Great Elm Group, Inc. 7.25% Notes due 2027 (GEGGL) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Unwired Planet's Fourth Quarter 2012 Conference Call. [Operator Instructions]. This conference is being recorded today, Wednesday, August 15 of 2012. And I would now like to turn the conference over to Mike Bishop with Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you for joining us today to discuss the results of Unwired Planet's fourth quarter of fiscal year 2012. Joining me today from Redwood City are Mike Mulica, Chief Executive Officer, and Anne Brennan, Chief Financial Officer. Before we discuss the results of the quarter, I want to remind everybody that we are operating under the rules of Regulation FD. The third quarter financial results’ press release was distributed at the close of market today, which includes the non-GAAP to GAAP reconciliation. And if you’ve not yet seen a copy, you can find one at our website at unwiredplanet.com. For your convenience, this call is being recorded and will be available for playback from our website for three months. Further, any remarks that may be made on this call or in our earnings press release about future expectations, plans or prospects for the company may constitute forward-looking statements for the purpose of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The actual results may differ materially from those indicated by the forward-looking statements as a result of various important factors. These factors include the specific risk factors discussed in the company’s press release that was distributed today and in the company’s filings with the SEC, including but not limited to the fiscal 2011 year end results on Form 10-K and any other reports subsequently filed with the SEC. We intend to make forward-looking statements based on management’s outlook as of today. We do not intend to update these statements until the release of Unwired Planet's next quarterly report and disclaim any obligation to do so prior to that time. We reserve the right to update the outlook for any reason during the quarter. I would like to note that during the discussion of the financial results, unless otherwise indicated, earnings-related items are reported on a non-GAAP basis, which excludes stock-based compensation, certain realized losses and impairments on investment, restructuring expense, discontinued operations, and amounts 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. And with that, I would like to turn the call to Mike. Please go ahead.

Thanks, Mike, and good afternoon, everyone. Thanks for joining us today. We begin our new fiscal year as a transformed business. During the past quarter we completed the divestiture of our product businesses, changed the company's name to reflect our intellectual property focus, and made significant progress in establishing our multipronged IP strategy. While I can say that we are working with urgency and there is a significant amount of momentum building on many fronts, I need to caveat today's call by acknowledging that we are consciously limiting our remarks to a discussion of events that have occurred and will not forecast potential outcomes of initiatives and progress. As you know, this is a common practice for many IP-focused companies. As many of you are aware, we are now just two months away from a major hearing in our pending ITC investigation at the International Trade Commission against RIM and Apple, and we won't disclose strategies that have not yet reached fruition and could potential impair this or any other current initiatives underway. During this call we plan on focusing on the following: an update on the divestiture of our product businesses, progress on our IP strategy and the transformation of our business, and lastly, Anne will detail the results of the past quarter which will focus on the ongoing business as we move forward with the new streamlined company we have created to pursue the IP opportunity. As you are aware, on April 30, 2012, we completed the sale of our mediation and messaging product businesses to Marlin Equity Partners. We are well on our way to unlocking the value of a very robust patent portfolio and are executing a multifaceted strategy that is anchored by two key pillars, licensing, and if required, enforcement to protect our patent portfolio of approximately 200 issued US and foreign patents and approximately 75 patent applications. Leading this charge are Tim Robbins and Daniel Mendez, two proven experts in IP licensing supported by litigation, and a world-class team of advisors. The DNA of our business is vastly different from a year ago, and although our strong mobile communication heritage remains, we are moving quickly to make the necessary changes to reflect our new business identity. We are also moving quickly to implement new finance and IT systems to support a successful and very efficiently-run IP business. As of September 30, we will have completed our transaction services agreement we have signed with Marlin Equity. At that time, we expect to be a company with less than 20 full-time employees. Our strong employee experience base is augmented by an equally impressive team of financial and legal experts, with successful track records in patent licensing as well as ITC and district court litigation. We have also re-engaged with many of our pioneering inventors who authored our patents and are leveraging their insights and knowledge as we pursue the opportunities for the portfolio. Next I'd like to provide an update on our pending ITC investigation. As you will recall, in August 2011, we filed a complaint with the International Trade Commission in Washington, D.C. against Apple and RIM in order to protect our intellectual property related to how mobile devices connect to the internet, among other things. We simultaneously filed a similar complaint in the federal district court in Delaware. We believe that these large companies should pay Unwired Planet to use the technologies we have invented, particularly in light of the substantial revenues these companies have earned from devices and services that we believe use our patented technology. At the end of 2012, we participated in a Markman hearing, which is also known as a claim construction hearing. We're now waiting for the judge to rule on the scope and meaning of the disputed patent claim language regarding the patents in suit. We could receive the judge's ruling on the Markman hearing or any of these pending motions, including new ones we expect to be filed in the coming weeks by all parties in preparation for the hearing, at any point up to, during or even after the trial, which is currently scheduled to begin on October 15. A Markman decision is often a significant factor in the progress and outcome of a patent infringement case. We are committed to providing updates as and when we can, but the ITC can be unpredictable in both outcomes and schedules. Trial dates often change and it is impractical for us to provide public notices of these changes. Although the ITC case is the most public of our initiatives at this time, it is a fraction of our overall strategy and inclusive of only a small portion of valuable patents contained in our portfolio. I would also like to note that the remedies available at the ITC do not include damages for past infringement which is something we must pursue in equivalent cases -- in our equivalent case in the federal district court. We do not want to overly emphasize the positive or negative outcome of the ITC as we consider this to be just one facet of our broad opportunity. Given the early timing of patents and their foundational nature, coupled with higher visibility of patents in general, there are many parties interested in our patents and many possible options for Unwired Planet. There are an increasing number of options for optimizing shareholder value, including potential partnerships, patent asset divestitures, patent acquisitions, an outright sale, or a combination of any of these alternatives. We continue to seek the most sensible strategy that maximizes shareholder value. But rest assured, given the unique nature of our intellectual property, we find ourselves in a very positive, dynamic environment. As part of our overall strategy, we continue to pursue licensing opportunities and there are many available to us. Given the nature of this type of negotiation, however, it is not in our best interest or the interest of shareholders to disclose the details of our conversations with potential licensees for many reasons, not the least of which is to avoid creating a negotiating disadvantage. We are committed to providing you the details on revenue events as they happen. Unfortunately, for the sake of protecting shareholder value, we can't provide guidance or an outlook. We must bear in mind that intellectual property licenses are connected and impact one another. Every license we brand has a strategic cost that we must weigh. When we do grant a license, we must meticulously craft the license so as to minimize these strategic costs. Careful negotiations regarding license scope and appropriate economics are complex and thus create a longer sales cycle. In some cases, we may delay or refuse to grant the license altogether even though it would offer short-term revenue, so as to maintain the strategic value of the patents while we pursue the optimal outcome for shareholders. Now I would like to turn the call over to Anne, who will detail the past quarter's financials, our expected expense structure and staffing levels for Unwired Planet, along with the pro forma balance sheet for Unwired Planet, reflecting the close of the business unit sale. Anne?

Thank you, Mike, and good afternoon, everyone. In April we announced the sale of our product business to Marlin Equity. As a result of the sale, the operations of our product business are reported as discontinued operations and OP is presented in our fourth quarter fiscal 2012 earnings release. For the fourth quarter of fiscal 2012, the April results and the residual expenses related to the transition of the product business generated a net loss of $9.2 million. Further detail of the financial results of the product business for fiscal 2012 will be provided in the discontinued operations [segment] of our 10-K to be filed in September. During the fourth fiscal quarter we generated $26.7 million in cash. We received $49.6 million from the sale of the mediation and messaging product businesses during the quarter. Our uses of cash included outflows related to operations both continuing and discontinued of $12.3 million. In addition, we spent $6.6 million on deal-related one-offs and $4 million in ongoing lease payments related to a 2005 restructuring of facility which concludes in approximately nine months. Over time, we expect the use of cash for the intellectual property business to track with our income from continuing operations, offset by balance sheet fluctuations. Additionally, in the first quarter of fiscal 2013, we expect to see the cash impact of previously accrued one-off expenses of approximately $5 million, including those related to the transaction. As we go forward, we expect the main operating expenses of the IP business will be related to litigation costs, operating leases and salaries. As with fiscal quarter four, over the next quarter we will continue incurring expenses related to the transition services agreement with Openwave Mobility. While we will be reimbursed by Openwave Mobility, it will be a flat fee, and we anticipate it will not cover all of our expenses incurred under the transition services agreement. These residual expenses will be reflected within discontinued operations in this and future filings. We experienced a $6.3 million non-GAAP loss from ongoing operations during the quarter. Please see the press release financial table for a reconciliation of GAAP net income to non-GAAP net loss. I will walk you through the individual line items of the income statement to help explain our ongoing business. Revenues in the fourth quarter were $4,000 and related solely to royalties from our first patent deal signed in September 2010. Non-GAAP patent initiative expenses of $4.2 million include the cost of employees directly involved in support of seeking new patent customers, primarily through both licensing and enforcement, as well as the external legal fees incurred which are the largest and most meaningful components. Patent initiative expenses of $4.2 million exclude $0.4 million of strategic costs. Non-GAAP general and administrative fees of $1.6 million include employee costs of executive, finance, HR and IT functions, as well as external audit and other public company costs, and exclude $0.6 million of stock-based compensation and $0.3 million of strategic costs. Our headcount at the end of fiscal quarter four for those employees who are solely engaged in supporting the intellectual property business was 14. We will have additional headcount employed throughout the TSA period who will be providing services to the buyer of the mediation and messaging product lines. Restructuring expense of $0.2 million relates to attrition on the restructured facilities obligation. The $45.1 million gain on sale represents the sale of the mediation and messaging product businesses in April 2012. This includes an estimated amount for the net working capital adjustment, offset by associated deal costs and the $3.8 million tax impact which is offset as a tax benefit in continuing operations. Discontinued operations of $9.2 million represent the net result of the product business for which one full month of operations was included in fiscal quarter four. It also includes $0.7 million in costs to support the pursuit of strategic alternatives which include external consultants and advisors, in addition to $0.7 million of retention bonuses as well as costs related to the business for which we are not reimbursed by the buyer. Looking forward, we're scheduled to complete the transition services agreement in September, and as mentioned earlier, we will be carrying a small number of employees to fulfill our contractual obligations. After September, our expense structure will be solely focused on the intellectual property business. As we continue to progress our IP strategy, we expect fiscal quarter one total non-GAAP operating expense to be approximately $7 million. We will provide updates on revenue as we conclude license agreements and reach settlements on current and/or future litigation. Operator, we'd now like to open up the call for questions.

[Operator Instructions] And our first question comes from the line of Charlie Anderson with Dougherty & Company.

I jumped in a little bit late, but I was watching the transcript, and it looks like you talked about the current ITC case being I think you said a fraction of your strategy. I wonder if maybe you could just elaborate on sort of, you know, beyond the ITC case, what else you're able to do. And as sort of a related question is, if the ALJ sort of decides against you in terms of your claims construction, sort of where do you go from there? What's sort of the next step after that?

Hi, Charlie. It's Mike here. So, from -- a bunch of this was covered in our prepared remarks, but from, you know, the standpoint of the number of patents in our portfolio and the number of patents that are involved in the ITC case, we have a fraction of our IP content involved in that particular initiative. And so from that standpoint, we don't think it represents a lot of the strategic underlying value that we have in the portfolio, although it is an important initiative that we have underway, as you know. In terms of other alternatives that are available to the company, we're in a very good space in terms of having an important foundational mobile patent portfolio, and so there's a lot of different alternatives at this point. And again I mentioned a list of them in the prepared remarks, but just to reiterate, we're considering a lot of different options, and those options span partnerships, divestitures, in part or in whole, various litigation initiatives and some combination of the above. I think the vantage point we have on the opportunity gives us a chance to employ a bit of game theory into the future, and there's a lot of positive choices that we can make amongst that group of choices. So the ICT case being one of the things that's visible to you, it's hard for us to make the other things visible to shareholders without impacting value, and so we're cautious about talking about too much detail. In terms of the logistics of the Markman and what we may or may not do, it's probably not in my -- in any of our interest for me to comment on what our strategy is there.

Maybe just a follow-up, you've spent a good amount of money on the current case. So if it's a fraction of the strategy, that would imply potentially a fraction of the expense to get there. I wonder if I'm doing my sort of analysis wrong there, if that's truly the case.

You know, I think that -- I think it's widely known that the ITC case -- the ITC forum is a very expensive forum, and so we're, you know, obviously down the path, coming to the end. We have spent a good deal of money on it. But we feel like it was money well spent. I don’t think that you can necessarily correlate on a percentage basis what we will do across the board, because different initiatives have different, you know, have a different cost basis.

Yes. And Charlie, this is Anne. I think the only thing I might add is that you have to remember that the ITC timeline is relatively condensed. If we were to proceed with cases out with the ITC, then we'll be looking at a much longer timeline and therefore, obviously, the costs will be diluted. So we're looking at costs that would be potential fractions of what we've seen in the last four quarters for ITC.

Do you still feel comfortable that the trial is going to start on October 15?

That's the date we have.

And our next question comes from the line of Jonathan Skeels with Davenport.

First off, maybe just a kind of a broad question on the patent portfolio. I'm assuming by now you guys have had a chance to kind of go through and segment the portfolio into various technology areas, and I'm just wondering if you can share maybe how that has played out, how many segments are there, how many possible licensing programs are there. Can you share any detail as to how these 200 patents break down?

Yes, I think we covered a bunch of this on the last conference call. So we have gone through a lot of analysis on the portfolio. And one of the things that we feel is that there are a large quantity of families represented in the 200 patents that we have at our disposal, uniquely large. And so that's one good metric for you to think about. We also believe that there's an extremely high percentage of foundational patents that exist within the portfolio relative to the total size of the portfolio. From a target standpoint, the targets span everything from over-the-top services to service providers to handset manufacturers and equipment providers. And so it's really a -- we think about it in a three-dimensional way in terms of how to maximize the value. And as I talked about in my prepared remarks, one of the things that we take into account is a license to one party has an interrelationship to other licenses. And so it's something that we need to consider deeply and make sure that we're acting consciously as we take action here in the coming months.

Okay. And then maybe just one on the Apple, RIM trial, I know you don't want to say much. But I did notice that, in that case, I believe Apple's iTunes and App Store have been included in the case. Is that significant? Can you comment at all on that? It looks like it was something you were pushing for in the case and it is successfully included at this point.

Yes, so that's a fact, and the foundational patents that we have in place are sort of relevant to all the key aspects of mobility as they relate to the way services are provided over a mobile network.

[Operator Instructions] And our next question comes from the line Scott Sutherland with Wedbush Securities.

Maybe quickly, can we assume, it sounds like from your comments, that you're moving down this multipronged strategy, that you've already been reaching out and talking to various participants. Is that fair to say?

Yes, that's absolutely fair to say.

Okay. And Anne, when we think about your cost structure, what, you know, you're going to spend $7 million OpEx, how much is the cash burn going to be this quarter? And of that $7 million, kind of what's an ongoing to support the 20 people and the real estate, and how much of that's going to be reduced once you exit the lease?

Yes. So the cash, specifically this quarter, it's the final quarter before the ITC hearing, so, fairly high in terms of legal costs on the IP side. In addition to that, we have G&A supporting the business. So in terms of expenses, I mean somewhere in the $6 million to $7 million range. In addition to that, so that's about the P&L, in terms of expense, how does that translate to cash? We obviously, you know, we had a transition quarter last quarter being Q4, we have a further one this quarter in Q1 to right-size our sales for the IP business, so the cash from expenses, you know, expenses pretty much translate to cash because the bulk of your fees are people or legal fees. And in addition to that, we have the $3 million to $4 million in terms of the lease payment which is running down. It's about nearing the end of that lease, and so we have another period of time, for approximately nine months on that one. And the other incremental cost for this quarter is around the deal costs which were accrued last quarter and won't yet be paid until quarter one. So, kind of in summary, it looks like $6 million from operations, we have lease payments of $3 million to $4 million, and then we've got another sort of bucket of costs, or cash rather, of about $4 million of one-offs, which obviously won't be recurring. On a kind of medium- and longer-term basis, when we see ourselves through the lease, dependent upon where we wound in terms of incremental legal spend, it would be, you know, right now we're looking at again at a $6 million number. And obviously, those cash numbers which I've gone through are in the context of not assuming any top line. So, to the extent that there are opportunities for licenses along the way, then that significantly improves cash position.

Okay. And Mike, can you give us an update, anything on the other payment from Microsoft, where we might stand on that?

So what I can say is what we've said in the past, Scott, it's -- the payment is unilaterally within our control to receive based on an event that's within our control. And that event has not occurred yet.

And lastly, I'm going to try to squeeze this in, and I know you're not going to talk too much forward about any guidance on winning anything or revenue from [the pens], but if we look throughout this fiscal year outside the ITC case, do you think there are going to be, or investors can start getting some data points that's going to kind of reveal the strategy a bit more? And I'm getting it would be this whole fiscal year to see something comes through.

Yes. I mean there's -- the level of activity here is extremely and the environment is a very positive environment. And so we're in the midst of trying to make sure that we make the best choices that we can to accomplish the best outcome that we can for shareholders. And so I'd say that everything leads me to believe that you'll see a lot of activity from us just based on the amount of opportunity that we see in front of us.

And at this time I am showing no further questions in my queue. I would like to turn the conference back over to Mr. Mulica for closing comments.

Great. Thanks, everybody, for dialing in today. We appreciate your continued support, and look forward to speaking with you next quarter. Have a great rest of your summer.

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference, you may do so by dialing 303-590-3030 or 1-800-406-7325, and entering the access code of 4555560#. We thank you for your participation, and at this time you may now disconnect.