Introduction
With a huge number of cellular wireless and mobile internet patents that are significantly undervalued compared to precedent transactions and other publicly traded patent assertion companies, UPIP represents a compelling, high risk/high reward investment opportunity. Given the size and liquidity, this one may be better suited for PAs. UPIP is trading at some of its lowest levels since the market recovered in Spring of 2009 amidst slow licensing progress and a cautious Wall St. stance towards patent based business models, but I believe upcoming catalysts could lead to strong appreciation in 2014 and the company may eventually collect royalties that are a multiple of its current market cap.

 

Company Overview and History
Unwired Planet was very early to the mobile Internet. In the late 1990s UPIP’s predecessor developed the WAP protocol with Ericsson to serve the nascent mobile internet industry. The company changed its name to Phone.com in 1999, merged with Software.com in 2001 and later changed its name to OpenWave Systems. OpenWave mainly provided equipment to mobile phone network operators to enable the mobile Internet on early digital cellular phones. However, the company failed to correctly position itself for the smartphone revolution and its products gradually became obsolete. Importantly, during its period as an operating company UPIP filed and was granted 200 U.S. and foreign patents related to these efforts that the company believes are foundational in allowing mobile devices to connect to the Internet and access online services.

By 2011, revenue was falling much faster than expenses and none of the company’s R&D investments seemed to make it relevant to the current generation of the mobile Internet. Clearly, something had to change, and UPIP attracted the attention of successful activist investor Starboard Value which filed its original 13D in May of 2011. Since then, presumably at Starboard’s behest, the company has gradually transitioned from a product company to an intellectual property licensing company and the board was reconstituted to include Peter Feld from Starboard and other IP licensing experts. It is probably a good time to note that Starboard has been particularly successful in identifying undervalued IP at otherwise struggling tech companies, scoring big wins with AOL’s billion dollar patent sale and the MIPS break-up familiar to many on this board in 2012. During 2012 the company sold the last two of its product divisions, shed legacy costs and changed its name to Unwired Planet. The executive team is led by Daniel Mendez and Tim Robbins, who worked together at Good Technology/Visto, which was successful in extracting large licensing payments for its mobile email patents from Blackberry and Microsoft among others. UPIP currently operates out of Reno, Nevada with a small staff dedicated to its patent enforcement activities.

In January 2013 UPIP underwent a transformative transaction. The company announced that it had purchased 2,185 issued US and international patents and patent applications from Ericsson in return for a license to UPIP’s entire patent portfolio and a share in the proceeds from licensing the combined portfolio. Ericsson will also contribute 100 new patents per year through 2018. In return, UPIP agreed to pay Ericsson 20% of the first $100M in proceeds it collects, 50% of the revenue between $100M and $500M and 70% of the revenue in excess of $500M. Ericsson is an extremely credible patent monetization partner, claiming to be the single largest holder of standards essential LTE patents. I also think the amounts contemplated in this agreement hint at the order of magnitude of potential licensing payments the parties expect.

The stock initially reacted favorably to the deal, reaching its yearly high of over $2.30 per share by March, only to lose all of this lift over the rest of 2013 as the year passed without any signed licensing deals. According to the company’s conference calls there has been a shift in the willingness of participants in the wireless ecosystem to license patents, which is also being felt by IDCC and ACTG among others. In order to make sure potential licensees didn’t simply wait for it to run out of cash, UPIP raised money in a debt and equity financing led by Indaba Capital that allowed existing investors to participate in a rights offering. The company also signed a strategic fee agreement with its outside council McKool Smith to cap legal fees in exchange for a higher contingency payments of 10-30% of settlement amounts net of the payment to Ericsson. As of the last quarter UPIP has over $80M of cash with around $7M of direct cash costs per quarter, giving the company nearly three years of runway to pursue its licensing and litigation efforts.

 

Assets and Asset Value
I believe in UPIP you have a collection of assets that are significantly undervalued at the company’s current EV of around $90M:

• 200 issued patents and 60 pending patent applications around mobile internet infrastructure and location based services from the original Unwired Planet Portfolio
• 2,150 issued patents and patent applications relating to mobile devices and infrastructure from industry IP leader Ericsson along with 100 additional patents to be added each year for the next five years
• $1.68B of U.S. federal net operating loss carryforwards that will shield UPIP from paying any taxes on proceeds collected from IP licensing and litigation for a very long time

Valuing IP is always tricky and UPIP does not have any current licensing streams that enable us to extrapolate. UPIP did license its original patents (before the addition of the Ericsson portfolio and the current IP-focused management) to Microsoft for $15M in 2012, which would imply much higher amounts for Apple and Google given their respective dominance of smartphone operating systems compared to Microsoft.
While all IP is obviously not created equal, all the precedents and publicly traded comps I’ve been able to find point to a significantly higher value for UPIP’s portfolio. Obviously, the mobile devices, infrastructure and online services markets are huge and any tiny royalty measured in basis points will quickly add up to hundreds of millions of dollars. IDCC management has said that it believes that wireless patent portfolios should be valued at $2.3M per issued U.S. patent. At the end of Ericsson’s commitment, UPIP will have 2,850 patents. If we assume that 30% of these are issued in the U.S., this gives you an approximately a $2B patent value, so even discounting 50% for the Ericsson revenue share you get an number that is 10x the current enterprise value. This gives no value for the fact that UPIP’s royalty payments should be completely tax shielded.

 

Comparable patent sales also imply a much higher value for UPIP if somewhat lower than the above exercise. Rockstar Bidco’s purchase of 6,000 Nortel patents (not all wireless) was for $4.3B or $720K per patent, and IDCC sold a group of 1,700 patents to Intel for $220K per patent. Note that IDCC considered these patents non-essential to its core wireless patent licensing efforts. ACTG also purchased the Adaptix portfolio of 230 issued and pending 4G wireless patents for an enterprise value of $150M or around $650K per patent. For all of these cases the value is per patent, not per U.S. patent, and applying the average of $530K per patent for these three precedent transactions yields a value of over $1.5B for UPIP’s portfolio before any discount for Ericsson’s revenue share or enhancement for UPIP’s tax shield.

 

Not that we need it, but comparing UPIP’s value per patent to the most prominent publicly traded patent assertion entities yields even higher values. Even significantly down from its peak, VHC sports a $940M EV on the back of 52 issued worldwide patents originally sourced from a defense contractor, over $18M of EV per patent. PRKR has a $350M EV based largely on 264 issued and pending patents of very dubious quality, an EV of over $1.3M per patent. VRNG has an EV of $230M on just over 500 patents (including infrastructure patents contributed by Nokia), a value of $460K per patent. Clearly, compared to other publicly traded patent entities, UPIP seems significantly undervalued. I believe this is due to the fact that the aforementioned three companies have prosecuted high profile  litigations with some success, even if none of them have yet collected the fruits of their most recent endeavors. While this is not true of UPIP today, I believe that will change over the course of the next two years, as detailed below.

 

Lawsuits and Licensing Efforts
Unwired Planet has filed several patent lawsuits which are now winding their way through the courts. I will provide a brief summary the major cases below, although I will not get into the specific merits of each case. UPIP’s litigation partner McKool Smith has been extremely successful with these types of cases for VHC and PRKR, so I am operating on the assumption that neither McKool Smith nor UPIP’s experienced internal patent licensors are wasting their time. Additionally, if you go back and look at the stock charts of VHC, PRKR, VRNG and even RMBS leading up to major trials, you will see significant appreciation as investors anticipated the potential positive headlines. I believe this process may repeat itself for UPIP in 2014, but I also believe that UPIP’s IP is denser and of a higher quality provenance, increasing the chances that UPIP may be able to reach ultimate settlements and ongoing licensing royalties.

1. Apple/Blackberry, District Court of Delaware- This case was filed in conjunction with an ITC case which has since been dropped due to an unfavorable claim construction. The district court judge also adopted the same claims construction, so UPIP will likely be appealing the claim construction to a higher court. The timing of the appeal is unclear, but if UPIP is successful getting its preferred claims construction they will pursue the lawsuit in full.
2. Google, District Court of Nevada- UPIP currently expects a Markman hearing in Summer 2014 and Winter 2014 for the trial. I think this case will provide the most near-term catalyst for UPIP shares.
3. Apple, District Court of California- Apple successfully had the trial moved from Nevada to Northern California where it is currently awaiting a scheduling order from the judge. This case is probably more of a 2015 catalyst.
4. Square, District Court of Nevada- This case was just recently filed, but the Nevada docket moves quickly similarly to the Eastern District of Texas favored by VHC and other patent trolls.

Note that the first three lawsuits were filed with original UPIP patents, so there may be further lawsuits filed using the Ericsson portfolio. According to http://www.unwiredplanet.com/blog, UPIP is currently also in licensing discussions with 27 companies across the core markets of mobile devices, mobile services and network infrastructure. While the recent conference call was somewhat discouraging in terms of near term licensing deals, I believe that given the volume and quality of UPIP’s IP, deals will eventually be reached. I would expect that the first couple of licensing deals announced could be significant to UPIP’s share price and I would be surprised if they did not occur sometime in 2014.

 

Conclusion and Valuation
Although I am generally skeptical of the patent troll business model (see my comments on the VHC, PRKR and ACTG threads), I think that UPIP’s intellectual property appears to be substantially undervalued by the market. I recognize that per patent metrics are deeply imperfect, however, any metric in terms of sale transactions or publicly traded comps that I can find point to upside that is a multiple of the current enterprise value.  And while I do believe that it is likely that Unwired Planet will eventually collect licenses and royalties in the hundreds of millions, in the nearer term based on my experience with other patent assertion stocks I also believe that the prospect of upcoming high-stakes lawsuits with requested damages likely in the hundreds of millions will attract investors to UPIP stock over the course of 2014 and beyond. Therefore, given the recent share price weakness that may be exacerbated by year end tax loss selling, I think it is a great time to look at UPIP. I also think downward pressure on the stock may be occurring because of the U.S. House of Representatives’ passage of the Innovation Act, which awaits Senate reconciliation. The Innovation Act is primarily aimed at the worst tactics of low quality patent trolls (sending mass letters threatening to sue end users, etc.), although the House bill’s lowering of the bar to recover legal fees from the losing party may add to the risk of pursuing patent lawsuits. I do not expect the law to have major ramifications for UPIP’s activities.  Price targets by the few sell-side firms who follow this stock range from $3 to $5 and seem reasonable to me, with the recognition that trying to get more exact is impossible at this stage and there is plausibly much more upside.

• Google lawsuit in Nevada entering trial phase in 2014
• First licensing deals from Ericsson portfolio
• Filing of additional lawsuits under new strategic fee agreement with McKool Smith
• End of tax loss selling