revisit this name.

The company has a strong balance sheet with $118M in cash, predictable earnings and cash flow and as litigation expenses decrease this year should return to positive operating leverage. While many investors are likely waiting to hear the results from the strategic alternatives process, I believe that even if the Company announces that the process has resulted in a return to the status quo the stock is still very attractively priced.

WIN has adjusted cash of $118 million or $1.00 per share

As of Q4/2013 Wi-LAN reported cash of $132 million, with no debt. However looking more closely at the balance sheet investors need to think about the ~$19M in current patent obligations that need to be paid in the next 12 months and another ~$7 million in outstanding lawyer fees (success fee obligation). Although Accounts Receivable increased at the end of the year CFO Shaun McEwan said on the last conference call that the majority of that ($10M-$12M) had already been collected. So adding all these pieces together the true cash balance is ~$118 million or $1.00 per share.

I believe the cash balance should continue to increase throughout the year as litigation costs decrease and positive operating leverage returns. Also management has shifted the litigation strategy toward more of a contingency model, which should help lower operating costs.

Q1 Results Should Beat Guidance

Q1 guidance is for revenue of at least $22.6 million leading to adjusted earnings of $10.6 million to $12.6 million or adjusted EPS of $0.09 to $0.11. On the last call management indicated that due to the change in the timing of releasing their financial results (moved a month ahead), guidance did not include the typical amount of royalty reports. While Wi-LAN always beats its guidance because guidance is comprised of revenue the company knows it will book, I believe the upside could be in the range of $1.5 million to $2 million (or $0.02 of EPS) a quarter. Wi-LAN should report Q1 results on April 30th before market open.

Wi-LAN Could Generate EPS of $0.37-$0.40+ in 2014

Although I anticipate guidance for the remaining quarters in 2014 to be slightly lower than Q1 (assuming no other deals), I believe the Company can consistently post revenue of at least $20 million and generate $0.09-$0.10 per quarter. Investors should remember that like Q1, guidance for the rest of the year will continue to be impacted by being issued a month earlier than it historically has and therefore will not contain as many royalty reports. In my estimation investors should be factoring in anywhere from $1 million to $2 million of potential upside for these reports on top of the guidance.

Valuation Looks Attractive Ahead of Positive Operating Leverage in 2014 and Pays a 5% Dividend

Today Wi-LAN is trading at $3.30 with a market capitalization of $395 million. The Company has an adjusted cash balance of $1.00 share and assuming it can post cash earnings of $0.37 in 2014 is only trading at 6.2x 2014 adjusted EPS. In down years the Company has traded at the 8x range and as high as 12x. Given management can illustrate the return of operating leverage in Q1 and through 2014, I believe the stock can move back toward the 12x range. Assuming 10x a 2014 adjusted EPS estimate of $0.38 plus the $1.00 share in cash would support a price of $4.80 or upside of 45% from today’s levels.

In October, Wi-LAN Announced it was Exploring Strategic Alternatives

My above analysis is based on the fact that I assume that nothing will come of the strategic alternatives review. While there have been many theories about a buyer taking the company out, a potential special dividend or a dividend increase, I think that if nothing changes the stock looks cheap. The Strategic review can only be upside and if the stock falls the value proposition would become even stronger.

Recent News Should Put Apple Back on the Table Going into the End of the Year

Following a loss to Apple (AAPL-NASDAQ) last year, which may have been the final straw for many investors, the Judge recently overturned the jury’s decision that several claims in the 802 patent were invalid, which ultimately led to the negative ruling against Wi-LAN. This week Wi-LAN announced that it has filed an appeal to the Federal Circuit in this case. While the appeal will likely take at least a year, Wi-LAN and Apple are expected to be back in court by the end of the year for patents related to LTE. As this trial approaches it should act as a catalyst for the stock given the significant potential revenue potential of a licensing agreement with a leading player like Wi-LAN and the precedent it would set for the rest of the market.

Disclosure: I currently have a long position in Wi-LAN at the time of publishing.


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