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Unwired Planet Inc. (NASDAQ:UPIP)

F3Q2014 Earnings Conference Call

May 1, 2014 5:00 PM ET

Executives

Lauren Stevens – Investor Relations

Philip A. Vachon – Chairman

Eric Vetter – President, Chief Financial Officer and Chief Administrative Officer

Analysts

Mark N. Argento – Lake Street Capital Markets LLC

Mike Latimore – Northland Capital Markets

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Unwired Planet Third Quarter 2014 Financial Results Earnings 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, May 1, 2014.

I would now like to turn the conference over to Ms. Lauren Stevens, Investor Relations, Unwired Planet. Please go ahead, ma’am.

Lauren Stevens

Thank you. Good afternoon and thank you for joining us today to discuss the results of Unwired Planet’s third quarter fiscal 2014. Joining me today are Phil Vachon, Chairman of the Board of Directors; and Eric Vetter, our President and Chief Administrative Officer.

The third quarter fiscal 2014 financial results press release was issued at the close of market today, which includes a non-GAAP to GAAP reconciliation, and if you’ve not seen a copy, you can find it at our website at www.unwiredplanet.com. For your convenience, this call is being recorded and will be available for playback from our Web site.

Further, any remarks that may be made on this call or included in our earnings press release about future performance, plans, objectives, and strategies of the Company may constitute forward-looking statements which are made pursuant to the Safe Harbor provision of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Such forward-looking statements do not constitute guarantees of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the forward-looking statements. We assume no obligation to update any forward-looking information discussed during this call and we encourage you to refer to the Safe Harbor language included in our earnings press release and our periodic reports filed with the SEC which described risk factors that may impact our future results.

I would like to note that during the discussion of our financial results, unless otherwise indicated, earnings related items are reported on a non-GAAP basis as defined by Regulation D, which includes stock-based compensation, restructuring expense, discontinued operations, and items related to certain strategic costs and the tax impact of these items. Please access our press release to review a reconciliation of the non-GAAP measures we report to the corresponding GAAP measures.

With that, I would like to turn the call to Phil.

Philip A. Vachon

Thanks, Lauren. Thanks for joining the call today, and we are obviously proud of the results. During the quarter, our big news was significant transaction with Lenovo. Lenovo paid us $100 million for a combination of patents and license fee. Our deal expenses for Lenovo were nominal. Our costs for the transaction all in were less than 10%. We will pay virtually no taxes on the income so to take the revenue unless the overhead and expenses and the zero tax rate one can see that we’re capable of being very efficient to creating shareholder value.

One thing I think people might have missed about on Lenovo deal is that a company with only 13 people has the skill to put together such a large and complex transaction. This as much as everything else, I will talk to you about today should provide some context regarding Unwired Planet’s potential.

During the quarter, we also launched series of major litigation in Europe. Those in the IT market known as the fast cost efficient venue. What’s most exciting about our opportunity in Europe were serious of related facts containing multiple press releases during and after the quarter.

Let me provide some color on how we think about these cases. We have such confidence in the patents that we are exerting that suit some of the largest unlikeliest handset manufacturers both in Germany and in UK simultaneously. The patents we chose cover every 2G, 3G and LTE phones. In terms of scale think about the number of phones sold by these defendants that use these technologies in the past and far into the future.

LTE growth is just getting started. Then separately an important times altogether, we announced our plan pricing offer, which is available to anyone worldwide who uses our proprietary technology.

Most investor questions we get are about the timing of deals. Let’s get that out of the way. We know or we think we know, but of course, we can’t say. We expect our transaction to be significant and if we do it right as we did in Lenovo, no one should know until the moment we announced. What we can’t say is that we have a set of potential licensees in these contracted major partners.

We have some deals that are closer than others and another quarters Q3 produced non-actionable low-vol offers. Our litigation moving forward in the normal phase and we are in the planning stages for more. When we have an insignificant litigation announcement in new or existing cases, we will call your attention to it.

Issuing the press release, we have [judge] (ph) in one of our cases blows in the nose, seems weak (indiscernible). For the convenience of people who follow us, we will provide litigation updates in our blogposts. We have a pipeline and we’re actively working it, the lack of news on any day, week or month, should not concern investors.

Given the trading volume for the last quarter, we know that I’ll have some new shareholders on this call. For the benefit of everyone, I would like to remind everyone how I think both our business and components of value. While the day to day is highly complex the basic business we are in this is pretty simply.

We own exclusive rights to certain technologies that companies are using. We ask them to pay reasonable fees for this use. When they do as in the case of Lenovo, it can be frictionalized and efficient for everyone. Companies refuse to pay us, we have no choice but to suit to get them to pay up and so we do. As far our components of value, first we have tremendous assets under management about 2,500 patents that include cloud and other portfolios and a wireless portfolio that covers an estimated 1.6 billion units that will ship this year alone.

Additional licensees especially under our brand pricing will be the main source of our profits in the coming years.

Let’s talk about profits. Lenovo deal accounting not yet complete, however, we maybe close to break-even or marginally profitable this fiscal year end. In itself it’s not a direct home about making profits while we’re here. But differentiates Unwired’s profitability model is that it’s achieved by multiple needs.

We have caps and we will continue to keep our expenses down. Our goal is to be able to take for annual cost early in any given year, giving our investors a great option on the upside. We achieved this in Q4 this year, our goal then is to pay our full year expenses earlier in the next fiscal year.

Also and this is the court, knew how our court calendars and legal agreements work together. Our expenses that company will reduce significantly within a year from now just as our European and U.S. cases are going to trial.

File dates are generally are catalyst for licensing transactions, but convertings of the cap costs with revenue from a growth industry like mobile as part of our model. Second is cash, people have asked what we are going to do with the cash. We will generate about $30 million of free cash flow this fiscal year. Cash opens up new opportunity for business in Q4.

Our agreement with Ericsson contemplates modest addition of our current portfolio that still that were previously published. Fully committed to the robust funding of the license plan using our cash, we believe will generate significant additional revenue and profit.

Finally, the NOL. We haven’t said much of emphasize the value of our $1.7 billion NOL. In the last few calls, the NOLs had zero value to shareholders without profit. Once we have achieved the meaningful profitability. We believe investors will ascribe more value to the NOL. We believe we will keep a profitability and then as such we’ve been thinking about ways to exploit the value in the NOL assets.

Worth mentioning also is that we continue to add expertise to Board this quarter by adding Rich Chernicoff bringing the total of our board to six. Rich has an extensive background in M&A and IP licensing especially in Asia. And we look forward to talking into significant knowledge and relationships.

Thanks for your time and support of the Company and especially the congratulatory e-mails we’ve got especially from some of the non-believers when we announced Lenovo. As is typical, I kept my comments brief and hopefully informative with in the confines of the public IP company. That said, we’re incredibly optimistic on the fields of the largest IP deal in Unwired Planet industry.

Now, I will turn the call over to Eric for a discussion of the financial results.

Eric Vetter

Thanks, Phil, and good afternoon, everyone. The biggest announcement during the third quarter, the signing of our licensing and sale agreement with Lenovo did not impact our financials to the period that this transaction did not close until mid-April. We’re working with a valuation firm now on the relative fair value, allocation of the proceeds, as well as on our accounting treatment for this significant event, which will very positively impact our Q4 and full year results. We’ll have these accounting items fully resolved and reported at year-end result.

In the meantime, we continue to manage our expenses closely while pursuing our licensing initiatives. For the third quarter of fiscal 2014 we are reporting a net loss of $9.3 million on a GAAP basis. Our results are comprised as follows: Patent initiative expenses totaled $5.6 million for the quarter. Of this, $1.1 million was for prosecution and maintenance, this being one of our biggest renewal quarters. $3.4 million was for litigation and litigation planning work, and $1.1 million related to external licensing resources and internal licensing staff. Included in these costs is $0.3 million of stock-based compensation expense.

General and administrative expenses totaled $2.3 million for the quarter. These expenses are comprised of external accounting, legal expenses and other public company costs as well as employee and executive-related expenses. Stock-based compensation in general and administrative costs this quarter totaled $0.7 million. That’s compared to our normal run rate due to stock modification charge of $0.5 million from recent changes in our Board of Directors.

As with the prior quarter, we incurred $0.9 million of paid-in-kind interest expense this quarter related to the notes we issued at the end of June 2013. The rise in our stock price from the prior quarter we incurred $0.5 million of other expense, which was the result of the quarterly revaluation of the market condition stock liability related to the Ericsson transaction. Discontinued operations totaled $58,000. From a balance sheet perspective, we ended Q3 2014 with $66.5 million in combined cash and investments and $8.1 million in current liabilities.

Before turning the call over to questions, I want to briefly comment on the cash generated by our recently announced transaction. As you know, we closed the license of sale transaction with Lenovo on April 17 and received a payment of $100 million. Through consideration payable for the patents we purchased and their share of the revenue split Ericsson will receive $30 million of this gross payment. Unwired Planet will retain $70 million before paying for deal expenses.

This one transaction effectively doubles our cash position, raising it from $66.5 million at the end of March to over $130 million now. We are glad to have completed this transaction with Lenovo and we are working hard to continue to increase shareholder value.

As always, we appreciate everyone’s support and time today. At this point, operator, we would like to open the call up for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Vetter. We will now begin the question-and-answer session. (Operator Instructions) And we have a question from the line of Mark Argento with Lake Street Capital Markets. Please go ahead, sir.

Mark N. Argento – Lake Street Capital Markets LLC

Good afternoon, guys.

Eric Vetter

Hey, Mark.

Mark N. Argento – Lake Street Capital Markets LLC

I know you said you’re still finalizing a lot of the accounting treatment. Any kind of general guidance you can give us in terms of maybe trying to rough out some numbers for our models for Q4 in terms of revenue. On the revenue side, I guess, will you be recognizing the revenues on a gross basis or will you net out the route share with Ericsson on the top one?

Eric Vetter

Well, Mark, I can’t give you sum, but I just want to profess it, make sure you understand it. They’re still a lot of that we need to work through here. I think I have a general idea of how it’s going to come out, but we still need to go through with our – finalize with our valuation firm, finalize both internally and externally with our external auditors on the accounting treatment.

So understand all of that has been worked through before all of this is finalized. That said, I think you’ve seen and you don’t really had a lot of reasons to look for the revenue line you realize to date. But when you look at the way we’ve been, our income statement is showing revenue since the Ericsson transaction, we always show sort of gross less the fee share and then, the net Unwired Planet revenue, so I would expect that to continue. And so, but the size that then out of the $100 million there is the consideration for the patents that we purchased from Ericsson.

I would expect those to really be not even included in the gross number, because of the way it’s treated. But nonetheless, when you get down to the Unwired Planet piece, it will be the, in total overtime it will be $70 million around Unwired Planet revenue. In the fourth quarter we’ll be recognizing the fair value of deployment for the sale piece, less of course like I said the consideration for the patents that we purchased from Ericsson, less Ericsson share and we’ll also be recognizing a piece for past infringement less the Ericsson share.

I think those two – and then the third piece of the three elements, the third element will be the future prepaid license component. And now we expect to recognize over the term of the license and so probably over the term of the license sale. The fourth quarter has mainly been impacted by the sale and the past infringement I expect. And I expect to those two in gross terms. Before you back out Ericsson’s share anything that will be about half of the $100 million, above $50 million plus or minus, that stuff still needs to be worked out, but that’s the kind of ballpark I think its going to be in.

Mark N. Argento – Lake Street Capital Markets LLC

And I know it’s difficult and thanks for at least giving at the good short. In terms of, think about from just a cash counter cash basis, of the $100 million when is also down fees everything kind of paid out, does that kind of give you that factor that $70 million number is kind of the gross number and then, whatever deal expenses and may be at somewhere between $50 million and $60 million is kind of that a net cash number that we can think about kind – we and thinking about kind of the liquidity on your balance sheet.

Philip A. Vachon

Yes you can tell me what the deal expenses are as we’ve already called out Evercore is on assistance, has a $2.5 million fee associated with it, so that will come off. And beyond that I mean, we’re going to be in the range of $65 million plus, netting that out. So we’ve got a whole out beyond that.

Mark N. Argento – Lake Street Capital Markets LLC

Okay, great, all right. And then, kind of looking at the, I don’t think that Tim or Daniel on the line, I’m guessing. But, may be talk a little bit about kind of the environment the IP licensing environment today. It feels to me talking and looking, watching other companies in the space that seems that may be the buyers or the defendants on the other side of the table are starting to leasing up a little bit, in terms of thinking about starting to take some licenses.

Now that they have a little bit better ideas to what the legislation out there, potentially going to look like. So, the markets starting to fall little bit, result our perception. And do you guys seeing anything in regards to that, in terms of the body language or posturing in any of these companies have the ability to get to the right guys and get the price tags in terms of talking about the much more licensing deals.

Philip A. Vachon

Yes. It’s still weak. We are seeing a little bit of that I’d say. I would support that if you’re looking to other companies. We’re getting some of the same behaviors. The question is did we get a full economic number that make sense. So, in the buyer market, as I said, we saw low-ball offers during the quarter, they will low-ball, they didn’t work fine, the prices didn’t clear. So, it’s not the worst that I have ever seen it. It’s getting better and I think we’ll all know a lot more when the legislation finally causes.

There is not much in the legislation that we’ve seen so far that, troubles us given the nature of our business, the quality of our portfolios, for example, the Supreme Court can have the decision in the last couple of days about making it easier for loser pays, but those are kind of a frivolous lawsuit, we don’t do that. So I think things will get better when people understand the new rules. but nothing that’s in the one space that we’re looking at right now would be problematic to our business.

Mark N. Argento – Lake Street Capital Markets LLC

Got you. And last question, I think within the last week or so, you guys have published, you’re going to talk about your friend and your friend rate card and talk a little bit about, we should be kind of doing the math and we think about the market opportunity for you guys some of the numbers that you guys published in terms of…

Philip A. Vachon

Yes. So I mean there are a couple of factors you have to reply for that, I mean if you read some of the research reports and I keep quoting this, but I still think it’s a valid number to start with the size of mobile shipments in the world – worldwide mobile shipments right for 2014. just start with that as a baseline. And now you’re going to take away from that places where we don’t have paths, right. Their countries that we don’t have paths, their countries we do. We have gotten some, I would say most or all of the major countries.

So I don’t know how you discount that number, and then a lot of that volume our future phones and things that are less capable. So you’d have to run that math at the rates that we published and you – throughout the number, I think that’s probably where you get there. We know that analysts and investors that we’re kind of get – trying to get a ballpark for what our rates were. and we were at a point in our cases, in Europe where we – it was good to us to make trend offers and we just thought if we make it public and it would satisfy our trend obligations in Europe and also give you guys a little more information to your mouth.

Mark N. Argento – Lake Street Capital Markets LLC

That’s very helpful. thanks guys, congrats.

Philip A. Vachon

Thanks, Mark.

Operator

Our next question comes from the line of Mike Latimore with Northland Capital. Please go ahead.

Mike Latimore – Northland Capital Markets

Hi, great. thanks a lot. Just on the UK and Germany cases, what are the next steps there, obviously, you got the offers out there, but just on the legal cases, what’s the next step, I think to look forward in those regions?

Philip A. Vachon

So I’d say I don’t want to sum up the question, but you should go and look at our blog, and I think they just posted it there, they should have just before the call. And now, I’ll give you a lot more detail on what’s going on the cases. But from my perspective, the way I think about it is that when you do the European cases, you have to prepare all your materials upfront.

So a lot of the work that we needed to do was done in the late fall, January this timeframe before we filed. So I don’t know if the bulk of our work is done, but certainly a lot of it is done. The fantastic answer and I think that’s kind of what’s going on right now, they have 30 to 60 days to answer and I think that’s the time. But as I look forward to one of the revenue catalysts, if I take we are roughly about it in certain remarks a year away from the trial date. But I don’t think we are years away from the trial date, I think we’re a year plus or minus to a trial date. And I’m sure that there will be a lot of back and forth between that, but that’s kind of how I think about the high level. If you want more detail, you got a specific volume.

Mike Latimore – Northland Capital Markets

Sure, okay. And then on the last call you talked about sort of looking at some non-traditional alternatives to capture revenue. Any update on that thinking doing the Lenovo would be on some other things proceeding here?

Philip A. Vachon

Sure. Lenovo, clearly, when we had last call, we knew what the sort of broad strokes that the Lenovo deal looks like – looked like, I’m not, in fact, sure where we’re specifically at the time. but clearly we knew, but that was coming. Now that I would call, it’s called a bit of a hybrid deal, right and it’s not just the straight license field. It was something that a strategic buyer found value in an asset that we had in our company.

We found value in the transaction, because they took the license from us, which is always helpful. They paid us $100 million, which was really helpful. And so that was one of the transactions that I’d refer to. I think company in our position has to look at a variety of ways to establish itself in the market, and Lenovo was an example of that. We’ll continue to pursue traditional straight license fields, exchange for cash. but I’m not close to other deals like the Lenovo deal where we think creatively about generating revenues.

Mike Latimore – Northland Capital Markets

And then there is some, framework for analyzing the payments by a mobile device. but maybe a little less clear on opportunities in mobile cloud services. Can you talk a just a little bit about cloud services? What kind of opportunities you’d never alter to say our license for mobile device?

Philip A. Vachon

Sure. So again, here is the way I think about, this is on a technical interpretation of our portfolio. This is just how I think about the revenue model for Unwired Planet. So we’re dedicated to a per-unit pricing on our handset portfolio, so lack of what they are coming to solve the handset portfolio. And we believe that that will provide recurring revenue, some recurring revenue base that hopefully will increase overtime its mobility handsets, shipments increase and as we sign and sign more and more licenses. Okay, so I look at that as a baseline of revenue.

The cloud portfolio, we shouldn’t forget that’s a very valuable portfolio, but it’s characteristic of license, and it’s very different than per-unit. Most per-unit royalties are tied to a thing, right. And this is not tied to a thing, this is tied to a service, what our computer that required to service. And so therefore, while we anticipate offering term licenses, it’s probably royalty per-unit. so if I have by clean scenario and this is light green this is not – I’m not telling you, this is what’s going to happen, but this is how we are trying to plan our business.

We would be able to have straightened out, what in this market is very lumpy revenue by combining per-unit royalties on the handset stuff and term licenses on the cloud stuff for positive surprises. I’d like to be profitable off of just the handset stuff with positive upside surprises on the cloud stuff. The cloud stuff does not value us by any stretched imagination, we have some huge phases going on with Apple and Google on in that market.

Mike Latimore – Northland Capital Markets

Yes, okay. Thanks a lot.

Operator

Mr. Vetter, there are no further questions at this time. Please continue with your closing remarks.

Eric Vetter

Thanks everyone for joining today’s call. we’re pleased with the progress we’ve been able to share with you today. You have to realize we are just getting started. as we continue to exercise our strategy, we look forward to sharing more developments with you in the future. Thanks everybody and have a good day.

Operator

Ladies and gentlemen, this concludes the Unwired Planet third quarter 2014 financial results earnings conference call. This conference will be available for replay after 4 o’clock Pacific Time today, through May 22 at midnight. You may access the replay system at anytime by dialing 800-406-7325 and entering the access code of 4677609. Thank you for your participation. You may now disconnect.

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