Unwired Planet (UPIP) Q4 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Great Elm (GEC)

Start Time: 17:07

End Time: 17:36

Unwired Planet, Inc. (UPIP)

Q4 2014 Earnings Conference Call

August 14, 2014 05:00 PM ET

Executives

Philip A. Vachon - Chairman

Eric Vetter - President, CFO and CAO

Lauren Stevens - Investor Relations

Analysts

Mark Argento - Lake Street Capital Markets LLC

Mike Latimore - Northland Capital Markets

Charlie Anderson - Dougherty & Company

Operator

Good day and welcome to the Unwired Planet Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Lauren Stevens, Investor Relations to Unwired Planet. Please go ahead.

Lauren Stevens

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

The fourth quarter and 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 Web site 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 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 financial results.

I’d 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 G, 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’d like to turn the call over to Phil.

Philip A. Vachon

Thanks, Lauren. Unwired Planet ended up the year with a small operating profit. It’s not much unless you take a moment and consider that it’s nine times more than all of the operating income in the Company’s 18-year history. It’s a start and infinitely better than starting this call by reporting yet another loss.

The Company previously lost $2.9 billion since inception and the bleeding had to stop before we can start to think about growth. Over the past two years we spent about $40 million in the U.S alone, monetizing our portfolio and we still expect these investments to ultimately produce significant profit.

For all of you [ph] [T-lead] readers, there are a number of court days coming on in our U.S cases. There was an UPIP technical tutorial that occurred last week; the Apple Markman was on August 11. There is a Google technical tutorial tomorrow. There is a Google Markman on August 20th and a Square Markman on September 22nd.

I’d like to caution investors about evaluating the Company’s prospects on any particular court proceeding as there are many steps in litigation monetization. We are however finally beginning to get our days in court. A few of our U.S trial should occur early next year. From a more comprehensive status, with all of our cases, please see the blog we posted today.

This may also forward progress in our European cases. We remain optimistic about our investments in Europe, which were above $3.4 million to date. So far so good. Europe appears thus far within the right decision. It seems to be a fair and efficient form. Our cases in both the U.K. and Germany are fully briefed and our trial dates begin mid next year.

It is interesting however to watch the defendants in the European cases try and dial through their delay the inevitable at all cost stupid (indiscernible) to little or no avail. Classic big company defendant behavior, but so far it seems like these cases are heading for trial on time.

We suit Microsoft during the quarter. They owe us money for previous license agreement and failed to pay. For confidentiality reasons, we’re not allowed to specify the amount or the details. But a layman’s analysis might be something like they should simply read the contract and pay up.

This is a contract case, not a patent infringement case. It’s interesting to note that subsequent to our dispute, Microsoft ended up on the other side of a similar argument. Apparently Samsung just stop paying Microsoft in a similar royalty payment contract dispute.

In IPO licensing, maybe this non-payment trend is the equivalent of the new black. Our cases in Delaware are well annoying, the costs, the collection not be significant. Licensing conversations continue on a daily basis. The bid now spreads are still not where we’re comfortable in closing. We remain mindful of our capital structure and maximizing our NOLs.

Finally, as we’ve demonstrated in the Lenovo transaction, milestone achievements are by necessity proceeded by long public quiet periods. So we both appreciate your patience, and understand your impatience.

Now, I’d like to turn it over to Eric, for a discussion of the numbers.

Eric Vetter

Thanks, Phil, and good afternoon, everyone. This quarter I’m pleased to be able to spend time on this call, talking about our top line. As you know we closed a significant patent licensing and sale transaction with Lenovo this past quarter, which grossed us a $100 million in proceeds. This was a fantastic transaction in many ways. Not least of which the simple fact that it was our first major agreement since transforming the Company into an intellectual property focused entity.

Not only as a top line of note, we realized positive net income for fiscal year 2014. The first time that has happened since 2006 and only the second time in the history of the Company.

Now before getting into the results for the quarter and full-year, I’m going to review the accounting impact of Lenovo transaction, which will help to frame our results.

As I mentioned above, gross proceeds from the Lenovo transaction totaled $100 million, which we received in April. The transaction is comprised of two agreements. One is the sale agreement under which we sold Lenovo 142 patents and the other is a term-based licensing agreement to our remaining portfolio of approximately 2,500 patents.

Of the 142 patents sold to Lenovo, 19 were patents we acquired from Ericsson, specifically for this transaction and these patents were subsequently sold to Lenovo. In principal the allocation of proceeds of this transaction are fairly straightforward.

We received the $100 million of which we paid Ericsson $20 million for their share under our MSA agreement and another $10 million for the patents we purchased from them to be included in the one sold to Lenovo which in excess of $70 million.

However, accounting is never that straightforward. For accounting purposes, we broke the Lenovo transaction into three elements. The term-based license to our portfolio, a release from past infringements, and the sale of the patents.

We utilized an external valuation firm to assist with valuing these three elements. They use what market comps they could gather for things like volume estimates, both past and future, market royalty rates and patent sale values. In short, the valuation work involves a lot of estimates.

The valuation results are as follows: 54% of gross proceeds were allocated to the sale element. 3% of gross proceeds were allocated to the past infringement element and 43% was allocated to the license element. The term of the license is five years with the option to extend for two more.

Based on the fact that Lenovo is not yet in most major markets, we will be recognizing the amount allocated to the license over seven years on a quarterly basis. The sale and past infringement elements are both fully recognized in Q4 of fiscal 2014. I will now get into the results.

For the fourth quarter of fiscal 2014 we’re reporting net income of $24.3 million or $0.22 per share, net revenue of $36.4 million. The results are comprised as follows: The net revenue comes from recognition of a 100% of the sale in past infringement elements and a partial quarter worth of the license element, less Ericsson’s corresponding 20% revenue share and less the cost of the patents purchased.

Patent initiative expenses totaled $6.8 million and include legal and consulting costs related to supporting, defending and asserting our patents, as well as costs of employees directly involved in support of our licensing efforts. This past quarter, patent initiative costs include $0.2 million of stock-based compensation expense.

General and administrative expenses for the quarter, totaled $4.6 million. In addition to the normal cost of external accounting, legal and other public company costs, as well as employee and executive-related expenses. G&A in Q4 includes $2.7 million of direct transaction costs related to the Lenovo transaction. Also included in G&A this past quarter, was $0.1 million of stock-based compensation.

I mentioned earlier, fiscal 2014 marks only the second time in the Company’s history that we’re reporting positive net income for the year, totaling $0.4 million. Revenue for the full-year all came from the Lenovo transaction, totaling $36.4 million.

Patent licensing expenses for fiscal 2014 totaled $23 million, an increase of $6.7 million from the prior year. This increase was primarily driven by the additional assertions we have to make against a variety of potential licensees. We expect our quarterly run rate going forward for patent licensing expenses to be approximately $7 million, plus or minus based on our current litigation and patent initiatives.

General and administrative costs for the year totaled $10 million. We continue to expect G&A expenses to trim slightly below $2 million per quarter, excluding the impacts of major transactions like the one we saw in Q4.

From a balance sheet perspective, we ended fiscal 2014 with $146.7 million in combined cash and investments and $25.5 million in current liabilities. The biggest component of our current liabilities is the C share we owe to Ericsson.

With the closing on Lenovo transaction, we’ve begun to realize the vision that were set in motion in early 2012 when we sold our products businesses and changed our strategy to concentrate on intellectual property. As we go forward, we remain focused on arriving at fair and reasonable licensing agreement with potential licensees, even in cases where we’ve had to initiate litigation and yet at the same time managing our costs.

It continues to be a difficult business environment, but we’re committed to realizing the significant value of our portfolio and confident we’re well positioned to do so.

Operator, at this point, we would like to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Mark Argento with Lake Street Capital Markets.

Mark Argento - Lake Street Capital Markets LLC

Good afternoon, guys. Sorry about that. First kind of a housekeeping question for Eric. I wanted to walk you the math, so on the revenue recognition of the Lenovo deal, so basically the -- effectively 57% of the proceeds have already been recognized, I believe in the term license at 43%, that’s part that you’re going to recognize on a recurring basis over the next seven years, is that right?

Eric Vetter

That’s right, Mark. I mean, a small amount -- little less of one quarter’s worth of that got recognized in Q4, because of the timing when we close the deal in mid April. But that’s correct and the rest of it, the sale and the past infringement elements, both got fully recognized.

Mark Argento - Lake Street Capital Markets LLC

Okay. So take -- so seven years, and you get roughly 28 quarters less a quarter we will call it. You’re going to recognize revenue, that revenue over the next 27 quarters and should we be taking this $70 million and then spreading that over the 27 quarters, is that the way the math would work?

Eric Vetter

No, no. The $70 million is …

Mark Argento - Lake Street Capital Markets LLC

Oh excuse me, 43% -- yes, the 43% of $70 million.

Eric Vetter

Yes, yes. Right.

Mark Argento - Lake Street Capital Markets LLC

All right. Sorry. Okay.

Eric Vetter

Right. You basically you would say okay, you got 43%, 42% left of that, Ericsson gets there 20% and so you really -- we’ve recognized 36 of the $70 million already. So we’ve the 34 sits on the balance sheet and that’s what we will get recognized over the balance -- over the remaining time.

Mark Argento - Lake Street Capital Markets LLC

Right. But at this point, so does Ericsson get paid kind of pari passu with you guys as you recognize the revenue. I’m just trying to get -- just trying to figure out what -- and we can go offline with this as well, but just trying to figure out what the kind of ongoing revenue will be for the model?

Eric Vetter

Well the ongoing revenue is going to be about a $1.3 million a quarter for us going forward, just under $1.3 million a quarter.

Mark Argento - Lake Street Capital Markets LLC

All right.

Eric Vetter

Or our net revenue.

Mark Argento - Lake Street Capital Markets LLC

Right. I could have probably started by asking that question first and would probably been a lot easier. So, my apologies for that.

Eric Vetter

No, problem -- no, problem.

Mark Argento - Lake Street Capital Markets LLC

Still kind of getting back to looking at new revenue opportunities, any kind of -- anything anecdotal you can talk about in terms of the conversations you’re having, maybe the number of -- do you continue to expand the target list. I think last time it was in the low 20s in terms of different conversations you’re having. I mean, just try to give us a little bit of flavor or feel for what's going on there?

Philip A. Vachon

So the conversations that we were having, we’re still having, and we can only talk so much before we’ll have to move on to the next phase. So, I think given the environment that you see less settling than you used to four or five years ago at the various juncture. So there used to be settlement at opportunities at first contact and filing, patent parade, at pre-Markman, post-Markman, after depositions, courthouse steps and a lot of that has collapsed into, well I’m not paying you till you sue me. So, those are our reps. So, yes we’re talking to everybody, but I think the market has fundamentally changed with respect to people just agreeing to pay a license because it’s the right thing to do. So, we continue those conversations, but when we had enough we’ll -- you’ll see us launch a lawsuit.

Mark Argento - Lake Street Capital Markets LLC

With the, a lot of the potential patent legislation that kind of had been an overhang in the industry for the better part of 2013 till that got resolved earlier this year. Do you think any of that was holding things up? I know talking with other industry participants there is a thought process that the immediacy or the need or want to settle might have gotten pushed out a little bit seeing what Washington was going to do if anything. Now, that that’s kind of been put on the back burn or more substantive conversations to take place. Is that more wishful thinking or is there something to that?

Philip A. Vachon

We have always had substantive conversations, I mean we have -- we’re not, this is not frivolous. Our patents aren’t fully frivolous patents. They are worth a lot of money, and the conversations are not about small amounts of dollars. So, we have always had substantial conversations, and I think yes, it went quite for a while. So whatever you’re seeing from occasion of peers, what we have in this group is probably what we’re seeing. But I’ll only be happy when we collect, and we’re not there yet. So, as I said in the remarks we -- there’s money on the table, but setting that precedent would be bad for our company. So the numbers are equated to, you know what, I really like Ferrari’s, they are really great, and I’d really love to spend like five bucks for one but nobody will sell me one at that price, and that’s kind of what this is. Its wishful thinking on the part of the defendant’s that we would ever sell for the kind of rates that they’re offering. And they all have their own excuses about why they’re different, but as a practical matter it’s not worth -- we’re not there yet. So, those conversations continue.

Mark Argento - Lake Street Capital Markets LLC

Last question for me in regards to, I know there had been some talk about potentially doing other types of partnerships or agreements where you might not be or you might layoff or hand over or trade IP, figure out other ways to monetize the IP than just taking 2500 patents and going out and trying to assert them one by one so to speak. Have you been working towards any other strategic opportunities with other market participants or with that kind of taken a back seat to just trying to get deals done the old fashion way?

Philip A. Vachon

I would say it was the later other than the former. I mean essentially what that first group looks like is wholesaling our patents. It’s wholesale versus retail, and wholesale comes with a pretty significant discount. So, if we packaged up and sold patents to a lot of the other participants, guys with money who can actually back litigation. They want their pound of flesh. Its fine, I get it. But it doesn’t really workout well for us. So we have a nice strong balance sheet right now. It’s not like I don’t feel the pressure to produce more revenue. It’s just that, producing wholesale revenue when we have a licensing team in an organization we’re paying for seems to be not top of mind, we’re open to a bunch of different relationships, they just got to make financial sense.

Mark Argento - Lake Street Capital Markets LLC

Okay. Congrats on getting some real revenue to the tape, and hopefully there’s more to come.

Philip A. Vachon

Great. Thanks Mark.

Operator

From Northland Capital we’ll now take Mike Latimore.

Mike Latimore - Northland Capital Markets

Thanks a lot, yes. Congratulations on the year. Just on your blog there, you talked a little bit about making progress such as Apple Markman hearing this week. I guess, can you just talk a little bit about that any highlights from the Markman [ph] [you need to have] this week?

Philip A. Vachon

Yes, it’s like well people will go sit in Supreme Court and watch and try and forecast what the Justices are thinking. Look, there was a Markman, we thought we did well and we’ll find out when the decision comes out. So there was a tutorial earlier it was broken up into two pieces. There was a tutorial a couple of weeks ago or week ago, and then the Markman was last week, and it was your pretty basic Markman, as best I can understand. I wasn’t there, but the team reports that it was a pretty basic Markman. And we thought we did well. We think we have a strong case. We went in there thinking we had a strong case. We came out of there thinking we have a strong case, and we’ll see what the Judge says when they come out with the decision.

Mike Latimore - Northland Capital Markets

Okay. And then also on the blog you talked about maybe some of the potential infringers in the cloud patent category are taking a little bit of a wait and see attitude around Google, I guess, I mean what's your thought there. I mean are they going to wait to see the final outcome or are they going to wait to see the Markman, well just how do you sort of strategize around (indiscernible)?

Philip A. Vachon

So on the LTE in handset side, I mean there’s a number of -- there’s only a select group of people who actually play in that space and that’s probably you can count them on both ends. On the cloud space, there’s a lot of different players. So, we look at -- we should not forget the value of the cloud portfolio, it’s a pretty valuable portfolio. We’re leading with some very, very tough guys. I mean these are big cloud player’s that were -- we [ph] [incorporate]. So yes, I think the little guys are trying to draft behind them, but our court dates are coming. This is what I said in my prepared remarks and I think you guys should think about when our court dates are, look at our blog. The day is coming, its not two years away anymore, it’s like months away. So I expect that everyone else is watching the same thing.

Mike Latimore - Northland Capital Markets

Yes, okay. And then, I think in the last call you talked about 27 active discussions, is that still about right?

Philip A. Vachon

Probably higher than that by now. I don’t have a number we can probably update the blog later and give you a more precise number.

Mike Latimore - Northland Capital Markets

Any sense of like what percent of those have given you some sort of low-vol offer at this point?

Philip A. Vachon

No, I think some of them have offered us zero. 100%. So, I don’t know if I had to guess off the top of my head, my guess is 25%, 30% of those people have put money on the table that they consider reasonable, but we don’t. That’s a guess.

Mike Latimore - Northland Capital Markets

Okay. Just last on Microsoft, so its really about the prior contract, its not about any future prospects you might have there that relates to Nokia or Ericsson fans I mean?

Philip A. Vachon

Well, the dispute is over money they owe us. But since we executed that agreement we have acquired a substantially larger group of IT. So, I’m sure they’d love to have a license like everybody else with zero, but that isn’t going to happen. So, the conversations are limited to the tactical dispute over the contract, and that’s kind of where we are. But look we’re still out there, they are a handset maker. We have handset patents. So, you can sort of draw your own conclusions.

Mike Latimore - Northland Capital Markets

Okay. And then, I guess, really the last one is, if one of these Markman hearings whether its Google or Apple or whatever, if it is unfavorable, is it the thought that you would have an opportunity to come back with a new set of patents or what's the general strategy around kind of an unfavorable month in hearing, (indiscernible)?

Philip A. Vachon

Our strategies don’t loose. But if you push -- one of the cases I believe it’s the Google case has been fabricated, some of the patents have been set aside. I may be wrong on this, it might be the Apple case, but one of those cases. We’re only talking about three or four patents, and the other three that are in the case are, are sitting on the sidelines waiting to follow behind. So, that’s the power of having a lot of patents. We’re not a one trick pony. If for some reason something bad happens we’ve got more where that came from.

Eric Vetter

It’s the Apple case where we’re – there’s only about just a fraction of the claims that are being looked at, 10%, 20% and the other ones are still in the case.

Philip A. Vachon

The Apple Markman was eight -- I think eight claims they were arguing over. I mean, I don’t know how many claims are in -- I mean it’s a lot. So, we’ll just keep going back until we get the right answers. But again I’m not predicting. There was nothing at the Markman that was troubling to us, is best I can tell. But the Judge still has to decide.

Mike Latimore - Northland Capital Markets

Okay. Thanks.

Eric Vetter

Yes. See you.

Operator

Our next question comes from Charlie Anderson with Dougherty & Company.

Charlie Anderson - Dougherty & Company

Yes, thanks for taking my questions. Phil, I think in the past you’ve talked about one of the key strategies here is to maximize the NOL. And I wonder, if you could just maybe update us your thinking there, what you can do strategically to pull that off beyond what you have in the current portfolio?

Philip A. Vachon

Great, question. I referred to it in the remarks, and you’ll notice I didn’t give you much meat behind it. Look, day-to-day our business is to monetize the patents that we have. That’s how we’re going to generate revenue in the sort of short, medium, long-term. That’s what we’ve got to sell right now. But a good corporate asset in addition to our nice $100 million plus balance sheet is the NOL. And so, the board is spending a lot of time thinking about the NOL. There are a lot of limitations to how we can operate with respect to the NOL under the 380 rules and so forth. So, we have been doing a lot of work on that, but I’ve got nothing to talk about today. But it’s not like we have forgotten about it.

Charlie Anderson - Dougherty & Company

Fair enough. And then I think, one thing I want to address is that, in the quarter InterDigital did a very substantial transaction with Samsung, it seems like what maybe end of the sale made there is that they gave up a little bit of rate in exchange for a longer duration of a deal. I wonder if there has been any movement toward that type of structure in some of the conversations you had and maybe (indiscernible) some of them?

Philip A. Vachon

So, I don’t know the specifics of that deal, but I have come from a software industry where it’s a licensable product. So when you extend the agreement for a period of time and you take the same money, that’s a discount. I mean it just (indiscernible) what it is. So, look if we have the overall economics of a deal that works for two years, five years, seven years, nine years, it’s not a problem. We have a lot of flexibility in how we structure our agreement. The question is, is the overall economics worthwhile? And so far the answer is no. But sure, if somebody offered me a seven year deal as opposed to a five year deal provided the discount wasn’t too much, but that what you just described I consider it discount.

Charlie Anderson - Dougherty & Company

Got it. Thanks so much.

Philip A. Vachon

All right.

Operator

We have no further questions at this time. I’d like to turn the conference back to Mr. Vetter for any additional or closing remarks.

Eric Vetter

We just appreciate everybody’s time today and have a good evening. Thank you.

Operator

Once again ladies and gentlemen, that does conclude today's conference. Thank you for your participation.

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