WiLAN changes strategy as U.S. patent wars, reforms, pose risk

Changes to WiLAN Inc.’s business plan have meant positive results for the company, and despite recent failures in court and growing criticism of “patent trolls” in the United States, the Ottawa tech company has exceeded analyst expectations.

“Changes to our business operations that we have put in place over the past twelve months are continuing to generate positive financial and operational results,” president and CEO Jim Skippen said in a press release in October.

The company reported positive results in the second and third quarters.

The revenue in the second quarter, ending June 30, was $25.7 million, up from $19.9 million at the same time the previous year. (All figures in U.S. dollars.)

In the third quarter, ending Sept. 30, revenue increased to $24.6 million from $20.7 million a year earlier.

Tyler Burns, the company’s director of investor relations, says the positive results are linked to two key changes made to WiLAN’s business operations following a strategic review of the company by its board of directors that began October 2013 and ended in May 2014.

Analyst Robert Young of Canaccord Genuity, says one of these changes has meant reducing risk in litigation.

In the 2014 third-quarter report, WiLAN says it prefers to negotiate licensing without litigation, but this is not always possible. Reducing risk as part of its business plan has meant that lawyers will take on more risk.

“They’re going to drive more contingency fees,” says Young, meaning the lawyers they hire will take on more of the risk of success or failure in licensing.

In addition, instead of buying and taking ownership of patents, WiLAN is going to work with big companies that already have patents to help them monetize their patent portfolios, Young says. If WiLAN were to buy patents, this would mean more risk, while its new strategy means sharing the risk with other companies seeking to capitalize on their patent holdings.

Expenses fell in the third quarter of 2014 to $21.9 million, down from $28.6 million in the third quarter the previous year. The main reason cited for this was a year-over-year drop in litigation expenses from $14.2 million to $3.1 million, which Burns says is a result of the shared risk model.

Expenses also dropped for the same reason in the second quarter to $14.5 million, down from $24.2 million in the same quarter the previous year.

The changes and positive results may have also impacted the company’s share prices.

Following WiLAN’s initial announcement of its new business plans in May its share price fell from $3.55 to $3.25, but it has since risen to a high of $4.24 in the third quarter. As of Dec. 4, it was trading at $3.55 per share.

Young says WiLAN has been exceeding analyst expectations and should perform well over the next few years, though “it seems to be a trend to make it difficult for WiLAN to operate.”

WiLAN doesn’t offer a product, but exists to protect other companies’ products in the tech industry. Critics often refer to this type of company as a “patent troll.”

The company originally developed the very kinds of products it now protects. Between its conception and 2006, WiLAN realized that although its own products were well-received in the industry, its equipment business was not profitable, and as a result it decided to focus on its more promising intellectual property business.

Young says momentum for patent law reform in the United States, where WiLAN has several offices, is generating a lot of heat on patent companies and U.S. President Barack Obama has made it harder for patent trolls to operate.

Eyal Ofir, an analyst at Clarus Securities Inc., told the Financial Post that there are concerns about WiLan’s future revenues.

“In the coming quarters, we anticipate stronger revenue and earnings that could be a point of stability for the stock, but without stronger execution in court we have longer term concerns about the company’s ability to grow revenue even with the current revenue diversification strategy,” Ofir told the Financial Post.

Young says recent court losses, including a case against Apple, have raised the question of how much power the company has to continue winning court cases.

At the same time, Young says President Obama is reaching the end of his term, and given the changes to WiLAN’s business plan, things should remain positive for the company going forward.