Positive conference call. Here is a part of transcript from Alpha Sink
"njan Holdings, Inc. (NASDAQ:FNJN)
Q1 2017 Earnings Conference Call
May 15, 2017 16:30 A.M. ET
Executives
Vanessa Winter - IR
Phil Hartstein - President and CEO
Michael D. Noonan - CFO and Treasurer
Analysts
Andrew D'Silva - B. Riley & Company
Unidentified Analyst - Zacks Investment Research
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to the Finjan Holdings Inc First Quarter Shareholder Update Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Vanessa Winter, Investor Relations. Please go ahead.
Vanessa Winter
Hello everyone and thank you for joining us this afternoon for a review of our first quarter results. Joining me on today's call is Phil Hartstein, Finjan's President and CEO; and Michael Noonan, CFO. As a reminder, this call is being webcast and a replay of the webcast will be available on our website.
Before I begin, I would like to quickly make note of our Safe Harbor. During the course of this call, we may make statements related to our overall business outlook, future financial operating results, timing of redemption of shares of Series A preferred stock, outcomes of our pending and future litigation, accounting matters, and future prospects for our operating subsidiary. These are forward-looking statements based on certain assumptions and are subject to a number of risks and uncertainties that could cause future results to differ materially from our expectations. You can learn more about these risks in our most recent Form 10-K filed with the SEC on March 27, 2017 as well as our subsequent filings. These documents are available on the Investor Relations page of our website at www.finjan.com. We assume no obligation to update any forward-looking statements.
I'd also like to mention that Finjan management will be attending a number of upcoming conferences, so we hope to get the opportunity to touch base with many of you in person. We will be presenting at the B. Riley 18th Annual Investor Conference on May 25th in Santa Monica, California; the 7th Annual LD Micro Conference on June 6th in Los Angeles; and finally the 2017 Marcum MicroCap Conference on June 15th and 16th in New York City. As additional details are available, we will make more formal announcements. Please contact me vanessa@finjan.com to schedule a meeting.
With that I'd like to turn that call over to Phil, Finjan's President and CEO. Phil?
Phil Hartstein
Thank you Vanessa and thanks again for all who are joining today's shareholder update call. A lot has happened since our last call a little over a month ago. First the obvious which is that Finjan has had an outstanding first quarter, notable in both the number of revenue generating deals and also the cash that hit the balance sheet. In particular our licensing and enforcement segment through Finjan, Inc. where we continued to be recognized with decisive outcomes in favor of the validity of Finjan's patent claims.
I will spend some time updating you on our licensing initiatives, address some near-term catalysts in our litigations that are currently or expected to be soon on the calendar, and also plan to give you a brief update on the general state of the cybersecurity market. Michael will dig a bit deeper into what we have been working on in our Finjan mobile division, now coming to light with our recently announced partnership with Avira and we will address both the financial and operational components of our business and discuss the investments in development efforts in our subsidiaries.
After a record 2016 and posting 18 million in revenue for the full year we jumped out of the gate in the first quarter of 2017 with revenues of 25 million and a significant uptick to our contracted revenues over the next two years. Net income from operations was $0.69 per share and we closed the quarter with $26 million in cash. The quarter was highlighted by a number of meaningful licenses and settlement events including Sophos, Avast, Veracode, and Avira at the start of the second quarter.
We've officially achieved our long awaited inflection point after several years of building and executing on our strategic objectives which include vigorously protecting Finjan's IP and successfully reintroducing our technology and new products into the market. This is evidence of our diversified platform built to position ourselves for strong sustainable growth. Looking ahead we remain confident in our vision and we look forward to multiple catalysts that we believe position us for future progress across all segments of our business.
In past calls we've spent a great deal of time discussing administrative challenges to Finjan's patents. In the quarter we received the remaining final written decisions from our IPR proceedings that had been instituted against Finjan's patented claims. As a recap we have prevailed in more than 70 of these administrative challenges, testing and reinforcing the validity of Finjan's patents again and again. These final written decisions bring to an end all of the presently instituted challenges.
We have maintained a decisively unattenuated position for all of Finjan's patents currently involved in our licensing and enforcement initiatives. For a full disclosure and clarity to date across these administrative challenges Finjan has only lost one independent method claim. We expect not having this "wait and see" overhang on our company will help us move forward and focus on our future growth initiatives both through our licensing program and our other operating subsidiaries.
Moving on to our licensing efforts, we've benefited from a nice cadence with a license to F5 to end 2016, a license with Veracode just prior to their acquisition by Computer Associates in the first quarter and Finjan mobile cross licenses with Sophos and Avira in the first and second quarter respectively. Delving into these Finjan mobile cross licenses with both Sophos and Avira for a minute these represent the first two inbound licenses into the Finjan mobile subsidiary. We've been working diligently over the past two years to develop Finjan mobile into a business that can translate Finjan’s early patented inventions into a consumer tangible product and while we think we've already made great progress the real measurable successes are still to come. These two licenses not only highlight our recent successes in building a best-in-class platform for mobile security but, also the fact that Finjan continues to be competitive and these cross licenses ensure we have a continued foothold in this growing market.
In the quarter we also reached two settlements individually with Sophos and Avast. While they technically resulted in the settlement of a legal challenge, internally we think of them as licenses and we compliment both companies in their willingness to find value in a license to the Finjan patents at a fair and reasonable price. You've heard me say the main focus of Finjan mobile is to increase consumer awareness of privacy and security issues related to the consumption of the Internet. Now more important than ever with the recent changes in U.S. policy allowing telecommunication companies to gather, bundle, and sell your individual usage and consumption to advertisers, this and also the type of attacks threatening to corrupt or ransom consumer data such as the one that we've seen over the weekend we believe there is still important work to do and this will continue to represent an attractive market opportunity for Finjan mobile's platform of products for years to come.
In our view security software and hardware segments of the cybersecurity industry are reaching a tipping point of maturity in which we are seeing a faster pace of consolidation than ever before. With this evolving and changing cybersecurity landscape we continue to evaluate new ideas and opportunities for expanding our current programs and potentially starting new ones. That said we remain active in pursuing licensing and given we always stand behind and encourage innovation we are flexible on how we work with prospective licensees to ensure we can arrive at a fair value license. We do so intending to minimize business disruption expense to both sides and by only involving the U.S. District and foreign courts when necessary.
I’d now like to briefly update you on the upcoming catalysts in our litigation. We have two separate lawsuits pending against ESET, one in the Southern District of California and another one in Dusseldorf, Germany. The trial in Germany is scheduled for July 6, 2017. This will represent our first trial in Germany and as European trial schedules move at a faster pace we may find ourselves in a position to report a resolution in this case within the year.
In our sprawling dispute with Blue Coat Systems you are all aware that Blue Coat I we have a jury verdict and judgment for $39.5 million. Not including pre and post judgment interest we are awaiting an oral hearing date from the Federal Circuit which we expect will occur this year. Our trial for Blue Coat II in the northern district of California is scheduled to begin October 30, 2017 and last for approximately two weeks. Finally our third case against Blue Coat is in Germany and currently scheduled for its trial on November 20, 2017.
Turning to our litigation against Symantec, our trial is set to begin April 9, 2018. While Symantec's acquisition of Blue Coat was completed last year this has not changed the timelines for these respective cases. We continue to be open to a combined resolution for both Blue Coat and Symantec to resolve all outstanding disputes.
In our case against Fireeye as many of you may recall the stay was lifted on the same day as our last shareholder call March 28, 2017. The stay was lifted precisely due to the resolution of all instituted IPRs against Finjan again in our favor as I mentioned earlier. In the first case management conference we received a claim construction hearing date also known as a mark man hearing for January 18, 2018. Our Palo Alto Networks case remain stayed but we expect with all instituted IPRs having been resolved that this stay will also be lifted in the near-term.
As additional progress is made on these litigations we will follow our best practices and make additional announcements. I will note over the coming quarters I expect our licensing team to initiate new discussions and unfortunately also suspect some number of ongoing licensing negotiations to move to litigation despite our best efforts. I would now like to turn the call over to Mike. Michael.
Michael D. Noonan
Well thank Phil. I'd like to begin this afternoon discussing our financials for the first quarter of 2017. Please note that unless otherwise stated all comparisons are on a year-over-year basis. For the first quarter we achieved a tenfold increase in our revenue to $24.7 million comprised of our settlement with Avast and Sophos and a license from Veracode. This compares to revenue of 2.3 million for the first quarter of last year.
Given the number of revenue generating events in the quarter and as we approach few upcoming trials, operating expenses for the first quarter were $4.7 million compared to 3.5 million for the same period last year. Net income from operations for the first quarter was 16 million or $0.69 per share compared to a net loss of 1.2 million or 5 pennies a share for the first quarter last year. Our profitability strength was driven by our 85% gross margin as well as our careful cost controls.
We ended the quarter with 26.4 million in cash and cash equivalents. Please keep in mind that our cash position at the end of the quarter did not include the $6.6 million used to redeem and retire a lot of our Series A preferred financing. Nonetheless when considering our current cash position along with the $39.5 million from our favorable judgment orders, we remain in a healthy position to pursue future growth initiatives.
Now I'd like to turn to our emerging businesses. We have had a busy start to the second quarter in our Finjan mobile business with a go to market partnership with Avira and the launch of our VitalSecurity Gen3.5 mobile secure browser. Our partnership with Avira sets us up for VitalSecurity Gen4. Avira will provide a virtual private network or VPN which we will design into our next browser to offer enhanced mobile security and protection for our customers. We are in the development phase of this product and expect to launch this in the third quarter of this year with revenue generation for the VPN enabled browser shortly thereafter.
The launch of VitalSecurity Gen3.5 is significant as customer interest continues to grow with more than 165,000 downloads to date for Avira through the Android Google Play Store. This month we are also targeting the launch of an internet update to VitalSecurity 3.5 browser to include tracker and ad blocking. We continue to actively meet and explore different partnerships and possible acquisition candidates to build upon our recent progress and position us for future growth.
Now turning to CyberRisk, while we are focusing much of our effort towards licensing and our mobile business, the consulting side remains a nice breakeven business for us and this positions us as a knowledge leader in helping enterprises proactively prepare for issues that they may encounter in the future. Our investments in innovation for the future through Jerusalem Venture Partners or JVP has two early exits in which we received $2 million so far in proceeds. The net asset value or NAV for JVP investment is approximately $3.4 million.
Now a recent traction in our licensing business allowed us to actively redeem and retire the entirety of our Series A preferred shares as of April 10, 2017. The fact that we did this in less than a year -- less than one year exceeded our expectations and we exit these shares in a much stronger financial position from where we started. Now with that I'd like to turn the call back over to Vanessa to help conduct the Q&A session.
Vanessa Winter
Thanks Michael. Operator, can we please begin the Q&A session.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Andrew D'Silva of B. Riley. Please go ahead.
Andrew D'Silva
Hey, thanks for taking my call, great quarter by the way. Just a few quick questions and I'll hop back in queue. First off could you give us an update on where things stand with Palo Alto now that PTAB cases are behind us and maybe a little bit of an idea what are the potential outcomes here, was it stipulated that a joint motion would need to be filed to lift the stay or when the order was provided to the Northern district did that leave it open for the state or remain in place while Palo Alto looks to maybe appeal PTABs decision or whatever data you have there would be useful?
Phil Hartstein
Well hello, by the way Andrew. I compliment you for the depth of your question. So you hit it on the head right there at the tail end. The administrative process of the stay when it was initiated in the Palo Alto Networks case actually required the resolution of pending and instituted inter parties review challenges as well as through the appeals process. Basically it said anti-appeal. While we all know that most appeals are unsuccessful and many are actually not even considered by the PTAB it is the remaining procedural hurdle for that. But, in terms of how do you remediate the stay to get it lifted, it is in fact a joint submission by both parties. It's typically very common practice that once those appeals are either not filed and missed their statutory deadline or once they are resolved definitively from the PTAB we would then submit another joint statement to the court and would expect that that stay would be lifted in the Palo Alto networks case.
Andrew D'Silva
just a follow-up on the process there, so are you saying that appeal would be with PTAB like an in bank review with PTAB or would it be actually like an appeal to the Federal Circuit that would be the delay, are those like -- I view those as two different outcomes which one is maybe a stipulation related to?
Phil Hartstein
Well they are two different things going to the PTAB on the administrative side or to the CAFC on the appellate side. The language in the stay order to the best of my recollection is any and all appeals. So whichever appellate pads that are chosen by Palo Alto networks would have to be exhausted. Now again we’re several months into that process now. I don't have anything more current to give you than that.
Andrew D'Silva
No, that was perfect I just wanted to understand what was that -- what we should expect from a timeline and that was very clear. And then you know maybe give some broad strokes here. On the companies within your licensing pipeline and litigation pipeline, I'm just curious you obviously had a lot of success in the last six months or so with settlements and license agreements being established. Are there any data points or do you have a sense at least of how companies that you are pursuing are viewing this, I would assume that at some point it just costs them more money to go through the litigation path or stall than just settle, is there any indication that you feel that that's true, that they're understanding that at this point?
Phil Hartstein
Yes, so certainly another good question. I would tell you based on my experience in this industry I would have actually expected that tipping point to have occurred much sooner in this licensing process with companies. And now if you look at the number of administrative challenges that we've successfully defeated, if you look at the district court outcomes that we've had, and if you look at both licensing and settlement activity I think it gives a pretty clear picture that Finjan is committed to its programs both in licensing and enforcement. But on the other side if you thought about this from the defendant's perspective as well you can get a sense of the type of licenses and settlements we're willing to do. I often make the joke here that this is not about filling a trophy cabinet this is actually about returning value and invested capital on what Finjan developed and what remains captured in the Finjan patents. So our job here is to advance those discussions, we are seeking fair value and licenses from as we've indicated now 25 or more licensing prospective licensees. Again those are various stages, some of those have been ongoing for more than a year, some are newly started. But, I do believe now what the first quarter represented was really kind of coming up to the top of the hill now where we've invested sufficient time and invested capital to advance all of those discussions now to a point where, in the coming quarters you can expect to see more of those deals done at a more regular interval.
Andrew D'Silva
Great and I got a question for Michael. Could you maybe give us a little bit of context behind gross margins. So Sophos is settled. Obviously they had a long litigation past before they settled with you but, your gross margins are still very high. Are there costs that we should expect that could possibly carry over to Q2 or is this really the gross margin that we should expect even when a case gets so far to the point when they get a settlement does that makes sense?
Michael D. Noonan
No, absolutely it does make sense Andy. So the Sophos probably had the lowest gross margin there of about 80%. The other licenses were very, very high so it offset that lower gross margin. I think modeling 80% going forward is probably conservative and probably not a bad place to be but there will be no other expenses.
Andrew D'Silva
Okay. Fantastic and then as final question as it relates to the embedded VPN maybe give us a sense of the strategy of how you intend to deploying it, would it just be a subsequent rollout where it kind of ties in to Gen3.5 or would it just be a brand new rollout where you start a whole new marketing initiative and then obviously the embedded VPN dramatically expands the mobile offering that you have currently, should we expect meaningful uptick in monthly fees from users?
Michael D. Noonan
So yes, right now we're going to be launching an interim product which focuses on tracking and ad blocking. And we are continuing a marketing push to get more and more users whether it's the premium product or the paid for product. That will back strap all of our VPN marketing efforts and as soon as we hit the ground running and we get the product out Gen4.0 we will be doing a big marketing push not only on our own but with a business help as well. So we are in really good shape there, we think we've got a pretty good plan. VPNs are the thing right now so I think we're coming we're going to be very timely with the offering.
Andrew D'Silva
Great and my apologies, one more quick follow-up. Just on the licensing pipeline, do you have a sense of how many companies are in it now obviously you have knocked down some in recent months and then as far as late stage versus early stage maybe a breakout there and maybe what the size is of some the ones that are in the late stage?
Michael D. Noonan
Oh boy, well so we continue to say that we have 25 or more and the more is where I emphasize because I think 25 has kind of become a threshold number for us. I think they're equally distributed. You know the market -- if you think about the market and from a perspective of IDC data for example you've got maybe 20 large players who occupy 80% of that market opportunity and then you've got 10 times that in much smaller companies who occupy the remaining 20%. So really what the thing you need to find in your licensing program excuse me, sorry I'm still getting over a cold. If you need to find that equilibrium how do you commit the appropriate amount of time and resources to advance you know kind of the smaller deal, the $3 million, $5 million, $8 million deal while you know that the much larger deals that are often going to involve litigation how many of those can you handle at the same time, what kind of drain is that on your cash, how quickly would you like to have all of those cases kind of spawn up? I think right now if you were to look at the 25 you're probably in that 80:20 you probably got 20 of those of the smaller 3 million to 8 million type of deals and you've got maybe 5 million to 10 million that are of the larger type, much more diversified or much larger security specific type companies.
In terms of time, many of those discussions have been ongoing for greater than a year. Some are approaching two years or more and if you just during my comments, during the early statement yes, we're going to continue to add new licensing discussions but, I believe we're also at a time where some of those who are along in the two licensing discussions, prolonged discussions need to move to litigation despite our best efforts. So I would expect to see some more of that in the coming quarters as well.
Andrew D'Silva
Got it, thank you for the color and good luck going forward".
