Unwired Planet's (UPIP) CEO Boris Teksler on Q2 2016 Results - Earnings Call Transcript

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Unwired Planet, Inc. (UPIP) Q2 2016 Earnings Conference Call February 8, 2016 5:00 PM ET

Executives

Lauren Sloane - Investor Relations

Boris Teksler - Chief Executive Officer

Jim Wheat - Chief Financial Officer

Analysts

Jim Fitzgerald - Northland Capital Markets

Mark Argento - Lake Street Capital Markets

Operator

Good day and welcome to the Unwired Planet Announces Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Lauren Sloane. Please go ahead.

Lauren Sloane

Thank you. Good afternoon and thank you for joining us today to discuss the results of Unwired Planet’s second quarter of fiscal year 2016. Joining me today are Boris Teksler, Chief Executive Officer and Jim Wheat, Chief Financial Officer of Unwired Planet.

The second quarter of fiscal 2016 financial results press release was issued at the close of market on Friday, February 5. If you’ve not seen a copy, you can find it on our website at www.unwiredplanet.com. For your convenience, this call is being recorded and will be available for playback from our website.

Further, any remarks that maybe made on this call are included in our earnings press release about the future performance, plans, objectives and strategies of the company constitute forward-looking statements, which are made pursuant to the Safe Harbor provisions 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 on 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 describe risk factors that may impact our future results.

With that, I would like to turn the call over to Boris. Please go ahead.

Boris Teksler

Thank you, Lauren and good afternoon everyone and thank you for joining us on today’s call. I would like to begin be reiterating our focus at Unwired Planet to drive stockholder value before providing a summary of the litigation activity that occurred over the last quarter. And finally, I will turn the call over to Jim to discuss the financials.

We have continued our efforts to reinvent Unwired Planet and have furthered that effort with the addition of Steve Wilson to our Board of Directors. Steve’s expertise in investment management and mergers and acquisitions coupled with his financial and legal acumen will be – will add a valuable perspective to our board. I would like to wholeheartedly welcome Steve and I would also like to thank Taylor for his contributions to the Board of Directors.

We continue to explore strategic alternatives to provide us with the resources required to drive results for our shareholders. The Board is focused on evaluating ways to utilize our net operating loss carry-forwards and on refinancing our debt to optimize our capital structure. Concurrent with our efforts to reinvigorate Unwired Planet, we have also made tremendous progress in the pending litigations in the UK and Germany. To briefly refresh, in March of 2014, Unwired Planet filed parallel patent infringement lawsuits in the UK and Germany. The UK lawsuit charged Samsung, Google and Huawei with infringement of 6 patents. In Germany, we likewise filed with the same 6 patents against Samsung and Huawei, but also added LG Electronics and HTC. Since then, we have resolved our dispute with Google on 5 out of the 6 patents, those which relate to cellular standard essential patents.

Q2 certainly entailed a busy litigation docket, with trials in both the UK and in Germany. In the UK, we had 2 patents in trial, and in Germany, we had 3 patents in trial. In January, we received rulings against Samsung, LG Electronics and Huawei, one which we viewed as a great result and one which was not. With these rulings, we have completed 3 of the 6 patent trials in the UK and 4 out of the 6 patent trials in Germany. As for results, we have thus far prevailed on 1 out of 3 patents in the UK and 3 out of 4 patents in Germany. We view this as a desirable outcome and are still of the mindset that European courts continue to serve as a model to the rest of the world on how to conduct complex patent trials.

I would like to add further color and detail to our current litigation record. Let’s start with the UK. The first ruling came down in November in which the UK High Court issued its judgment that Samsung and Huawei infringed an LTE standard essential patent held by Unwired Planet. The second judgment ruled against us, stating that patents EP (NASDAQ:UK) 2,119,287 and EP (UK) 2,485,514 held by Unwired Planet are invalid for obviousness and will be revoked in the United Kingdom. The third trial began today, February 8, 2016 and covers another cellular standard essential patent. There will be two additional technical trials in May and July 2016, followed by separate trials scheduled in October 2016 to cover competition and FRAND damage issues.

Now, turning to Germany, the first German trial took place on June 30, 2015 versus Huawei on 3 LTE patents. On July 14, the court held that 2 of our patents are infringed and 1 was not. In January, we received a clear victory with the judgment in our favor that Samsung, LG Electronics and Huawei each infringed multiple Unwired Planet cellular standard essential patents and that those patents cover the cellular standards found in cell phones and infrastructure equipment. We view the results in both the UK and Germany as a validation of the inherent value of our IP portfolio and believe the wins in two jurisdictions will drive the process forward and move us closer to attaining shareholder value.

With that, I will turn the call to Jim.

Jim Wheat

Thank you, Boris. Good afternoon, everyone. Let’s take a look at the financial results for the second quarter of fiscal year 2016. On a GAAP basis, net loss for the second quarter ended December 31, 2015 was $12.7 million, or $1.35 per share compared with a net loss of $11 million, or $1.18 per share in the second quarter of the preceding year. We recognized $1.3 million in net revenue during the second quarter of fiscal year 2016 which consists of amounts previously recorded as deferred revenue under the Lenovo licensing agreement net of the fee share under the Ericsson MSA. These amounts were consistent with the Lenovo licensing revenue recognized in the prior comparable period. Patent initiative expenses for the quarter totaled $10 million. The increase in patent licensing expenses during the second quarter compared with the same period of the 2015 fiscal year is primarily due to the occurrence of trials in the United Kingdom and Germany. We expect our quarterly patent licensing expenses to vary in accordance with our litigation activities.

General and administrative expenses for the quarter totaled $2.8 million. The increase in general and administrative expense during the second quarter of 2016 compared with the same period of the 2015 fiscal year is primarily attributable to increases of $0.3 million in stock-based compensation expense and $0.3 million of other employee expense in the current period associated with the changes on our Board of Directors and new executive management. We expect our quarterly general and administrative expenses to remain relatively consistent on a quarterly basis during fiscal 2016 excluding currently unknown significant transactions or other unique events.

From a balance sheet perspective, cash used in operating activities during the second quarter of fiscal 2016 was approximately $9.1 million and was used primarily in conducting ongoing patent licensing operations and other operating expenses. As a reminder, on December 10, 2015, the company’s stockholders approved an amendment to the company’s Certificate of Incorporation to effect a reverse split of the company’s common stock and authorize the company’s Board of Directors to determine the ratio in a range of up to 1 to 20. The Board of Directors determined to fix the ratio for the reverse stock split at 1 for 12, which went into effect on January 5 and trading began on the post reverse split-adjusted basis as of the opening of the market on January 6.

This concludes my remarks. It is now time to turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] We will take our first question from Mike Latimore with Northland Capital Markets.

Jim Fitzgerald

Hi, guys. This is Jim Fitzgerald standing in for Mike Latimore. My first question is do you guys see potential for regional deals or is your focus mostly on global deals only?

Boris Teksler

So we see – our focus has been on global deals. That being said any particular litigation is subject only to the jurisdiction in which it finds itself in. So it’s – while it’s possible that regional deals could be achieved, our real desire is to sell a license for our portfolio on a worldwide basis.

Jim Fitzgerald

Okay. And are there any major changes in strategy, maybe around partnerships, acquisitions or patent sales?

Boris Teksler

No, there aren’t. We continue to stay the course of our strategy which is to conduct our cases, seek licenses that we would offer on FRAND basis for the patents that are termed standard essential patents and continue to drive value for our shareholders. The strategic committee continues to work on a number of strategic areas of which I highlighted several of those in the call this – the call earlier today.

Jim Fitzgerald

Okay, great. And then you guys have previously expected OpEx to be between $31 million and $35 million for the year. Looking at our model right now, it looks like you guys are at about a little over $23 million through two quarters, so what needs to happen to get down to that $31 million to $35 million level and do you still see that as a realistic frame of operations?

Jim Wheat

Yes, this is Jim. We believe the budget if you will, that I talked about on the prior call to be generally correct. In this second quarter, we had a contingency fee arrangement in one of our cases and we accrued for that which caused the bump in the second quarter relative to the prior quarter. And I would say this was – this is something that we wouldn’t expect to see every quarter. So I would say going forward, we expect expenses to be in the range that we have talked about on the last call, but there could be changes based upon fee shifting arrangements in one or more geographies.

Jim Fitzgerald

Okay, great. Thank you.

Operator

We will take our next question from Mark Argento from Lake Street Capital Markets.

Mark Argento

Hi, good afternoon guys.

Boris Teksler

Hi Mark.

Mark Argento

I know you guys have talked a little bit about the opportunity to modify some of your fee agreements with some of your law firm partners, could you talk a little bit about how – at a high level, how those are structured now as you are kind of end the trial in Europe in particular with a couple or a handful of the patents, maybe talk how you guys are compensating, what the incentive structure is for those law firms you have working for you?

Boris Teksler

Sure. Maybe an easy way to describe this is we have been working – this is going to be a continuous work in progress, if you will. But we have already modified the compensation of our lawyer partners in Europe. And they are being compensated more directly and less in a manner that gives them big bumps, if you will with victories. And that’s exactly what Jim just alluded to as he answered last question. And so we don’t expect anymore of those hitting our P&L in outer quarters in Europe.

Mark Argento

So in particular, so it’s going to be more you guys are – originally, the model was, say if you hit a certain milestone, intra – even before that you got to a victory, that there would be a payout, is that what you are referring to?

Boris Teksler

Yes. Based on our arrangements, they would had some ability to get payouts based on first instance decisions.

Mark Argento

Got it. So in the UK, obviously you had one win, I guess I don’t know exactly how you count it, one win, two losses or one win, one loss, you have what, three more cases to go. The loss in the last patent trial in particular, obviously that doesn’t really impact other countries, right because the patent systems are separate, it’s not a unified patent network or system in Europe at this point, is that right?

Boris Teksler

Yes, I believe you said that correctly, which – I will just repeat it, which is each of these jurisdictions have their own findings on the patents. And quite often, jurisdictions find different patents as the ones that are most important, if you will, which just goes to show that different people may look at this – different smart people may look at it differently as to which ones are the most important assets that we have. And that’s exactly why we filed six patents in each of these jurisdictions. And the net result of it is we have wins in both jurisdictions which is exactly what we wanted.

Mark Argento

I want to understand a little bit better in Germany, in particular, the opportunity for some type of injunction in terms of the limiting product being sold, is that still on the table or how does that – how would that come into play?

Boris Teksler

Sure. So first, let me say that we have not sought any injunctions to-date. That all we have sought after was conducting licensing on fair, reasonable and non-discriminatory basis. And that has been our real pursuit. We have not sought to enjoin anybody from shipping their products. Is it on the table, it’s certainly on the table for what I would describe as recalcitrant licensee. And certainly, the European Court of Justice, which is the highest court in Europe, offers guidance on that matter with a landmark decision that they came out with in ZTE and Huawei, the Huawei versus ZTE case. And to that extent, I think it’s correct that if you have recalcitrant licensees, you can seek an injunctive relief, but we have not yet chosen to do that.

Mark Argento

Alright. So you are wanting to play nice and you will go down that path if you have to. But at this point, it’s something that you guys haven’t sought, I am paraphrasing…?

Boris Teksler

That’s correct. We have not sought it and we continue to walk the FRAND path as we believe it should be walked.

Mark Argento

Sure, alright. And last but not least, so the NOL strategy, what’s the process that you guys – when you are looking at this asset, I guess maybe clue us in a little bit on the process at the Board level of analyzing the situation and potentially coming up with various ways in which do you unlock value there?

Boris Teksler

So I believe I would like to do that at a different date, when we have some intangible to talk about. And then I think in the construct of something that’s a little more tangible, it will be easier to communicate without it being hypothetical, if you will.

Mark Argento

That’s something that – is that a Q1 event or is that – is the analysis and strategy putting that together, is that something that’s going to take longer in your opinion?

Boris Teksler

It’s a work in progress, but I assume you are talking about calendar Q1, because we are in our Q3 for what it’s worth.

Mark Argento

Yes. Sorry, calendar. Yes.

Boris Teksler

Okay. I think it’s fair to say that it will be – it’s something that we are continuing to work on and when there is something to talk about, we certainly will. When that actually comes to fruition, it’s hard to predict as I sit here at the moment.

Mark Argento

Got it, alright. Thanks guys.

Operator

And at this time, we have no further questions. I would now like to turn the call back over to Mr. Teksler for any additional or closing remarks.

Boris Teksler

Thank you all for your time today. As always, we appreciate your time and support. We look forward to providing you more information in the future.

Operator

This does conclude today’s conference. We thank you for your participation.

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