Unwired Planet's CEO Presents at Patent Purchase Agreement Conference (Transcript)

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Unwired Planet Inc. (UPIP) Patent Purchase Agreement Conference Call January 10, 2013 5:00 PM ET

Executives

Mike Bishop – Investor Relations

Mike Mulica – Chief Executive Officer

Eric Vetter – Chief Financial Officer and Chief Administrative Officer

Daniel Mendez – General Manager, Intellectual Property Division

Timothy M. Robbins – General Manager, Intellectual Property Division

Analysts

Mike Latimore – Northland Securities, Inc.

Dan Weston – Westcap Mgt. Ltd.

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Unwired Planet Patent Purchase Agreement Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, January 10, 2013.

I would now like to turn the conference over to Mr. Mike Bishop with Investor Relations. Please go ahead, sir.

Mike Bishop

Thank you, Kameil. Good afternoon and thank you for joining us today to discuss Unwired Planet’s Patent Purchase Agreement. Joining me today on the call are Mike Mulica, Chief Executive Officer; Eric Vetter, Chief Financial Officer and Tim Robbins and Daniel Mendez, General Managers of the Intellectual Property Division.

Before we discuss the agreement, I want to remind everybody that we are operating under the rules of Regulation FD. The press release announcing the Patent Purchase Agreement was distributed at the close of market today, and if you have not yet seen a copy, you can find one at our website at unwiredplanet.com. For your convenience, this call is being recorded and will be available for playback from our website for three months.

Further, any remarks that may be made on this call or in our press release about future expectations, plans or prospects for the Company may constitute forward-looking statements for the purpose of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

The actual results may differ materially from those indicated by the forward-looking statements as a result of various important factors including, but not limited to the abilities of the parties to the Patent Purchase Agreement to consummate the proposed transaction and other factors. These factors include the specific risk factors discussed in the Company’s press release that was distributed today, and in the Company’s filings with the SEC including, but not limited to the fiscal 2012 year-end results on Form 10-K and any other reports subsequently filed with the SEC.

We intend to make forward-looking statements based on management’s outlook as of today. We do not intend to update these statements, and disclaim any obligation to do so. We reserve the right to update the outlook for any reasons during the quarter.

And with that, I’d like to turn the call to Mike.

Mike Mulica

Thanks, Mike and good afternoon, everyone. Thanks for joining the call today. This afternoon, we announced that we have entered into a transaction with Ericsson whereby Ericsson will transfer to Unwired Planet, 2,185 issued U.S. and international patents and patent applications. This is a transaction that significantly broadens Unwired Planet’s patent portfolio and solidifies our strategy to create a long-term scalable industry licensing platform and maximize our return to shareholders

We’ve provided a presentation to accompany this call, which you can download from our website. On the call, I plan to discuss the following. first, an overview of what we have announced today, many of you will have seen the press release and the 8-K. so keep this part of the discussion brief, but I do want to highlight a few key points as well as lay out the terms of the transaction.

Second, I’d like to offer more detail on the patents that are involved in this transaction. And third, I’ll provide some detail on how today’s announcement affects the going-forward strategy for our business. We’ll have some time following the prepared remarks to answer questions. I’m joined to this call by Eric, Tim, and Daniel as Mike mentioned at the front-end of the call.

For those of you that have the presentation, please turn to slide four where we have set out the highlights of today’s transaction. We’re excited about today’s announcement in relation to our transaction with Ericsson, a leader and innovator in the telecommunication space and the largest holder of standard essential patterns for mobile communications. The transaction broadens Unwired Planet’s existing portfolio into the field of telecommunications infrastructure, mobile handsets as well as over-the-top services.

As part of the transaction, Ericsson will make future patent contributions to the Unwired Planet LLC beginning in 2014. Ericsson has committed to contribute at least 100 new patent assets every year for five years, with a portion of those being U.S. patent assets. The future patent contributions from Ericsson are expected to extend the life of our portfolio significantly, and contribute enormously to the terminal value of our enterprise. This transaction strengthens and positions our existing business for the long-term, with a holistic and deeply relevant combined IP portfolio reflecting decades of mobile industry research and development at Unwired Planet and Ericsson.

The combination of the contributed patents from Ericsson with Unwired Planet application layer focused intellectual property is very, very powerful and provides us with a greater opportunity to leverage our management’s expertise and licensing across the broad portfolio of technology assets with much greater scale.

Ericsson will share the revenues generated from the combined portfolio under a revenue sharing mechanism, which we will also cover later in the call. This transaction structure establishes Unwired Planet as an alternative channel for the realization of value from Ericsson’s IP portfolio and creates a long-term industry platform for the realization of IP expanding telecommunications infrastructure, mobile handsets, and the mobile Internet.

One additional benefit of the transaction is that we believe it enables the company to move from lump sum perpetual licensing models towards pursuing recurring royalty based licensing. With royalty payments calculated based on licensees’ revenues.

Our goal at Unwired Planet has been a consciousness and sustainable long-term IP licensing program, delivering ongoing value to our shareholders. With today’s announcement, we have expanded our existing licensing plan and taken a significant step towards these objectives.

Please move forward to slide five, which covers the financial highlights of the transaction. As I mentioned, Ericsson will share in revenues generated from the combined portfolio under our revenue sharing mechanism. And there is no upfront consideration payable for the Ericsson patent portfolio.

In the event of a change of control of Unwired Planet, in order to ensure that it receives fair value for its patent contribution, Ericsson will be entitled to a deferred consideration and it’s based on the fair market value of the patents. Should it choose to terminate the revenue-sharing arrangement with the future owners of the Company, while we get our licensing program underway and the revenues from the portfolio ramped in the first three years, the payment to Ericsson is subject to a floor of $1.05 billion.

Going forward while supporting a larger portfolio, we will require a build out of our internal IP supporting. Initially, we expect to be able to supplement our existing team with external resources, and we’ll build up the internal team over time, commensurate with the revenue generation from the licensing program. We will see a modest uptick in the internal corporate expenses and an increase in prosecution and maintenance costs in view of the increased number of patents under management.

We do not however anticipate any increase in the near-term litigation costs, which obviously are the largest cost driver in our going-forward business. We will expand on the financial information on our next earnings call. I’ll move to reoccurring royalty licensing models would transform our financial model and allows for greater visibility for the company and our shareholders on a recurring cash flow basis from our licensing program.

Finally, one of the most important aspects of the transaction from a financial perspective is the increased use of NOLs. Unwired Planet has accumulated net operating losses of approximately $1.6 billion, which can be utilized as a tax shield against the future profits generated from our licensing activities.

With a significantly expanded licensing program and a financial scale that comes with it, we expect to utilize a very large portion of our NOLs. This halo effect enables us to unlock greater value from our net operating losses, improving the underlying economics of the Ericsson transaction for our shareholders and it’s one of the most important drivers to the financial rationale for this transaction from my perspective.

The next slide, slide six, provides further perspective on the rationale for this transaction. The relationship between Unwired Planet and Ericsson goes back a long way. Both companies were at the forefront of technical innovation at the dawn of the mobile Internet.

In 1997, we teamed up to introduce the wireless application protocol, which brought Internet access to mobile devices. We shared decades of telecommunication’s industry innovation with pioneering research and development. The two companies have committed billions of dollars to development of critical telecommunications inventions and have delivered massive social value and technical advancement globally.

Our enlarged IP portfolio spans key communications technologies from the handset to the network with Unwired Planet’s rich application layer patents augmented by Ericsson’s patents, covering infrastructure and key telecommunication standards.

The illustration on this page reflects the excellent fit of the Ericsson contributed portfolio to our existing patents. Unwired Planet’s patent portfolio represents solid domain strength in fundamental application layer technologies across a variety of areas including the mobile Internet, mapping, location and search.

We bring considerable technological and licensing expertise to our global IP licensing program. As a public company, our shareholders participate in the returns from our licensing activities and support our licensing efforts with a source of permanent capital. The portfolio contributed by Ericsson reflects fundamental communications technology at the core of the mobile network infrastructure and telecommunication standards.

The Ericsson portfolio comes with over 100 years of telecoms DNA from one of the industry’s leaders in the space. Ericsson’s future patent contributions ensure the continuation of a long-term sustainable licensing strategy with Ericsson participating in our licensing program towards revenue share arrangement.

Slide seven sets up further detail of our revenue sharing arrangement with Ericsson. Cumulative growth revenue represents the total revenues generated from the combined patent portfolio going forward over the life of its patents. Ericsson’s share of the first $100 million of licensing revenue has fixed at 20%. This reflects our need to invest a portion of these early licensing proceeds to develop and expand our global licensing activities to the point where they become self-funding.

As the licensing program bears fruit, and achieves critical mass, Ericsson revenue share increases to 50% for cumulative growth revenue between $100 million and $500 million. This split reflects the technology contribution of both parties to the enlarged portfolio, and revenues will be divided evenly between the companies as we make progress over the medium-term.

Ericsson will be entitled the 70% share of the cumulative growth revenues generated in excess of $500 billion. This reflects Ericsson’s future patent contributions to our portfolio as well as the longer life span of Ericsson’s patents relative to the existing Unwired Planet portfolio. We believe this revenue sharing arrangement reflects the strength and heritage of each of our portfolios and aligns our interest with Ericsson in the future as Unwired Planet embarks on a broad IP licensing program, supported by this robust portfolio of industry leading technologies. I would now like to give you some more detail and color on the enlarged portfolio in our go-forward licensing strategy.

On page nine of the presentation, we lay out key technology areas covered by the enlarged patent portfolio. The combined patent portfolio allows us significant and different additional coverage across to application and infrastructure layers of the mobile communication industry. And our patent coverage now extends across all layers of the telecom, handset and infrastructure stack.

This technology coverage of the heritage Unwired Planet and the heritage Ericsson patents is highly complementary. The application coverage of the Unwired Planet portfolio extend to a very broad range of foundational and implementation patents relating to mobile device functionality and the mobile Internet. These include Internet on mobile devices; push technology in location based services, application stores, mobile search and many more topics.

The contributed patents have broad coverage of the communications layer including signal processing, radio resource management, mobility management, antennas, network protocols, voice and text applications as well as key software and hardware technologies. The 2,185 contributed patent assets include 809 U.S. patent assets, consisting of 825 patent families in total from Ericsson. This top to bottom approach to licensing discussions is very, very powerful and will be a key strategic advantage for the company going forward.

Over the medium term, our goal is to reach licensing arrangements with all of the companies to use our patented technologies. We must acknowledge that this process to reach these arrangements, may take patience and expense. And as with our existing licensing program, we will use litigation when necessary.

I’d now like to talk a little bit more about our going forward licensing strategy. The first component of our licensing strategy is to license the Ericsson contributed patents across the mobile, infrastructure, and handset space. These royalties are expected to drive a reoccurring annual revenue stream based on our license fees sales to products. The second component of our strategy is to continue our application layer licensing program, which is well underway based on our existing portfolio patent assets.

Our application layer patents maybe licensed either in conjunction with the Ericsson’s contributed patents under a portfolio wide license or separately, creating the potential for flexible royalty arrangements. As we highlighted in our last quarterly call, we are moving aggressively to protect our existing patent portfolio, and in September we announced two patent infringement complaints in Nevada against Apple and Google.

In two separate complaints filed in Reno, Nevada, Unwired Planet has charged Apple with infringing 10 of its patents, and charged Google with infringing 10 different patents. Together these two cases, charge infringement of these 20 patents related to mobile smartphone devices, cloud computing, digital content stores, push notification technologies and location based services such as mapping and advertising.

We believe these cases represent a strong advance in our IP initiative. We are in preliminary phases of these proceedings, but we will keep you apprised of its development. We have a strong intellectual property portfolio, and we are taking the appropriate actions to direct shareholder value through licensing and partnering efforts. The lawsuits represent an important part of this strategy to protect our patent value and our licensees.

In summary, our multi-faceted licensing strategy offers us and our licensees, significant flexibility and opportunities going forward for a productive engagement on licensing discussions.

Slide 11 shows the expected unit growth of the mobile handset industry, which is the largest user of our infrastructure and mobile Internet technology. This rapidly expanding revenue base of the industry demonstrates the massive, social and economic market value generated by the significant investment by companies including Unwired Planet and Ericsson over decades of pioneering innovations.

This slide illustrates how 4G and UMTS markets represent growing and attractive markets in which to execute our patent licensing strategy. Keep it in mind that future royalty revenues are linked to this expanding revenue base.

Moving on to side 12, the addressable market for the contributed portfolio is impacted by existing encumbrances on the contributed patents from Ericsson. The bulk of these encumbrances are term licenses, which one-off over time. Initially, with the considerable portion of the smartphone market, initially, we expect a majority of these encumbrances should be discontinued over the course of time with a substantial majority of the smartphone market will be unencumbered within three years.

Unwired Planet remains unrestricted in the licensing of its existing patent portfolio without any additional encumbrances as a result of this transaction. There has been a lot of change in Unwired Planet in the last 12 months, transforming its business and its prospects.

Slide 13 provides some background on the team and the company that we have assembled to lead its licensing program. We have evaluated a wide range of opportunities since the sale of our product business and are happy to be in a position to publicly announce this transaction with Ericsson today.

Tim, Daniel, Eric and I are very excited about this transaction, and as it’s the product of an extended and complex discussion with Ericsson, which ultimately is a win-win for both parties. The transaction validates the strength of our business and our long-term IP strategy, the combined portfolio reflects Unwired Planet and Ericsson’s decades of significant investment and research and development and both our company’s respective roles as pioneers in the development of technology, critical to the telecommunications infrastructure, mobile Internet and mobile handset markets.

Moving forward, we will be pursuing a broad range of licensing opportunities. We will continue to seek avenues to optimize the shareholder value. Our overarching goal is the conscientious and sustainable long-term IP licensing program, which maximizes value of our technology for our shareholders and for Ericsson.

I would d like to conclude by stating that we feel strongly about executing on our strategy with integrity. Our patents represent significant investments of time and resource and include inventions that are foundational to the telecommunications industry. We are devoted to protecting and maximizing value from this investment. We believe our actions drive social value, ongoing industry innovation and long-term sustainability for our business and our investors.

Operator, I’d like to now open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from the line of Mike Latimore with Northland Capital. Please go ahead.

Mike Latimore – Northland Securities, Inc.

Great, thanks a lot. Very interesting transaction there, I guess on the – are there, I mean we have 2012 patents here, are there a couple here that you think are really core and maybe combined with your patents have very much create a foundational element here that surpasses the value from the other patents or is this going to be a really kind of a broad portfolio for us?

Mike Mulica

All right. I think at this point, we would say that we think the combined portfolio is very, very unique, and this is relating to the comment that I made in the prepared remarks. in total, it’s the portfolio that covers broad, wide and deep.

Mike Latimore – Northland Securities, Inc.

Yeah.

Mike Mulica

So, there’s a lot of value and a lot of important IP in the combined portfolio.

Timothy M. Robbins

Yeah. This is Tim Robbins, I’ll add. I think, we think there’s a lot of synergies between the portfolios. certainly, when we have diligence and evaluated the portfolio in its entirety and there are obviously favorites, because there is a lot of them, a lot more than a couple that will qualify for that.

Mike Latimore – Northland Securities, Inc.

And I don’t have Ericsson’s full patent portfolio in front of me here, but of the patents, how many patents are left here related to say, mobile and telecom at Ericsson. and were any those ones that you thought it would be nice to have as well.

Mike Mulica

Yeah. I won't speak for Ericsson. I don’t know exactly how many patents they have in their portfolio, but this agreement represents a meaningful initiative on their behalf.

Mike Latimore – Northland Securities, Inc.

Got it.

Timothy M. Robbins

They have many, many, many patents. I couldn’t verify that, but I think they are widely considered to be the most important innovator and patentor in the mobile space, and they have many thousands of patents that we’d love to have, but they’ve kept those. and in the end we’re happy with the portion that we’re getting.

Mike Latimore – Northland Securities, Inc.

All right. And just to clarify, Ericsson will get a payment even if some of Unwired Planet’s patents are sold or licensed, right they get a portion of sales, royalties from your patents as well?

Mike Mulica

That’s correct.

Timothy M. Robbins

Yeah. That’s right.

Mike Latimore – Northland Securities, Inc.

Okay.

Timothy M. Robbins

That’s a complete sharing across the board.

Mike Mulica

Yeah.

Mike Latimore – Northland Securities, Inc.

Okay. And my last question, obviously, there’s a lot of licensing efforts that will go around handset based technologies. with Ericsson here right, I’m guessing, you mentioned several infrastructure based patents, is there a metric there, obviously, is it sort of clean to look at the number of handsets sold as a metric arose. Is there another important metric beyond that to tighten to more of the infrastructure technologies?

Mike Mulica

I think what we said was, from a targeting standpoint for licensed discussions, our priorities are set out as handset manufacturers, and then all of the rest to follow. And so, probably the most significant part of the market that we think if that exists is in the handset segment.

Timothy M. Robbins

But obviously as devices proliferate infrastructure sales growth, but...

Mike Mulica

Yeah.

Timothy M. Robbins

But it’s not as a proportion of handset sales; it’s not an equal by any such.

Mike Mulica

The portfolio, we have the very significant components of infrastructure patents so it’s very strong on both the handset side and the infrastructure side as well.

Mike Latimore – Northland Securities, Inc.

I’m just curious, of the patents that you are getting, you said patents and patent applications, how many patent applications are in the mix here as well?

Mike Mulica

We have to look that up, but it was a small percentage of the total.

Mike Latimore – Northland Securities, Inc.

Okay, great thanks a lot. Very nice deal.

Mike Mulica

Thank you.

Operator

(Operator Instructions) Our next question is from the line of Dan Weston with Westcap Mgt. Please go ahead.

Dan Weston – Westcap Mgt. Ltd.

Yeah hi. Good afternoon, thanks for taking the questions and congratulations it looks like a very nice deal here. A couple of questions in terms of the – on slide 12, I may have missed a couple of things there in regarding the encumbrances that you may experiencing relating to the Ericsson licenses. Can you talk a little bit about what you mean there?

Timothy M. Robbins

Yeah I will. Again it’s Tim Robbins. I think we have to be very conscientious and careful, there are many confidentiality restrictions related to this. So I think what we want to say there was, there are a number of encumbrances, that they were taking on, but that they – can the majority of the, large majority of them will be lapsing, either have lapsed or will be lapsing in the next couple of years.

Dan Weston – Westcap Mgt. Ltd.

I totally understood on the confidentiality side Tim. I’m just trying to get my hands around on what exactly do you mean by encumbrances?

Timothy M. Robbins

Existing licenses that would have been granted by Ericsson to other parties for running royalties.

Dan Weston – Westcap Mgt. Ltd.

Ah, ah.

Timothy M. Robbins

So there might, for example, be an agreement for the entire portfolio Ericsson may have granted to some party or another that has two years left on it or something, by the way of example.

Dan Weston – Westcap Mgt. Ltd.

Oh okay. So when you are talking encumbrances, in broad terms, you are talking about, may be license deals that Ericsson has already structured and are receiving royalties for now that you are not entitled to in the time being?

Timothy M. Robbins

That's right, until they expire.

Dan Weston – Westcap Mgt. Ltd.

Until they expire okay got you. And I guess in terms of the 2,100 and change patents that are involved in this particular transfer, other than the ones that have encumbrances that tied to them, are there any that are generating any license revenue today that you are entitled to?

Timothy M. Robbins

No, we don't obtain immediate revenue, but we have immediate revenue opportunities, because there are important large parties that do not have licenses as of day one.

Dan Weston – Westcap Mgt. Ltd.

I got you. So may be is it fair to say that Ericsson on their own was kind of already in may be later stage discussions with some of these guys before your agreement came into fruition that you may be able to get some “low hanging fruit on.”

Timothy M. Robbins

I don't want to speculate on that and quite frankly Ericsson has been very, they've been very careful to honor their own confidentiality on those issues. So I don't have inside knowledge on all that they’ve done, but I do know that, I do know we’re getting in line exactly how we want to get started as soon as this closes. So we have a very concrete direction to head in.

Dan Weston – Westcap Mgt. Ltd.

Got you, okay, that’s fine. And then just a close loop on the back and forth between your two parties is the lawsuits that are on going right now in Nevada with Google, Apple and what not. Forgetting about any royalties or licenses that you may get out of any potential there? If you were to receive let's say a settlement to what not, is Ericsson entitled to receive any monetary benefit that you get from those already pursued programs in court?

Mike Mulica

Yes.

Dan Weston – Westcap Mgt. Ltd.

Okay, fine, okay, okay, that's fine.

Mike Mulica

So value chair across everything that we do from a going forward basis in its entirety.

Dan Weston – Westcap Mgt. Ltd.

Fair enough. Couple more quick ones, in terms of the ongoing contribution that Ericsson is going to make them 100 per year, who decides which patents are you entitled to there? Is that specific to Ericsson?

Mike Mulica

That will be a collaborative process each year.

Dan Weston – Westcap Mgt. Ltd.

Okay. Okay fine. And then Mike I think you indicated that going forward obviously we’re going to have to get some more resources in-house to deal with these additional portfolios. Is there any sense you can give us in terms of where you expect operating expenses to kind of trend over the next few quarters?

Mike Mulica

Yeah I don’t think we’re going to talk about that in detail at this point, but what I can say is that, a very small portion of our ongoing operating expenses associated with in-house resources. We get a enormous amount of leverage from a small amount of people. So if I guess that we will add more people, we certainly will add people, but we’re not talking about – we’re talking about five or ten, we’re not talking about ten or twenty.

Dan Weston – Westcap Mgt. Ltd.

Yeah.

Mike Mulica

And then from a going-forward standpoint, we are cycling through the final phase of putting open ways into our review mirror from a cost and transition standpoint, and we’re feeling really good about our going forward operating model from an efficiency and effectiveness standpoint. So this falls very nicely into what we have prepared for from a structure standpoint, and we’re very consistent with the functions that we have in place.

Dan Weston – Westcap Mgt. Ltd.

Gotcha, okay. last two quick ones, in terms of your Evercore relationship there, just to be clear so, I think I read in the 8-K that they’re getting paid in stock, I guess at this point, has there been any cash contribution to Evercore up to this point, and in the future outside of the stock issuance, are they only getting paid based on creating value?

Mike Mulica

That’s right. So we actually feel pretty good about the structure that we put in place, and if you read it, there is three tranches of stock that they would be available for them, one at closing and one at – two, share prices going forward.

Dan Weston – Westcap Mgt. Ltd.

Yeah.

Mike Mulica

and no other consideration other than that.

Dan Weston – Westcap Mgt. Ltd.

Very good, and then my last one is relating to one of the first licenses you got a couple of years ago with the Microsoft, I think we’d still do a second charge payment. is that correct?

Mike Mulica

That’s right.

Dan Weston – Westcap Mgt. Ltd.

And any indication on that, when you guys can get your hands on that?

Mike Mulica

We’re not talking about that at this point.

Dan Weston – Westcap Mgt. Ltd.

Okay. All right guys that’s all I had, I appreciate your help.

Mike Mulica

Yeah, no problem. Good questions.

Operator

Our next question is a follow-up from the line of Mike Latimore. Please go ahead.

Mike Latimore – Northland Securities, Inc.

Great, thanks, just one question. So Ericsson other than the encumbrances, sort of like, Ericsson has no right to do something with your patents on their own, they can’t go out and try to monetize, it has to be through your channel basically?

Mike Mulica

That’s correct.

Mike Latimore – Northland Securities, Inc.

Okay, great. Thank you.

Operator

I’m showing no further questions at this time. I’d now like to turn the call back over to Mr. Mulica for closing remarks.

Mike Mulica

All right, terrific. Again, thank you everyone for joining us. we think that this is a very exciting news certainly for Unwired Planet and Ericsson. what we think we’ve accomplished here is something that’s extremely unique and really a win-win for both companies’ shareholders and we’re excited about getting started and demonstrating how valuable this really is. So thanks again and we’ll be talking to you all in a couple of weeks on our next earnings call.

Operator

Ladies and gentlemen, this concludes the Unwired Planet Patent Purchase Agreement Conference Call. If you’d like to listen to a replay of today’s conference, please dial 1800-406-7325 or 303-590-3030 with the access code of 4590216. We’d like to thank you for your participation. you may now disconnect.

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