Patent-licensing company Wi-LAN continues to underwhelm investors

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Investors in Wi-LAN Inc. have mostly given up on waiting for a big windfall.

A new deal signed with Samsung Electronics Co. Ltd., while promising for future licensing revenues, does little to raise the stock's appeal to technology investors.

"A lot of people came in expecting a big score – a technology name with a lot of excitement, but it's turned into a yield-type investment with no big upside," said Peter Hodson, chief executive at 5i Research.

But there's not much downside, either, so consistently has Wi-LAN's stock depreciated over the past four years. That, combined with generous dividends, while not exactly inspiring, may make the stock a decent candidate for investors looking for both value and dividends.

As a pure-play patent-licensing company, Wi-LAN is branded by some as a "patent troll" for profiting off technology patents it holds but has no intention of commercializing itself.

The company developed its own wireless technology in the 1990s, enjoying a brief period as a tech darling before crashing when the dot-com bubble burst. The stock peaked at $87.50 in 2000, then lost 90 per cent of its value within the year, never again to trade at more than $10. These days, the company exists solely to enforce the patents it developed in its previous incarnation, as well as those it has acquired since.

It does so through licensing agreements and lawsuits against companies that it believes are infringing on its patents.

Wi-LAN's high-quality portfolio has resulted in some big deals with the world's largest communications and technology companies. In 2006, Nokia Corp., then the largest cellphone maker, signed a $50-million deal to license Wi-LAN's wireless patents.

The company's licensees number more than 250 and include Cisco, LG, Samsung and BlackBerry Ltd. Conspicuously missing from the list is Apple Inc.

In October, 2013, a Texas jury decided that Apple had not illegally used Wi-LAN's communications technology in its devices. Investors had previously thought the suit was a "slam dunk" for Wi-LAN, said Stephen Takacsy, chief investment officer at Lester Asset Management, which owned shares of Wi-LAN for 10 years before selling this month.

In recent months, the legal climate has swung against companies such as Wi-LAN, which rely on the favour of the courts. "The environment has become much more difficult for companies to enforce their patents; it's a costly and lengthy process," Mr. Takacsy said. "The whole business model is not as attractive as it was five years ago. Now you're just collecting nickels and dimes, scrambling to grow with smaller deals."

There is a push for patent reform in the United States, where a Supreme Court judge recently said some patent-licensing behaviour "can impose a harmful tax on innovation."

With potential licensees less likely to lose in court, they may have become less inclined to pay for the use of patents in the first place, Mr. Hodson said. And when they do sign deals, royalty rates are coming down.

And yet, in early June, the company announced that it had acquired a portfolio of 7,000 patents and applications for $33-million (U.S.), and that it had signed a related multiyear licensing agreement with Samsung.

The stock, which had been trading close to its lowest level since late 2009, has risen by 26 per cent since bottoming out.

"While we are encouraged by the Samsung deal and potential licensing opportunities associated with the acquired portfolio, we remain on the sidelines," Canaccord Genuity analyst Robert Young said in a note, citing a number of risks, including the lack of transparency regarding Wi-LAN's earnings and U.S. patent reform. He rates the stock a "hold" at a target price of $3.25.

But the Samsung deal does help to mitigate the risk of a dividend cut as a result of the patent acquisition, he added. After the announcement, Wi-LAN nearly doubled its second-quarter revenue guidance.

The stock currently yields a hefty 7 per cent. The valuation, meanwhile, is low, at 6.7 times price-to-forward-earnings, a number that drops to about 5.5 times when factoring out the company's cash, Mr. Hodson said. "It's not exciting, but it's not terrible."