Tyler Burns - Director of Investor Relations James Douglas Skippen - Chief Executive Officer, President, Chief Legal Officer and Executive Director Michael Shaun McEwan - Chief Financial Officer

Robert Young - Canaccord Genuity, Research Division Todd Adair Coupland - CIBC World Markets Inc., Research Division

Thank you, operator, and good morning, everyone. Earlier this morning, WiLAN issued a news release announcing its financial results for the fourth quarter and fiscal year ended December 31, 2014.

This news release is available on WiLAN's website and have been filed on SEDAR and EDGAR. In this morning's call, we have Jim Skippen, WiLAN's President and Chief Executive Officer; Shaun McEwan, WiLAN's Chief Financial Officer; and Michael Vladescu, WiLAN's Chief Operating Officer.

Following prepared remarks by Mr. Skippen and Mr.

McEwan, analysts will have the opportunity to ask questions. Certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements.

Actual results could differ materially from those anticipated. Risk factors that could affect our results are detailed on the company's annual information form and other public filings that are made available on SEDAR and EDGAR.

During this conference call, we will refer to adjusted earnings. Adjusted earnings do not have any standardized meaning prescribed by U.S.

GAAP. Adjusted earnings are defined in our quarterly and annual filings that are made available on SEDAR and EDGAR.

Now I would like to turn the call over to Jim Skippen. Jim, please go ahead.

Thanks, Tyler, and good morning to everyone. During the quarter, WiLAN generated revenues of $22.1 million, exceeding our guidance of $20.6 million.

We generated adjusted earnings of $12.2 million. This exceeded the top end of our guidance by $3 million, over 32%.

We generated $14.8 million in cash from operations. We returned $5.4 million to shareholders in dividend payments.

Finally, the board has declared a quarterly dividend of CAD 0.0525 per share. This represents a 5% increase over our previous quarterly dividend.

This dividend will be paid on April 7, 2015, to shareholders of record on March 23, 2015. In May 2014, we announced some changes in strategy and set certain goals for 2018.

First, we announced we intended to diversify our business by adding licensing programs in new market segments. We also announced that we intended to focus more on licensing partnerships and outright acquisitions to grow our business.

Thirdly, we would change the way we work with law firms to tie the law firms' financial reward more closely to our financial success. I wanted to update shareholders on these strategies and progress towards our goals.

Firstly, we branched out of our historical TV and wireless markets by adding portfolios in the automotive, building automation, data networking, energy, medical and semiconductor fields. In total, we secured 17 new licensing partnerships in 2014, bringing the total number of portfolios we manage or own to over 40.

We signed 18 new licenses and 11 renewal licenses in 2014. A number of our licenses are portfolios we now manage on behalf of partners, including new portfolios in the medical and data management fields.

Of particular note, we ended 2014 with multiple partnership agreements with Panasonic and ROHM, 2 highly respected technology companies in Asia. These agreements have helped identify WiLAN as a desirable licensing partner, particularly for Asian companies.

Now I would like to take a minute to review some of the financial highlights for fiscal 2014 and the progress made towards achieving our 2018 strategic plan goals. This year, our revenues were $98.3 million, representing a 12% increase over the revenues of 2013.

We are pleased to report that the new fee deals with external counsel and decrease in the level of litigation activity contributed to a 78% reduction in our litigation expenses in 2014 over the previous year. All of our outside counsel now have some part of their compensation at risk.

Our adjusted earnings were $58.7 million or $0.49 per share, representing a 233% increase over the $17.6 million in adjusted earnings that our business generated last year. This improvement is over half of the $0.70 per share target that we established as a goal for 2018.

In 2014, we generated GAAP earnings of $9.7 million or $0.08 per share. When compared to the GAAP earnings loss of $18.1 million or $0.14 per share in 2013, this represents a $0.22 per share improvement in GAAP earnings.

This is half of the 44% share GAAP earnings improvement we have targeted to deliver by 2018. In 2014, we returned $19.2 million to shareholders in dividend and share buybacks.

I'm pleased with the strong earnings our business delivered in 2014, believing the strategies we have put in place has given our board the confidence to increase the quarterly dividend again. Today, we announced the second dividend increase in 6 months and the seventh increase in our dividend since it was first declared in 2009.

Overall, we are pleased with our 2014 financial performance, and we believe the improvement over 2013 is due in part to some of the shifts in strategy we announced last year. In conclusion, although it is somewhat more of a challenge for patent licensing companies than in the past, we believe WiLAN is well positioned to succeed.

We believe the improvement in our business in 2014 is a testament to WiLAN's ability to make significant big gains despite a tougher market. In fact, it seems that the current environment is driving more valuable patent portfolios to us at a cheaper price than in the past.

This is because patent owners are realizing that they need a company in their corner today with the capital expertise and track record of WiLAN. It's also enabling us to cut better deals with law firms.

With that, I will now turn things over to Shaun to discuss our financial results in more detail. Shaun?

Thank you, Jim, and good morning, everyone. Revenues for the fourth quarter of 2014 at $22.1 million did exceed our guidance of $20.6 million by approximately 8%, as Jim outlined, but I will draw your attention to the fact that, that's consistently -- we've consistently beat revenue expectations for the past 3 years quarter-on-quarter.

Three licensees in the fourth quarter individually accounted for 14%, 12% and 10%, respectively, as compared to 3 licensees each accounting for 24%, 15% and 11%, respectively, for the comparable period last year. For the 3 months ended December 31, 2014, and 2013, the top 10 licensees accounted for 81% and 88% of revenues from royalties, respectively.

For the full year, revenues were $98.3 million as compared to $88.2 million for the fiscal year 2013. For that entire year of 2014, 2 licensees individually accounted for 15% and 13% of our revenues as compared to 2 licensees each accounting for 20% and 14%, respectively, last year.

For the 12 months ended December 31, 2014, the top 10 licensees accounted for 74% of revenues, whereas in the comparable period last year, top 10 licensees accounted for 79% of revenues. During the fourth quarter, we generated approximately 2% of revenues from our partner program.

The absolute dollar amount of revenue generated by our partner programs in the fourth quarter was lower than in the third quarter, and this contributed total fourth quarter -- contributed to fourth quarter revenues being slightly lower as well. As we expect revenue from licensing partnerships to be more of a onetime in nature, not all but generally, investors should anticipate the partner program and, as a result, total revenues may vary from quarter-to-quarter.

Now I'd like to cover our operating expenses. The cost of revenue expenses for the fourth quarter of fiscal 2014 totaled $16,460,000 or approximately 74% of revenue.

Compensation costs, patent management and external litigation expenses, all cash costs in this category, were $1.9 million, $1.8 million and $3.5 million, respectively. Our cost of revenues also includes noncash expenses, principally amortization of patents, in the amount of $8.9 million.

Comparatively in the fourth quarter of fiscal 2013, cost of revenue expenses totaled $17.5 million and included compensation costs and patent management expenses of $1.6 million and $2 million, respectively, and litigation expenses of $4.6 million, along with noncash expenses of $8.9 million. In the fourth quarter, litigation expenses at $3.5 million were lower than the guidance and were down from the fourth quarter of 2013.

This decrease in comparison to the same period last year is largely attributable to a decrease in the level of litigation activities carried out in the quarter and the shared risk fee arrangements Jim has already outlined earlier in the call. This is our fourth straight quarter in which our litigation expenses have been lower than the levels experienced in the prior year period.

The cost of revenue expenses for the full fiscal year totaled $63.2 million and included licensing expenses of $18.1 million, litigation expenses of $9.9 million and noncash charges totaling $35.2 million. Comparatively for the full year last year, the cost of revenue expense totaled $88.6 million and included licensing expenses of $13.6 million, litigation expenses of $45 million and noncash expenses totaling $30 million.

The increase in licensing expenses in 2014 over 2013 is due in part to higher staffing levels and additional licensing programs. In addition, 2014 licensing expenses, in this category that I've categorized them as, include contingent partner payments and legal fees as well.

As I already said, litigation expenses amounted to $9.9 million in 2014, representing a decline of over $35 million from the year before. The litigation expenses that we're talking about here relate to either full fee external counsel arrangements or our hybrid fixed fee amounts, plus any expenses of our litigations, things like external experts, technical analysis and such.

We also have a contingent litigation expense that reflects the amounts paid to external counsel upon the successful conclusion of a licensing agreement. Together, these expenses will vary quarter-to-quarter as a result of the level of activities undertaken as well as the level of license agreement signed in any particular quarter.

Our marketing, general and admin expenses in the fourth quarter of 2014 totaled $2.1 million or approximately 10% of revenue and included $1.8 million in overhead expenses, which we would say are cash-oriented, and $349,000 in noncash charges principally for stock-based compensation. Comparatively in the same period last year, MG&A expense totaled $3.5 million, which was comprised of $2.8 million in overhead and noncash charges of $759,000.

The $1.4 million or roughly 40% decrease in spending in the fourth quarter of 2014 is primarily attributable to a decrease in staffing and consulting costs as well as stock-based compensation expense. In the fiscal year ended December 31, 2014, MG&A expense totaled $10.6 million or approximately 11% of revenue.

MG&A expenses during the period -- prior period were comprised of $8.9 million in overhead expenses and noncash charges of $1.7 million. Comparatively for the year ended December 31, 2013, MG&A expense totaled $13.1 million, which was comprised of $10.1 million in overhead expenses and noncash charges of $3 million.

The $2.5 million or 18% decrease in spending for the 12 months ended December 31, 2014, is primarily attributable to $0.9 million decrease in staffing costs as a result of changes in staffing levels and a $1.3 million reduction in stock-based compensation expense. In the fourth quarter, the company incurred a foreign exchange loss of $684,000, which included a noncash, unrealized foreign exchange loss of approximately $482,000.

The unrealized foreign exchange loss recognized in the fourth quarter results from converting Canadian dollar cash on hand to U.S. dollars at quarter end as well as the revaluation of foreign exchange contracts we held.

At December 31, we did hold foreign exchange contracts totaling approximately $17,700,000, which mature at various dates through to October 2015. In fiscal 2014, we incurred a foreign exchange loss of approximately $2.1 million.

This loss is by and large offset by lower operating expenses contained elsewhere in our P&L and therefore should not be considered on a standalone basis. We recorded a net income tax expense of $1.9 million in the fourth quarter as compared to $4.1 million for the previous year.

And for the full year, we recorded a net income tax expense of approximately $10.9 million versus a net income tax recovery of $79,000 for the previous year. As you will recall from our previous calls this year, our deferred tax expense is significant when compared to our pretax earnings.

This arises from 2 main points. First, we are highly profitable in our Canadian parent corporation, and therefore we are utilizing our previously recognized deferred tax assets inside the Canadian parent.

And second, as we make investments in the business, including hiring team members, developing partner relationships and obtaining additional portfolios, we are generally doing that in new operating subsidiaries in both Canada and the U.S., and therefore any investments we make, which will for tax purposes be reflected as losses, accumulate for use in future periods. However, at this time, we are unable to recognize the value of those assets on our balance sheet.

If we were able to recognize them, they would offset the utilization of the Canadian parent corporation's deferred tax asset and lower the ultimate deferred tax provision. At year end, we maintained tax pools of approximately $112 million, with approximately $21 million of that located in the United States.

We have a valuation allowance against all of the U.S. assets and certain of our Canadian assets.

The total valuation allowance at year end is approximately $14.3 million. As a result of all the above that I just spoke of, in the fourth quarter, WiLAN generated GAAP earnings of $518,000 or 0 per share on a basic and fully diluted level.

In the comparable period last year, we generated GAAP earnings of $2,432,000 or $0.02 per share on both a basic and fully diluted level. For the full year, GAAP earnings totaled $9.7 million or $0.08 per share, basic and fully diluted, representing an increase in earnings year-over-year of $27.8 million.

If you move up the statement of operations just a few lines, you'll see that our fiscal year 2014 earnings, at a pretax level of $20.6 million, are $38.8 million better than the previous year. This increase is particularly notable given that revenues increased by $10.1 million.

We believe that adjusted earnings, a non-GAAP measure, assists in evaluating the performance of our business by eliminating noncash and certain other nonoperating expenses. For the fourth quarter ended December 31, adjusted earnings were $12.2 million or $0.10 per share on a basic level.

Adjusted earnings, at $12.2 million, represent a decline year-over-year of approximately $5 million, which is largely attributable to lower revenues for the quarter, whereas on the full year, adjusted earnings of $58.7 million or $0.49 per share represent an increase of $41.2 million or over 230% as compared to last year, reflecting strong control of expenses and revenue growth. Now quickly turning your attention to cash on our balance sheet for a moment.

We generated $58.6 million in cash from operations, from which we paid $19.2 million to shareholders in dividend and share buyback payments and payments for patents acquired in both the current and previous fiscal years in the total amount of $43 million. This resulted in a cash decline of about $4.2 million year-over-year, to finish at $127.6 million.

Lastly, I will discuss our guidance for the first quarter of 2015, which ends March 31, 2015. Revenues for this first quarter, based on royalty reports that we've received up until the close of business on January 27, are expected to be at least $17.5 million.

I would like to remind listeners that our revenue guidance reflects actual revenues based on fixed-price contracts or on running royalty reports received up until January 27 in this case. All reports that are received after this date and all license agreements signed between now and the end of the quarter will be incremental revenues to this guidance.

The majority of our running royalty reports are not due until January 31. Operating expenses for the first quarter of 2015 are expected to be in the range of $14.4 million to $15.4 million, of which $6.3 million to $7 million is expected to be litigation expense.

For the first quarter of 2015 and assuming no additional agreements are signed or no further royalty reports are received, adjusted earnings would be expected to be in the range of $2.2 million to $3.2 million. This concludes my review of the financial results for the fourth quarter and year ended December 31, 2014.

And I would now turn the call over to Tyler.

Thank you very much, Shaun. We now move to the Q&A portion of our conference call.

[Operator Instructions] Operator, may we have the first question?

Okay. So for my 2 questions, first one will be on the comments you just made, Shaun, on the running royalties reports.

I think you said that your guidance is based on received royalty reports as of January 27, but they're not due until January 31. So if you could give just a little more color around like how -- what percentage of those do you expect to come in.

Or how back-end-loaded in that frame are they typically? Do they come in late?

Maybe just a bit of color around the running royalties. I guess it's an important time of year for that now.

Robert, it's Jim. I'll give the quick non-accountant answer.

And if you need more detail, we'll turn it over to the accountant in the room. So we started doing our quarterly releases very soon after the end of the quarter.

And if you think this is year end and it's only January 29. As Shaun indicated, most of our royalty reports don't come in -- aren't due till the 31st, which means they arrive the 31st or the 1st.

So when we go out with what we've actually got paid and in the bag, which is how we do our guidance, it's going to be less than actually comes in. And if we did it a week from now, it would probably be a higher number.

Well, we're quite sure it would be a higher number. So it's -- the guidance in the quarter is less than sort of the run rate that we've typically been -- had.

But it's probably due to the fact that royalty reports haven't come in yet, and we did the quarterly release a little bit early. Does that answer the question?

Yes. Well, I guess if I read into that, there's still a good chunk that could likely hit your mailbox over the next few days.

Yes, that we expect will hit our mailbox in the next 2 days, 2 or 3 days. So yes, that's -- but we decided we weren't going to veer from what our practice has been, which is to just guide to the money that we actually have because there's some -- there's always variability in the reports, and they're not sure things, unlike the fixed deals.

Right. Okay.

And then my second question is just you've been very active on building out the patent portfolios. I think if I heard right, I think you said 40 in the dialogue.

But I think in one press release, you said 45 portfolios now. So I was wondering if you could clarify that.

And then -- sorry?

Yes. And so the 45 number is accurate.

I think that I'll be direct on this point or candid on it, which is that when we have this many portfolios, it is possible that we will decide that for whatever reason, one of the portfolios may not be worth pursuing, and we may give it back to the patent -- the original patent owner. And rather than explain these types of fluctuations, we thought it'd be better to just say over 40.

It's a lot of portfolios. And when we get to 55, we'll probably say over 50.

And so we'll give people the ballpark, but the exact number, we think, may be more trouble than it's worth.

Okay. And I'm just trying to reconcile the difference.

I think Shaun said that 2% of revenue was from partner programs. But in July, I think you'd said that there are 25 or 30.

So maybe if I just round that up a bit. You're coming close to doubling the number of portfolios, but only 2% of the revenue is coming from there.

And I think you said they're lumpy, but just provide any color around that, how we should think about that going forward, because I've thought of that as a large growth opportunity for you.

It's Shaun here, Robert. First out, that's the Q4 number, right?

We were higher than that in Q3 and higher than that on the whole year. But in reality, that was the Q4 number.

The simple fact is we started branching out into this partner program over the last year. We've often said it takes anywhere between 12 to 18 months to get licensing program done.

We were successful in under 4 months on several of these portfolios in the first round. So I think even though that number seems low or sounds low when you say only 2%, the reality is that's well ahead of expectations in terms of building the business, and we certainly look for better performance on that on a go-forward basis.

If you could put maybe a bracket around it, like what percentage of revenue do you think these new partners could represent in the next couple of years?

50%. Up to 50%, I think.

That's where our longer-term plan is.

And if you compare Q3, it was much, much higher. I don't know if we gave the exact percent in Q3, but it was much, much higher than...

Firstly on the higher legal expenses. The step-up in Q1 and with what you see planned for 2015, is that a good run rate to use at this point?

Well, in our current plan, that Q1 is much higher -- or higher at least than other quarters. So what we're planning for is a fairly significant drop in Q2 and then another drop.

So -- but having said that -- so this should be the high-water mark, and it should go down from there based on our existing operating plan for the year. And it's just the timing of when certain payments were due.

We now have these deals with law firms where we basically pay them a fixed amount per quarter and it's capped, and then the payments stop and until we are either -- until we're successful in licensing the party in the litigation. And so we sort of had a high-water mark in Q1, but it goes down after that.

So I think you're going to see it go down unless something unusual happens or unexpected happens, in which case, we'll deal with it at the time. But based on what we think is going to happen today, we expect significant decreases in Q2 and Q3 and Q4.

Okay. Great.

And second question. So if we think about partner programs for 2015, maybe a little bit of color would be helpful.

What do you think is going to start to contribute first? Meaning, what areas?

Do you have an idea at this point roughly what percentage it might be in the first quarter or goal for 2015? A little bit of color along those lines would be helpful.

Yes. I mean, I don't think we're ready right now to break down the percentages for the fiscal year.

When these programs get a little bit more mature and a little bit more underway, we may give a bit more color on that. But we are expecting a significant contribution this year from the programs.

And we -- some of the programs that we expect to generate significant revenues would include our -- one of our data networking portfolios, some of our medical portfolios, the heart stent portfolio, for instance, and the orthopedics portfolio. Some of our semiconductor portfolios we definitely think are going to start generating revenue, like our CMOS imaging portfolio as well as some of our clocking and more technical portfolios.

And I know that we're engaged in licensing discussions right now in all those portfolios, where parties are putting real money on the table and it's just a matter of time until we hopefully get to a number that's acceptable and then we can transact.

Okay, Jim. Maybe if I could just sneak one more in.

I don't know if you're prepared to update the backlog at the end of the year. If you could, that would be great.

Yes. What we have been doing on that front, Todd, is we don't want to give too much away.

So we gave a wide range of $225 million to $325 million in backlog, and we're going to continue to stick with that range. And part of the reason -- hopefully, at some point, it will be more than $325 million.

We don't expect it's going to be less than $225 million at any point. So we'll -- hopefully, the next update will be when it's more than $325 million.

I just wanted to ask about -- one of the things you said in your prepared comments was that it's more of a challenge for patent licensing firms than in the past and that you noted that you're seeing an improved environment for patent pricing. I was wondering, is there anything that you can say about how patent reform discussions in the U.S.

have changed since the midterm elections? And I was wondering if you could comment.

One of the larger licensing bodies, the Rockstar Consortium, looks like it's wrapping up from selling some of their patents. And I was wondering, is that a sign that things are shrinking, it's getting less competitive?

Or is it a sign that the market is getting more difficult and people are turning away from it? Anything you can talk about the state of the industry.

Yes. I mean, I think -- to be honest about this, I have to say it is a tougher environment.

And the reasons -- there are multiple reasons for this, but 2 main ones. One is that the laws, whether it's the case law that's coming down from the courts or some of the laws that have been enacted as patent reform, including the America Invents Act, have made it a tougher environment.

The second thing is that some of the large infringers have mounted a very aggressive campaign to sort of say licensing patents is something untoward, and they've gotten some traction with that. So it's made the environment tougher in -- a little bit tougher in courts and maybe with juries.

Not all courts, not all juries, but it's made it a bit tougher. So in that environment, I do think that there's been a little bit of a reassessment of the value of patents and a reassessment downward, and that's just the reality of it.

Now does that mean that this business is not a viable business? Absolutely not.

As last year showed, even in that tough environment, we had significant revenue growth, we had significant bottom line growth. We expect that, that can continue.

But it has changed the way we're doing business. We're putting less of our own capital at risk.

We're probably repricing our offerings. So we're willing probably to do licenses for a little bit less.

But we're expanding the number of programs that we have so that our volume and our business continues to grow, notwithstanding slightly more competitive pricing. The other thing, though, that is going on, as you alluded to, is that I think the market is tougher, and what that means is it's shaking out some of the weaker players or -- it's just not attracting as many, and in some ways, that makes it better for us.

Because it's getting so complex and difficult in some ways that you really need to be a pro at this and you can't be sort of a dilettante. And so it's driving people to us because we've got all the track record and we've got expertise.

And when I say people to us, I mean patent portfolios to us, mostly. That maybe 5 years ago or 6 years ago, people would have tried to make a go of it on their own, but now they're realizing it's too tough and they need the pros to do it.

So it's -- there is a silver lining there. The other silver lining, as I mentioned, is that some of the law firms that do this work are a little bit more hungry, which I think is good for us.

We can drive better deals, and we can take a little bit less risk and maybe even pay a little bit less ultimately than we did before. So that's the situation.

Just in terms of the future, there is talk of another patent bill. We've seen drafts of it.

And I don't know where it's going to go. But the all-Republican Senate and Congress seem to have some interest maybe in passing a patent bill, though I did notice that this year, unlike last year, President Obama did not mention patent reform in his State of the Union address, but it's possible there will be more.

But nothing we've seen is going to make -- change our business fundamentally, we think. And again, we think it just makes it a little bit harder for other people to get into the business, which I think may help us, because the strong probably should continue to get stronger and the weak just will dissipate.

So there's a long-winded answer. I hope that helped you a little bit, Robert.

Yes, no, that's great. And then maybe just a second question.

People are always concerned about the status of Apple litigation. I was wondering if there's any update you can provide there.

And perhaps if you can give any detail around any actions against Netflix. And then I'll let it go.

Yes. So we have a lot of activity going on with Apple right now.

We have an appeal on one of our 3G patents. We have -- I guess it's going to be an appeal on one of our LTE cases.

We have another case with 5 LTE patents that is ongoing, and it's really at the point now where we're in discovery on it. And the next step will be Markman hearings and then trial.

I think we have a fairly quick trial schedule, although I don't -- I could dig it up if you need to know, but I don't have it at my fingerprint -- tips. But it's coming up pretty quickly.

Oh, I've got it. It's -- we go to trial on that case in -- on June 13, 2016.

So it's an ongoing fight with Apple, but we're determined. We've got lots and lots of patents that we think that they infringe, and we're not -- we're going to keep going until we succeed and they take a license.

And we aren't -- we've had some setbacks. They get a sympathetic hearing in court.

There's no question about it. But we're going to keep going and have faith that, eventually, the courts are going to make the right decision and find that they infringe.

All right. And anything you can say on Netflix?

Oh, yes. Sorry.

Well, Netflix, we have 1 case. It's on a patent portfolio that covers digital rights management, so the way that they protect their movies from being copied by their customers.

The case is in relatively early stage right now. We filed the case.

I believe they filed a defense, and we're just in discovery right now.

Thank you for attending WiLAN's Fourth Quarter and Fiscal 2014 Financial Results Conference Call. Replay of this conference call will be available until 11:59 p.m.

on the 29th of April 2015. Instructions for accessing the replay of this conference call can be found on the news release that was issued earlier today.

Thank you, and goodbye.