Wi-LAN'S (WILN) CEO Jim Skippen on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Wi-Lan Inc. (WILN)

Wi-LAN Inc. (NASDAQ:WILN)

Q2 2014 Earnings Conference Call

July 30, 2014, 10:00 AM ET

Executives

Tyler Burns - Director of IR

Jim Skippen - President and Chief Executive Officer

Shaun McEwan - Chief Financial Officer

Michael Vladescu - Chief Operating Officer

Analysts

Blair Abernethy - Cantor Fitzgerald

Daniel Kim - Paradigm Capital

Eyal Ofir - Clarus Securities

Ralph Garcea - Global Maxfin

Robert Young - Canaccord Genuity

Rob Manson-Hing - CIBC

Operator

Good morning, ladies and gentlemen, and welcome to Wi-LAN's Second Quarter Fiscal 2014 Financial Results Conference Call. (Operator Instructions) I would now like to turn the meeting over to Tyler Burns, Director of Investor Relations.

Tyler Burns

Thank you, operator, and good morning, everyone. Earlier this morning, Wi-LAN issued a news release announcing its financial results for the second quarter ended June 30, 2014. This news release is available on Wi-LAN's website and will be filed on SEDAR and EDGAR. On this morning's call, we have Jim Skippen, Wi-LAN's President and Chief Executive Officer; Shaun McEwan, Wi-LAN's Chief Financial Officer; and Michael Vladescu, Wi-LAN'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 in 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 US 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.

Jim Skippen

Thanks, Tyler, and good morning, everyone. I'll now speak to the highlights of the second quarter.

During the quarter, Wi-LAN generated revenues of $25.7 million, exceeding our guidance by $6.3 million or 32%. Wi-LAN generated an adjusted earnings of $16.6 million during the quarter, exceeding the top end of our guidance by $6.1 million or nearly 60%. Wi-LAN had GAAP earnings of $5.6 million. During the quarter Wi-LAN generated $11.7 million in cash from operations. We returned $4.3 million to shareholders in dividend payments. And during the quarter, we signed partnership agreements with six companies that have opened up new markets for Wi-LAN.

During the quarter, the US Patent Office, after conducting re-exam proceedings at the urging of certain defendants in our cases, confirmed the validity of our 802 patent, which was an issue in our case against Apple in Texas. It's worth highlighting that the Texas court also confirmed the validity of the 802 patent, ruling that the patent was improperly validated by the jury in the trial against Apple that was held in October 2013. The 802 patent was one of the original Wi-LAN patents filed by its founders.

Finally, the Board of Directors has declared a quarterly dividend of C$0.05 per share for the second quarter of 2014, representing a 25% increase over our previous quarterly dividend. This is the fifth time we've increased our dividend since it was introduced in June 2009. This dividend will be paid on October 3, 2014, to shareholders of record on September 12, 2014.

Next, I would like to talk about licensing partnerships. The plan we've established sees us focusing more on licensing partnerships than outright patent acquisitions. We define the licensing partnership as a relationship with the patent owner in which we help the patent owner derive value from the patents by offering a turnkey licensing program for the patent portfolio. With our expertise in licensing, strong financial position, strong track record, we are ideally positioned to be the licensing partner of choice for many companies.

The partner will typically receive its rewards only when we actually sign licenses. So the risk is shared. This partnership focus is intended to generate a greater return from the resources that we invest with less risk and enables us to execute a larger number of licensing programs. This does not mean that we will completely eliminate portfolio purchases, but we do believe they will be fewer in number.

As highlighted earlier, our team secured licensing partnerships for six new portfolios in the second quarter. Early in the second quarter, we entered into two different licensing partnerships in the automotive market. Another partnerships involved technology related to headlights. The second relates to automotive diagnostic technology. Also in the second quarter, we entered into a partnership to license technology related to irrigation control. This transaction actually comes with the revenue stream for an existing running royalty license.

We also acquired a portfolio related to networking capabilities of non-standard devices such as point-of-sale terminals. Anyone that buys a cup of coffee or goes out for dinner knows that point-of-sale terminals are big business. The devices are everywhere, but it's particularly exciting as we've already signed our license with Philips for this portfolio, less than three months after acquiring it.

In the second quarter, we signed a partnership agreement to license technology related to medical stents. This agreement expands our business into the medical technology market, a market we believe represents a significant opportunity for Wi-LAN.

Late in the second quarter, we entered into an agreement with a global leader in non-volatile memory or flash memory to acquire portfolio of patents. Obviously we're very pleased that another large global corporation has selected Wi-LAN to be their licensing partner of choice. Although we're restricted from saying very much in the press release about this transaction, we believe this deal is extremely significant for Wi-LAN. The flash memory market is a giant multibillion dollar market, and we believe major flash vendors will need and want to license this important portfolio. We already have documented evidence of use of 13 families of patents in this portfolio covering flash memory broadly. Given the pedigree of the patents, the remaining license of the portfolio and considering the size of the flash market, we believe this program has the potential to generate very significant revenues for Wi-LAN.

We are particularly pleased that our acquisition of this portfolio did not require any upfront payment by Wi-LAN and revenues will be shared with our partner. To put it in perspective, we believe this is probably the most significant portfolio Wi-LAN has acquired to date.

The partnerships signed in the second quarter bring the number of signed licensing partnerships to 25. This includes partnerships with other global corporations including British Telecom, Cypress Semiconductor, Asus and Panasonic. As we continue to grow our business, primarily through licensing partnerships, the number of portfolios we are actively licensing will continue to rise. As we embark on an increasing number licensing programs, a number of programs could ultimately require litigation to achieve a successful licensing outcome.

I wanted to clarify the impact of this litigation activity on our financial results. In the past, we have fully funded all litigation efforts, which was quite expensive, particularly if revenues were delayed. This has now dramatically changed. Going forward, we expect our law firm partners to share the risk with us of achieving a successful litigation outcome, which we hope is a speedy license agreement. We expect the majority of future cases to be full contingency cases with a law firm only gets paid upon a successful outcome of the litigation.

Certain cases may involve some payments to the law firms during the process of the litigation, but typically it will be fixed and tapped, so that most of the law firms' reward will only come upon the successful outcome. So what does this mean? The key point for investors, I think, is that as licensing activity and possibly litigation activity rises, litigation expenses will not rise nearly as much as in the past, because most of the cost is postponed until the litigation is over and there is a successful outcome. The successful outcome should more than offset the cost.

I will now turn to licensing activity during the second quarter. In second quarter, a Wi-LAN subsidiary signed a license agreement with Bluegrass Cellular and one other US wireless carrier for a technology company that wants to remain anonymous related to network management.

As a reminder, the patents in our network management licensing program were acquired from Siemens in the second half of 2012. This technology, which is tagged as multiple jurisdictions relates to network reliability and security for carriers generating tens of billions of dollars in annual revenue from the services that use these techniques.

Also during the quarter, we signed a renewal licensing with Archos S.A. Archos signed their first license for a Wi-Fi and CDMA technology since 2008. Recognizing the value of the technologies that we've added since 2008, the renewal license with Archos adds coverage of 3G and 4G wireless technologies using a broad range of Archos brand and consumer electronic devices, including PCs and smartphones.

Towards the end of the second quarter, we also signed a license with Nokia Networks. Remember that Wi-LAN first signed a patent license agreement with Nokia in December 2006, the latest of the portfolio patents that we owned at the time. Nokia Networks is a successor of Nokia for its networking business. So we consider this renewal to position Wi-LAN to sign wireless license agreements with respective licensees and renewal agreements with licensees. It is critical that we invest responsibly in the development of new technologies and the outright acquisition of patent assets to not only sustain, but to increase the value of our wireless portfolio.

Understanding this dynamic in the second quarter, Wi-LAN acquired a portfolio of wireless patents from Nokia Networks. The acquired portfolio of patents has worldwide coverage related to various current and future wireless handset and infrastructure technologies. As Nokia has been at the forefront of the development and commercialization of wireless communication technology for decades, we believe the acquired portfolio will aid in the signing of future licenses. Also during the quarter, we completed the license agreement with Sony related to our portfolio of television technology.

In conclusion, I believe we continue to make solid progress towards delivering on the plan that we have put in place to more than double our revenues by 2018, while increasing profitability and reducing business risk. With the reduction of legal fees due in large measure to the new shard risk fee model we are adopting with all of our outside counsel, our margins have increased significantly. The second quarter marks the third quarter in a row that our business has delivered strong adjusted earnings and significant GAAP earnings.

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

Shaun McEwan

Thank you, Jim, and good morning, everyone. Revenues for the second quarter ended June 30, 2014, were $25.7 million, which exceeded our guidance of $19.4 million by $6.3 million or roughly 30%. For our second quarter of 2014, three licensees individually accounted for 12%, 12% and 10% respectively of revenues, whereas in the comparable period last year four licensees individually accounted for 17%, 16%, 14% and 10% respectively. In the second quarter of 2014 and 2013 as a comparative, the top 10 licensees accounted for 74% versus 85% last year.

I want to take a quick moment to highlight to investors that as a number of our licensing programs, as Jim has outlined, in our business increases and in particular the number of licensing partnerships increases, we expect that a greater share of the revenue that we generate in a given quarter will come from what's characterized as one-time payment. As we've highlighted many times, the revenue guidance that we provide includes only those revenues booked just prior to when we put our press release out. Therefore, additional reports received in the remainder of the quarter and any new license agreements signed including those with the one-time payments or front-end loaded will have a positive impact on actual revenues reported.

Now I'd like to cover our operating expenses briefly. The cost of revenue expenses for the second quarter of fiscal 2014 totaled $14,472,000 or approximately 56% of revenue. Compensation costs, patent management costs and external litigation expenses, all cash costs in this category were $1.9 million, $2.1 million and $1.7 million, respectively. Cost of revenue expenses in the quarter also included $8.4 million in non-cash expenses, which is principally amortization of patents. Over the last few quarters, our total cost of revenue expenses have declined sequentially due in part to lower compensation costs and principally lower litigation expenses. Comparatively in the second quarter of fiscal 2013, cost of revenue expenses totaled $24.2 million and included compensation costs of $1.2 million, patent management expenses of $1.5 million and litigation expenses of $14.5 million along with non-cash expenses totaling $6.6 million.

In the second quarter, litigation expenses of $1.7 million were at the lower end of our guidance and were down significantly from the comparable period last year. This decrease year-over-year is largely attributable to a decrease in the level of litigation activities and these new shared risk fee arrangements, which Jim has already outlined. Litigation expenses are expected to vary from period-to-period due to the variability of litigation activities themselves and any contingent payments that may be required as a result of licenses signed in that particular quarter.

Our marketing, general and administration expenses in the second quarter of 2014 totaled $2.8 million or approximately 11% of revenue. It included $2.2 million in overhead expenses which are cash oriented and $492,000 in non-cash charges for depreciation and stock-based compensation. Comparatively in the same period last year, MG&A expense totaled $3.6 million, which was comprised of $2.8 million in overhead expenses and non-cash charges of $858,000.

In the second quarter, the company realized a gain on foreign exchange of $1.1 million, which included a non-cash unrealized foreign exchange gain of $1.3 million. The unrealized foreign exchange gain recognized in the second quarter results from the translation monetary accounts denominated in Canadian dollars to US dollars at quarter-end as well as the revaluation of foreign exchange contracts WILN held. Speaking of that, at June 30th, Wi-LAN held foreign exchange forward contracts totaling approximately $21 million, which mature at various dates through the January 2015.

We recorded a net income tax expense of $3.4 million in the second quarter as compared to an income tax recovery of $2 million for the previous year. The current income tax expense of $1.3 million booked in this quarter relates to taxes withheld on royalties received from foreign jurisdictions, for which there is no treaty relief. We also booked a $2 million deferred tax expense resulting from the utilization of certain loss carry-forwards principally in Canada. As of the end of the quarter, we still held various tax assets totaling more than $120 million.

As a result of all of the above, Wi-LAN's GAAP net earnings for the second quarter were $5.599 million or $0.05 per share of all the basic and fully diluted level compared to a loss of $7.632 million or $0.06 of all the basic and fully diluted basis in the second quarter last year. We believe that adjusted earnings, a non-GAAP measure, assists in evaluating the performance of our business by eliminating non-cash and certain other non-operating expenses. For the second quarter ended June 30, 2014, adjusted earnings were $16.6 million or $0.14 per share on a basic level. This compares favorably to a loss of $762,000 or $0.01 per share on a basic level last year.

Now quickly turning our attention to the balance sheet for a moment, we ended the second quarter with $140.1 million in cash, cash equivalents and short-term investments. This remains principally consistent with cash at last quarter-end and represents an increase of $8.2 million from the cash position at December 31, 2013.

During the quarter, we generated $11.8 million from operations. Out of that, we returned $4.3 million to shareholders through dividend payments and $125,000 on the repurchase of common shares on a normal course issuer bid, which really commenced only in the last week of the quarter. Further, we used approximately $10.7 million to pay for patents that we had previously acquired.

Lastly, I will discuss our guidance for the third quarter of 2014 ending September 30th. For that quarter, we expect revenues to be at least $19.7 million. This revenue guidance does not include the potential impact of any additional reports that we receive or new agreements that may be signed during the balance of the third quarter, as I've already outlined. Operating expenses for the third quarter of 2014 are expected to be in the range of $9.7 million to $10.4 million, of which litigation expense is expected to be between $2.5 million and $3.2 million. For the third quarter of 2014 and assuming no additional agreements are signed, adjusted earnings are expected to be in the range of $9.4 million to $10.2 million.

Due to their nature, certain income and expense items such as significant license agreements with companies, brokerage opportunities, new litigation actions, contingent payments to licensing partners and litigation counsel that may be required from certain licenses signed in any particular quarter, losses on asset impairments or realized foreign exchange gains or losses cannot be accurately forecast. Accordingly, we exclude such forecast items from our guidance.

Actual revenues reported may exceed the revenue guidance provided due to the receipt of royalty reports and the signing of new license agreements that happen after our guidance is provided, as well actual expenses may exceed the expense guidance provided due in part to contingent payments to licensing partners and litigation counsel that may be required from certain licenses signed during the quarter.

This concludes my review of the financial results for the second quarter ended June 30, 2014. And I'll now turn the call over to Tyler.

Tyler Burns

Thank you very much, Shaun. We will now move to the Q&A portion of our conference call. As we want to get the questions from as many analysts as possible, we ask that you limit yourself to one question and one follow-up. We also ask that analysts avoid long and multi-part questions. Should analysts have additional questions and time permits, they're certainly invited to rejoin the queue.

Operator, may we have the first question please?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Blair Abernethy with Cantor Fitzgerald.

Blair Abernethy - Cantor Fitzgerald

Jim, I just wonder if you can give us a little more color on this disposition program that you announced yesterday with Adapt IP Ventures and some sense of sort of the magnitude of what this covers for you, value, any sense of timing on when this could generate some revenue for you.

Jim Skippen

Sure. So first of all, it was their release, not ours. I did give them a quote, but just to be clear, it wasn't our release. The second thing is that the release sounds very extensive. There is a lot of patents that are beings sold. In fact, it's 150 patents that really relate to our white space development and we conduct it ourselves. And it does touch literally on a number of wireless standards like LTE and other things. But really it's a white space portfolio. It's difficult to predict when revenues might be generated from this, but I certainly would not expect anything for several months after the release. Could be quicker, but that's what I'd estimate. And I am reluctant at this point to publicly estimate how much it will be.

Operator

Our next question comes from the line of Daniel Kim with Paradigm Capital.

Daniel Kim - Paradigm Capital

Jim, thanks very much for clarifying in particular the flash memory opportunity. Wondering if you could at all frame the opportunities within the other verticals that the company is now targeting. Specifically, trying to get a sense of how much more, if at all, money will be required to round our patent portfolios if required in any of the other verticals before you start to assert these patents?

Jim Skippen

Essentially, I think all the portfolios that we have at this point we would view as self-sufficient. In other words, they're enough to be licensed as they are. It doesn't mean we won't embellish them in the future, but we're not waiting to start licensing activities on them. We think they're already valuable and already ready to license. So we have approximately 30 portfolios now that we look at as distinct portfolios. And they're all important portfolios. They're all valuable. We're actively starting to license many of them. So I'm reluctant to try to go through all 30 of them and give exact dollar numbers on the call at least, but hopefully that helps a little bit.

Daniel Kim - Paradigm Capital

My second question would be related to the Apple situation. I guess first off, wondering what the next steps would be on the 802 patents now that the patents are valid. And secondly, as it relates to Apple again, I believe you're coming up to trial end of this year relating to the LTE patents. Will there be any type of merging of these two separate matters or how do you think this play out for the balance of the year?

Jim Skippen

Well, of course our objective is always to sign a license. So we're always actively working towards that end, whether upfront or in the background, but you can count on us trying to do that if it's possible. If it's not possible, that would be disappointing. But we will end up in litigation in November on several patents. These are patents that were developed by Ken Stanwood's team. Ken Stanwood is a full-time employee of ours and a subsidiary of ours at Cygnus. And we have a very strong case. We think they're very fundamental patents. We just had a very positive ruling clarifying the Markman, which we think really assists in the case. And we'll go to trial in November if there is not a resolution, which of course is our first choice.

We did introduce Apple to a number of additional patents that we think they might be interested in, and we hope to have a friendly discussion. Apple beat us on those patents. We then filed suit on the same patents in San Diego. They beat us in San Francisco. So these are additional five LTE patents. So we now have eight or nine LTE patents that are in litigation with Apple. And we believe that the two cases should be consolidated, because the patents are all related. And they're co-developers. So we'll likely be working towards that end. We think all the cases should be heard on the San Diego. But I don't think these new five patents will be the subject of the trial in November. It'll be just the original four.

Operator

Our next question comes from the line of Eyal Ofir with Clarus Securities.

Eyal Ofir - Clarus Securities

Just to clarify the Apple trial, you talked about going to trial in November. That's a different trial, right the LTE trial?

Jim Skippen

Yeah. The LTE trial is in November. It's on two LTE patents developed by Ken Stanwood.

Eyal Ofir - Clarus Securities

Okay. That was in Florida, right?

Jim Skippen

It was in Florida and was transferred to San Diego.

Eyal Ofir - Clarus Securities

I just wanted to clarify on the 802 situation, what kind of timelines we'll see.

Jim Skippen

The 802 was one of the original patents that Wi-LAN had developed, by its founders. We think it broadly covers 3G technologies. It's been licensed by many parties, Apple beat us on that patent trial. The judge then came back and said despite the fact that the jury has found the patent invalid, he didn't think any reason for jury to reach that conclusion, and he overturned that. Then they took another case, because they took the patent into re-exam. And the Patent Office looked at it and the Patent Office just recently came back and said, no, all those things are valid. So now we have one remaining issue, which is infringement. And we are appealing the infringement ruling to the Court of Appeal. And we hope that they are influenced by the fact that the jury got the validity wrong. And we feel optimistic about that. And that appeal, I would expect, will be resolved probably within the next six months or so, maybe a little bit longer.

Eyal Ofir - Clarus Securities

When do you expect to hear dates on that appeal?

Jim Skippen

Well we have to file materials. We just actually asked for an extension of one month with Apple's consent on filing material. So I would expect the materials would be filed at the end of August. And then I would expect that we'll have a hearing within three, four months and resolve within six months. It could be a little longer, it could be a little shorter, but that's the approximate timeframe.

Eyal Ofir - Clarus Securities

Obviously a lot of moving pieces in your business now and you have a lot more partnerships in hand. Looking at over the next 12 months, in terms the partnerships, where the most growth is going to help drive your revenue profile? And then just in terms of the ongoing discussions you guys are having in terms of licensing, what are you seeing there and kind of what your thought process is in terms of licensing just the general patent portfolio?

Jim Skippen

Well, it's always difficult to predict in the short-term where growth comes from. It could come from many places. I definitely think we're going to continue to see growth on our legacy programs like our wireless and TV programs. But I also think that some of the bright spots in the horizon where we're seeing a fair bit of licensing activity and offers are in areas, are some prospective licensees are in areas like our British Telecom portfolio that applies to basically digital rights management, video and other content that's springing over the internet. We're seeing a lot of life on our portfolio that relates to non-standard devices, but point-of-sale terminals offers on that portfolio. So we think we'll see activity there.

I'm hopeful that on some of the Panasonic patents, our CMOS image sensing patents, we're going to see some licenses. It's possible on the flash portfolio. The big flash portfolio, we may see some licenses. There's lots of areas where there could be licenses now. We've 30-excess program and we've got lot of teams actively licensing. And when I track sort of where we're at on them, we have lots of interest in taking licenses. It's just the price that's an issue. I think we're going to see lots of growth in lot of areas. So hopefully that helps without being too granular about it.

Eyal Ofir - Clarus Securities

And just on the partnership, you expect to have more kind of one-off payments.

Jim Skippen

What we've seen in the last few quarters is we've guidance around $90 million of revenues, in this quarter closer to $20 million. And then the actual results come in and it's much higher. And I think what we're seeing is that with so many portfolios and many licensees are happy to make one-time payments or maybe there is a payment one year and then a payment next year and the year after. But less of these sort of pay every quarter deals, that we're going to see a lot more one-time payments in our revenues. And they're going to become a much bigger component of overall revenues.

So again when we look at the guidance for next year, we know for instance there are number of reports that haven't come in on running royalties. So we know those will come in. So we know the actual revenues will be higher. And we also are in the process of negotiating number of deals, some of which will be one-time probably, and that could affect revenues too. So a long-winded way of saying these one-time or periodic payments are becoming a bigger component of our overall revenues, and it's probably fair to expect that they're going to show up most quarters. And they usually don't come in till the end of the quarter, so they're not there at beginning where we give our guidance. And we only give guidance on what we've actually got in the bag. This time, I'll just repeat, we're missing some running royalty payments as well that are significant. So that's a little bit more color on the guidance.

Operator

Our next question comes from the line of Ralph Garcea with Global Maxfin.

Ralph Garcea - Global Maxfin

As you get more active on these partnerships, how far advanced are your partners in discussions with prospective licensees when you sign these agreements? I mean if you look at the flash side or even the point-of-sale terminal ones, have they already started sort of putting companies on notice?

Michael Vladescu

No, they're all different. The flash portfolio is a virgin portfolio. It's never been asserted, never been licensed as such. This is a very well-known global company, and so they have a few cross-licenses, but not very many. So largely the portfolio is completely unlicensed. And there was a huge room for us to get this portfolio. Unfortunately, I understand why the market doesn't react as much as we thought it would, because we have to be so quiet in the press release. But it's very significant. The terms are good and there is no cash upfront. So it's a real win for us.

If you compare that to the point-of-sale terminal portfolio, that portfolio has actually been through litigation, been successful and a number of parties have taken licenses. And so it's a great portfolio for us to take along, because we know it's a winner. And we're just basically going around and doing the clean-up on the unlicensed parties out there. And it's a pleasure to license that type of very high-quality portfolio.

Ralph Garcea - Global Maxfin

On the one-time payments, even though you're not getting the sort of quarterly run rates, these are still sort of five or seven-year deals and you're just leaving it flexible, so they can pay as units are shipped and so forth.

Michael Vladescu

No. So we do have some. So there were some agreements signed last quarter that are still quarterly payments, but some of these are very smaller proposals. Let's say there is only one or two patents in the portfolio, but they're valuable patents. And maybe the infringement, it's not a huge amount of infringement. What typically happens is someone pays us an amount and then they are fully licensed for the life of the patent. And we're going to see more patents like that. And that's much closer to, I think, the style of licensing that you'd see from a company like Acacia. And that's going to be a component of our overall revenues. So it's not that it's five to seven years and it's unit-based running royalties. It's a one-time payment, maybe a smaller licensee, also the bottomline, and we're just going to see more and more of those.

Operator

Our next question comes from the line of Robert Young with Canaccord Genuity.

Robert Young - Canaccord Genuity

I was hoping to dig a little bit into the litigation expense. The last two quarters have been in the $1.7 million level. If I understand how these are structured, there is a retainer fee or an extended retainer fee, which includes typical work, and then there is a success fee. And I was wondering that $1.7 million, is that a good sort of a baseline level for that retainer fee or should we think that that could potentially go lower if there is no activity?

Jim Skippen

We basically have two models now with law firms. The first model is a 100% contingency where all we would pay probably is out-of-pocket disbursements. So they would typically be things like third-party experts or maybe photocopies or things like that. But we don't pay anything to the law firm until we are successful in the litigation. And then they would get a percentage, and the rough rule of thumb on percentage is about 30% of the gross.

The other type of model that we have is a little bit more complicated. But basically what we do is we agree on a fixed amount. So let's say for argument's sake the fixed amount we agree on is $1 million. Basically it's usually a percentage of what we think the actual cost would be. So if the actually cost of litigation, let's say we think it be would $10 million, we might agree to pay 40% of that. Let's use $4 million. We would then pay $4 million in sort of quarterly payments, not for $4 million a quarter, but whatever $4 million breaks down to over two years. And at the end, once we paid it off, that's it. We don't pay any more to the firm. The firm would then cover disbursements and it would cover its own fees. So that's all the fees they get. And they will only get more money if 30% of the actual amount that we get from the licensee is more than the $4 million.

So this enables the firm to operate on a marquee litigation, because they have enough to sort of cover their cost. They're not making any profit probably, believe it or not, but they can cover the cost. And our interests are aligned. We like it, because on these big litigations, third-party costs can be a lot, and they're actually incented to try to keep them down too, but they're still incented to get the maximum amount, because that's how they make a lot of money. So that's the other model that we've employed.

Robert Young - Canaccord Genuity

I was wondering if you'd venture an updated backlog figure. I think the guidance this quarter is roughly the same as last quarter around the same spot. I think you said that you'd signed some quarterly payers, which might suggest the backlog is dropped. And I was wondering if you could maybe give us some direction to that or maybe update to that?

Jim Skippen

We have a range of backlog. The range certainly hasn't changed. And I can tell you our backlog is pretty steady. It hasn't changed much from last quarter. But I don't want to really be granular on backlog every single quarter. So unfortunately, we're not prepared to do that at this point except to tell you it's very similar to what it was.

Operator

Our next question is a follow-up from the line of Blair Abernethy with Cantor Fitzgerald.

Blair Abernethy - Cantor Fitzgerald

Jim, I wonder if you can give us some color on your thinking now in terms of stock buyback.

Jim Skippen

Well, we only actually got in a place, because of the regulatory timing of it all for the last seven or eight days of the quarter. We have it. We've been making modest purchases under it. We're continuing to think about it. Certainly if we saw a weakness in the stock price, I'm quite sure we'd get much more aggressive. We do think the stock price doesn't reflect the value of the company. So we may get more aggressive anyway. But I don't want to give too much more color than that except we do expect to make consistent purchases everyday, and we will react to the stock price. And if we don't think the market is valuing it properly, we'll get more aggressive.

It is a balance, because we do think we can use that money to go out and buy or at least sometimes we have to pay in advance on very valuable portfolios, which can really benefit the company in the long-term. So we have to offset that against buyback. We also have over 6% dividend now, a very aggressive dividend. So we're committed to the buybacks, but I won't say much more than that in terms of the volume.

Blair Abernethy - Cantor Fitzgerald

And just if I could slag one more in, could you just talk to the volume of licensing activity in the first half of this year versus sort of what you were trending last year and the capacity of your team to sign more licenses?

Jim Skippen

Well, we've changed the organization somewhat. We used to have sort of one person in charge of licensing, one in charge of business development. Now we have five somewhat independent teams, and they certainly in charge of their own acquisitions and own licensing. And I think that has unleashed some entrepreneurial spirit in the teams. And we're seeing a lot of activity, particularly for some of our teams. So my own feeling is the trend is very good. We've got lot more programs. We've got lot more activity. Through volume of programs, we should see more licensing. So bottomline is it looks healthy to me, and I think the results are indicating that as well, the dramatically improved financial results of the company over the last two, three quarters. It'll be interesting to see over the next three, four months. All the teams have aggressive targets in terms of attracting new partners and all of them have aggressive targets in terms of signing the licenses. So I have to sit back and hope that it comes to fruition.

Operator

Our next question comes from the line of Rob Manson-Hing with CIBC. Please proceed with your question.

Rob Manson-Hing - CIBC

Just in terms of the timing for the Sony, Philips, Nokia Networks signings, is that going to be recognized in Q3?

Jim Skippen

There will be some revenues from Q3, yes.

Rob Manson-Hing - CIBC

In terms of litigation cost, I don't think I've got a good sense of what I guess maybe longer-term costs are?

Jim Skippen

I think litigation expenses in the quarter were about $1.7 million. I actually think the run rate that we're expecting is probably $2 million to $3 million, and that's the range we think at this point is sort of a normalized range for litigation expenses, which is up a bit, but obviously dramatically down from the $40 million-plus the year before.

Rob Manson-Hing - CIBC

Is that assuming that you go into litigation with lot of these like auto, irrigation, medical potential licensees? Is that kind of the thought?

Jim Skippen

Yes, we're taking that possibility into account.

Rob Manson-Hing - CIBC

I thought you were going to recognize a major obligation this quarter, $30 million or so, in Q2. I didn't see that come. Is that something that can happen next quarter or the timing of that goes on Samsung?

Jim Skippen

I don't think there is an obligation next quarter to Samsung of $12 million to $13 million.

Operator

Our next question comes from the line of Daniel Kim with Paradigm Capital.

Daniel Kim - Paradigm Capital

Just to clarify on the legal. Jim, with regards to the new agreements that you have to offload the risk and share the litigation expenses, does that apply only to new patent assertions or would that also apply to the Apple case?

Jim Skippen

No, all of our litigations, one or the other model at this point, to the extent they weren't that way, we've changed them and negotiated new deals. So I think it'll be safe to assume that the Apple follows that model. So we're obtaining a fixed amount if we (inaudible) with Apple, and it's not going to change. And when we reach a license with Apple, then the law firm will get a significant portion of its reward. $1.7 million contemplates the fixed fee for Apple which should not change.

Operator

Our next question comes from the line of Robert Young with Canaccord Genuity.

Robert Young - Canaccord Genuity

A couple of quick ones. The decision to use Adapt IP Ventures, it seemed to me you have that expertise in-house. So Blair asked earlier about the workload on the team. Is that a sign that you're just overflowing a little bit or why would you use a broker for that?

Jim Skippen

I'm not sure we view ourselves as patent brokers. Yes, we have sold some patents in the past. But the brokerage business is a slightly different business. And that's all they do. They just focus on sales. They have many, many contacts. They can talk to companies that might be harder for us to talk to. They only get paid upon the successful outcome of a transaction. And so we think it's a sensible way for us to manage ourselves.

But this relates back really to the announcement we made three or four months ago when we ended the strategic review that we intended to divest some of our portfolios that we didn't think were core portfolios for us. So one of the first ones we're looking at is our white space portfolio that was developed internally. And we do think that it makes sense to use an outright broker for that. And most of the licensing companies like us when they divest the portfolios, they do use brokers. So this is not unusual. And we could develop that expertise and operate as a service, but we really don't currently.

Robert Young - Canaccord Genuity

And then the purchase of intangibles in the quarter of $11 million, I think you said earlier that there were some payments for patents previously acquired. It seems obviously that would be the Nokia announcement. But should we expect another purchase of intangibles related to Nokia announcement in the coming quarters?

Michael Vladescu

What you need to look at is the patent finance obligations on the balance sheet, that reflects (inaudible) we have. And the cash flows actually reflect the sort of the retirement of patent finance obligations. That's why I said it's related to previously acquired stuff.

Operator

Thank you. This concludes Wi-LAN's second quarter 2014 financial results conference call. I will now turn the call back to Tyler Burns for final remarks.

Tyler Burns

Thank you for attending Wi-LAN's second quarter 2014 financial results conference call. A replay of this conference call will be available until 11:59 PM on October 30, 2014. Instructions for accessing a replay of this conference call can be found on the news release that was issued earlier today and on the Wi-LAN website. Thank you for attending. Good bye.

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