Acacia Research Corp (ACTG) 2006 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

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 8K which was filed with the SEC today for our forward looking statement disclaimer.

With me today are Chip Harris, President of the Acacia Technologies Group, Clayton Haynes, our Chief Financial Officer, and Rob Berman, our Chief Operating Officer and General Counsel.

Today I will give you an overview of the progress we are making in building the business.

Clayton Haynes will provide you with an analysis of our financial results, and Rob Berman will provide a brief update for litigations we have initiated.

We will then open the call for questions.

As we just reported, Acacia Technologies revenues for the year ended December 31st, 2006 were $34.825 million compared to $19.574 million for the year ended December 31st, 2005.

For the year, Acacia Technologies reported a GAAP net loss of $5.496 million or $0.20 per share, including noncash patent amortization and noncash stock compensation charges totaling $9.259 million.

Excluding the impact of the noncash charges, Acacia generated $3.8 million of net income in 2006.

Cash and short term investments were $45 million at year end compared to $39 million at the end of the prior year.

In 2006 Acacia Technologies began generating revenues from seven new licensing programs and is now generated revenue from 22 licensing programs.

In 2006 we acquired control of 20 patent portfolios for future licensing and now control 60 patent portfolios.

Revenues for the fourth quarter of 2006 were $7.313 million compared to $8.246 million in the year ago period.

New licensing agreements in the fourth quarter included licenses to Unilever, Wyeth, Capital One, LG Electronics, Best Western, Funai and Dell.

We also acquired control of seven new patent portfolios in the fourth quarter.

For the fourth quarter Acacia Technologies Group reported a GAAP net loss of $3.137 million or $0.11 per share, including noncash patent amortization and noncash compensation charges totaling $2.346 million.

In 2007 Acacia technologies expects continued growth in revenues, new licensing programs, and new patent portfolios for future licensing as we continue to build our leadership position in patent licensing.

Our licensing success during the past year is increasing opportunities for partnering with owners of patented technologies for future licensing programs.

Acacia continues to build the country's premier patent licensing company.

We are meeting a huge unserved need in the market from inventors, research labs and small technology companies that do not have the scale, expertise or experience to effectively execute patent licensing and enforcement programs.

To put this market opportunity in perspective at a recent investment conference a presentation compared who owns patents in the information technology sector and who generates licensing revenues.

It was revealed that 40% of the patents come from large corporations and 60% come from small companies, individual inventors and research labs.

The large companies generate 99% of all the licensing revenues while the small companies and individual inventors, who hold the majority of patents, generate only 1% of licensing revenues.

This clearly demonstrates that large companies know how to get paid for their patents while small companies and individual inventors do not have the scale, expertise or experience to get paid for theirs.

We believe that by partnering with Acacia, these smaller companies now have the opportunity to generate appropriate revenues from their patented technologies.

We are at a very early stage in the growth of our business.

Our licensing success in 2006 is creating new business opportunities for us and given the current pipeline of patented technologies we're evaluating, we expect to significantly expand our business in 2007.

The creation of Acacia shareholder value is built in three phases.

The first step in creating shareholder values starts with the acquisition of the new patent portfolios from our partners.

Acacia's share of licensing revenue after legal fees and expenses is generally 50%.

The second step in creating share holder value is launching the licensing and enforcement programs and completing initial licensing agreements.

Generally the first license is the first most difficult and very important because it significantly increases the probability of completing additional licenses.

The third step in creating value is expanding the licensing and enforcement efforts and initiating litigation when necessary to generate significant revenues for fully licensing the market for each technology.

In 2006 our licensing, engineering and business development teams did a great job in all three areas of building shareholder value.

We added 20 new patent portfolios, initiated seven new revenue generating licensing programs, and increased our revenues by 78%.

Our policy is not to give future revenue guidance due to the lumpy nature of our quarterly revenues, particularly in the early stages of our growth.

What we can say is that our revenue opportunities for 2007 greatly exceed those of the past year as we are beginning the year with a larger number of patent portfolios for licensing and a much larger number of active revenue generating licensing programs already in place.

Acacia is at a very early stage in generating revenues from its patent portfolios.

We have only begun generating revenues from 22 of our 60 patented technologies and have realized only a small percentage of the potential revenues from many of these 22 licensing programs.

We will continue to be aggressive in adding new patent portfolios which will continue to build our future revenue base.

In summary Acacia is very well positioned for growth.

We are serving a very large market.

We have very talented licensing, engineering, and business development teams in place.

We are establishing a very successful track record in licensing.

We are attracting new business at an accelerating rate.

We have a strong balance sheet and we have built a large base of potential future revenue from our 60 patent portfolios.

We continue to see a major business opportunity for our Company in serving this unmet need in the marketplace.

Before I turn call over to Clayton Haynes I'd also like to make a comment, we received a-- regularly a lot of calls regarding the CombiMatrix split off.

At the present time CombiMatrix plans to file an amended S1 including year end financials to the SEC within the next two weeks.

The split off will occur as soon as the SEC declares that S1 effective.

And with that I'd like to turn the call over the Clayton Haynes, our Chief Financial Officer.

Thank you, Paul.

As indicated in today's earnings press release fourth quarter 2006 license fee revenues totaled $7.3 million as compared to $8.2 million in the fourth quarter of 2005.

During the fourth quarter of 2006, the Acacia Technologies Group generated revenues from six of technology licensing programs, including our DMT technology, audio/video enhancement and synchronization technology, image resolution enhancement technology, [interstitchal] internet advertising technology, multi-dimensional bar code technology and our first license for our audio communications fraud detection technology.

To date, the Acacia Technologies Group has generated revenues from 22 of it's technology licensing programs.

As discussed in prior quarters, license fee revenues fluctuate from period-to-period primarily as a result of the following four factors.

First the mix of specific financial terms and conditions of the license agreements executed each period.

Second, fluctuations in the number of license agreements executed each period.

Third, fluctuations in the royalty per unit activities of our licensees.

And fourth the timing of the receipt of periodic license fee payments and/or periodic reports from licensees.

Acacia Management measures and access the performance and growth of our business based on total license fee revenues recognized across all our licensing programs on a trailing 12 month basis.

Trailing 12 month revenues were $34.8 million as of December 31, 2006 as compared to $19.6 million as of December 31, 2005, reflecting a 78% increase as of the end of 2006 compared to the end of 2005.

Our average margin is defined as gross license fees less inventor royalties expense and contingent legal fees for the portfolios generating revenues during the period.

Our average margin was approximately 40% in the fourth quarter of 2006 as compared to 35% for the fourth quarter of 2005.

Average margins fluctuate period-to-period based on the mix of patent portfolios that generate revenues each period, and the related economics associated with the underlying inventor agreements and contingent legal fee arrangements, if any, related to the revenue generating portfolios.

For the fourth quarter of 2006, the Acacia Technologies Group reported a GAAP net loss of $3.1 million versus a GAAP net loss of $1.083 million in the fourth quarter of 2005, as illustrated in the Acacia Technologies Group comparative income statements provided in today's press release and related 8K filed with the SEC.

Excluding the impact of noncash patent amortization charges of $1.322 million and noncash stock compensation charges of $1.024 million, the Acacia Technologies Group fourth quarter 2006 net loss was approximately $800,000 as compared to break even for the fourth quarter of 2005.

As a reminder the new accounting standard that requires all companies to expense stock options and other stock-based awards in the income statement was adopted effective January 1, 2006, resulting in the significant increase in noncash stock compensation charges reflected in the 2006 quarterly and annual results.

Fourth quarter 2006 operating expenses totaled $10.8 million as compared to $9.6 million in the fourth quarter of 2005.

The primary drivers of the quarter-to-quarter change in operating expenses include a $982,000 decrease in inventor royalties and contingent legal fees expense, due to the slightly lower amount of license fee revenues recognized in the fourth quarter of 2006, and due to the higher average margin in the fourth quarter of 2006 stemming from the licensing of certain patent portfolios in the quarter with lower contingent legal fee percentages associated with them.

A $791,000 increase in noncash stock compensation charges resulting from the adoption of the new stock option expensing standard in 2006, an increase in MG&A related to the addition of licensing, engineering and business development personnel since the end of the prior year quarter, which is reflective of the continued growth of our business, an increase in patent related research and consulting costs related to ongoing licensing programs and business development related diligence efforts.

And lastly, an increase in facilities costs and other corporate, general and admin. costs related to our ongoing operations including certain costs associated with the planned split off of CombiMatrix Corporation.

In addition, fourth quarter 2006 patent related legal expenses increased to $977,000 versus $295,000 in the prior year quarter.

Patent related legal expenses include prosecution and enforcement costs incurred by outside patent attorneys and gauged on an hourly basis, and the out of pocket expenses incurred by law firms engaged on a contingent fee basis.

Specifically patent related legal expenses include case related costs billed by outside counsel for economic analysis and damage assessments, expert witnesses and other consultants, case related audio/video presentations for the court and other litigation support and administrative costs.

The increase in patent related legal expenses in the fourth quarter of 2006 versus the fourth quarter of 2005 is due to a net increase in the number of ongoing patent enforcement litigations in the fourth quarter of 2006 versus the fourth quarter of 2005, and an increase in the number of portfolios where we are paying on an hourly or discounted hourly basis.

The increase also reflects significant third party expert expenses including costs incurred related to the expert witnesses and the preparation of damages reports incurred in connection with certain of our patent portfolios that are further along in litigation.

We expect that patent related legal expenses will continue to fluctuate from period-to-period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and with the commencement of new licensing and enforcement programs in each period.

For 2007 estimated fixed costs for the Acacia Technologies Group are expected to be in the range of $10 million to $12 million.

Fixed costs include employee salaries and benefits, facilities costs, corporate, legal, accounting and other general and admin. costs, and are included in the marketing, general and administrative expense line in our income statement.

Estimated variable costs for 2007 excluding inventor royalties and contingent legal fees are expected to be in the range of $4.5 million to $5 million for the year.

Variable costs include patent related legal expenses, patent related research, consulting, and maintenance expenses, and other patent related development and commercialization expenses.

These costs fluctuate quarter-to-quarter based on business development, enforcement, research and prosecution activities each quarter.

All variable costs excluding patent related legal costs are included in the marketing, general, and administrative expense line in our income statement.

Variable costs included in MG&A for the fourth quarter of 2006 and 2005 totaled approximately $195,000.

I will now provide an overview of the results for the full year ended December 31, 2006.

License fee revenues recognized in 2006 totaled $34.8 million representing a 78% increase over revenues recognized in 2005 which totaled $19.6 million.

The increase in license fee revenues reflects the impact of the increase in patent portfolios controlled by the Acacia Technologies Group and the increase in the number of patent licensing programs launched and generating revenues since the prior year period.

Our average margin as defined earlier was approximately 51% in 2006 as compared to 43% in 2005.

The Acacia Technologies Group 2006 division net loss was $5.5 million as compared to $6.3 million in 2005.

Included in the 2006 divisional results our noncash stock compensation charges and noncash patent amortization charges totaling $9.3 million versus $5.3 million in 2005.

Excluding the impact of noncash patent amortization charges of $5.3 million and noncash stock compensation charges of $3.9 million, the Acacia Technologies Group 2006 net income was $3.8 million versus nearly break even in 2005.

Marketing, general, and administrative expenses, excluding noncash stock compensation for 2006 increased to $10.3 million from $7.8 million in the comparable 2005 period.

The net increase was due primarily to the addition of licensing, business development, and engineering personnel, an increase in patent related research and consulting expenses for new and ongoing licensing programs, an increase in accounting and legal fees related to the split off transaction, and an increase in corporate, general and administrative costs related to the continued growth of Acacia Technologies Group's ongoing operations.

Inventor royalties expenses for 2006 totaled $9.6 million versus $5.5 million in 2005.

Contingent legal fees expense for 2006 totaled $7.5 million versus $5.6 million in 2005.

Patent related legal expenses for 2006 were $4.8 million versus $2.5 million in 2005.

Cash receipt from licensees totaled $30.2 million for the year ended December 31, 2006 and $15.6 million for the year ended December 31, 2005.

Net cash inflows from operations for 2006 totaled $6.4 million compared to net cash outflows from operations of $3 million in 2005.

As of year end cash and short term investment balances totaled $45 million versus $39 million as of the end of 2005.

In conclusion, the Acacia Technologies Group licensing business development and engineers produced a strong year of revenue growth and a strong year of overall performance for the inventors with whom we partner, and for Acacia's shareholders.

We look forward to continuing to build on our 2006 growth and strong results in 2007.

I will now turn call over to Rob Berman, Chief Operating Officer and General Counsel of Acacia, for his remarks.

Thank you, Clayton.

Since the last report to shareholders on October 26th, 2006, companies that are part of the Acacia Technologies Group dismissed five lawsuits in their entirety involving seven parties in connection with our broadcast data retrieval, product activation, and image resolution enhancement technologies.

We have also dismissed five parties from ongoing litigation in connection with our audio/video enhancement, user activated Internet advertising, portable devices with links and credit card fraud protection technologies.

As previously announced our credit card fraud protection patent emerged from reexamination from the U.S.

PTO with all of it's claims intact, and we are again vigorously pursuing our licensing and enforcement campaign for that technology.

In addition, we became involved in five new lawsuits with 22 companies in connection with our information monitoring, portable devices with links, telematics, high quality image processing and broadcast data retrieval technologies.

As a result we currently have 33 ongoing lawsuits involving 118 companies.

As always additional information with respect to any of these lawsuits is available through the pacer system.

I'll now turn the call over to Paul Ryan who I believe will lead our Q&A session.

Yes operator, if you could open up the call for questions and answers.

[OPERATOR INSTRUCTIONS] Our first question comes from Michael Cohen of Pacific American Securities.

Please go ahead sir.

Yes, hi Paul.

One of the things I was wondering you now have 60 portfolios in total, 22 of which have generated revenue.

What do you think the mature ratio of total portfolios to paying portfolios will be as your business matures?

I know you evaluate your portfolios pretty well up front before you take them on.

Sure.

It generally takes -- I think a better way to look at the situation is on average it takes us approximately 18 months from the time we partner on a new patented technology to begin generating licensing revenues.

So as you can see if you go back and look 18 months ago I think we probably had somewhere in the area of 31 patent portfolios, and we've already generated revenues from 22 of those.

So the newer ones-- there is a lead time from the time we acquire the portfolio.

We have, in some cases, generated licensing before that, but I would assume there's about an 18 month lag period from bringing in the portfolio to beginning to generate revenues.

You think 22 over 31 would be roughly what a mature ratio would be?

No we've still got some programs that we've yet to do our first license.

And there's probably of those 31 there are about six of them that primarily relate to litigation against a small number of parties.

So we wouldn't have expected at this stage probably to have entered into settlements or final dispositions of those.

So it's probably a better way to say out of the 31, six were kind of more pure litigation leaving about 25 and we've generated 22 out of 25.

Okay.

And my next question is I'm kind of wondering how one time payments versus ongoing royalties happen?

When you license somebody, do you frequently get I guess a past production payment and then get an ongoing payment, or do a lot of people prefer to settle just in a lump sum and then have the rights going out?

Most of our licenses are paid up licenses.

It's more efficient for us if it reflects the net present value of the use of the technology.

Most companies prefer that don't have ongoing and be monitoring and auditing their records.

Some of our paid ups do have contingencies based on either our future licensing activities or expanded use of the technology.

Some of our other portfolios lend themselves to recurring royalty payments, but the majority of our deals are paid up deals which would include past infringement as well as anticipated future usage.

Got it.

Okay thank you very much.

Sure.

Thanks, Michael.

Thank you [OPERATOR INSTRUCTIONS] We'll go to Bennett Notman of Davenport.

Good afternoon and congratulations on a year of progress.

Could you just tell me if any of the five new lawsuits that you entered into in the quarter would sort of be categorized as binary in nature?

Well why don't I have Rob Berman answer that.

Sometimes it's difficult in certain cases there may only be one or two infringers and if the potential damages are significant usually those take a longer time to get resolved given the dollar amounts and I guess that's what you be referred to as a binary case.

So I don't know Rob with that context, if you could comment on that?

Sure.

In each of the new litigations that I referred to earlier we do have multiple defendants.

And so I'm just looking through my list now as we speak but I don't believe that any of those new lawsuits were against single defendants.

All right great.

And then you mentioned in your commentary that there's an increase in the number of portfolios where you're paying legal fees on an hourly basis, is that a conscious shift away from contingency in some of these cases, or is ti just something that's done in addition to contingency?

No we're primarily still all on contingency cases.

Selectively there are occasions where we feel that there may be early settlements immediately upon the filing of litigation.

And so we may choose to pay in that case but if it's expected that it's going to be extended litigation we still choose to do the vast majority of those on contingency.

Okay thank you.

Okay.

Thank you.

And we'll go next to Harris Hall of Singular Research.

Hey guys how are you doing?

Hi Harris.

Question on the DMT litigation.

Can you give us an update on where that is?

Sure why don't a I have Rob Berman fill you in on that.

Sure, we're still in the claims construction process, although the judge did issue a third claims construction order since the last conference call.

We are expecting a fourth claims construction order from the judge from the court and we have no indication when that will be.

After all four claims construction orders are issued, we will evaluate them and determine what our next steps are from there, which could be a variety of possibilities, including reconsideration of some of the terms that he has defined, initiation of discovery and many other possibilities.

So we're still waiting for what should be a final claims construction order and then we'll evaluate our opportunities at that time.

Should investors still view that as kind of the big case that we're waiting to be resolved in 2007, or are there others that their may be more material that you expect to be resolved in 2007?

We're first of all, I don't think that it's a fair assessment to assume that the DMT case is going to be resolved in 2007.

The litigation has already gone on for many years and frankly I think it's an unrealistic expectation to think that it would be resolved in 2007.

Especially in light of the fact that we haven't even begun discovery yet.

So that I would say respect to DMT.

Overall, we have several cases that have significant revenue potential associated with them.

And so frankly, we are no longer the DMT company.

We have cases that could potentially bring in value of-- significant value or even equal or exceed what DMT may bring in.

So if you're going to sort of look at and judge Acacia, the way to do is not based on how the DMT case is going, but rather how all of our portfolios are going.

Okay.

Also I know that you've been in discussions with other companies about acquiring larger portfolios of patents.

Perhaps exceeding what you'd comfortably pay out of your existing cash balances, has there been any further negotiations there or any updates?

Yes we've been offered a number of opportunities as we've licensed many of the Fortune 500 companies from that source as well as others with our rising visibility in the marketplace.

We have been offered a number of patent portfolios that we have been doing due diligence on and negotiating.

If the acquisition price of those portfolios kind of exceeds what we think is a fair given our current capital structure we will do that by partnering with other financial investors.

But we are evaluating a number of portfolios that have been offered to us that would fit into that category.

Thank you very much.

[OPERATOR INSTRUCTIONS] And we'll go to Jason Stankowski of Castle Peak.

Mr. Stankowski, please go ahead.

Yes, thank you.

Hi guys, just curious if you can comment at all on the agreement you've reached with Lexmark and give us a sense of whether that is a paid up license or something with an up front fee, an ongoing royalties, et cetera.

And also maybe give us a sense of the order of magnitude you think the-- that will be relative to the balance of your current portfolio?

All our license agreements have confidentiality provisions in them which prohibit us from going into issues such as the ones that you're asking about.

In terms of paid out versus recurring, versus size of payments.

So the answer is we are contractually prohibited from going into those areas.

Okay.

So however, I guess you're a public Company so would you -- we just have to wait and see what cash ends up on your balance sheet and ask then?

I mean there's a certain amount I guess that you have to disclose and how are you able to enter into those agreements without kind of breaking the agreements you've made with your public shareholders?

Well our policy to date has been to announce all deals and so we are able to announce the deal.

And when we announce earnings for a given quarter, we don't necessarily announce which earnings go along with which agreement.

And it's that that would actually be the violation.

So we've announced several deals already in the first quarter that have been completed and you'll have to wait until we release our first quarter earnings to see the effect that those deals have had on the Company.

Okay.

Thanks.

Sure.

Okay thanks Jason.

Thank you.

We'll return to Michael Cohen of Pacific American Securities.

Yes this is a DMT case question for Rob Berman.

When we get the fourth claims construction order back, do you consider any of the claims from all four orders-- or construction significant enough that you would be following summary judgment actions?

From the plaintiff's perspective, it would be difficult to file summary judgment actions without having any discovery at this point.

So I would say that the chances are probably not but frankly I would have to get together with our outside litigation counsel and review all of the four claim construction orders before that decision would definitely have been made.

So the claims construction alone doesn't seem definitive enough to where just on the language alone it would lead to possible summary judgment?

Well it doesn't-- it's usually not definitive enough on the infringement side.

It may be on the invalidity side.

And so don't be surprised if some of the defendants move for summary judgment with respect to the validity or invalidity of some of the claims.

Because in order to do that, all you have to do is look at the judge's ruling and look at the patents.

You don't have to look at the actual infringing devices.

Got it.

It would be more likely that the defendants will be bringing summary judgment motions and that we would not.

I'd also like to add that as we've described many times, these cases are long drawn out cases and in order to succeed it's necessary for us to have one valid claim left that's infringed.

And it's really the defendant's job to try and gnaw away, I usually define it as a big iceberg and different chips and chunks are going to be taken out along the way, but we only need one ice cube left at the end of the case to win.

So don't be surprised if the defendants do move for summary judgment on certain claims.

And further more don't be surprised if we end up losing certain claims.

That is usually -- that actually is quite typical for a patent infringement case.

And do you have any idea how long you expect this discovery period to last?

You know what the judge hasn't even started discovery yet.

And generally between regular discovery and then expert discovery, and I'm just speaking in very general terms, that period is usually at least nine months to a year.

So at this point we don't have a trial date and we haven't begun discovery and so that's why I said earlier that I thought it was unrealistic to expect any type of final event with respect to the DMT portfolio in 2007.

However, we have many other portfolios as I added earlier that we are as excited about as DMT, and which frankly may more likely lead to revenue events quicker than the DMT portfolio will.

And a lot of that depends on how quickly the judge moves the case along, in what jurisdiction the case is filed, how many defendants are in the case, there's a number of factors that determine how quickly a case moves along.

In terms of the timing of where the cases are and the potential magnitude from the various cases you have going, which cases in the first half of the year are you most excited about?

It's our policy not to point to specific cases.

What I'm excited about is a relatively-- can change from time-to-time from day-to-day based upon developments in the case.

And frankly it's very hard to handicap these cases.

Things happen with respect to prior [art] or with respect to claims that change your assessment of the case fairly quickly.

The good thing is that we now have a number of portfolios, and so that the the risk of anything going wrong in any one case is no longer frankly material to the Company because we have so many other portfolios that are sources of revenue for us.

Great.

Okay.

Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] We'll go now to [Norman Lipton] a private investor.

Good afternoon.

I was wondering if you could give us some color on the pending U.S.

Supreme Court cases and how you think they'll impact your current patent portfolios?

Norman, most of the cases that are going on currently will not have any impact on our business.

Either several high profile cases going on now regarding the Microsoft case that's going on with offshore use of their technology and being imported, and from a practical standpoint we don't see that any of the current Supreme Court cases would have any impact on our businesses.

Great.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] And this will conclude the question and answer session for the Acacia Technologies Group.