Unwired Planet, Inc. (UPIP) Investor and Financial Analyst Day Conference Call March 12, 2013 12:00 PM ET
Mike Bishop - Public & Investor Relations, The Blueshirt Group
Mike Mulica - CEO
Tim Robbins - General Manager, Intellectual Property Division
Daniel Mendez - General Manager, Intellectual Property Division
Eric Vetter - CFO & Chief Administrative Officer
Good afternoon. I am Mike Bishop with Unwired Planet’s Investor Relations and I would just like to welcome everybody to the Investor and Analyst Day. We have to do our usual legal forward-looking statements here.
So statements in this presentation that are not reported financial results or other historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They include for example statements about our business outlook and other statements that you can find on page two of our slide which webcast users can find on our website. These statements are based on management’s current expectations that involve a number of business risks and uncertainties which could cause actual results to differ materially from those expressed or implied by the forward-looking statements.
The risks and uncertainties relating to the forward-looking statements in the presentation include those described under the caption Risk Factors in Unwired Planet’s SEC filings including but not limited to Unwired Planet’s quarterly report on Form 10-Q filed on February 7, 2013 and any subsequent reports filed with the SEC.
I would like to introduce the management members here today; we've got Mike Mulica, the CEO who will start off; Tim Robbins and Daniel Mendez who are the General Managers of the IP Division are in the back and will come up second. And then, Eric Vetter, our Chief Financial Officer will conclude the presentation before opening the floor to Q&A.
And with that I would like to turn the floor over to Mike.
Thank you, Mike. Welcome everybody to our inaugural Unwired Planet Analyst Day. We are happy to be here to share more details about our company and our strategy going forward. I know some of you have been following the story for a long, long time; some of you have been following it for a couple of years and it’s due to others. What we plan on doing is giving you sort of a view of past, present and future, so we can cover everybody’s needs in the audience. We will dig a lot deeper I think than we have before into, in particular the intellectual property portfolio and what our going forward go-to-market strategy is and we will give you a view of our operating principles and what you should expect from us from an operating profile standpoint going forward.
We will continue to be somewhat vague about things like ongoing negotiations, litigation strategies, pricing, things like that, but I am hoping that after today, you will have enough material that you can begin to start modeling some things and as we begin to show results in some of our licensing engagements, you will begin to layer those in to the models and will become a lot more predictable on a going forward basis.
So I will take you through a bit of a strategy overview to set the stage; Tim Robbins and Daniel Mendez, the core of our licensing team and sort of the spear of the staff that we have inside and outside the company will take you through an overview of portfolio and a view of how we intend to cover the marketplace. And then Eric Vetter, our CFO and Chief Administrative Officer will give you a sense for how to think about our operating environment and profile our cost and operating model going forward.
So from a team perspective, I’ve always been fascinated by this model. It's an incredible high leverage model. You don’t need a tremendous amount of staff inside the company. Those of you that follow the IP space, you will note that that’s the case across this segment. We're in that same position. Today, we have somewhere in the range of 15 people in the company, at our maximum levels, we will be in sort of the low 20s. Those people have to people have to be really, really talented because they are managing external resources that are, one, very talented, two, very expensive and so the key is you having a very talented core and then having really strong strategic partners that you can leverage outside. So you can stay nimble and react to the market as you face it.
And so from a team perspective, the way that we think about our company, we think about sort of solid gold core in what Tim and Dan will do, tons of experience in developing, prosecuting, maintaining and licensing and litigating intellectual property specifically in mobile. And you will find us go back and back and back and back into the mobile definition; we are mobile pure-play. We are not multi-faceted; we go into market to cover the whole mobile ecosystem, but it's a pure-mobile focus that we’ll have.
Our partners are McKool Smith from a litigation standpoint, arguably the best litigator in the world in litigating IP. EIP is a very well positioned firm that is in London and does all of our prosecution and maintenance for the portfolio; we work very closely with them. Evercore Partners, our financial advisor. They were instrumental in helping us develop and close the Ericsson transaction and continue to work with us. And last but not least, over the course of the last year and half we have developed a really close relationship with the original investors of the Unwired Planet’s patent; that’s an important asset on a going forward standpoint as we get into discussions with potential licensees or a litigation to have those folks participate on our team and that will continue to be a part of our ecosystem going forward.
So I guess what I would like to start with is just the review of the last 12 months and this maybe a bit redundant for some of you, but when I got here a year and a half ago, there was a product business that was loosing $1.5 million a week and it was urgent that the company exited that product business as soon as possible or we would have run out of money and gone into bankruptcy. We were lucky enough against the odds to be able to come to the conclusion that not only did we think we could exist the product business, but we also believed that the underlying intellectual property that was resident in the company that has been developed many years before had substantial value and we came to that conclusion as a result of brining in a new team in December of 2012.
Tim and Daniel came in during that timeframe and spent months themselves and with these external resources that I talked about, categorizing and really evaluating the portfolio to determine really what it was and where it was going to be useful and how valuable it could be. And so through that period of time we convinced ourselves that there was a bare-dare in our going forward strategy as an independent mobile license IP licensing company.
At the same time, we recognized that there has been a decade, a lost decade of significant losses that have had occurred over the course of time and those operating losses represented an asset that we might be able to take advantage of; it wasn't clear what our strategic alternative choice would be, but it was important for us at that time to sort of secure the net operating losses and so we put the shareholder rights plan in place in late 2011 in order to be able to make sure that nothing would happen to the net operating losses, the assets that we have. So we have a $1.06 billion in net operating losses that represent a tax shield for the company in the event that we could build a business model that would yield enough revenue to take advantage of that tax shield.
And so we reached mid-2012 and ended up successfully divesting of the product groups. The key item there was we kept all the patents and all the rights to the patent and so we sold product groups without any of the intellectual property associated with those products. We also eliminated all the liabilities associated with those product groups and so we were free and clear on a going forward basis with the past clearly behind us.
And then finally, we began to think about what the model is associated with an IP licensing company going forward really only thinking about it in the context of our 200 patents and where they sat relative to their footprint and most of them were North America and North American basis. So we came to the conclusion, we can run this business with 10 or 15 people; you know two weeks before we had in the company 600 people and so the transformation was dramatic. But we started to get really, really excited about what's the leverage that existed in this model and the potential.
At the same time, we worked really closely with Evercore and I know I've talked a bit about this on conference calls, we looked at all kinds of strategic alternatives and we looked at selling the company, we looked at joint ventures, we looked at selling parts of the company and we spent months evaluating a lot of creative ideas that we thought of and ones that were brought to us.
About mid-summer, we started to talk more and more with Ericsson and began to talk to them about us as a viable alternate channel for their intellectual property. They had never done anything like that before. It was completely anti-cultural for them from a sweetest conservative consensus driven company standpoint and the only reason that I think we got them to make the decision that this is the right thing for them and ultimately for us was our heritage in mobility and the fact that we had shared a common experience back in the late 90s, early 2000 and the development of the mobile internet and we ourselves have invested $4 billion or $5 billion in R&D in the patents that we have and they really saw us as a legitimate alternate channel that wasn't your standard patent licensing company. This is our IP and if they were going to give us their IP they wanted to make sure they had legitimate stand in the marketplace.
And so that transaction for us became superior to anything else that we were looking at because we started to really work on it collaboratively with them to develop an IP portfolio that was custom built by both of us. It wasn’t a negotiation. It was a collaboration of coming up with a multi-layered patent portfolio with really strong underpinnings of standard essential patents and really high level applications that are used across the board that would give us a very unique portfolio from a go to market standpoint. It also is something that we worked on very closely with them from a modeling perspective and build incredibly detailed business plans that went to both Board’s that gave us line of sight on ways that we could exhaust all of the NOLs associated with the NOL asset that we have.
And so the way we structured things from an economic standpoint puts those two things into account. The quality of the assets that came in, the business plan that we've built, the way we can use the NOLs, really gave us a view that selling the company or selling parts of the company wouldn't give us the same economic returns that we could get from Ericsson and so we set our sights on that from a going forward standpoint.
So I am unbelievably proud of what the teams accomplished over the course of the last 12 months. There has been some challenges. I think getting out of the product business and tapping those liabilities and keeping the IP was a bit of a miracle. Getting to a position where we have, Tim and Daniel as the center of our IP initiative is they are truly two of the most talented people in this industry in the world and we're lucky to have them.
And from a leadership and mobile telecom’s IP, I just went to Mobile World Congress last week and I went last year and because I was at open web, about the Unwired Planet, and I went this year and people were running up to me wondering how this happened with Ericsson and that included leadership from Siemens-Nokia and other major companies. This is a company that is now sort of landed in the headlines of our industry and rightfully so; Ericsson and once the patents are known that Ericsson has delivered in to our portfolio, has really put us at the forefront of the industry from a mobile licensing perspective.
Some of the things have been tough. The cost of transition was heavy; although, it's behind us and our cost model going forward is really, really attractive. The ITC case as we reposition to have that case in the District Court in Delaware, we feel really good about that position; when we arrived on Ericsson alternative mid-summer, we had, I wouldn’t say stall, we had to wait for our portfolio to get settled in order to be able go forward with the licensing strategy, because we knew the Ericsson patents would give us a fundamentally different opportunity to move from lump-sum licensing to reoccurring royalties. And so I know there is pent-up demand for us that deliver deals for you guys and I am sure that we will deliver more than our fair share, but there was a pause in the strategy as we got the underlying portfolio settled.
And then finally, one of the things that will be an ongoing challenge is to figure out how to deliver enough information to keep all of you satisfied and not in anyway impair our success going forward. So as I said, we will talk about this a couple of times, but we are likely to be more back based and less, you won’t find us having much conjuncture in what we delivering in terms of shareholder communication.
So just to get into the meat of who we are that Ericsson transaction is obviously core to our going forward strategy. So the thing that’s robust was combining these two patent portfolios so that we had a multi-layered licensing opportunity and so we are going to get deep into that when Tim and Daniel come up and they are going to talk about the various layers that give us the opportunity to really cover the industry both from entire ecosystem perspective as well as from a global perspective. The key underpinning of this multi-layered opportunity are seminal patents that cover two, three and LTE and it maybe give us an opportunity to be able to move as I said recurring royalties.
Ericsson is going to continue to deliver patents into our system. This model is intended to be their primary alternate channel for IP, so we’ve contacted with them to deliver 100 patents annually for five years and it’s beginning in 2014, but the economics of it should prove attractive for them to continue to do that overtime. And so the intent here is that this is something that lasts on its current basis 20 plus years, but likely something that lasts longer than that because the economic nature of the way we’ve restructured it is intended to draw them forward in delivering more and more patents overtime.
The way that is structured, we formed a wholly owned LLC, owned by Unwired Planet, managed by Unwired Planet; we both contributed our intellectual property to that LLC and the consideration for that contribution is the revenue share with Ericsson resulting 2400 patents in our portfolio today and many patent applications that will continue to yield overtime.
So in terms of our transaction highlights, as I mentioned Ericsson contributed over 2200 patents. The combination of their patents and our patents really gives us critical technology at every layer of mobility. It’s a position where we move from a portfolio that had a life expectancy of something around six years or so, the life expectancy of our portfolio is 20 plus years today and so as you are modeling this, this is something that will last into the next couple of decades and you'll get a flavor and probably have gotten a flavor for the team, world class inside the company and world class advisors representing us outside the company.
And it really accelerates our plan in terms of being able to go to the market and get recurring royalties from a licensing perspective that we think will yield a much higher enterprise value for the company.
From a financial standpoint, as I said before consideration, I think this is significant Ericsson didn't ask for any money upfront. This was a collaboration of this business model into the future. We are going to share the proceeds on a basis that I'll get into in a moment. And they are in this for the long-term with us.
The basis that we have going forward from an operating OpEx perspective is very efficient, plenty of cash, and very strong liquidity. We are going to be in the business of licensing in a way that's typical and standard essential licensing in accordance with brands and Tim will describe those terms but ultimately its reoccurring royalties, its term based versus perpetual licenses that we think reflects the way this industry is organized around these types of assets.
And ultimately, our hope that the NOL would become valuable over time given the right underpinnings of the right business that would yield the revenue to take advantage of it is in place and we think the NOL will provide a significant cash yield for Unwired Planet investors.
So here we are 2,400 patents really positioned for a long-term platform. Ericsson delivering more patents into the future and we think we represent something that's very unique in the marketplace from an investment thesis in mobiles IP licensing.
Targeting arguably the highest growth industries on the planet, we will get into the meet of 2G, 3G and 4G when Tim and Daniel come up but clearly high growth, high margin target markets. One of the areas that there's been some questions about is well from an addressable make standpoint, all these patents that you now have in your combined portfolio are they, can you go and license and I'm going to be a little vague here in order to be able to protect the confidentiality issues associated with some of the agreements that we have.
But I could tell you today, the majority of the marketplace is licensable. And so, I use that word specifically and I can tell you in three years the substantial majority of the marketplace is licensable. And so, there's plenty for us to do today and there's a lot more for us to do over the course of time and so as you think about the target market and begin to potentially build model, assume that in a relatively short period of time a substantial majority of the marketplace is available for us to license our technology and the phones are sort of irrelevant.
So don't start to read too much into the phone. So from a revenue share perspective, as I mentioned Ericsson didn't receive any proceeds or consideration for their contribution. They are, it's all been a rev share structure with us. So we will get 80-20 for the first $100 million that gives us the ability to fund the initial licensing activity.
Then we will split the next $400 million 50:50 and then after that we will move to a 30:70 spilt. That was developed specifically to incent them over the long-term to create terminal value for the company and so their intent is to start with the 100 patents a year but what we wanted to do is reach an economic point of equilibrium where we were equal or superior to their own direct licensing channel and so that was the purpose of that and I think overtime, you know, as we succeed, you will see this as a very valuable compliment to their direct licensing activity.
So, few people asked me when you are leaving and why you are leaving? So I figured out I would cover that here. I am not really leaving. I am finished with this part of my job and I don't have a background in IP licensing.
I am more of a tactical business development fixer and this is set and as I look forward into my world going on the board and continuing to be involved, the part of the story that I love is the history and the inventors and the legacy that this company has and I am very proud of that and so as I look back at sort of 19 years that Unwired Planet or Libris to stand in place, there has been just decades of innovation and literally billions, and billions of dollars invested. And IP has survived all the craziness of the last decade in terms of how well the products did.
The IP remains intact and those inventors remain intact, and so I think I can play a great role from a board perspective and complement the (inaudible) but this is somewhat personal for me. As I tell the story about where we have come from and where we are, I truly believe Alain Rossmann invented the mobile internet and I really do and many people do as well.
He did come up with the ideas that we are sort of the basis of many other things that we use today, when he founded Libris. When the company went to market with their first commercial product, they did an agreement with Ericsson shortly thereafter to create something called wireless application protocol that was sort of genesis of one of the arguments that we have with Ericsson that we have been into this together for a long time, any way, they might as well continue with us and when we went to market, we had a 100% market share.
There was nobody else on the planet that you could get the mobile internet from other than us. I was lucky enough to be the first VP of Sales several years after that and it was the most fantastic sales job in the world, the inventors of the mobile internet and I went around the world from China to every country on the planet with a 100% market share.
Leading up to I don't know, if some of you have been following the stock for a long time, we ended up coming to the conclusion that if you could combine this 100% market share position in access to the internet from your mobile phone with the great app, you would really have something, and we thought e-mail was that app turn out to be that app and we ended up buying software.com for $8 billion, this little tiny company bought software.com for $8 billion.
And we are really on our way ready to goto rule the world and so then we skip 10 years and well one of the things that we joked about was we can have a tutorial after this meeting is barged to talk about that 10 year gap for any of you those are interested, and so software going into but in any event we are in 2012, we come to the conclusion that the IP has been affected by that 10 years of, the last 10 years we are calling here.
And we are able to divest the product through reorganize around the mobile licensing business, change the name that Unwired Planet to reflect our original heritage and move the company to Reno, Nevada right across the street from the Court House that we are going to be litigating our tape of that, big sign, judges walking everyday, people getting to know Unwired Planets for the local company that they are.
And so as we move into this year positioning for the future, it was so reinforcing that Ericsson chose to go into business with us and make this a story that wouldn’t last for the five years but it last for the next 20 years. And so, we look forward we are really in a unique position to be a company that is around for the long, long, long time.
So I am going to leave you with sort of my last thought in terms of how to think about this company and how to think about us as an investment thesis and so this would be my view of our company's signature going forward and so first of all, we are pure-play mobile licensing franchise.
We are only going to pursue markets in mobile. We are going to pursue the whole ecosystem. We are going to do it globally but it’s only going to be mobile. We are uniquely positioned to represent our IP, as IP that we invested R&D in and Ericsson invested R&D in. This is our stuff.
We have connections to the regular inventors both on the Unwired Planet sales side as well as on the Ericsson side. We are partnered with a staff that's world class inside the company and represented by world class talent outside the company that forms a great virtual team globally and we are in a position from a financial standpoint to be very nimble and so we can react with great liquidity to opportunities as they arise but I think you are going to find us to be very focused on funding our business going forward based on the licensing and that's the plan.
So I hope this slide sort of brings it all together for me. It’s a pretty simple thing. It’s something that's very focused and I think something that should be very easy to invest in over time. So on that note, I think I'm handing over to Tim and Daniel and they are going to take this a step deeper.
Thank you. Hi, everybody. I see some familiar faces and not so familiar. I'm Tim. This is Daniel. It’s good to meet you all. Before we get started I wanted to flip back to one slide, just before, the last time I saw this slide it said Reno’s best licensing and I had Mike talk down but its overall (inaudible) so anyway I just wanted to know that wasn’t my wording.
So I'm going to break my presentation into two sections. The first one is going to be largely data driven. I'll tell you about the combined portfolio, a lot of different cross sectional views on what it is and what it means and then the second part will be a bit about how we see the mobile market, what the mobile ecosystem means to us in the way that we plan to address it from a licensing strategy.
So the first thing I wanted to highlight was the global footprint. The Unwired Planet standalone portfolio was very US focused. It had a little bit in Europe but for the most part it was US based. Now as you can see we have patent assets and a lot of places in the world with particular strength in the US, Europe but also the key Asian markets, South Korea in there as well. That’s a number of issued patents per country. I will try to give you a better explanation.
So in addition to the global, we're really excited about the synergies of the portfolio. It's been interesting to me when people talk about mobile. When somebody from Ericsson or somebody with that kind of background, they talk about mobile, they're talking about fundamental, back and forth signaling to make wireless possible whereas when Dan and I talk about mobile, we mean cool applications on top of it consumers can see but it happens to make a great fit here, you know, bringing to (inaudible) our areas of app store and push and mapping, location technology, browsing.
Together with there sort of core back and forth radio transmissions that we all take for granted. (Inaudible) I am going to give one for a second here. I don’t want to take anything for granted that I might us a term that not everybody is familiar with. So I am going to cover a few words that we're going to use throughout the presentation just to make sure you all know what we're talking about.
So patent family means a little bit of a different thing. There is different people but here we use the extended patent family concept which is since patents related to a common certification in some way, directly or indirectly. So what that means is you might have, this maybe the simplest family might be a US patent and an equivalent in China and an equivalent in Russia and so on.
But a more complex family will have continuations multiple in US for example, continuations in part. So we are talking about when we say family were counting in the broad sense of relations the one another.
But then at essential pattern, then news quite a bit lately and I am going to talk about in the context of mobile and essential there are lot of standards, but it is a pattern that claims and invention that must use to comply with the technical standards.
So must use this functionality to be 2G, 3G, or 4G compliance. And with the standard essential pattern comes and obligation particularly in the mobile context under ST which is European telecommunication standard institute and they are responsible for organizing the world’s mobile players to get together and negotiate in debate the right and most optimal and most efficient solution for how next started will work and this companies like Ericsson and Qualcomm and Nokia they have people that are dedicated their life to this standards and now to get together and now purpose solutions and they will built (inaudible) behind their solution and then a solution will get voted on and adopted and whole there is of the pattern in the area have a standard essential pattern. (Inaudible)
So what he means is that if you do have standard essential pattern through this process, you are not going to withhold that technology from the rest of the world, you will be willing to license it on a fair, reasonable and honest (inaudible) and so this, there are a lot of questions about this, can you even take an assumption etcetera, etcetera but the bank (inaudible) they are not using patterns to block for using patents to enable and then you should ask for a fair royalty.
And then finally, you will hear the term implementation patent and we are going to use it in the context of a patent that is not an application layer patent even, meaning below the application layer, consumer visible but yet has not been declared standard essential\. Now that being said, it doesn't make enough valuable that is not essential in someway you might argue it has more value because its not subject to a friend licensing obligation.
So there is a lot interesting patents in portfolio, contribution that our implementation that we like. And I mentioned I did put on the board but application layer that we are using it to described Unwired Planet portfolio, things that typically you can test and use on your own tablets and phones and few working end functions.
Okay, so with that, this is a pyramid view on the issued patents in the portfolio, there are 209 essential patents issues, 202 Unwired Planets patent and over 1700 implementation patent. (Inaudible) and hopefully it will grow, we plan for it to grow and this is family, so those 200 essential patents that I described earlier are comprised in 37 families. Unwired Planet has a 140 families and the implementation of that are reflected in 785 families. This is another view of countries besides the map. I think the key takeaway here. This is the 200th line by the way, the key takeaway here is first of all Unwired Planet by itself heavily US and then you’ll also see a nice distribution of implementation and essential patents across for those in the back who can't see it. You are seeing Europe, China, Japan, Canada, Taiwan, India and so on.
This is our attempt to sort of describe an impossible thing which is what is the technology in Ericsson portfolio, the contribution to our portfolio. We've tried to break it down. This is also a granted reflected in blue and pending applications that are in prosecution in the tan. So on the left some of the taller stats you’ll see in radio resource signal processing and mobility which is handing one base station to another. That's an area you’d expect to find its core to communication and many of the essential patents are in those same areas.
Other things to note network here is the network intelligence voice over IP, we consider it to be a network. Multiple antenna among other things is multi mode so most of the LTE phones that are being sold are also 3G and even 2G capable. Hardware like battery and screen shielding and then software not as we think of an application layer software but lower level software and then non-cellular which is mostly satellite technology.
Again much of the same data from the pyramid, but this has shown the applications that are pending, noting that 53 essential patent applications or 53 members of families that are essential are still pending and 61 Unwired Planet source application. Now this is getting into something we are really excited about. This is a little bit of qualitative in a sense. This is the way we are dividing the portfolio by market. You see infrastructure all blue on the left. This is Ericsson’s heritage. They are the world leader in network infrastructure, base station equipment. Not surprising Unwired Planet doesn't have patents in that area.
We are reflecting Unwired Planet contribution in the green area and this is the core heritage here, used cases, pushing app stores, mapping, advertising, browsing. And then the best part of all I think is the mobile device synergy which tested the limits of my PowerPoint skills, but it’s attempting to show sort of a bottom layer fill from Ericsson’s contributions and transitioning to the green which is the top layer applications use of your device.
Unidentified Company Representative
Yeah I have a neck pain so I'm not trying to turn my back on you guys. Alright. So this another question I get a lot is about how old is the portfolio, when does it expire. Each patent is entitled to basically 20 years from the day of filing. So you can add 20 years to this annual account. One of the things that think is really need about this view, I think about what was happening at these companies at the time and you could see in 1996, (inaudible) and his team were just coming out with the browsing technology that we all know the company for. At the same time Ericsson was doing paddling things that became part of 2G.
So there is a nice complementary and the WAP forum happened right around the time and then in the late 90s when Unwired Planet inventors were most prolific and did the most amount of patenting, the Ericsson, you see a lot of blue and in the same year, 99 and 2000, those are 3G and so there was kind of a joint timeline here and then perhaps most interesting of all is that you will see in the later 2000, there is still quite a lot of Ericsson contribution here and you can pretty much assume these are LTE 4G patents that we expect to be important because worldwide networks for a long time. So you can see a path where the LTE patents, the later Unwired Planet patents and the 500 additional contributed patents from Ericsson will allow this licensing business to run beyond 2030.
Unidentified Company Representative
Okay, I am going to get one slide for those on the web and come back to it. But I wanted to show the next slide which is the LTE 3G and 2G breakdown. Now the applications again are shown in [tan] and you can see the LTE as a younger portfolio. It's a younger technology. So there is a lot more appending that will be prosecuting the completion, but another really key note is that LTE requires backward compatibility to 3G and 2G. So you would expect LTE the latest phones to actually have all three of these capabilities, so they can run on 4G, 3G and 2G networks and therefore take advantage of all these apps. So it's not that the 2G is no longer relevant or the 3G will become obsolete, it will remain pretty nicely in sync with the life span of patent.
So now I will back up to the slide to, it's a complex slide and the way we drew it on our board was a lot more complex than this. There are few layers and boxes missing, but I think the first thing I will say is these purple badges reflect the number of families declared essential to the various layers in the communication stack. What I will say is technologist think of communication as a multiple layer, logical layers on how to group functions and thoughts and how the protocol going to take place.
So in a full stack you’d see the application layer way, way, way at the top and that’s the technology Unwired Planet view. But this shows the things that we all take for granted because in our pockets right now, our phones are in a very complex symphony of signals and receiving signals back and forth from a variety of base stations, every millisecond this is happening, and this physical layer, layer one is the simplest form of spending and receiving radio waves. The second layer is packaging and compressing and encrypting traffic, and this third layer you will see 15 in the RRC is an area that Ericsson has been well known to be a thought leader for a long, long time and so it’s not surprising to see a lot of strength in that area. That is the brain of the phone, it continues the communication and establish the communication link, it runs the whole operations the back and forth that’s occurring like I said in our pocket.
Meanwhile back up above this user input like surf the web and to text, make a voice call that traffic is also passing through and that itself we are most accustomed to and we think of the traffic but this RRC is actually keeping the phone away, its corresponding back and forth, its finding the best signal, it’s handing you from one base station to another.
One other thing I will say about this is that this communication protocol is not just an user equipment which we show on the left, but actually the core network and the radioactive network utilize these same layers. All right.
Okay, I have shown this slide. So here is a map of the essential patents, issued patents distributed around the world. Again with a lot of issue patents in US, China, Europe, India, Japan and to a lesser extent from the other important markets. So that's the data. I think I'll now move into the market approach. Before I do I want to reiterate a little bit about what Mike said and we are a license business and more specifically we are in negotiations business. So we are trying to tell you as much as we can here without jeopardizing any negotiation or giving away anything that would be of advantage to another party to use against us. So you are not going to hear our actual pricing and you are not going to hear a lot about timing.
Questions I know you all have, but we still nevertheless are going to try to give you our framework for thinking about it and a framework for measuring it. So this slide we call the mobile ecosystem in 3D and I do want to say upfront that its not intended to be interpreted as infringement accusations. Okay, this is representative of how Daniel and I thought about mobile and in fact the way we described it to our Board in the first meeting even well before Ericsson was a thought.
But what we are trying to demonstrate here is that there's a complexity in the mobile business, interoperability and intersection that you have to think about. First of all you've got mobile devices which everybody is used to. You've got unbelievable amounts of high cost network equipment deployed around the world. These are some of the providers in (inaudible) and then you've got an ever growing cloud and service set of software that rides over the top of the infrastructure. And what makes it even more complicated is a lot of companies are in both, they are all facets of this cube.
So types of markets that cross through mobile and just to name a few that are critical of mobile advertising has probably studied or heard a lot about of course content, you know mapping, gaming, almost anything you can think of has a mobile aspect to it. This slide you intend to take away here is to think about the intersection of these markets and perhaps the easiest one to describe is the infrastructure because it turns out that most of the infrastructure manufacturers also happen to manufacture mobile devices.
So you can imagine a license discussion that we would have would take into account our infrastructure sales and a mobile device sale. But most complex and I think the thing that we are paying a lot of attention to is the intersection between mobile device and a cloud and services model, because while it might be easy to measure the price point of a mobile device and say well I should get X percent of that, in fact what we are seeing is all kinds of different content, cloud, service strategies that either might enhance the value of a handset or it might actually one might have a strategy of selling content and trying to give the device away for cost or below cost. So its not always clear that the price of the device ought to be price that a royalty is based on.
And just to give a couple of more examples, I think a lot of the OEMs as long as I've done deals with them which has been a while they've always wanted a differentiation one from another. So rather than plain Android they’ll want their own app store, their own proprietary app, their own backup cloud, content that’s exclusive to them, all the different ways they can keep customers thinking about them as a brand so that when they buy their next phone or tablet, they want exactly the same brand again. That's one strategy.
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So the goal in that model would be to sell more devices. Then you have the somewhat flipside, the digital content which I alluded to earlier, give the device away or sell as cheaply as you can and then sell books and magazines and music and movie rentals and so on. Advertising, you might give everything away that you possibly can for free and keep driving advertising revenue. There are enterprise strategies where you kind of sell backend software for management or security. And then subscription would be another version of content sale, but plenty more I am sure you guys in the room can think off a whole lot more.
But the main idea here is we have to adapt the licensing model, enhance the licensing, pure handset licensing is pretty easy, what's the price, what's the fair royalty. In a cloud model, you will often hear we don’t make any money out of that or that sort of low value service and you might, but you would have to counter that with an economic argument which we will.
So not surprisingly, as I’ve been hinting at all day and might have said already. Portfolio is rich in all three of these market. Ericsson bringing the base station in core network technology. Unwired Planet having really high value mobile applications and content services, many but not all of them are type of band increasing in our pending litigation in Nevada, with App on Google and then the substantial synergies that we see between the essential function a divides must practice the 4G and the key feature that we add that allow firms to differentiate one from another.
So I think summarize, our go-to-market and if you can't read it I will highlight it. But I believe that we have the quality scale and diversity in the portfolio to drive recurring revenue, which I hope and expect to build shareholder value measurability, predictability and the market that track such as the increased sales handset, and the way we are going to go about doing it is we are going to see base-line royalties for standard compliance, mobile devices and infrastructure in compliance with brand, so we are brand obligated and happy to do so.
Nobody has ever really define exactly what brand means, so we think we have a pretty good idea and so we are going to be seeking for all 2G, 3G, 4G compliance equipment. Then in addition to that, we will be seeking on a per company basis depending on whether there are more feature phone or more smartphone and how many different services they have on top of the phone, but we will be seeking uplift to that royalty for the devices that deployed our feature pack.
And then finally, most amorphous of all is the licensing, we will adapt our license model to address the diversity of the cloud and service business model, but we have an advertising model we will do one-way through an OEM seeking differentiation, we might do another way, which might just see yet another uplift of the device sale, but I guess the bottom-line is, we are not going to give way the clouds technology just based on device price point. We are going to take into account other revenue sources in the cloud and make that part of the license.
Now recurring royalty is something that is harder to achieve then lump sum perpetual licenses. And I feel that we are most likely on the trajectory as a standalone on our planet. I believe we would end up with quite healthy, but one time arrangement that would essentially have been an elaborate liquidation strategy. You can see how we have licensed the market lump sum and that’s the end of the story.
Here I think because we have especially in handsets this application layer to go with the essentials and because manufactures are used to reaccepting and (inaudible) royalty rate. I believe it’s achievable to get into a business where your mobile handsets growth means growth from our planet, and that’s the plan. So this is my takeaway conclusion side here. The portfolio is exceptional; I thought it was exceptional standalone. I said that it’s our view over the last year, really exciting people, outsiders are all around and complimentary to it. There is a lot there this inflow from Ericsson really makes us incredibly special.
The worldwide coverage I think is something not to underestimate and the more to follow. I think our performance, if we perform, I think we will expect to see high quality assets continuing to flow in and we have 300 applications which I would like to call un-molded clay that we can work with; the three key markets, infrastructure devices and cloud and finally the long-term recurring model with royalties on devices and the flexibility to adapt the cloud mobile strategy.
And with that, I will turn it over to Eric.
Thanks Tim and Daniel and good afternoon. I appreciate everybody’s time. As the guy said my name is Eric Vetter. I am the CFO for the company and we are excited to have you today to be able to have our coming out party. We've gone through some great transitions over the last year and very important transaction just completed to the day a month ago, so we are now focused on the future and I am going to go through a little bit might give an overview of where we've been; Tim and Daniel talked a lot about the core assets, so I am going to give you a little bit of an idea of our operating proxy and our cost structure and hopefully that will be helpful as well as you begin to put your model together and your thinking together about this company.
Before I do though, I am going to talk a little bit about or at least size up the market we are in. As Tim talked about, really are three segments right cloud and services and infrastructure and mobile devices. Mobile devices as you are aware it all comes together to a great extent; it’s the biggest one, it’s much easier to the point of external data and the size of the market and so not surprisingly and everybody knows that in this market or in the industry; it’s a big global market, its growing and anticipated to continue to grow. The growth is in the premium phone segment, so we are looking at you know over $200 billion business globally right now with growth expected to get up over $300 billion by 2016 and all that growth as I said being really in that premium phone segment. So that’s the most visible market that we can point to and hopefully one that you can think about as well when you are thinking about us.
Our operating objective; we talked about the transformational deal that we've pulled off now and now we are really focused on how we go forward on the licensing. We are going to be very measured in our approach; I love the fact that it’s now a portfolio that really allows us to build off of a recurring revenue model versus the one-time perpetual type licenses that I think some are applicable just to the Unwired Planet standalone portfolio; I am going to talk a little bit about our cost structure and how we are you know the costs around our virtual network if you will. We like our liquidity position and I am going to talk a little bit about the flexibility we have going forward and then I'll talk briefly about that NOL and how that will impact us as we move forward as well.
We are not fully staffed and we are not there now. We have I think right now currently 15 full-time employees. It will eventually be 23 employees, almost entirely located in Reno; setting aside Mike’s jokes about the Reno location. It is a very attractive location for us; it’s great quality of life there. So we're able to attract the talent, but we don’t need to have a lot, but for the positions we do we want to have top talent. It’s a low cost market, low housing costs, low real estate, salaries are much more competitive, so it's a good place for us to have as our foundation and it translates into allowance to be cost competitive and that staff is the Unwired Planet and as Mike talked, it's surrounded by our virtual teams. So we like our overall structure there.
What that means from a cost standpoint is really when you think about the internal and the external, from an internal standpoint as we go forward here we're on the low end of the range here which is about $2 million a quarter for our operating company pieces; we think of the business in those two segments; the operating side on the organization chart and then the licensing side. So from an internal cost structure perspective, we're thinking of the operating side being about $2 million and as a public company, the headcount is only, is probably less than half of that and then the licensing team.
The external really have a lot of flexibility. Currently we are trending on the low end of the range here as well and this is the one where we can ramp up as we see opportunities and we need to or we can crank it down and that’s be in this virtual team really helps us.
The third piece we have is those transition costs that we struggled with; I think I talked on the quarterly conference call that we have about $9 million in expenses ahead of us between the end of calendar 2012, and the end of our fiscal year, so from January through June. But that’s going to be the end of it and it's primarily the rent on those facilities down in the Redwood City.
So let me talk about seeing the light at the end of the tunnel of this thing in another way, that’s really what we are talking about there and we are happy that it's all pretty much on. We are not happy about the extent of it, but we are happy that it's pretty much behind us and we are able now to really focus on the licensing and just go forward theme.
From a balance sheet perspective, at the end of December we had $64 million in assets and 97% of that cash and equivalent. And then on the liability side, we have no debt and really no contingent liabilities even after moving out all of the product sales. So our product businesses, I think the team did a fantastic job of transitioning us over the year of moving off of and we are very clean from an exposure and balance sheet perspective.
What you don't see on this balance sheet is what, well, any of the three biggest assets I think we have, obviously you don't see the talent that we have assembled and you don't see the patents on here either, which are our two biggest assets. The third one is our NOL. We have a $1.6 billion NOL; what that means is and it's got a 20-year license in front of it, in fact it will $1.6 billion out since 2019, so we’ve got six or seven years in front of us of being able to use all of it and then it begins to climb down till 2032. What that means is that for every dollar of operating income we bring in, we are going to bring about $0.97 for the bottomline between NOL and the low cost, low tax structure of Nevada. We have great leverage there that you are not going to find in a lot of companies that are having to pay 35% corporate tax.
One other item, a footnote on the restricted cash of $19 million; you will see that on our financials for the third and fourth quarter of this year and that’s strictly related to our transition; we had this cash collateralized, some letters of credit around those facilities down in redwood City and as they time out on the leases, the letter of credit requirement will go away and that cash will free up.
So our view on liquidity is I think we’ve all said, we are licensing company first and foremost. We are really excited, I am very excited, I joined the company in November and I saw how much time and effort had gone in just this company to where it was in November and everything we had to do together to do the transaction since last month and it’s been really time and effort consuming.
Now we have a very stabilized platform; we’re out there actively licensing it. The licensing discussions are very much around the recurring revenue basis as Tim and Daniel outlined which is a totally different profile we had on a different path. So that’s our focus and there are licensing opportunities and they are being actively pursued. You know, we are going to balance short-term opportunities with the long-term shareholder value and we like where we are at to be able to do that.
As opportunities come up that maybe require us to think about how to accelerate some of our activity. We have additional alternatives. We have refinancing options which could range anything from case based to contingency arrangement to financing revenue stream. Partnership, placing IP and these are opportunities that are coming to us and we are evaluating. This is not something that we have to actively go out and chase rather than we just have to spend time and are spending time on evaluating.
And then the third one is the filing of the shelf that I think everyone saw we did yesterday. And that just gives us added flexibility quite frankly. We like where we are at on our basis and we like the flexibility going forward and I will just emphasize that and this is the way we think of liquidity options.
Licensing is obviously our preference, our focus and the number one choice for us. We have other alternatives. And the shelf itself gives us the third alternative but we don't believe the value of this company is reflected in our price today.
And so it’s probably the most in my opinion the expensive form of financing. So it just gives us another option that we will have out there three year life on a shelf so we've got plenty of time to have it and if we ever need to access it to accelerate an opportunity and it makes financial sense to do so you will have it available. And make shelf relatively small, not 26% to 27% of our market cap, depends on where we trade on any given day.
And as I said, we are putting up this so we would have adequate facility. Our equity structure, I wanted to touch on this briefly simply because Unwired Planet is (inaudible), not made a lot of money and so we've always talked about what's out in the market which is a 90 million share. There are also our (inaudible) outstanding primarily with the management team, the bulk of it options are out there and then our partners at Evercore as part of the transaction we got shares and have an option, an opportunity to get more shares based on our prices, stock price and I think those are like 20 day running averages.
You have to see those for them to hit those trigger point. So with that, I'm going to wrap it up before we turn it over everybody here or to the questions everybody. As we've said, we are a pure-play mobile licensing franchise. We are a Nevada company which is a low cost, low tax location. We are fully staffed now or fully staffed to where we feel we need to be with a clear line of sight as we continue to move forward.
We love our portfolio and we've got internal and external talents who know how to manage it and so with that I'm going to invite everybody else up here and we will turn the floor over to questions everyone. And they are going to pass a microphone around so that people on the web can hear the questions as well.
So if we think about what the long-term goal and model would look like, is there a company that you guys admire that has a significant penetration of this 1.5 billion unit market and is there ASP out there that you achieved that you think is relative comparable and have penetration number that you think is something that you see as achievable for you over the long-term?
You know, I think it's a good question. Obviously, there are a lot of operating companies that combine patent licensing, like for example, Qualcomm and Ericsson themselves. We admire them quite a bit. You know, one example, there is in mobile to a degree and does have some (inaudible) to be inner digital. I don't think they have the application layer compliment that we bring but those are the ones that come to mind. I can’t really comment about the penetration rate either. I believe Qualcomm and Ericsson’s penetration rates probably higher than Air Digital but I can’t say that for a fact.
You have a three years or five year goal percentage market, we should sort of measure against?
Well, I assume we have one but I am not going to share.
I just had couple of questions on the structure of LLC and how the costs are going to associate. So that the NOL, is just specific net revenue on the operating company after the LLC contingency and I guess similarly (inaudible) contingency how does that work against the rest of (inaudible)?
First of all, on the LLC, you are correct; the NOL sets up with the corporate level. So that’s (inaudible) on the earnings and flow up because the level of Unwired Planet. As far as the revenue share goes Ericsson’s revenue share is based on gross revenue and so if there are contingency fees they are at gross level, they are before any contingency.
Well, no actually we have local Nevada Council and plenty of worldwide support as well, but they are effectively reconciled in all of our pending US actions, all of our actions.
We have not. No.
(Question Inaudible) So there is a potential?
Right and I think one thing there might be underlying the question is there is a concern that contingency would cover a gross revenue opportunity in a major way that would take away from our share and I think people recognize the opportunity we have in front of us, this is not a typical several pattern company where a contingency would be available.
So I think we expect our partners, and our partners do understand that we have massive opportunity and they would adapt. Basically, Eric was being kind about the (inaudible) we are lining up to be part of this and there will be flexible with the way they do deal with us. So they wouldn’t take a stand, we wouldn’t do a standard contingency without taking into account our share.
None, other than aligned interest.
(Inaudible) maintained that in the portfolio.
I wonder, if you could talk about the governance of the LLC with Ericsson did they say are ongoing basis, is everything just codified in, you know, go into that yield document. I am also wondering on go to market strategy, what their involvement is obviously they have a renewal schedule with their own IPs, do they bring you in any those conversations or are you going to run on separate track?
We control this discussion making our licensing completely, so we have positive relation with Ericsson but it is on (inaudible) and they don't have an active control mechanism we just have documents.
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I think it does cover this question from LOC governance standpoint; they have no role on the LOC at all, where they have some restrictions around what the LOC can and can do but management and governance (inaudible) have no rights.
And then in terms of encumbrances, you talked about majority and substantial majority I wonder if you could be a little bit more specific on the (inaudible) side versus infrastructure side, and how those line up into those levels?
Probably not, we agonized over on those words in that slide and so I think they speak for themselves and it’s meant to represent double portfolio and so I would not take it on that basis. And I am sure that all of you know the definition of majority and substantial majority, from an approximate perspective.
One tip that I can give you is infrastructure is a much more concentrated market, there’s a lot fewer players in it, so obviously encumbrances have a choppier impact than they might in mobile devices. But I think the same term is applicable; applied to both sides.
Hey, maybe a question for Mike. It’s very hard for the public and market investors to get a real value on this asset so just a couple of numbers that stand out to me, and you mentioned in the call and you mentioned again today is kind of line of site to exhaust the NOLs and that's $1.6 billion number, just trying to understand how you get to that. The other number is $1.05 billion number that Ericsson placed in the change of control document. Both of those numbers are obviously order of magnitude different than your market caps so maybe give us some color around both of those numbers and how we should think about them or maybe we should not be thinking about those numbers.
I would think about those two numbers. So I mentioned in my part of this, we went through at months joint business plan development with Ericsson, and the way we architected this had a lot to do with the contribution of patent and comparing up to previous question, what penetration rates and speeds we could expect and what royalty rates given the quality of the patents we could expect, and so needless to say we were leveraging Tim and Daniel and our extended teams expertise. But really leveraging a lot of the knowledge that our partner in this business brought to the table.
So there's an expected business here that we have in mind. We are not going to share the details of that and you know that. When Ericsson gave us the contribution of patent, one of the things that we struggled with was well we are giving you this very large asset, we are expecting you to use it as we have used it in terms of licensing it over time for running royalties and we have to figure out a way to prevent you from effectively flipping the company.
And so I have lots of talent on my Board, Peter sitting right there. This is one of the things he took very seriously, and so that number represented the $1.05 billion to $1.50 billion number represented their agreement that would sort of hold us standstill in going to this business and if in the event somebody comes and buys the company and they get that share that wasn’t a super negative from their perspective. And so that was a very conscious number that was negotiated fairly heavily.
From an NOL standpoint, the way that we looked at that was it gave us the ability to be able to negotiate a revenue share with them in the context of our joint business plan that incented them to put more assets into the portfolio, and so we got better assets that grew the pie because we could take more of our proceeds on a tax free basis for a substantial period of time and so I won't give you the variable of how quickly we absorbed those NOLs, but its our expectation that we have the assets in the portfolio that will absorb the NOL and I can't tell you what business plan is. But I will tell you that there was substantial amounts of energy expertise and study based on this over the course of six months.
Alright, and then maybe a follow up for Dan and Tim. The public market clearly values recurring revenue. It's clear that what you guys want as well. It's also a lot tougher to get. So I guess the question I have for you is just walk me through how you are going to approach this when the time comes, when you have a very big lump sum opportunity on the table and you have this discipline of wanting recurring revenue. Both of the signaling method for future deals, and how do you approach that decision metrics?
That is the many million dollar question. First of all, I think one thing in our favor is that essential patents of this quality typically do end up getting licensed on a term, but its not just a lump sum, it's the fact that it's not a license forever but it might be a five-year deal or a three year deal but it has an expiration. So there is party that are somewhat accustomed to paying royalties in that sense.
That being said, they do have sophisticated teams that delay, stall, refuse, don’t want to hit the margin. So I know those will be obstacles. I think we’ve demonstrated that we're willing to enforce patents if we must. It's not our goal that kick off a bunch of new litigation, but we're not afraid of it either. I think we have such a magnitude in this portfolio that there is just an inevitability of coverage and so that being said, it will still nevertheless be tempting if somebody put a large proposal on the table and says this is all-in-all you can eat five year or something like that. Those are thing you are going to have to evaluate, but I think we are going to try to maintain a discipline and not led time pressure force us to cave into those kinds of proposal.
I will just add that you kind of gave the answer in your question; it is about discipline and will power. It’s very difficult when those opportunities arise to get together as a management team and as a Board say we are not going to take this deal. But that is our state purpose and we can say that we have the power to do so.
Would you elaborate a little bit going forward on what the role of the inventors is going to be and how you manage any conflict of interest that they may have with other business activities?
Well, I mean first of all the inventors are in addition to having invented some great things they are actually all really smart guys, and we plan to leverage their opinions on a variety of subjects. That been said, we have to be very careful not over taxing, or over requesting or over involving them because they don't want have that much involvement. Conflicts of interest I, if there is a conflict then we will have to stay arms length from in that way. But I don't anticipate a major problem in that area. Do you want a follow-up on that or...
I mean they may have access information on patent filings and they may have other activities outside. So confidentiality (inaudible).
I see, I see, yeah we will, their role will largely be to assist us as regards to the past. So things that were going on they can put inventions in context, they can help us to understand what competitive features were out there and those kinds of things. I think we will – as far as what they are working on today, we will keep that away from us, that will not be the part of the role.
Their role is either backward looking like Tim said looking into the past and asking about the event surrounding there inventions and so far as it’s forward looking it’s helping us evaluate additional portfolio that we may be interested in looking at and get in to a sense and technology overall, because like Tim said they are people that are well versed in their field and their input is extremely valuable to us as a company.
I have two questions, first is how would the [shelf] work with the need to preserve the NOL and related to that is I couldn't see the slide on liquidity but is Ericsson a source of liquidity potentially, and then I have another question?
On the liquidity we don't give our action is really source of liquidity at this stage. They have no commitment to do and as there’s no discussions around that. The shelf as I said before that’s not our preferred way of going out. If we need to there are ways that we can issue more shares and keep one way to do it is keep in trenches of less then 5% and if we do it that very focused to raise it. If we have to do it on a broad basis, we can also keep it so that people aren’t acquiring more than 5%. So as long as we keep it under that and there’s a few other technical things we have to deal with, we can keep the 3D to announce pretty closely.
Okay. And the second question is can you talk about the Microsoft deal; I think there was only a first tranche of payment. There is still a second and that was all pre-Ericsson, so just wondering how that has changed if anyway?
Yeah, no real change. As you said the Microsoft transaction, they paid us the first step of the two-step payment. I think I've said over the course of the last year and a half that the second payment is up to us. So we sort of have unilateral ability to be able to proceed with that. It continues to be in that same position and it falls into the revenue share agreement that we have with Ericsson and so the good point, there are no sources of revenue that we will receive going forward that don’t fall into that revenue.
No. So Microsoft licenses to the Unwired Planet patent, but when we receive that second payment it would be shared by Ericsson.
So could be.
You spoke to the roughly 97% drop through for future recurring revenue, but one thing that might help people as they construct an element for the company in the next few years, if you maybe help us think through what the range of royalty assumptions are in the industry today obviously not making a comment on what you expect to get yourself, but just to remind people it is 35 basis points at the low end, 3.5% of the high end, is that still the right range or what is the right range to think about?
Thanks for the question. First of all, I would point you guys to that there are a lot of articles about LTE royalty rate that I haven’t written but there's a lot of information out there that will tell you about Qualcomm’s published rates and what the total royalty stack ought to be and then of course they will take into account the cross license factor between two operating companies which plays a big role. So there's a lot of research and a lot of written material in that area; I mean that's probably the best I can give you.
I guess so you are obviously going to try to license your sort of flow patent portfolio, do you think at the end there will be a couple of key patents that generates the majority of the revenue and (inaudible)?
You ought to just hang on.
I'll hang on, I am sorry. Actually no I think we've gone from what I would, even before this deal was done I would have said a few that we exceeded there were a few and would have been in the dozens category before. Now I think we are in the hundreds. So I mean that's what's happened here.
Got it and obviously two of the big potential licenses are Apple and Google. You've already gone down the legal route, you started the legal route with them right, so how practically can you go kind of the licensing route; is there a logical strategy to go licensing and legal at the same time?
Yeah, you may have noticed we intentionally kept sort of litigation out of the presentation. We are going to use. When we do have litigation like we do, we are going to vigorously pursue it and expect to win and bring all the best experts and lawyers there. But I think the way you should think about our litigation in the future is that we will have made an exhausted licensing negotiations and using enforcement really is, not quite a last resort but installed for we just cannot reach economic agreement on what the rate ought to be those kind of things. So, I think we're going to be, we're going to, we don’t spend all of our time thinking about our litigation. I know it's the most observable thing for you. That being said, we do have the two cases pending, they are high profile, high cost, high upside and so we're going to keep going with those but it doesn’t preclude us from having license discussions with those parties and others at the same time.
You did kind of a broad sort of market value, 250 billion for the mobile device market. Obviously, you are talking about cloud and content about other opportunities give sort of market value for the non-device segment or is the best way to look out kind of mobile device total market value?
It's a great question and we don’t, we have some ideas but because of the diversity of the models, we have to take them one-by-one. We take an advertising model, won't name names but you can study the advertising model and try to figure out how much of that is mobile, how much of that is related to features that we invented.
If you have maybe the most measurable thing but I think would sell us short would be content and app sale. As you know, that’s an area where we had a lot of patents but I think the diversity of the model makes it so hard for me to give you a total size. I think you sort of need to go company-by-company and figure out their model why they are doing what they are doing and attribute some mobility component to it.
Yeah. Good question about your background, I know you had touched on it going into your previous remarks, your presentation but could you talk a little bit about your experience in monetizing patterns in particular IP licensing and then this is a huge portfolio, how do you guys think about the resources how are you going to pull on I know you touched a little bit about McKool but any other parties that you bring into help monetize your portfolios?
Sure. Was that directed to me specifically or Daniel?
Yeah. So Daniel and I got to know each other. He founded what's now Good Technology, it was call Visto at the time and he and his team invented quite a lot of mobile synchronization patterns, I was a general council there. And we had you can definitely read about or may heard about we had quite a lot of legal activity around the world with a lot of big companies Microsoft, Motorola and so we did licenses with litigation we have licenses with parties outside of the litigation that confidential but that’s pretty much where our background comes from is, the mobile synchronisation patterns from Good Technology.
And that’s why I think the application layer are (inaudible) side if you will (inaudible) Unwired Planet portfolio so attracted to us it was along the lines the types of patterns we have worked with before. The Ericsson’s essential patterns are definitely require some expertise and we have hired one guy from Nokia essential and got another portfolio manager to maintain and prosecute the pattern, our team will have a diversity of subject matter to address these things, but we are going to need predominantly I think technical expertise.
So EIP not just the prosecution (inaudible) our strategy they have formal cortile Nokia people themselves very well robust in all of mobility, so we have plenty of outside people to lean on but we have some technical experts that are already (inaudible) on this potential patents and we will be continuing to look for more of those types of people but Nokia folks, Qualcomm folks, Nokia folks these are the types of resources that working with and looking forward.
Hey, can you talk about the overall regulatory environment specifically [DOJ] and I think that came out recently as it relates to essential patents?
Not just overall regulatory environment as it effects NPEs, Congress, big picture.
Well I guess the biggest news in Congress about patents is there is a bill introduced to have a loser pay and one way looser pay system for enforcing patents that you didn't create. So that would impact us on the Unwired Planet litigation that's pending but it could potentially impact if we were to enforce an Ericsson patent and we would lose the case, we might have to pay the attorney fees, it is dissimilar to the UK system where the loser pays, So I kind of think my position on that but it is going to be loser play system, it should be both ways because I think lot of times that (inaudible) and if I do win neither should pay out but anyway that is the most interesting thing going on the Congress right now.
The DRJ and European Union as well are considering standard of essential patents in any competitive conjunction and it sort of a burning question around especially Europe is even more sensitive than we are here but we are not going to be, these are not our goal to seek conjunction, I mean it’s our goal to seek royalty. So I don't think we are going to be cross wired there.
I know you are not going to talk specifically about timing wise in terms of when you expect some of this enforcement activity but maybe you could give some kind of higher level thoughts on the landscape out there as it relates to kind of the licensing versus litigation and how things may have changed perhaps this time around with LTE first kind of where they were with 2G and 3G? You have a lot of new players in this space. It seems like there's a lot more litigation going on now and a lot less friendly licensing?
Yeah, I know I mean there's no question there you know I think people particularly in 3G, 2G it was kind of a new thing and I, there weren't a massive group of players throwing everything they can, declaring it essential and 3G you know it wasn’t a lot of bloating there, some bloating if you will.
LTE has been a different story and there are a lot of people out there declaring essential patents trying to participate in the standards so you are going to hear more about it. Now one way that I differentiate LTE patents is are you base station and handset LTE or are you core network LTE because core network LTE isn't mandatory, its an operator-by-operator deployment and its really hard to detect.
So there are those who may have a core network LTE patents I don't think they have the same value, that's one example. But also there is a lot of over declaration. There are parties out there looking to declare patents that aren't necessarily an applicable standard but there's an argument they can make, and so there is people patent numbers and that sort of thing, that's phenomenal. And it does make a lot of noise in licensing no doubt about it. I think that we will be able, we do have noise to separate from but we will be able to rise above it because, I mean we will be in pretty elaborate technical discussion with these players and we will bring our experts and we will have a debate about how the network is functioning and I think we will be able to prevail, they’ll come to realize these are high quality of the patents.
But that being said there is a lot of litigation I think people aren't necessarily seeking their royalties for what they have, and I also think that what we are going to be asking is going to be perceived as a brand type of offer for what we have. So I have hope, but I'm not naïve to believe there won't be noise that I have to feel to get mine shared with these.
A quick question on liquidity, or maybe it’s more on the structure of the deal. Your ability to sell assets, does that exist?
It does. It falls under the rev shared split. Any proceeds that come into the company, we have the ability to split with Ericsson. If and I don't know if we got into the details of this from an agreement standpoint okay. So we can unilaterally do things with the Unwired Planet historical portfolio. In the case of Ericsson patents, they have a right of first refusal that they can exercise if we decide that we want to release some of their patents for sale.
Can you talk a little bit about counter party dialog pre-Ericsson and post-Ericsson?
Sure. So I mentioned that coming out of the product group sale, we had a lot of alternatives and some of those were, I had assumed when I first understood that we were going to divest to the product group, unburdening the IP portfolio. If we could do it, would bring a lot of people to us that would have various degrees of interest and that was true. And I would say that we talk to every name that you can imagine and there was interest, broad based interest in the portfolio, and I would also say that we got far down a couple of [house] and at a point, decided to go down the Ericsson path, to the exclusion of other things that we were doing at the time.
So one of the things that I know was opaque to you guys is, we did a variety of things that never became visible and so as we got in to the fall, and we are cycling towards board agreements with Ericsson’s Board in Sweden and that was taking on a life of it's own. We had done eight things and none of them were visible to the outside world. I think what that gave us is a point of view of the value for our independent portfolio. It sort of validated our point of view in terms of the combination of the assets as they came together because we had some external validation that Ericsson could look at in addition to their own analysis, and so then we get on Ericsson pattern we closed Ericsson deal.
I think the feedback that they’ve gotten is wow, that was a really good deal from Unwired Planet and I think Ericsson gotten a feedback that that was a good deal for them, given the unique structure of our ability to be able to leverage the NOLs and our public company transparency and all of the things that comes together with this multi-layered portfolio.
The conversations continue and so the licensing conversations that Tim constantly involved in. Always have a dimension of business developments and alternatives associated with them. I think you will find us to be sort of at where we wanted to get to strategically. I don't think we will do anything that is going to take us up our course, but I do think that to your point how do you get leverage into this model and how do we make sure that we get enough wood behind the arrow, there are things that we can do to give us a little bit more leverage and we will continue to look for those opportunities going forward.
But I’d said that what the last year has given us from a dialogue in the industry standpoint, we have talked to everybody at this point and we have got to know them pretty well. And they know not only what we have now but probably what we are capable of. And I think it puts in a very good position going forward.
Any further questions? At this point in time, I will conclude the webcast and thank you for participating.
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