Straight Path Communications, Inc. (NYSEMKT:STRP) Q3 2016 Earnings Conference Call June 9, 2016 4:30 PM ET
Davidi Jonas - President and Chief Executive Officer
Jonathan Rand - Chief Financial Officer and Treasurer
Good afternoon and welcome to Straight Path Communications’ Third Quarter Fiscal 2016 Earnings Call and Webcast. All participants are listen-only mode. [Operator Instructions] Please note this event is being recorded.
As a reminder, some of the matters Straight Path management will discuss on this call are forward-looking statements. You should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and that such statements are not a guarantee of future performance.
In addition to the factors specifically noted in the forward-looking statements, such risks and uncertainties include, but are not limited to, general economic conditions and those factors discussed under the Risk Factor section of our Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q and other SEC filings.
These forward-looking statements are made of this date and the company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in forward-looking statements.
Representing Straight Path today are Davidi Jonas, Chief Executive Officer; and Jonathan Rand, Chief Financial Officer. Let me quickly outline the agenda for today's call. Davidi will discuss Straight Path’s achievements overall strategy. Then, Jonathan will outline the company's financials and outlook. There will not be an opportunity to ask questions on today's call.
And now, allow me to turn the call over to Straight Path’s CEO, Davidi Jonas. Davidi, the floor is yours.
Thank you and thank you all for joining us on today's call. I would like to discuss some recent developments in our subsidiaries as well as provide some outlook regarding where we are heading. Allow me to begin with Straight Path’s IP Group. On the heels of the Federal Circuit's decision in our favor on the [indiscernible] appeal last November, the Patent Trial and Appeals Board has now ruled largely in our favour in all of the pending interparty review proceedings that have been filed against our patents.
In addition to the [indiscernible] case itself in which the PTAB ruled in our favor on remand from the Federal Circuit's decision. The PTAB also ruled in our favor in pending or requested IPRS by Samsung, LG and Cisco. While a few ancillary claims were held invalid, the core claims of our patent survive as the PTAB rightly reverse course following the Federal Circuit's proper claim construction. Although, Samsung and LG have filed notices to appeal to the Federal Circuit, we believe that our position has been greatly strengthened.
Following these positive rulings, we have resumed our enforcement efforts in the federal district courts. We have updated the courts and asked them to lift the stays in our actions against LG and Samsung. We refiled our case against Verizon and intend to refile our cases against Apple, Avaya and Cisco in the coming week.
We recognized that our successful defense against the challenges, the defensibility of our claims at the PTAB, does not guarantee success in our enforcement effort. As we continue to vigorously litigate these cases, we remain receptive to opportunities to enter into settlement and license agreement that would maximize benefits to our shareholders while reducing risk and uncertainty.
Moving onto Straight Path Spectrum. Since the FCC issued its notice of proposed rulemaking last October, participants in the proceeding including Straight Path have developed a robust record. The industry’s sustained attention and the efficiency and thoroughness of the SEC have exceeded our expectation. I encourage everyone to go on to the SEC's website and review the record of the proceedings for themselves.
While we conservatively projected that a report and order might issue 16 to 18 months following the issuance with the NPRM, the SEC has indicated that it expects to issue a report and order this summer perhaps as early as mid-July less than nine months after issuing the NPRM. The commission said it intended to keep America and the lead for 5G and it appears that they are delivering on that promise.
We commend the Chairman, commissioners and staff for their tireless work to make millimeter wave 5G possible. The approach of the mobile communications industry has also been impressive. All four major mobile network operators have announced plans to test 5G in 2016 and 2017 with some already saying that they intend to utilize millimeter wave spectrum for commercial deployment even prior to conclusive mobile standards being set for 5G.
We are seeing a lot of focus on certain underlying 5G technology that will likely be used for fixed offerings what we refer to as fixed 5G or 5G to the home. We discussed these technologies on a past conference call and our Chief Technology Officer, Jerry Pi, co-authored a paper on the topic in July 2015 in the IEEE Communications Magazine. We are pleased to see the industry most notably Verizon and AT&T leaning toward this approach and it confirms our decision to invest in technology designed to help bring these offerings to market in 39 gigahertz as quickly as possible.
Turning back to the SEC rulemaking. When we were preparing to comment on the NPRM, we identified our goal in order to ensure that our advocacy would be focused. We identified seven primary goals. Flexible use rights for incumbents, repacking the 39 gigahertz bands to allow for large contiguous block, channel sizes of 200 MHz or more, geographic areas meaningfully larger than counties, we pushed for economic areas, but are open to a middle ground, technical rules that would allow for flexible service offerings, the opportunity to demonstrate substantial service prior to the current deadline or an alternative approach that would allow licensees to demonstrate substantial service at a later date based on reissued licenses and perhaps new performance metrics and ensuring that terrestrial services continue to have primary access to the band and that any satellite access whether secondary or primary not impede the development of terrestrial millimeter wave services.
We hope that many, if not all of our goals, will be achieved. We feel the proposals will be made to the SEC are in the best interest of the public and further the commission’s stated goal of achieving 5G leadership. Of course, we do not know which of the four bands specified in the NPRM will be included in the report and order that the FCC is expected to release this summer.
I want to spend a short time on the other bands and the proceeding namely 28, 37 and 60 gigahertz. It seems likely that 60 gigahertz will be unlicensed. 28 gigahertz has been hotly contested between terrestrial and satellite and that debate may impact the rules such as geographic area size of licences in the 28 gigahertz band. 37 gigahertz is up in the air if you'll pardon upon between license and something of a hybrid or shared access licensing model. Again, I encourage everyone to review the comments on the FCC’s Electronic Comment Filing website.
Turning to our own spectrum related activity. This past quarter, we successfully renewed our New York City 28 gigahertz license for an additional 10-year period. Under the current rules none of our other licenses are up for renewal until 2018 or later. We made a strategic decision to invest in increased market adoption of 39 gigahertz in advance of the commercial availability of the 39 gigahertz point-to-multipoint radios from Cambridge Broadband Networks, which we expect in late 2016 or early 2017.
We invested in currently available technology at 39 gigahertz and offered radios and spectrum to new customers throughout the country. This was not intended as a direct revenue generation opportunity, but rather as an investment in our future and the response has been promising.
We have attracted dozens of new users in over 100 markets covering over 90% of our 39 gigahertz holdings by megahertz filed [ph]. We saw the deployment as an opportunity to engage a broad customer base in anticipation of rolling out our 39 gigahertz point-to-multipoint offering and we hope that many of these operators will become revenue-generating customers when the 39 gigahertz point-to-multipoint is rolled out.
Over the past few months, Straight Path has filed hundreds of notifications with the SEC covering its leases of spectrum with these operators to utilize our spectrum. With regard to the independent investigation into allegations made against the company, which is being led by Morgan Lewis and assisted by Kroll, we initially expected that it would be completed by mid-June, however, the investigators required additional time to conclude their inquiry and now expect to report their findings to us within the next two months.
As we previously disclosed, the results of a preliminary investigation indicated that a significant amount of equipment installed in connection with the substantial service showing was no longer present at the original locations. We continue to believe that the required showing of substantial service was met.
We also previously disclosed that we were arranging of replacement equipment to be procured and deployed. However, rather than wait for the results of the investigations, we decided that it would be more prudent to deploy new equipment across 100% of our 39 gigahertz holdings. Therefore in addition to engaging a broad customer base for our 39 gigahertz point-to-multipoint rollout, we also aim to increase the market adoption in each of our 39 gigahertz license areas.
Looking at the changes underway in the wireless industry now is a truly exciting time to be involved in the millimeter wave. It is clear that next-generation technologies in the millimeter wave are likely to have a profound impact in the fixed and mobile market. We continue to proactively position Straight Path to be at the forefront of this developing opportunity. We have been a key contributing member of 3G PPE where the standards for 5G are being determined.
We have also been working on next-generation technology for a 39 gigahertz transceiver at our Gigabit Mobility Lab in Texas. We hope to test the technology perhaps with other parties and partners in 2016. We are also looking to leverage our capabilities for fixed service offerings with potential partners. We will keep you updated in the coming quarters.
We hope the recent success of our IP Group will lead to additional revenue from that side of our company. We are excited about the new wireless technology we are bringing to market and hope it will add value and drive revenue as well. We will continue to advocate in the standards community as well as at the SEC and hope our efforts will be a vital element for next generation wireless services.
I'll now hand the call over to our CFO, Jonathan Rand, for financial results and an outlook. Jonathan?
Thank you, Davidi. It’s certainly an exciting time to be part of the wireless communications industry particularly with Straight Path playing a significant role in both the regulatory process and technical development of next generation wireless technology. Additionally, with the good news from the Federal Circuit confirmed by the PTAB's rejection of challenges to the key claims of our patents, we are well-positioned for the future both for potential revenue generation as well as value creation.
Before I describe this quarter’s financial results and outlook, I’d like to step back and outline the history of the Straight Path IP Group. The Straight Path IP Group initiated its patent enforcement program on the day we became an independent public company in the first quarter of our fiscal 2014.
Through Q1 of our fiscal 2015, we secured settlement and licensing agreements with 12 companies including Google, Sony, Panasonic, Sharp, Netflix, and others, which generated $18.3 million in gross payments. After direct costs, primarily payments to law firms and litigation expenses, these efforts netted approximately $9 million to the IP Group of which we own 84.5%.
After a hiatus on the efforts due to an adverse ruling that is now been reversed, we are resuming our enforcement program and proceeding against companies such as LG, Samsung, Horizon, Apple, Avaya and Cisco. Of course, resumption does not mean success and we will have to see how these efforts develop.
Now I'm pleased to outline our financial results for the third quarter of our fiscal year 2016 the quarter ended April 30, 2016. We closed the quarter with $13.2 million of cash and cash equivalents versus $15.4 million at the end of the previous quarter and $19 million one year ago. We recognized revenue of $219,000 for the quarter consisting of $97,000 from our IP Group and $122,000 from our Spectrum subsidiary.
The Spectrum revenue is an increase of approximately 10% over the previous quarter. This is due primarily to the major U.S. operator during the previous quarter leased a small portion of our LMDS spectrum for utilization in New York City as mentioned on previous calls. This quarter, we recognized a full three months worth of revenue from this spectrum lease.
The IP Group's revenue records the final payment received this quarter from a settlement and license agreement reached prior to our spinoff from IDT. This quarter's revenue is nearly doubled last quarter's revenue of $112,000 in balance from year ago revenue of $2.9 million.
Total cost and expenses for the quarter were $2.1 million consisting of direct cost of revenue, research and development expense, and our SG&A. This compares to $2.7 million in Q2 and $2.7 million one year ago.
Last quarter, we expanded our cost and expenses category to include research and development expense. This expense has grown in Q3 which indicates a sign of good progress both in Cambridge’s development of its 39 gigahertz point-to-point wireless platform and specifically in regards to our Gigabit Mobility Lab because Cambridge achieved a second out of three development milestones towards its commercial prototype we’ve spent an additional $400,000 against the $1 million prepaid under our development arrangement with Cambridge.
This quarter's R&D expenses also included $105,000 of expenses for our Gigabit Mobility Lab. The lab has achieved significant internal milestones and it now makes sense to provide better visibility by identifying the Lab as a third segment, which I'll describe further in a few moments.
Our SG&A spend totalled $1.5 million for the third quarter and includes non-cash compensation of approximately $600,000. This is down from last quarter's SG&A spending of $2.3 million primarily due to a reduction of expenses for outside advisors and a decrease of $400,000 in non-cash compensation.
With $219,000 of revenue and $2.1 million in cost and expenses, we reported an operating loss of $1.9 million for Q3. This compares to a $2.6 million operating loss last quarter and a $200,000 operating profit in year ago quarter.
Now I'd like to provide some insight into the impact of these results including expectations we have for the upcoming quarters and to describe some changes we’ve made in our segment reporting. A guidance principle for Straight Path is to maintain a high level of fiscal discipline.
Our SG&A budget for fiscal 2016 excluding non-cash compensation is $6 million, which consist of approximately $1 million per quarter for our general operations and $2 million for two strategic projects, $1 million to launch and operate our gigabit mobility Lab in Plano Texas and $1 million to fund the one-time payment to Cambridge to develop its point-to-multipoint platform for 39 gigahertz spectrum.
The Gigabit Mobility Lab will not spend its full $1 million budget allocation in fiscal year 2016 even with the increased cost of advisors related to the shareholder litigation and the independent investigations we expect to generally maintain its overall budget. The Gigabit Mobility Lab has gained enough traction in regards to prototype development milestones and in early discussions with potential strategic partners that we determined it’s time to graduate the lab in our financial reporting to be shown as an independent business segment. Hence you will note in our financials in today's 10-Q, we have included a third business segment Straight Path Ventures in addition to our Spectrum and IP segments.
Another notable change in our financial statements is our spending in Q3 of approximately $1.3 million to purchase hardware as our investment to increase market adoption of 39 gigahertz in advance of the availability of Cambridge's system. This shows as property and equipment net of depreciation in our balance sheet. Due to the success of this program, we increased our previously announced hardware order to Cambridge for the 39 gigahertz point-to-multipoint radios by approximately $1.3 million much of which will be occurring in fiscal 2017 and will be accounted for in next year's budget.
Bottom-line, regarding our cash balance versus operational expenses and possible opportunistic spending, we feel that our currently available resources placed us in a comfortable position for at least the next 12 months. We described how our IP Group is resuming its enforcement program. Although, we hope that these efforts will be successful, there's a great deal of uncertainty regarding the outcome and timing of these efforts.
Regarding the prospects of our spectrum leasing business, we continue to see strong interest from U.S.-based operators interested in learning more about point-to-multipoint solutions using 39 gigahertz spectrum. We have begun a soft marketing effort with Cambridge primarily by supporting their efforts at tradeshows for wireless operators. There's a long sales cycle for most operators particularly large operators to evaluate the equipment and solution as part of their network growth plans, so we do anticipate slow growth for these efforts to become a significant revenue source.
In particular, until Cambridge launches its commercial rate 39 gigahertz platform, which we currently expect to be in late 2016 or early 2017, we are limited to sales where we have 28 gigahertz spectrum available to work with Cambridge's existing 28 gigahertz point-to-multipoint platform such as in New York City and San Francisco. We therefore maintain that this business will not make a significant revenue contribution until at least calendar 2017.
To summarize the quarter, we believe Straight Path is in good physical shape to continue our strategic and operational efforts to generate value and revenue over the coming quarters. We've expanded our business segments to include our Gigabit Mobility Lab. We continue to spend carefully and strategically within our modified budget to achieve our goals and maximize shareholder value. We are excited about all three of our divisions and believe each one is poised for success in the coming quarters.
I hope this provides you with good insight into our fiscal status and forward-looking vision for Straight Path. There will not be a Q&A session on today's call. So we are ending the call at this time. Davidi and I thank you very much for joining Straight Path Communications third quarter fiscal 2016 conference call.
This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.
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