A tough year for Wi-Lan

Wi-Lan is finishing 2013 on a low note with seriously undervalued stock, successive quarters of high litigation fees, and a question mark looming over the company’s recently announced strategic review.

The Ottawa-based company makes money by buying patents and then licensing them to technology companies. If one of the patents in Wi-Lan’s portfolio is used without a licensing agreement, the company then pursues litigation against the infringing party.

Wi-Lan currently has a portfolio of over 3,000 patents that it licenses to 275 companies, said Tyler Burns, Wi-Lan’s director of investor relations. These patents cover technology ranging from Wi-Fi connectivity to laptop and television displays, he said.

By owning these patents and sharing the technology with the world, patent licensing companies have a monopoly on the knowledge, said Michael Salter, director of corporate communications for Ottawa patent licensing company Conversant, formerly Mosaid.

“There’s no secret sauce,” he said on the knowledge sharing of patents. “If people want to use (the technology), they have to license your patent.”

Legal costs on the rise

If a company neglects to sign a licensing agreement, Wi-Lan takes it to court. This had led to ballooning legal fees for Wi-Lan in 2013.

The company generally tries to pursue litigation in waves, meaning trials happen at once rather than being spread out, said Justin Kew, a Toronto-based analyst for investment bank Cantor Fitzgerald.

By grouping litigation, patent licensing companies are able to assemble similar evidence and cases and move them forward at the same rate, said Colin Ingram, an Ottawa-based lawyer and partner at intellectual property firm Smart & Biggar.

This tactic sometimes leads to smaller legal expenses than if a company were to litigate against each of the defendants separately, Ingram said.

Wi-Lan’s most recent surge of courtroom activity included cases against Apple, Sony Ericsson, and HTC.

Losses in 2013

Steep litigation fees from this wave of trials have contributed to the company’s losses in 2013. Wi-Lan lost $20.5 million in the nine months ended Sept. 30, compared to losses of $12.4 million in the same period of 2012.

Revenues for the company in the nine-month period were $59 million, down from $66.8 million in 2012. While revenues slipped, the company’s legal expenses skyrocketed. Wi-Lan spent $41.2 million in litigation fees in the first nine months of 2013, more than double its $16.8 in legal expenses in the same period of 2012.

Because most of the trials active during these quarters have ended or were settled out of court, Wi-Lan is expected to have lower litigation fees in future quarters, accompanying documents to the third quarter financial statements said.

Along with waves of high legal expenses, the danger with increased litigation is sometimes unpredictable courtroom results.

“To take an action to trial and leave it in the hands of a judge represents both a significant cost and a significant risk because at the end of the day, you may lose,” Ingram said.

Caught in a coin flip

The “coin flip” of court decisions often leads to investor overreaction to both legal wins and losses, Kew said. This has affected the company’s value in the stock market, he said.

“(Wi-Lan) is finding that being a public vehicle is problematic in terms of maintaining good valuation,” Kew said.

The recent Apple trial proves this. On Oct. 23, a Texas jury found that Apple hadn’t infringed on a handset patent owned by Wi-Lan. On the morning of the trial, Wi-Lan stock opened at $4.19 on the Toronto Stock Exchange. The next morning, it opened at $3.05 – a decrease in value of more than 27 per cent.

This number is especially surprising given that Wi-Lan’s share price based only on its cash assets and current contracted license agreements is $3.40, an Oct. 24 research update written by Kew said.

This price doesn’t include the value of the company’s patent portfolio or any potential renewals on contract agreements, Kew said in the research update.

A strategic review

On Oct. 30, seven days after the Apple ruling, Wi-Lan issued a press release stating that the company would be undergoing a strategic review. In the press release, the company said it didn’t believe that its current share price reflected the value of its assets.

The review isn’t surprising considering the company’s low stock price, Salter said.

“There’s a certain point in time when you have an obligation to shareholders to try to increase the value of shares,” he said. “They recognize that they have an issue with their share price, and they’re putting in place a plan to try to crack that.”

Wi-Lan is considering alternatives including “changes to the Company’s dividend policy or other forms of return of capital to shareholders, the acquisition or disposition of assets, joint ventures, the sale of the Company, alternative operating models or continuing with the current business plan,” it said in the Oct. 30 press release.

In terms of a potential sale, Kew said it’s unclear whether a buyer will emerge or who that buyer would be. He said potential players could be Acacia Research Corporation, an American company that partners with patent holders, or Chicago-based Sterling Partners, which bought out patent licensing company Mosaid in 2011 after Mosaid rejected Wi-Lan’s hostile takeover bid.

Cash on hand

Kew believes that the company’s large cash reserves suggest that a change in dividend policy is more likely than a sale, he said.

The company had US$142 million in cash at the end of the third quarter. Jim Skippen, Wi-Lan’s CEO, has said that $100 million is a very comfortable number to have in the bank, and $50 million is the minimum needed to run the business, Kew said.

Because of this, Kew believes a dividend payout of $60 million, or around 50 cents a share, is within reason, he said.

The problem with a potential change in dividend policy is that it won’t fix the underlying problem of Wi-Lan’s “severely low” market value, Kew said.

“It’s a situation that clearly doesn’t make sense,” he said. “The market isn’t giving (Skippen) any credibility for his ongoing business.”

To fix this, Skippen will need to demonstrate that he can win major cases and settle with big players in the technology industry, Kew said.

At the end of the day, Kew said he is sceptical that the strategic review will result in any changes at all.

“I think there’s a big likelihood that nothing happens,” he said.