(LMCA) Is there hidden value in TruePosition?

I’m interested in the value of TruePosition since it may be a vehicle for hiding value in the proposed Liberty Broadband spinoff.  The real story seems to be complicated.

  1. The core business seems to be in decline.
  2. I have my doubts about Craig Waggy, the new CEO.  He was associated with improper accounting at Gemstar-TV Guide International.  The SEC brought a civil action against him.  Waggy paid a $25k civil penalty.
  3. The company has upside from patent trolling and from suing other companies for antitrust.

Industry overview and company background

TruePosition’s main market for its technology is the E9-1-1 market.  When somebody calls 911 on a cell phone, it is helpful to know that cell phone’s exact location so that emergency services can be dispatched to the right place.  Most cell phones nowadays have GPS receivers built into them.  This allows for fairly accurate positioning… as long as the caller is not inside a building or surrounded by skyscrapers.  If GPS is unreliable or unavailable, a fallback mechanism is used for “assisted” GPS.  These fallback mechanisms will sometimes yield an erroneous location and aren’t always reliable.

TruePosition has technology that revolves around Uplink-Time Difference of Arrival (U-TDOA).  Sensitive receivers are located at cell towers to determine the location of a cellular phone.  By using the timing information from different receivers, it is possible to calculate the location of a mobile phone.  The real world gets complicated because cell phone signals bounce off surfaces, get weaker as they pass through material, etc. etc.  This presumably causes problems in some situations that can cause the technology to not work as well as one would like.  I believe that GPS is more accurate if and when it works.  (I do not understand this technology that well so I could be wrong about the advantages and disadvantages of TruePosition’s technology.)  U-TDOA and GPS can be combined to deliver better location accuracy.

The Polaris Wireless website reposted an easy-to-understand summary (link) of their technology, the competing U-TDOA technology, and assisted GPS.  The article on their website states:

U-TDOA is a high-cost, hardware-based, non-scalable location solution that determines the device location by using trilateration methods. It uses multiple hardware radio receivers or Location Measurement Units (LMU’s) that require manual installation at each base station across an operator’s network to trilaterate signals based on measured time delays.

LMU’s have only been deployed on 2G GSM networks and would require major hardware upgrades for 3G UMTS networks. U-TDOA has not been standardized for support in 4G LTE or WiMAX. U-TDOA performs well in line-of-sight conditions and its accuracy performance and reliability degrade in non-line-of-sight conditions.

From what little I understand, TruePosition’s technology is not a good solution for new 3G UMTS and 4G LTE networks.

Competitive positioning

AT&T and T-Mobile have contracts with TruePosition.

EDIT (7/26/2014): T-Mobile did not renew its contract which expired in 2011.

AT&T public policy blog recently attacked TruePosition on June 2014, criticizing its technology:

The fact is that the approach proposed by TruePosition is, at the core, antithetical to the design of modern 3G and 4G networks.

Sprint and Verizon use assisted GPS.

Overall, it seems that:

  • TruePosition’s technology is good for older 2G/GSM networks.  However, the company does not offer a compelling solution for 3G and 4G.
  • The company has had difficult selling its product for 2G networks in the US and internationally due to high cost.
  • TruePosition does not generate much revenue outside of the E911 market.

What employees are saying on Glassdoor (link)

Generally speaking, employees give low ratings to TruePosition relative to other technology companies.  The employee comments are interesting as they give some insight into TruePosition’s competitive positioning and the overall industry.

#1

“Great people to work with, very interesting technology 10 years ago.”
Senior Engineer (Former Employee)
Berwyn, PA (US)

Pros – Great pay and good benefits, get to work with some large wireless telecommunication companies. You can learn a lot from the most knowledgeable engineers in the location and wireless communication industry.

Cons – Aside from the initial offering of enhanced 911, none of the other location projects seem to have infiltrated the market. Working mainly with GSM networks makes you less marketable.

Advice to Senior Management – Look forward, concentrate on using location based technology rather than litigating to make the numbers.

#2

“Good technology, not enough sales”

Anonymous Employee (Former Employee)

Pros – The technology works well and as intended. The benefits (401k, health care, education reimbursement) were all top notch. The employees are dedicated and hard working.

Cons – The cost to manufacture and deploy it is too expensive. Management has reacted to the market rather than proactively updating the technology and sales market for their products. Management has remained the same for years, but have not introduced any new contracts.

#3

Cons – Management team. Liberty Media ownership. Liberty Media operates as an investment banker, treating TruePosition as an annuity from its maintenance contracts with AT&T and T-Mobile. There’s little understanding of the technology and how to leverage it in new markets, as demonstrated by allowing itself to invest and lose tens of millions in a failed attempt to go from a niche safety and security 911 location firm to a consumer electronics firm. And entrusting this failure to executives with no background in that field.

Advice to Senior Management – Layoffs are a morale killer. Annual RIF’s are worse than a morale killer, they demonstrate senior management’s complete disregard for people, their families, and the local community. Advice: figure out what TruePosition is and truly right-size rather than capsize.

#4

Cons – When i started there was about 600 people. We are now down to 250, and probably looking by years end, to be around 150. The engineers keep taking the brunt of the layoffs, while management is untouched and able to keep making the same mistakes. We treat our current customers like crap and are unable to close any new deals.

However, the company does has a history of misjudging it’s employee base, and alternating between layoffs and hiring. When I left, they were trying to leave the start-up mind set, and were working on adjusting to the fact that they had near 500 employees. The majority of income is based off of their relationships with TMobile and ATT Wireless, so the relationships with those companies seem to lead to a lot of hirer level politics. (I initially had a good boss, so I was shielded from most of them, but I heard a lot about them from the team I was on.)

Skyhook Wireless acquisition

Skyhook is a pioneer in the mobile positioning field.  Its technology incorporates data from various methods that can be used to locate a cell phone:

  • Wi-Fi
  • GPS
  • Cell towers
  • IP addresses
  • Device sensors

It is not a player in the E911 field because its software must be installed in the user’s cell phone to work.  (As well, I am guessing that Wi-Fi has to be turned on for that data to contribute to a more accurate location.)  Its technology has been used for maps/GPS and for various cell phone apps.

Its technology was originally incorporated into Apple iPhones.  However, Apple dropped their technology in newer-generation iPhones.  Google’s Android OS does not incorporate Skyhook’s technology either.  Skyhook is currently suing Google for patent infringement and antitrust.  On the antitrust front, Skyhook alleges that Google pressured Motorola (and Samsung) to stop using Skyhook’s technology in its phone to give Android’s mobile positioning solution an advantage.  There is a network effect as each cell phone collects data that improves the location database.  The database get better if more cell phones are contributing data to it.  By getting Motorola and Samsung to drop Skyhook, Skyhook’s database is weakened while Google’s gets better.

Skyhook is in an unfortunate position because it has been left out of the two biggest cell phone platforms today.  (Its technology is still being used in older iPhones without GPS receivers.)  It may make some money through patent trolling lawsuits and possibly in its antitrust lawsuit.  While I am not a patent lawyer and do not understand the legal system very well, I believe that Skyhook has a valuable patent portfolio given its pioneering work in the field.

The FOSS patents blog has excellent posts on the legal issues surrounding Skyhook.  The blog suggests that Skyhook is slightly better off on the legal front because it can now fund its legal battles against other companies.

Craig Waggy

Stephen (Steve) Stuut has been TruePosition’s CEO from 2006 and 2014.  On June 16, the company announced that Craig Waggy would become the new CEO.  Craig’s biography from TruePosition’s website states:

Craig Waggy joined TruePosition in 2005, serving as the Executive Vice President of Finance and Administration from 2005 to early 2014.

Prior to joining TruePosition, Mr. Waggy served as Senior Vice President and Chief Financial Officer of OpenTV Corp. (Nasdaq: OPTV) and Liberty Broadband Interactive Television, where he was responsible for overseeing the finance, accounting, tax, human resources, information technology and facilities organizations. He previously held the position of Senior Vice President and Chief Financial Officer at TV Guide, Inc. (formerly United Video Satellite Group) (Nasdaq: UVSGA, prior to its acquisition by Gemstar-TV Guide International, Inc.)

Mr. Waggy is a CPA and graduate of the University of Kansas, where he earned both Master of Science and Bachelor of Science degrees in Accounting.

I believe Waggy’s association with Liberty Media began with TV Guide, a company that Liberty invested in.  Back then, Liberty did many deals where industry players would co-operate and collaborate in multi-party joint ventures.  TV Guide would eventually merge with Gemstar.  Liberty traded its shares in Gemstar-TV Guide with Rupert Murdoch, presumably making a very good profit on its initial investment in TV Guide.

After the Gemstar merger, Waggy (the CFO) and Peter Boylan (the former CEO) would leave and join Liberty in a joint venture called Liberty Broadband Interactive Television.  Liberty would own 90% of this subsidiary.  Liberty seemed optimistic about this joint venture judging from its press release.  Somewhere around this time, accounting issues emerged at TV Guide (now Gemstar-TV Guide).  The SEC alleged that TV Guide structured its contracts in a way that facilitated the overstatement of its revenues.  This document on the SEC website describes Waggy’s involvement.  Craig Waggy agreed to pay a $25k civil penalty.  In 2004, Boylan agreed to settle with the SEC for $600k.  Multichannel News has a good article that describes the events.

Shortly after joining Liberty Broadband Interactive Television, Waggy would become the CFO for OpenTV for a brief period of time.  Following Waggy’s departure, OpenTV revealed that it had material weaknesses in its internal controls.  Its YE2004 10-K states:

Certain duties within our financial group, which has the responsibility for preparing our financial statements, were not properly segregated. In the fourth quarter of 2004, we determined that our controller had the ability to direct other personnel within the finance group to initiate and enter manual journal entries in the company’s books and records without authorization or review by other members of the financial organization. After identifying this weakness, we introduced new procedures in the first quarter of 2005 requiring that our Chief Financial Officer review any and all non-recurring journal entries with a value of $100,000 or more and also required that our Chief Financial Officer review all journal entries that are directed by our controller, including those below $100,000.

The 10-K does not lay the blame on any particular individual or group of individuals.  It is unclear to me if Waggy was responsible for the material weaknesses in internal controls.  However, I think that somebody screwed up (or intentionally created weaknesses in internal controls to facilitate accounting shenanigans).

I do not know why Waggy has been associated with Liberty for so long.  Personally, I would be very hesitant to hire him after the accounting issues at TV Guide.  Perhaps part of his appeal is that Liberty made a lot of money in mergers and acquisitions that Waggy helped facilitate.

As far as running TruePosition goes, Waggy seems to have a strong financial background.  However, he does not seem to have a technical background and does not seem to have much experience running a company (or even a division of a company).

Hidden value

TruePosition’s value lies in two areas:

  1. Providing mobile positioning technology.  This business seems to be in decline.  I could be wrong about this.  Perhaps there is a turnaround opportunity in TruePosition that I’m not seeing and that the company could experience high growth as the company attracts more customers.  In the E911 market, AT&T’s unhappiness suggests otherwise.
  2. Patent trolling (and antitrust lawsuits).

It’s unclear to me what TruePosition’s books will look like when the spinoff paperwork is filed.  The legal battles inherently cost a lot of money upfront, with a small possibility of a  large pay-off sometime in the future (potentially several years if litigation drags on).  The legal costs may be causing TruePosition’s cash flow and earnings to be depressed in the short-term, which may mislead investors into putting too little value on the company.

Investment bank analysts may discount the assets further because they normally cover the media industry and do not normally have to analyze the mobile positioning industry or understand patent trolling.

I’m not a huge fan of declining businesses or questionable CEOs.  Nonetheless, TruePosition may be mispriced simply because it is difficult to understand and investors may overlook the value of the patent portfolio.  The company should be worth a few hundred million or more.

Liberty Broadband

Liberty Broadband’s main asset is Charter common shares (and warrants).  It is possible that investors underestimate Charter’s future value for two reasons:

  1. They may not put enough weight on Tom Rutledge’s skill as a cable operator.
  2. Charter’s free cash flow currently is terrible.  The transition to an all-digital system brings short-term pain and long-term gain.  Because Charter is currently in the process of migrating its customers to digital, its current free cash flow is not a very good indicator of future cash flow.

Similarly, the proposed Liberty Broadband spinoff will contain other assets that may be difficult for investors to understand:

  1. TruePosition.
  2. The derivatives associated with Liberty’s Time Warner Cable position.
  3. “Certain deferred tax and deferred revenue liabilities”… whatever they are.

When Liberty Broadband finally spins off, there may be an opportunity to buy an undervalued company (Charter) at a discount via Liberty Broadband.

*Disclosure:  Long LMCA common shares.

Advertisements

16 thoughts on “(LMCA) Is there hidden value in TruePosition?

    • If you model out $200+ EBITDA / home passed, then you would get a valuation much higher than today’s. It comes down to whether or not you think that Tom Rutledge can get Charter’s economics up to Cablevision’s level.

  1. True Position and the derivatives are oddities attached to the Liberty Broadband Charter vehicle. This is a good sign: Malone adds complexity to stoke uncertainty which
    can lead to mispricing.

    In the past, Malone`s penchant for architectural complexity has systemically led to the undervaluation of many of his companies, allowing for tax-efficient stock buybacks.
    It`s a really smart and unique approach.

    Let`s wait for the Form 10, then collectively get our heads around the spinoff valuation.
    These forum threads are very useful to us all.

    Good work on True Position , Glenn.

  2. From my notes, seems like the AT&T agreement – likely a majority of revenue – expires in 2016.

    Other Liberty-related entities (esp. o3b) are friendly w/GOOGL. So Mr. Mueller may be correct in that Liberty will seek a settlement w/GOOGL at some point.

    In terms of the technology itself, it’s clear that Bluetooth beacons, Wifi/WLAN-based positioning, and extending GPS/Glonass to in-building may all more promising for the future than U-TDOA (especially since Bluetooth and Wifi-assisted location broadcasting seems to be supported natively in iOS and Android respectively).

    At any rate, TruePosition seems like something with positive value that will be ignored in any kind of Liberty Broadband analysis, so thanks for highlighting it.

    http://www.trueposition.com/assets/Uploads/TP-TestResults-2014.pdf

    Above is a somewhat interesting recent study, done by what I believe is a related-party company. Seems like there are some negatives and some positives (summary of results on pg 82 is an interesting read).

    To me intuitively, it does not seem like the UTDOA receivers, which must be deployed at the cell sites as you mentioned, and probably upgraded every generation or two, are an elegant (capital-light) long-term solution for indoor-positioning.

    I don’t have a great feel for the present value of the co on a probability-weighted patent-troll basis either, but my gut says you are in the right ballpark.

  3. Hey it does not seem like Charter has much upside. They have 220$ per passing in ebitda now right? Average is about 300$. Even if they would get 400$, that is 5.1 billion$ in ebitda. Giving it the same Ev/EBITDA multiple as Comcast of about 8x I get a equity value of 26 billion$. And that seem to be a very positive best case scenario likely not happening within 1-2 years.

    Could there be value in those derivatives?

    • I think Charter might exceed Cablevision’s level of performance.

      I don’t think there is too much hidden value in the derivatives. Malone uses derivatives for tax reasons. I don’t recall anything spectacular that Malone has done with derivatives… other that perhaps selling long-term call options during the tech bubble.

  4. Pingback: Liberty Broadband valuation spreadsheet | Glenn Chan's Random Notes on Investing

    • Hmm I think it depends heavily on the details. I see they added height in there- something that True Position’s technology cannot do.

      The cell phone companies want to migrate to 3G and 4G, where True Position’s technology is a poor solution.

  5. This tech. niche is tricky. What I keep coming back to in my mind is why Malone
    put True Position into the spin in the first place. Its inclusion hasn`t skewed the valuation dynamics — the spin is easily valued, and is trading a bit under fair value. My hunch is that Malone knows something material… why else have TP in a spin entity he wants for himself?

    • I think for tax reasons, they have to spin it off with some type of operating business.

      So LTRPA spun off with a real dog of an ecommerce business.

      True Position is mostly a dog, though Skyhook is something they recently acquired. True Position’s remaining customer is talking smack about them, so you can be fairly certain that they’re leaving.

  6. It doesn`t make sense (at least to me) that Malone would put a dog into one of his
    favourite growth vehicles. If you need to put an operating business into it for tax reasons,
    why not put something in that has potential, thereby providing additional value upside
    to the stock for Malone once the rights offering is over?

    We have different opinions, and that`s OK. That either of us is correct on TP (dog v/ hidden upside) may prove to be immaterial — what really counts is Charter`s performance post
    digital upgrade.

  7. Pingback: John Malone and His Cable/Media Empire

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s