After spending more than a decade growing Ottawa-based WiLAN (TSX:WIN, NASDAQ:WILN) into an intellectual property powerhouse, CEO Jim Skippen is stepping aside as the company enters an emerging industry in search of greater growth.
The decision to move beyond patent licensing and into the so-called “Industrial Internet of Things” through a multimillion-dollar acquisition of a Saskatchewan firm comes a year and a half after WiLAN said it was restructuring by spinning off its R&D activities and focusing on its core business.
WiLAN traditionally made money by acquiring technology patents and then licensing them to other firms, sometimes under the threat of legal action. But that business model led to dramatic revenue swings and, according to company executives, insufficient growth opportunities.
WiLAN – which also announced this week that it was changing its name to Quarterhill – will continue to operate in the intellectual property and patent licensing market. But its $63.5-million acquisition of International Road Dynamics (IRD) will position the company in its new space as a holding firm for companies involved in the industrial Internet of Things (IIoT) sector.
Shaun McEwan, WiLAN’s former chief financial officer, is taking over as interim CEO for Mr. Skippen, its long-time chief executive who will remain with the company as executive chairman and previously indicated that he’d like to retire by 2018.
Mr. McEwan said the company’s reliance on intellectual property – which generated a profit of $11.1 million on revenues of $92.9 million in its last fiscal year – no longer provided the required growth.
“In reality, WiLAN’s generated very positive cash flows for a number of years now, but we’ve come to the conclusion that as a standalone business, it’s really not right for a public company. It’s a little too ‘lumpy,’” he told OBJ in an interview.
By “lumpy,” Mr. McEwan means that the licensing business made it difficult to accurately predict growth trends. Whether particular licences were signed in a quarter, in addition to the success or failure of litigation and court battles over patents, makes for wild fluctuations in revenue quarter to quarter and year over year.
“We could have pretty low quarters and pretty high quarters,” he said. “That is not terribly conducive to a public company.”
Industrial Internet of Things
WiLAN has, however, accumulated a great deal of cash over recent years. As of Dec. 31, 2016, the company’s cash on hand stood at $143.1 million, part of which will be used to acquire IRD.
The acquisition marks a foray into the emerging IIoT market, which Mr. McEwan believes to be worth trillions in the coming years. Like the commercial side of the Internet of Things – which typically refers to the wireless connection of appliances, devices and objects for applications such as controlling home electronics and lights with a smartphone – the industrial sector utilizes sensors and information-collecting devices to generate data and communicate information and analytics to users and each other. Devices and systems in IIoT improve the efficacy of industrial processes such as manufacturing or maintenance, leading to what WiLAN believes will be a strong return on investment.
“IoT stands to take off in the industrial space, a lot more than my watch talking to my shoe when I’m taking steps.”
“That’s why IoT stands to take off in the industrial space, a lot more than my watch talking to my shoe when I’m taking steps,” Mr. McEwan said.
Based in Saskatoon but with offices throughout the United States and overseas, International Road Dynamics manages traffic flow on more than 16,000 roads through its proprietary systems. The data generated and collected through IRD’s systems is an increasingly valuable analytics source in the global transportation industry.
“IRD comes with a strong portfolio of more than 80 pending and issued patents. We were impressed with both the quality and depth of the portfolio. Adding to our patent portfolio in this exciting growth industry will serve to bolster our IoT patent strength and makes this acquisition particularly attractive and synergistic. It is also comforting to know the IRD product offerings have solid patent protection,” said Mr. Skippen in a statement.
“We think we’re joining the IIoT with IRD at the right time,” Mr. McEwan adds.
The interim CEO said the company looked at more than 100 options before deciding on IRD, though he didn’t rule out revisiting a few other contenders further down the line. As it explores its new vertical as a holdings firm, acquisitions will be central to WiLAN’s success. Ottawa’s Sampford Advisors acted as the sole advisor to the company in its latest deal.
The company will continue to operate in its intellectual property revenue stream, and Mr. Skippen, a patent lawyer by trade, will remain involved in that side of the business from his new role.
Though he served as chief executive for more than a decade, Mr. Skippen’s background no longer directly supported the direction of the company. In a statement, he said the move fits both with his personal plans and with the company’s evolution.
Markets reacted poorly to the WiLAN pivot today, with shares on the TSX and NASDAQ down 4.5 and six per cent respectively in midday trading.