Wi-Lan Inc. (NASDAQ:WILN) CEO Jim Skippen on Relationships with Samsung, Panasonic, Freescale Semiconductor Ltd.

James West
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Wi-Lan Inc. (NASDAQ:WILN) (TSE:WIN) CEO Jim Skippen discusses his company’s patent licensing business with clients like Samsung Electronics Co Ltd. (KRX:005930), Panasonic Corporation (TYO:6752), Freescale Semiconductor Ltd. (NYSE:FSL) and others who license Wi-Lan’s portfolio of 15,000 patents.

Midas-Letter-financial-radio-podcast-thumb[four_fifth_last padding=”0 0 0 20px”]Listen to the interview with Jim Skippen:

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Transcript:

James West:         Jim, thanks for joining us today.

Jim Skippen:         Thanks for having me.

James West:          Jim, can you give me an outline of the value proposition for investors in Wi-Lan?

Jim Skippen:         Yeah, well today, the value proposition is quite easy to say: Wi-Lan currently has a market cap of about roughly $135 million. We have $95 million USD in cash and we have a backlog, meaning signed agreements, for a range — and the lower end of the range is 190 million. So to my eyes, it’s a very, very compelling value proposition and I think there’s been a bit of an over-reaction to a cut in our dividend, which has created a tremendous value opportunity for investors.

On top of that, we cut our dividend, we didn’t eliminate it, and our current dividend yields about 3.5 percent. So that’s a healthy yield, and there’s good growth prospects, I think, for the company, and certainly for the stock price at the current levels.

James West:          Okay. So exactly what is the business you’re in? What’s the size of the market you’re pursuing, and how much of that do you plan to capture?

Jim Skippen:         So we have a somewhat unique business, and some of the traditional measures may not be as relevant. Basically, what we do is, we manage patent portfolios. In some cases we own the portfolios; in other cases, we manage them on behalf of our clients, and we have a wide range of clients, from hospitals to very large technology companies like Panasonic and Roam and Freescale and Infineon and many others. And basically what we do is, we offer a turnkey solution where we will run a licensing program for these patent portfolios, and we will pay our clients when we are successful.

So in a sense, they just have to sit back and wait for the dividends to arrive.

I think we’re one of the major players in this market; there are only a handful of players, and we would certainly be amongst one of the top players. We have over 42 different clients that have parked portfolios with us, and have a patent portfolio today of approximately 15,000 patents. So we really have a lot of depth, a lot of different diverse licensing programs, and with our financial strength, and some might think we cut the dividend in a moment of weakness but we really didn’t; we did that because we made a conscious decision to grow the company and focus our cash on growing the company, we’re an ideal partner, I think, for many companies who want to do something with their patents.

James West:          Interesting. So you cut the dividend to preserve cash, I’m assuming?

Jim Skippen:         To preserve cash would be one way to put it. We have a healthy cash balance of approximately $95 million, we were cash flow positive, but what we wanted to do was two things: we wanted to allocate more of our cash to growing the business, and we were paying out $26 million CDN a year in dividend and you can just juxtapose that with our current market cap of about 140 million or so, and see that that’s a very, very large amount to be allocating as a dividend.

And so we felt that it was a better use of capital, to focus that capital on growing the business.

The other thing was, our business is going through a transitional period, and notwithstanding that, we have had growing revenues over the last year, and we’re cash flow positive and have very strong EBITDA contribution. But we wanted to make sure that no matter what happened, we remained in a very strong cash position, and so for those two reasons, we thought it was appropriate at this time to reduce our dividend.

James West:         Okay. So then, would an investor then be able to infer that upon achieving your growth objectives, there might be an increase in the dividend in the future?

Jim Skippen:         Well, that’s certainly a possibility. There are many possibilities; that’s one. Special one-time dividends are also a possibility, because sometimes we may get a large license amount, and we might decide that it was an appropriate use of cash to do a one-time dividend. And I think we’ll continue to listen to our shareholders and what they would like us to do, but at this time, we have a solid 3.5 percent, maybe it’s even slightly more than that, dividend, and I think that should be attractive. And it is possible that we will increase it in the future, but I think we want to get back actually more to being a growth play than being an income play.

James West:          I see. Okay. So who do you compete with? Who are the largest competitors in the space, how much of a threat…

Jim Skippen:         As I said, first of all, if you understand patents, there’s no – if you have a valuable patent portfolio, and let’s say that products need to use your patents in their products in order to have viable products, then there’s no one that you compete with, per se, because if I have an essential patent on Wi-Fi, or an essential patent on LTE, and by the way, I do have patents like that, the only place you can get a license to those patents is from Wi-Lan. So we don’t compete in that sense.

But where we do compete is in getting new portfolios, because if you’re a large company, and a good example would be Freescale – Freescale was looking around for a partner. Freescale, as I’m sure you know, is one of the world’s largest semi-conductor companies, it was basically the semi-conductor portion of Motorola that was spun out. And they were looking for a partner to license a very large portfolio. And they looked at the options, and they actually zeroed in on us, and I don’t even think there was any competition per se, in that there was no bidding or anything like that. But there would have been other companies out there that might have come to mind. And again, I think we feature very well compared to our competitors, because we have been very, very effective at licensing. We’ve signed well over 300 licenses, so companies know we will be successful or are likely to be successful with their patents.

We are well capitalized, as I said, with about $100 million in the bank, and with cash flow positive financial results. So we’re a good choice for them to go with, because we’re stable and we know what we’re doing.

James West:          Okay. Interesting. What is the capital structure —

Jim Skippen:         I should say, too, one other point on that: there are only maybe three or four companies that are like us out there. But if you think of it, there are thousands and thousands of companies that have valuable patents that would probably like to do something with them, but they’re not. So because of just the sheer ratio of the number of companies with patents, to the number of companies that can do something with them, we see a significant volume of transactions. So in a way, competition isn’t that fierce for these portfolios, given that there are so few companies of our stature looking for them.

James West:          I see. So you’ve got a patent portfolio consisting of technologies that are essentially required for a wide range of products, and therefore you are able to attract ongoing business that creates significant cash flow on an annual basis?

Jim Skippen:         Well said.

James West:          Takes me awhile, but I do catch on eventually! Okay, what’s the ownership structure of your company look like in terms of insiders versus retail and institutional?

Jim Skippen:         Well, it’s hard to track that exactly. We have about, I think, 5 percent or so of our stock is owned by insiders. We have a mix of the institutional investors and retail investors, and we’re listed on both the Toronto Stock Exchange and the NASDAQ.

James West:          Okay. Do you maintain any relationships with any billion-dollar-plus players in the sector?

Jim Skippen:         Sorry, billion dollar what? Could you repeat that?

James West:          Do you have any strategic relationships with billion-dollar-plus customers or other technology users in the space, in the technology space?

Jim Skippen:         Well, I would say that our relationship with Samsung is pretty close to a strategic relationship. We’ve had a number of transactions with Samsung; we’ve never had litigation with Samsun, and they’ve been our biggest licensee, and we’ve worked with them on a number of portfolios. So we don’t formally call it a strategic relationship, but I think it could be described as such.

James West:          Okay. So the – looking at your chart, the stock took quite a hit when you cut your dividend. Now I guess what you’re saying form the entire conversation we’ve had so far is that the opportunity is because you’re going to direct more cash towards growing the business, the opportunity is for share price appreciation, should the market respond favourably.

Jim Skippen:         Well, that’s how we feel. We just feel that based on the value that’s there today, it looks to us to be more than the market cap and so we think there’s an opportunity for our business, and an opportunity for investors right now, for sure.

James West:          Sure, okay. So what kind of milestones would I, as an investor, be looking for going out 12, 18 24 months, that would be a signal of your successful growing of the business?

Jim Skippen:         Well, I think at this point, you would look to a couple things, maybe. You would look to our financial results. We’re not sort of a lottery ticket company or a company with little or no revenues but great future potential, or little or no positive earnings with great potential. We right now are generating $95 million, $98 million, $100 million, of revenue, about $60 million of EBITDA. So if you think about that, given our current market cap, we’re trading at 2.5X our EBITDA, which is almost unheard of in the market. So again, it’s another metric to show the value.

In terms of the future, I would look to our Q4 results, our Q1 results, I would look to our license announcements, I would look to our announcements about new partners that have partnered with us to have us license their patents, as being metrics of us moving forward and having success with our business.

James West:          Sure, okay. So where are the risks to your business model, and the risks to your growth strategy?

Jim Skippen:         Well I think right now, there’s been kind of a negative sentiment towards patents that has affected all the participants in the sector. And we feel that it’s overly impacted us, because if you look at our financial results, we think they’re actually some of the strongest in the sector, so we shouldn’t get lumped in. There have been some legal changes in the US, both some of the case law that’s come down and some of the statues or bills that have been passed or have been discussed by Congress, that have put a little bit of a shadow on the business.

So I think there’s a minor risk that a bill might get passed that would basically say that loser has to pay in patent cases. Now, we think we can deal with that; we don’t think it’s going to fundamentally change our business, even if it does pass. But that might weigh a little bit on some investors’ minds, and I know that it does, because I’ve been talking to some investors, and I think they have this feeling that there could be a significant regulatory change that would be negative. In fact, I don’t think that’s the case, and I think any regulatory change has been factored into the stock.

That’s probably the major risk. Another risk is that we could have an adverse court ruling. Occasionally we have those, but investors should keep in mind that we have over 16 litigations going on right now, and that occasionally we’re going to have things that are not going to go perfectly, but in the long run, almost every company signs up for our patents, because we have so patents. So even if one patent has a problem in court, we have other patents, typically, that apply to the company. Eventually, they cry Uncle and take a license. So there have been very few companies that we’ve been asserting our patents against that haven’t eventually stepped up and taken a license.

James West:          I see. So you find yourself oftentimes, or the majority of times, having to litigate enforcement of your patent rights?

Jim Skippen:         Well, in fact, a majority of our revenues, historically, have come about without litigation. So a majority of the time, at least in terms of the revenue, we haven’t had to do that. But we do find that more and more in the current environment, it sharpens the mind on the other side. So more and more, unless we are fairly confident that we’re going to get the proper respect for our intellectual property from the other side, we may file a suit. Now, we may not serve the suit, but we may file it just to ensure that the other side takes it seriously, and hopefully we can engage in a discussion and arrive at a license without prosecuting the litigation.

Litigation is an important feature of our business. I should add that we’ve now changed our model on litigation, and almost always we don’t pay the law firm unless we’re successful in signing a license. So we’re able to preserve our capital, much, much better, and we’re able to share the risk much, much better. Much as we’ve changed our model now from we used to buy all our patents; now, mostly, we take on portfolios for our clients with no money upfront and they only get rewarded if we’re successful in licensing the patents. So it serves to preserve capital and reduce our risk.

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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