Patent-licensing firms set to soar

An even better reason to consider this niche is timing. Many of this sector’s top firms saw valuations soar this past summer after a consortium led by Apple Inc. of Cupertino, Calif., shelled out US$4.5 billion for patents owned by bankrupt Nortel Networks Corp. By Dec. 20, share values of companies in this niche had tumbled well below the level they were at before the Apple consortium made its bid public, thus representing some solid deals.

For instance, Wi-LAN Inc. of Ottawa saw its share price plummet by 40%, to $5.70 on Dec. 20 from $9.56 on July 26, and is considered a “buy” by all nine of the analysts who cover it, according to Bloomberg LP.

Over the past few years, Wi-LAN has transformed itself from a failed wireless-products company with a few dozen patents into a veritable cash machine. Wi-LAN was expected to generate US70¢ a share in cash in 2011 — plenty of coverage for its US14¢ a share dividend. Its net cash balance as of Sept. 30 was US$197 million.

Wi-LAN’s secret: its original orthogonal frequency division multiplexing patents, which were developed by Wi-LAN’s founders, are part of the core technology for connecting laptops and smartphones to the Internet via Wi-Fi.

Wi-LAN CEO Jim Skippen leveraged the popularity of wireless technologies to raise US$191.4 million in six financings — diluting his firm’s stock by more than 30% along the way — and used some of the proceeds to buy another 1,200-plus patents. Then, early in 2011, Wi-LAN persuaded LG Electronics of South Korea, Intel Corp. of San Jose, Calif., and other high-tech heavyweights to pay royalties and other fees for the use of Wi-LAN’s OFDM patents.

As a result, revenue is expected to reach US$125.4 million in 2012, up by 15% from 2011 and almost 150% higher than 2010’s revenue of US$50.7 million. But Ralph Garcea, an analyst with NCP Northland Capital Partners Inc. of Toronto, estimates in his Dec. 11, 2011, report that Wi-LAN will post earnings of US49¢ a share in 2012, down from a projected US50¢ a share in 2011 and up from a net loss of US21¢ a share in 2010.

On the face of it, that’s not very impressive earnings growth — at least, in the short term. But part of the slowdown in 2011 was the result of costs incurred in Wi-LAN’s unsuccessful attempt to acquire Ottawa rival Mosaid Technologies Inc. Wi-LAN estimates these costs at US$10 million, or roughly US8¢ a share, which will be spread over the second half of 2011 and into the first quarter of 2012.

More important, almost all the large deals negotiated by Wi-LAN in the past year are at least five years in length — with the value of royalties increasing over time. As a result, Garcea reckons that both revenue and earnings will accelerate in 2013, with momentum carrying over into at least 2015. He estimates revenue will reach US$155.4 million in 2013 — up by 24% from 2012 — while earnings will jump by 43% year-over-year to US70¢ a share.

Wi-LAN has plenty of company in the patent licensing field. IBM Corp. of Armonk, N.Y., which registers thousands of patents annually, generates an estimated US$1 billion-plus annually from licensing its intellectual property. That’s just a tiny fraction of IBM’s total sales.

Much closer to a patent pure play is Qualcomm Inc., a San Diego-based pioneer in key wireless technologies, such as code division multiple access. Qualcomm recently closed the books on a record year, with revenue of US$15 billion for fiscal 2011 (ended Sept. 30) and earnings of US$2.70 a share. In fact, Standard & Poor’s Financial Services LLC analyst James Moorman predicted in a Nov. 8, 2011, report that Qualcomm’s revenue would jump by 24% in fiscal 2012 and by another 12% in fiscal 2013 — paced by the rapid growth in smartphones, which rely on Qualcomm’s technology.

However, Moorman projected a modest 14% increase in earnings, to US$3.09 a share in fiscal 2012. The reason earnings will grow more slowly than revenue, Moorman says, is that average selling prices for Qualcomm chipsets are slipping. Even so, he rates Qualcomm a “buy” with a 12-month price target of US$73. Qualcomm pays an annual dividend of US86¢, representing a yield of 1.6% as of Dec. 20.

A patent pure play closer to Wi-LAN’s size is InterDigital Inc. of King of Prussia, Pa., one of the pioneers in the business. InterDigital also has been in a state of flux since July 19, 2011, when it announced it was exploring strategic alternatives — effectively putting itself up for sale.

There’s no secret why: Inter-Digital’s CEO William Merritt told analysts a couple of months earlier that the value put on wireless patents was being driven sky-high by the fact two of the most successful new makers of smartphones — Google Inc. of Mountain View, Calif., and Apple — had relatively few patents. That’s why the Apple-led consortium had bid billions for Nortel’s patents and why Google has purchased Motorola Mobility Holdings Inc. for US$12.5 billion.

“These companies need to build assets,” Merritt says, “because a lot of them are also new players in this market. Apple and Google never participated in wireless up until a few years ago. They don’t have the portfolio that an Ericsson or Nokia have built over time.”

Nevertheless, Merritt’s attempt to find a strategic partner or buyer has proven difficult. By Dec. 20, InterDigital’s share price had slipped to US$40.32 — down from a peak of US$82.50 this past summer, despite posting some good numbers.

Ron Shuttleworth, an analyst with Toronto-based M Part-ners Inc. forecasts revenue of US$465.2 million for 2012 for InterDigital — up by 55% from 2011 — and earnings of US$3.90 a share vs US$1.87 for 2011. The 2012 forecast puts InterDigital in an unusually good light; its 2011 results were depressed by its inability to persuade LG, a major customer, to extend a fixed-fee royalty arrangement.

In Shuttleworth’s Nov. 9 report, he rated InterDigital a “buy” with a 12-month price target of US$118 a share. This is based on his expectation that one of the high-tech giants will eventually see the value in InterDigital’s 19,000 patents and almost 200 engineers. IE