Acacia Research Corp (ACTG) 2004 Q4 法說會逐字稿

Good afternoon.

And welcome, ladies and gentlemen to the Acacia Research fourth quarter earnings release conference call.

At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the Company we will open the conference up for a question-and-answer session after each presentation.

I will now turn the conference over to Mr. Paul Ryan.

Please go ahead, sir.

Thank you for being with us today.

Today's call may involve what the SEC considers to be forward-looking statements.

Please refer to our 8-K, which was filed with the SEC today for our forward-looking statements disclaimer.

With me today are Chip Harris, President of the Acacia Technologies Group;

Robert Berman, our Chief Operating Officer and General Counsel; and Clayton Haynes, our Chief Financial Officer.

Today, I will first review progress in our DMT licensing program during the fourth quarter.

Second, I will update you on the roll out and growth of use of our DMT technology by cable TV, satellite TV, Internet, Telco and wireless companies.

And lastly I will discuss some of the licensing opportunities from the 27 new patent portfolios we recently acquired.

I will then open up the call for questions for our Management Team.

Earlier today we reported our financial results for the year.

The Acacia Technology Group revenues for the year ended December 31, 2004 were 4,284,000, comprised of 2,784,000 in revenues from our Digital Media Transmission Licensing Program and the recognition of $1.5 million in deferred revenues from the television V-chip Licensing Program.

During the fourth quarter we reported 779,000 in licensing revenues from our DMT licensing program.

We entered into 103 new licenses for our DMT Technology in the fourth quarter, including 95 new cable TV licenses.

We have signed an additional 9 licenses since the end of the quarter and now have entered into 294 licenses, which include 182 licenses for Internet usage, 107 licenses for cable TV, and 5 licenses covering Digital Media in hotel rooms.

With the fourth quarter revenues of 779,000 we are now at approximately 3.1 million in annualized revenues from our DMT licensing program.

Based on our industry estimates of future use of the DMT Technology and all licensing categories, including wireless, fiber-optic, and satellite TV, as well as the Internet and cable TV markets we have already begun to license, we have licensed approximately 2 to 3 percent of the total market.

So we certainly have a lot of opportunities ahead of us in our DMT Licensing Program.

The adoption of Digital Media is growing rapidly as we are seeing the rollout of video-on-demand and digital ad insertion by cable TV companies, announced plans by the Telcos to provide Digital Media directly to the home via fiber-optics and plans by wireless providers to deliver digital content.

The rollout of video-on-demand by cable TV companies continues to accelerate.

The industry leader, Comcast has announced that 60 percent of their 21.5 million subscribers now have access to video-on-demand.

They also reported that their subscribers viewed 72 million on-demand movies and programs in the month of January alone.

And that they expect their subscribers to order over 1 billion on-demand programs in 2005.

Time Warner recently reported that 44 percent of their subscribers are now digital and that they have already had 1.5 million customers who are video-on-demand subscribers.

Comcast has reported that in Philadelphia market on average each digital cable customer views 23 video-on-demand titles per month.

These numbers indicate that video-on-demand is becoming a very important service for cable TV companies and that customers are confirming the value of our DMT Technology by their rapid adoption and high-usage rates.

In addition, cable TV companies are also deploying digital ad insertion services, which utilize our DMT Technology.

Comcast reported a 23 percent increase in annual national and regional advertising in 2004, which they credited to their Regional Interconnect Strategy, which utilizes our digital ad insertion technology.

Analysts have estimated that cable TV companies using digital ad insertion technology could generate an additional $2 billion in annual advertising revenues or approximately $55 per subscriber per year.

This would indicate the use of our technology for digital advertising insertion should generate increased revenues and profits for the cable TV companies.

On the Telco front SBC has announced that it will dramatically accelerate its plan to build a new fiber-optics network, providing 18 million homes with high-speed data and video services over the next 2 to 3 years.

Verizon has also begun an aggressive program to deliver digital services over optical fiber directly to the home, and passed 1 million homes at the end of last year, and plans to add 2 million homes this year.

On the wireless front AT&T, Verizon, and Cingular have all announced that they will be offering full motion video-on-demand with the new 3G technology.

Verizon launched in one-third of the country on February 1st, and will have two-thirds of the country covered by the end of this year.

Wireless delivery of digital video could become one of our largest licensing opportunities as there are approximately 155 million wireless subscribers in the U.S. alone.

We are obviously very enthusiastic regarding the licensing opportunities for our DMT technology given the rapid rollout of video-on-demand and digital ad insertion services by the cable TV companies.

And the planned development of on-demand digital media by the Telcos and wireless providers.

We will continue to license Internet usage covering corporate websites, and movie, news, sports, and entertainment sites, as well as E-Learning.

All of these internet categories continue to grow with the rapid penetration of high-speed Internet usage.

On the DMT enforcement front, we have filed litigation in 5 separate jurisdictions against cable, satellite, and Internet companies.

In December, we filed an application with the Multidistrict Panel to transfer these actions to one jurisdiction.

This would result in greater efficiencies and should speed up the discovery process leading up to trial.

We are waiting for a ruling from the Multidistrict Paddle, which we expect at any time.

Until the Panel selects which court it would like to handle these cases, all litigation has been staid.

Once the Multidistrict Panel rules we will proceed with our litigation and push as quickly as possible toward trial.

The meter is running on all of those companies that utilize our technology and our royalty rates have already increased, and we will continue to put through additional rate increases.

Next I would like to discuss the new licensing opportunities resulting from our recent acquisition.

In today's Press Release we have included a brief description of 19 technology or product areas that these patented technologies relate to.

Some of the areas include multiple patent portfolios.

The technologies and product areas include Audio/Video Enhancement and Synchronization, Broadcast Data Retrieval, Computer Memory Cache Coherency, Credit Card Fraud Protection, Database Management, Data Encryption and Product Activation, Digital Video Protection, Dynamic Manufacturing Modeling, Enhanced Internet Navigation, Image Resolution Enhancement, Interactive Data Sharing, Interactive Television, Interstitial Internet Advertising, Microprocessor Enhancement, Multi-dimensional Bar Codes, Network Data Storage, Resource Scheduling, Rotational Video Imaging, and Spreadsheet Automation.

As we previously reported, 11 of these patent portfolios had been partially licensed prior to our acquisition and our goal is to accelerate the licensing momentum for those portfolios.

We are also in the process of commencing licensing and enforcement programs for all of the other portfolios.

Certain of these new portfolios have very broad licensing opportunities to many companies.

These would include portfolios, such as the Credit Card Fraud Protection Technology, the Interstitial Internet Advertising Technology, the Multi-dimensional Bar Code Technology, and the Dynamic Manufacturing Modeling Technology.

Other portfolios are utilized by a more select group of potential licensees.

We anticipate that these 27 additional patent portfolios will provide multiple licensing revenue streams during 2005.

In fact, we signed our first license earlier this month with Thomson, a set-top box manufacturer relating to our interactive television portfolio.

On the business development front we will continue to evaluate additional patent portfolios for requisition and expect that we will add a number of new portfolios this year.

And with that, Operator, I would like to turn the call over for questions.

Thank you, sir.

The question-and-answer session will begin for the Acacia Technologies Group. (OPERATOR INSTRUCTIONS).

Our first question comes from John [Schellner] at Knott Partners.

Hello, good afternoon.

And congratulations on progressing through your work here.

You had mentioned your application via Multidistrict Panel, I think that's what the terminology is you would use.

I didn't quite get with the timing would be on a ruling there?

Why don't I have Rob Berman, our Chief Operating Officer and General Counsel respond to that.

Yes, a little argument already took place in front of the Multidistrict Panel at the end of January and we expect a ruling from them any time now with respect to which Court they select to handle all of these various litigation's that we have brought.

So there's no specific time frame within which they have to rule, but we expect it frankly in a matter of days.

And the is there a more -- do you view one Court to be more favorable than another and would it be 1 of the 5 where you have already conducted some discovery?

Frankly, the chances are very high and it will be transferred to the District Court for the Central District of California, which is the first jurisdiction in which we initiated action or the District Court from the Northern District of California where the Judge who is handling the Central District case generally sits.

So we expect it to be either one of those 2 jurisdictions.

So there's some rhyme or reason to this panel result or -- they are basically trying to make it the most efficient process, that's what the Panel --?

That's correct.

And what the Panel usually does it usually transfers it to the first jurisdiction where legal action was brought.

In this case there is a bit of an extenuating circumstance because the Judge that is sitting in the Central District case is a Northern District Judge that's just sitting sort of as a visiting judge.

And the Multidistrict Panel together with the Judge might determine that it's more convenient to move this to the Northern District of California.

But we expect it will be either the Central District or the Northern District.

Okay.

I will get back in queue.

Thank you.

(OPERATOR INSTRUCTIONS).

Our next question comes from Paul [Haber] at Leeb Brokerage.

Hi.

I have but 1 or 2 questions.

You just raised 19.6 million.

What are your plans with that?

We have stated previously that we always want to have a balance of approximately $25 million from a credibility standpoint from a licensing enforcement.

So the balance of that capital would be available to us if we could make accretive acquisitions of intellectual property.

We have now expanded our Team with the recent acquisition to include Doo-Young Lee who is our Executive VP of Business Development and we're aggressively looking at a number of patent portfolios and we want to make sure that we have the capital to purchase those.

Okay.

Two more questions.

Is the customer mix of the new patents is it similar to the DMT, by that I mean are there a lot of lower tier licensees or are there just 1 or 2 licensees?

The portfolios are spread, what I indicated in the prepared remarks, there are certain portfolios like the Interstitial Internet Advertising and the Multi-dimensional Bar Codes where there are literally, large numbers of potential licensees.

Other of the portfolios could be probably concentrated in 4 or 5 infringing companies.

So it's pretty much when you look at the 27 portfolios it's kind of spread across the lot.

Okay.

One more question, then.

Regarding the DMT.

What are your thoughts on the pending summary judgment motions and the status of the open continuation claims?

I'll have Rob Berman respond to that.

The summary judgment motion has been staid pending this decision that we're waiting for from the Multidistrict Panel.

And we will not be with the -- there is a status hearing scheduled for the judge in the case which was originally scheduled for February 28th, that's now been moved to April because of the delay in waiting to hear from the Multidistrict Panel.

So from a procedural perspective, that will be put back on the Judge's docket once we meet with him on the 28th.

I don't know if you're just asking about the procedural aspects or what we think of the merits of the case or are you asking for both?

Well, more of the merits.

Like for instance, one, what you think is going to happen, and, two, what happens if it ends up being granted for them?

Well, it's very difficult to predict obviously the legal system and which way the Judge is going to rule.

Obviously, we think we have a very strong case -- or not obviously, but we do think we have a very strong case that the claims in question are not indefinite.

But even if the Court does ultimately hold that they are indefinite, we have several surviving claims that are still being infringed which would keep the case alive.

So we do not consider that to be a case dispositive, what's called a "case dispositive motion," which would end the case.

Okay.

And the last part was on the open continuation claims?

Yes.

We continued to make progress with the U.S.

Patent Office as is typical in patent prosecution situations.

The examiners ask questions and ask for further information with respect to those pending claims.

And we hope to get some claims issued in the near future, but it is a time-consuming process as it always is when you're working with the Patent Office.

Okay.

Thank you very much.

You have answered my questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We do have a question again from John Schellner at Knott Partners.

Yes.

I did have a follow-up question.

With respect to the initial litigation that you filed where there was put on the table summary judgment for 2 of the claims, how many additional claims do you have?

How many different --

How many additional claims do you have?

We have 137 claims in these particular patents.

I think what you might be asking me is how many additional claims do we have that we think are being infringed by these companies that bought the summary judgment motions; is that correct?

Yes.

That number is somewhere between six and 12 independent claims and then several dependent claims as well.

Okay.

And the 137, those claims cover the broad focus of your litigation against the cable and satellite companies; is that correct?

No, the patent has 137 claims some of which we believe are infringed and some of which are not.

Okay.

Great.

Thank you .

We have a question from Daniel Katz at Apex Capital.

Hello, gentlemen.

Good afternoon.

Can you give us some idea of what the non-DMT license revenue might look like for the next year or two?

Well, as we have indicated when we initially announced the purchase, the initial licensing activity of 11 of the portfolios had generated over $40 million.

So it's a substantial revenue stream.

We do not make projections, but certainly if you look at the types of technologies and products that these patent portfolios cover, you can see that there's a fairly substantive product areas that they do cover.

We certainly think it's going to be, a very significant addition to our revenue stream, but we have not quantified or made any projections as to the total licensing revenues that could be generated yet.

And will you report that on a separate basis from your DMT license revenue?

Yes, Dan, this is Chip Harris.

I think what we plan to do as we're licensing this quarter, when we announce this quarter's earnings in about 90 days, what we will do is we will separate the paid-up nature of license, compared to the recurring revenue nature that we have in certain portfolios.

Because upon a paid-up license with some of the agreements we have with the legal community will include contingent payments.

So you'll see a relative increase in the legal expenses associated with incremental revenue.

So we'll start to give some color and some direction as to those types of revenues.

Okay.

And then in terms of the DMT licenses signed I think it was a lag period before those were actually reported.

Can you discuss the relationship between the licensing income that you reported and the licenses that you have signed in the last 2 quarters?

Well, typically we recognize revenue when we receive the cash, the new accounting tests are such that we have made a decision with our auditors with the exception of one licensee, we actually wait until the revenues have been received, the cash that has been received in the subsequent quarter to recognize revenues.

So typically there is a one-quarter push-out from licenses entered into in that quarter until the revenues start coming on the following quarter.

So is fourth quarter licensing revenue mostly representative of the additional licenses that you signed in the second quarter, then?

In the third quarter.

Yes.

Thank you.

Surely.

Moving on to David Reese, it's a private investor.

Yes.

I just have one question.

You indicated that since the end of the last quarter you had signed up 9 licensees, I think.

That represents a fairly substantial slowdown from a rate of the fourth quarter from what I could tell.

Is there any particular explanation for that?

Sure.

From time to time we established deadlines for rate increases, which tends to in certain periods of time in different licensing categories, accelerate licensing activity and in the fourth quarter there was a rate increase that was due at the end of the quarter and we believe that certainly that accelerated a lot of licenses from the cable TV companies.

And we will from time to time during our licensing program as we announce rate increases typically that would take affect at the end of a particular quarter oftentimes that results in a larger movement of licenses and many of them have also waited until the near the end of the quarter as well.

I understand.

Thank you.

Surely.

Do you have any further questions, Mr. Reese?

No, that's all I got right now.

Thank you.

We will take a question from Barry Raeburn at EGE.

Good afternoon, gentlemen.

Just a question on the legal expense line, just over 3 million in legal expenses for the 12 months ended December '04.

Obviously, '05 is going to be a much bigger year with respect to the activity in that environment.

What kind of guidance do you have on that front?

Well, first of all, let me clarify the legal expense for the past year.

The legal expense of 3 million one, there was a one-time legal expense of the deferred legal expense that was a percentage of the V-chip revenue, so on a normalized basis she would need to back out about $600,000 out of the annual legal expense run rate, which would have been then about 2.5 million for last year.

And in the fourth quarter we reported 780,000 of legal expenses and that was probably about 250,000 larger than a normal quarter because we had a tremendous amount of responses to motions, expert witness testimony, and the like.

So I would think we would still, relative to the DMT, I think as a rough approximation we've been running about $500,000 per quarter.

And with the new patent portfolios, which are represented by a large number of outside law firms, all of those are on a contingency basis.

So any increase in the legal expense would only come with corresponding revenues.

So our out-of-pocket so to speak, legal expense we still expect to be in the range of about $500,000 per quarter.

And it could, very quarter-to-quarter depending on activities.

Great.

Thanks for the clarification, Paul.

Sure.

And this will conclude the question-and-answer session for the Acacia Technologies Group.

You will now be placed on hold until 2:00 p.m.