Posted by permission of Robert Millham:
RESEARCH CAPITAL CORPORATION
28 June 1999
WI-LAN WIRELESS DATA
(ASE: WIN— $6.15)
Rob Millham, CFA
robert.millham@researchcap.com
(604) 669-6022
BUY
Initiating Coverage on Wi-LAN Wireless Communications – Full Report Pending
HIGHLIGHTS
· With a data rate of 30 Mbps, Wi-LAN launches a product with
the industry's most efficient use of bandwidth.
· Not only has Wi-LAN delivered a product three times faster
than any other competitor, it has done so at a remarkable price.
· As OFDM is set to become the industry standard for high speed
networking, the Company is in an enviable position given its
technological lead – we expect to see a number of licensing
agreements in the coming months.
· Wi-LAN's proprietary W-OFDM also has far reaching potential
beyond the Company's initial focus.
Per Share Data
Target Price (one year): $12.00
Projected Return: 95%
Year End: December
1998A 1999E 2000E 2001E
FY Rev (mm)$5,768 $12,500 $30,000 $65,000
FY EPS -$0.37 -$0.19 $0.02 $0.26
P/E N/A N/A N/A 23.4x
3Yr. Growth Rate: 55%
Market Cap. $112.5 M
We are initiating coverage on Wi-LAN Wireless Data Communications with a BUY
recommendation, and are preparing a full research report. However, given the stock's
momentum and the near-term potential for strategic alliances being consummated
(subsequent to the launch of the Company's new flagship product), we are expediting
our recommendation. We have spent a considerable amount of time over the past few
months researching the wireless data market to develop an understanding of Wi-LAN's
core technologies, namely Wide-band Orthogonal Frequency Division Multiplexing
(W-OFDM). We have concluded that Wi-LAN has launched a product that is
significantly more advanced than that currently available on the market (three times
faster). Furthermore, we believe the Company has developed a platform technology that
will attract a number of lucrative licensing agreements. It appears that W-OFDM has far
reaching applications beyond Wi-LAN's initial focus. As a result, we believe that this
relatively unknown company will gain a great deal of attention in the coming months as
strategic alliances are forged.
Product launch of “I.WiLL Access Point” for wireless data/Internet networking
· Unprecedented data transfer rate of 30 Mbps in 20 Mhz of bandwidth
· True throughput of about 22 Mbps – only about 25% overhead
· Speeds achieved both up link and down link
· Range 3-7 km (depending on the application and geography)
· Point to multi-point
· I.WiLL's ability to transmit combinations of video, web, videoconferencing, MP3 and
VOIP simultaneously
· Cost: about US$9,000 per base station
PROFILE
Located in Calgary, Alberta, Wi-LAN Inc. is a pioneer in the field of high-speed
wireless data communications, with a focus on high-speed Internet access, LAN/WAN
(Local Area Network/Wide Area Network) extension and WLL (wireless local loop).
In seven years, the Company has achieved a notable position in the burgeoning wireless
market and has begun to develop a global reputation for providing leading edge wireless
communications technology and products that are efficient and cost effective. The
Company's patented technology is at the foundation of a proposed international
standard.
Wi-LAN Inc. was founded in 1992 to commercialize two patented technologies: spread
spectrum technology designed for the emerging wireless LAN market and W-OFDM.
Dr. Hatim Zaghloul and Dr. Michel Fattouche, Wi-LAN cofounders, recognized the
potential of OFDM in 1990 and patented a version of this technology in 1992 called
W-OFDM.
Until now, W-OFDM technology implementation has been slow due to the inability of
existing digital signal processor technology to support the high-speeds made possible
through the underlying technology of W-OFDM.
Initially, Wi-LAN chose to commercialize other products using spread spectrum
technology until DSP chips caught up with the capabilities of W-OFDM. Wi-LAN's
new 30Mbps W-OFDM product has enabled the Company to push forward its
development of the world's first channel estimator for W-OFDM that can mitigate
multipath effects, while
introducing an innovative new error correction technology. This has allowed an increase
in speed that is much higher than current wireless technologies.
BACKGROUND ON WIRELESS LANS
Within the spectrum of electrical energy, the frequencies and bandwidth used for
wireless LANs range from the high end of the ultrahigh frequency (UHF) radio band
(900 MHz) through the microwave frequencies (2.4 GHz, 5.8 GHz and 18 GHz) and
into infrared (invisible) light (measured in terahertz). In the U.S., wireless LANs are
typically designed to operate in portions of the spectrum where the Federal
Communications Commission (FCC) does not require the user to purchase a radio
operator's license (and therefore there is no charge to use the frequency). This
spectrum, which is referred to as the Instrumentation, Science and Medical (ISM)
bands, include 902-928 Mhz, 2.4-2.483 GHz, and 5.725-5.875 GHz. Compared with
wired LANs, wireless LANs provide installation and configuration flexibility and the
freedom inherent in the network mobility. In evaluating Wi-LAN's products, or
competitors, one should consider all of the following issues: range of coverage, antenna
diversity and multipath interference, throughput, integrity and reliability, interoperability
with wired and wireless infrastructure, simplicity and ease of use, security, and cost. Of
these concerns, bandwidth (throughput) and cost are particularly paramount for
commercial viability.
ALTERNATE HIGH-SPEED NETWORKING TECHNOLOGIES:
Manufacturers of wireless LANs have a range of technologies to choose from when
designing a wireless LAN solution. Most wireless LAN systems use spread spectrum
technology, a wide band radio frequency technique developed by the military for use in
reliable, secure, mission critical communications systems. Spread spectrum is designed
to trade off bandwidth efficiency for reliability, integrity, and security. There are two
types of spread spectrum radio: frequency
hopping and direct sequence, each with its own set of advantages and limitations. The
greatest limiting factor for both of these techniques is the increase in bandwidth required
as the amount of data increases. The best system currently available delivers 11 Mbps
(most available products are between 1and 5Mbps) and uses 22 Mhz of spectrum.
Spread spectrum technology is approaching its limits in speed.
Wi-LAN's answer is OFDM because it breaks one high-speed data signal into tens or
hundreds of lower speed signals, which are all transmitted in parallel. However, OFDM
in its native form is subject to a number of technical shortcomings, particularly amplifier
linearity and resilience to multipath (resulting from signals deflecting off objects thereby
altering the intended sequence of reception).
To overcome these weaknesses, Wi-LAN made some modifications and developed
W-OFDM (Wideband Orthogonal Frequency Division Multiplexing). W-OFDM uses a
broad frequency band that increases the data throughput appreciably and mitigates
multipath effects through the use of a channel estimator. Noise and multipath immunity
enable
for wide area, multipoint coverage, and the efficient use of bandwidth allows for many
more high-speed channels within a frequency band.
APPLICATIONS
One of the fastest growing applications of wireless communications is Internet access.
The marriage between low cost wireless technology and the promise of high bandwidth
is a natural for the Internet. One leading research firm projects 29.6 million wireless
Internet and email users by the year 2003. Wireless Internet access has the potential to
become the "killer app" of the next millennium. Until now, the problem with wireless
technology has been that it was too slow and/or very expensive for fast data rates. All
that is about to change and Wi-LAN is at the forefront of this transformation.
Wireless access to the Internet is already available throughout much of the U.S. through
two different forms. Some companies such as Teligent and WinStar are building a
national wireless microwave network on a licensed frequency. These companies are
able to deliver massive data rates at a considerable expense. As a result the intended
customers are typically office buildings who then distribute the signal through a wireline.
Other companies such as, GoAmerica or
Metrocom, offer wireless Internet access for mobile users through what is essentially a
cellular modem. These companies offer this service through licensed cellular frequencies
and are limited to slower data transfer rates. Wi-LAN's initial target market is fixed
wireless Internet access users situated in homes, small offices or educational facilities.
We believe in the near future Internet Service Providers (ISP) and Regional Bell
Operating Companies (RBOCs) will begin to establish base stations which offer a
wireless connection to the neighborhood. Initially each base station could provide up to
30 megabits per second (Mbps) of data to the surrounding subscribers. Adding another
base station doubles capacity. This data rate would be divided up by the number of
users accessing the network at any one time. For example, if 100 users were accessing
one base station at the same time then each user would experience a data rate of about
240Kbps (after giving effect to overhead loss) or about six times faster than a
conventional phone line rate.
Wi-LAN expects to double it 30 Mbps data rate within the next six months which yields
an even stronger business model.
STRONG INITIAL CUSTOMER INTEREST
Two European companies have already begun rolling out wireless networks to provide
Internet access based on Wi-LAN's equipment. Telia GlobalCast, part of a large
Swedish telecommunications company, told us they want to build the largest wireless
network in Europe based on Wi-LAN's equipment. Telia is in the early stages of
building this network, and depending on customer acceptance and Wi-LAN's ability to
deliver product, this agreement could be worth US$36 million over three years. Tele2
U.K. Ltd., a subsidiary of Millicom International (NASDAQ:MICC), is building a
national wireless local loop system that will provide high-speed Internet and intranet
service to small and medium-sized businesses in the U.K. This contract is expected to
generate revenues of approximately $5-10 million over the next year to Wi-LAN.
Again, depending on the success of this network and Wi-LAN's products, over the next
five years this public network is expected to generate between $75 to $150 million to
Wi-LAN. Over the past few months Wi-LAN has responded to a number of requests
for proposals by North American telecom companies who are
looking at setting up trail wireless data networks similar to those in Europe. One such
initial contract alone could amount to as much as US$30 million and news on such trials
could come as early as this fall. Wi-LAN's base station access point, that's the
“I.WiLL” product launched last week, will sell for approximately US$9,000. Wi-LAN
expects the price of its base station to be significantly reduced over the next year as
volume increases and design modifications are made. The next most important product
development will come this fall when the Company consolidates a number of its chips
into a single ASIC allowing for a substantial cost reduction. The end product intended
for home and small office use is anticipated to initially cost less than $500 – the generally
acknowledged “sweet spot” for the market. That price will fall further as volume levels
increase.
The potential of Wi-LAN's products and technology are not just limited to Internet
access. More conventional applications of wireless data products in enterprise wide
area networks or local area networks also offers significant potential. Similarly, newer
applications such as “home networks” or remote e-mail/palmtop devices are well suited
to benefit from Wi-LAN's core technology. It is just as important to understand that
W-OFDM modulation is adaptable
to other modulation schemes.
INDUSTRY PROFILE
Until recently, the wireless market has been relatively slow to develop. This is due to
both a high price and low data rates associated with the legacy and current technology.
Over the past twelve months, we have seen these price/performance characteristics
change dramatically and we anticipate another quantum leap over the next year.
Witness Wi-LAN, which twenty four months ago offered a leading edge wireless LAN
product with a data delivery rate of 1.5Mbps for about $2500. Within six months, the
Company anticipates offering a 30Mbps product for less than US$500.
The other factor limiting growth has been the lack of industry standards. The primary
U.S. standards body creating and maintaining standards for the data networking industry
is the Institute of Electrical and Electronic Engineers (IEEE). The IEEE currently has
established draft standards (802.11a) governing high-speed wireless networking
(greater than 10Mbps) which could be ratified by the end of the year. A surprise
development to many industry experts, OFDM was
selected as the modulation scheme. This put Wi-LAN in an enviable position given that
the Company is a pioneer of advancements in OFDM and is well underway in
developing commercial products. In fact, given their patent positions, it is Wi-LAN's
contention that those who use OFDM in North America will ultimately have to license it
from the Company. In our view, the success of Wi-LAN doesn't depend on whether or
not other companies are violating Wi-LAN's patents, but rather on the strength of the
core technology it utilizes - W-OFDM.
We have reviewed various industry reports from leading experts on the projected
growth of the wireless data LAN market. While we have seen a wide range of
projections, the consensus view is that this is an explosive market growing from about
$500 million today to $1.5-$2.0 billion by 2002. Our view is that these numbers are
likely on the low side.
Considering that current sales of Ethernet LANs and HUBS are in excess of $10 billion
and that new wireless LANs offer Ethernet speeds at a reduced cost (when considering
the cost of installing, moving and maintaining wire), it is conceivable that wireless LANs
will capture greater than a 20% market share within the next few years. Factor in new
markets from portable devices, home networks, and fixed wireless Internet access and
the market size quickly exceeds
$2 billion by 2002.
CONCLUSION
In our view, Wi-LAN's success depends on the Company's ability to license its
technology to OEMs. For that reason we put little emphasis on the success, or lack of,
in the marketing of past products. We believe Wi-LAN's primary value is in its
intellectual property. In recent years, merger and acquisition activity in the
Internet-related field has grown significantly. These acquisitions are often at very high
multiples. High prices are generally due to the value placed on intellectual property.
From everything our research has found, Wi-LAN is in a lead position with OFDM and
OFDM
appears to have a promising future. If correct, we will see a number of licensing
agreements emerge in the coming months.
From a valuation perspective we have looked at several public and private companies.
Not surprisingly we have found few good comparables. Included in our comparable
analysis are some “wireline” companies, which although not wireless have proprietary
technology that focus on increasing bandwidth. In the public forum we have considered
such companies as Proxim, Aironet (proposed IPO), TUT Systems, WaveRider,
Breezecom (proposed IPO) and Sierra Wireless. We have also considered acquisitions
of both wireless companies and other network related companies. In terms of
acquisitions: Nokia's acquisition of Vienna and InTalk; Broadcom's acquisition of
Epgram and Maverick; Lucent's acquisition of Wave Access; Cisco's acquisition of
Clarity; Texas Instruments' acquisition of Armati; and
Nortel's acquisition of Broadband and Shasta, are all relevant examples of high priced
acquisitions for technology.
The information contained in this report has been drawn from sources believed to be
reliable but its accuracy or completeness is not guaranteed, nor in providing it does
Research Capital Corporation assume any responsibility or liability. Research Capital
Corporation, its directors, officers and other employees may, from time to time, have
positions in the securities mentioned herein. A copy of the firm's statement of financial
condition, along with a list of partners, directors and senior officers is available on
request. Contents of this report cannot be reproduced in whole or in part without the
expressed permission of Research Capital Corporation.
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