Ottawa-based patent licensing company WiLAN Inc. will finish 2016 on a mediocre note, with modest revenue figures and a stock price barely higher than it was 12 months ago.
The company generated higher-than-expected net earnings in the first quarter of 2016 before sinking US$3.1 million into the red in the second quarter. The third quarter saw modest earnings of $657,000.
WiLAN’s business model works by acquiring patents portfolios and waiting for tech companies to use its intellectual property. At that point, WiLAN either license its patents for a fee to these companies or, if necessary, sues them for using its patented ideas.
The company’s stock price had risen to $3.82 by June from $1.57 at the beginning of the year, but sank after the second quarter to $1.73 by November.
There are more than 60 ongoing litigations, CEO Jim Skippen said in a teleconference with shareholders announcing third quarter results in early November. Ongoing licensing deal negotiations are confidential.
New agreements needed
WiLAN’s bottom line was $2.4 million after the first nine months of 2016, the company will have to make up for revenue sources close to drying up as several Wi-Fi and wireless technology patent agreements are about to expire in the coming months, according to Todd Coupland, a Toronto-based analyst for investment bank subsidiary CIBC World Markets.
“They’ll need to replace that revenue with new licensing agreements and I expect they’ll be able to do it,” Coupland said. “It’ll take a few months for that which probably puts a cap on the stock until they do.”
In the teleconference, Skippen said the company had delayed securing several patent licensing agreements in the third quarter. He hoped such agreements would result in greater revenue down the road, although he didn’t say whether it would occur in the fourth quarter or in 2017.
“If we had closed one, I think it would’ve made a pretty big difference,” Skippen said, referring to the impact of one deal on revenue figures. “We’ll continue to resist the temptation to take a deal that is less than it should be simply to have a better quarter.”
WiLAN’s performance is precarious because it’s based on the number of licensees and the value of royalties they pay to the company. Licensing deals occur at random times, and payments from companies can come periodically or in a lump sum.
“This lumpiness is now standard for the industry,” Skippen said.
Trimming operational costs
One bright spot for WiLAN in 2016 was it ability to scale down its operating costs.
Expenses in the first nine months of 2016 totaled $53.3 million, $10 million less than in the first three quarters of 2015.
Although revenue results were “volatile,” according to Coupland, WiLAN’s bottom line was buoyed up by lower costs in areas such as litigation.
“If all of sudden they’re dramatically increasing legal expenses, then that would cause me to question the quarterly results,” Coupland said. “But that did not happen, and they actually had good control on operating costs this quarter.”
Litigation costs swallowed $11 million in the first nine months of 2015. Legal fees were cut to $2.2 million in the same nine-month timeframe this year. WiLAN had struck a deal with its hired lawyers for them to incur part of the risk in lawsuits rather than the company.
A dismal performance in 2015 led to WiLAN cutting 30 per cent of its workforce and slashing its dividend by 76 per cent from $0.21 per share to $0.05. Gone are the days where its dividend had been one of the most generous on the Toronto Stock Exchange.
Eyes to the east
Although WiLAN’s near future may look shaky, its silver lining might be found in China, where intellectual property courts have expanded and its IP law has matured greatly in the last decade.
“I think it’s an indication that China is trying to boost its national institutions,” said Richard Gold, a McGill University professor specializing in IP policy. “There seems to be growing trust in the judicial system and dispute resolution system.”
In November, WiLAN became the first patent licensing firm to sue a foreign company in the country where many of the world’s high-tech products are manufactured. The company is suing Japanese electronics company Sony Corp. in the southern city of Nanjing, alleging its smartphones violated WiLAN’s wireless communication technology patent.
“WiLAN has a global strategy, absolutely,” Coupland said, also mentioning that settling in China could push the companies it’s suing to be cautious of using the technologies in question in other jurisdictions. “But it’s hard to say whether it’ll add significant amount of revenue.”
IP litigation in China
Evidence suggests China could be the next hotbed for IP litigation. A Santa Clara University School of Law report found foreign companies had a 100 per cent success rate suing in Beijing’s IP court.
An April report in China Daily stated the average time from suit filing to verdict in Beijing courts was 125 days. The median time in the United States, the global hub for IP suits, is 2.4 years.
IP rulings would also apply to exports of goods made in China, potentially giving WiLAN a strong bargaining tool to negotiate deals with companies rather than go to court.
However, Gold said this phenomenon will only last as long as China doesn’t further reform its patent courts and policy.
“It’s likely gone too far if it’s this easy to win at this rate,” Gold said. “My guess is that China isn’t going to want plants pulled out of their country so it’ll adjust its patent laws so that it’ll be more in line with success rates elsewhere.”