Acacia Research Corp (ACTG) 2007 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Acacia Research third quarter earnings release conference call.

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

At the request of the Company, we will open the conference up for questions and answers after the 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 today with the SEC for our forward-looking statement disclaimer.

With me today are Chip Harris, President of Acacia Research, Dooyong Lee, Executive Vice President, and Clayton Haynes, our Chief Financial Officer.

Today I will give you an overview of the progress we are making in building the business and Clayton Haynes will provide you with an analysis of our financial results.

We will then open the call for questions.

As we just reported, Acacia Research revenues for the third quarter of 2007 were $9,544,000 compared to $8,424,000 in the year-ago period.

Trailing 12-month revenues were $47.9 million, compared to $35.8 million in the year-ago period.

Acacia Research third quarter GAAP net loss was $4,674,000 or $0.16 per share, including non-cash patent amortization and non-cash compensation charges totaling $3,555,000.

Cash and cash equivalents were $55.4 million at the end of the third quarter, compared to $45 million at the beginning of the year.

Acacia entered into 27 new licensing agreements in the quarter, and generated revenue from seven different licensing programs.

During the third quarter we acquired control of seven new patent portfolios, and now control 81 patent portfolios.

Dooyong Lee and his business development team continue to do an exceptional job in acquiring new patent portfolios for licensing, which is significantly increasing shareholder value.

Over the past 12 months, all of Acacia's employees have continued to deliver significant growth in all of our key performance metrics.

Revenues in the first nine months of 2007 have increased by 46% over the prior year period.

The number of revenue-producing licensing programs has grown by 39%.

Most importantly, our company's asset base, represented by the number of patent portfolios we control, has grown by 62%, and we achieved this significant growth in assets while also growing cash by 20% to $55million.

Over the next 12 months we expect continued growth and new licensing programs, and in the acquisition of new portfolios for future licensing.

Our track record of licensing success continues to increase opportunities for partnering with owners of patented technologies.

And our acquisition of new patent portfolios is increasing opportunities for future revenue growth.

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

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

Currently, these small companies and individual inventors and research labs, who hold the majority of the technology patents, generate only 1% of total patent licensing revenues.

By partnering with Acacia, these smaller entities now have the opportunity to generate significant revenues from their patented technologies.

Acacia is at a very early stage in the growth of our business.

Our recent licensing success is creating new business opportunities for us, and given the current pipeline of patented technologies we are evaluating, we expect to significantly expand our business over the next year.

We continue to an expanding group of leading law firms who want to partner with us, and we also continued to expand our team of talented and experienced IP executives with the addition of Brad Brunell, who joined us from Microsoft, where he was formerly General Manager, Intellectual Property Licensing, Jonathan Taub, who also joined us from Microsoft, where he was Director of Strategic Alliances for Mobile and Embedded Devices, and Marcel Mahdavi, who joined our Engineering team and formerly held positions with mComm Solutions, Sprint Nextel, Cingular Wireless, and AT&T.

Our policy is not to give future revenue guidance.

We do continue to expect uneven quarterly revenues at progressively higher levels, as our revenue opportunities over the next 12 months greatly exceed those of the past 12 months, as we will be launching several new licensing programs, and have a number of existing licensing programs that are beginning to generate revenue.

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

We have only begun generating revenues from 25 of our 81 patented technologies, and have realized only a small percentage of potential revenues from a number of these 25 licensing programs.

We will continue to be aggressive in adding new patent portfolios, which increases shareholder value and expands our future revenue base.

We continue to see a major business opportunity for Acacia as the leader in serving this unmet need in the marketplace.

I will now turn the call over to our Chief Financial Officer, Clayton Haynes.

Thank you, Paul.

As indicated in today's earnings press release, third quarter 2007 license fee revenues totaled $9.5 million, as compared to $8.4 million in the third quarter of 2006.

License fee revenues for the nine months ended September 30, 2007, totaled $40.6 million, as compared to $27.5 million for the comparable 2006 period.

During the third quarter of 2007, we generated revenues from seven of our technology licensing programs, including license fees from our DMT technology, Credit Card Fraud Protection technology, Multi-Dimensional Bar Code technology, Portable Storage Devices with Links technology, Image Resolution Enhancement technology, Pop-up Advertising technology, and Rule-Based Monitoring technology.

To date Acacia Research Corporation's subsidiaries have generated revenues from 25 technology licensing programs.

License fee revenues fluctuate from period to period, primarily as a result of the following four factors.

One, the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of the technology being licensed, and the magnitude of infringement or use associated with a specific licensee.

Two, the specific terms and conditions of license agreements executed each period, and the periods of infringement contemplated by the respective license fee payments.

Three, fluctuations in the total number of agreements executed each period.

And four, fluctuations in the sales results or other royalty-per-unit activities of our licensees that impact the calculation of license fees due.

Management continues to measure and assess the performance and growth of our business based on total license fee revenues recognized across all of our licensing programs on a trailing 12-month basis.

Trailing 12-month revenues were $47.9 million as of September 30, 2007, as compared to $35.8 million as of September 30, 2006.

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

The average margin for the third quarter of 2007 was approximately 41%, as compared to 68% for the third quarter of 2006.

Quarterly 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.

A significant portion of third quarter 2006 license fees were generated from portfolios that had a lower average inventor royalty percentage, and that did not have a contingent legal fee arrangement associated with them, resulting in a significant fluctuation in the average margin in the current quarter versus the prior year quarter.

For the third quarter of 2007, Acacia Research reported a GAAP net loss of $4.7 million, or $0.16 a share, versus a GAAP net loss of $1 million, or $0.04 a share in the third quarter of 2006, as illustrated in Acacia Research's comparative income statements provided in today's press release and a related 8-K filed with the SEC.

Excluding the impact of non-cash patent amortization charges of $1.7 million (sic - see Press Release), and non-cash stock compensation charges of $1.8 million, the third quarter 2007 net loss was approximately $1.1 million, as compared to net income of $1.3 million for the third quarter of 2006.

For the nine months ended September 30, 2007, Acacia Research reported a GAAP net loss of $3.8 million, or $0.14 a share, versus a GAAP net loss of $2.3 million, or $0.08 a share for the nine months ended September 30, 2006.

Excluding the impact of non-cash patent amortization charges of $4.3 million, and non-cash stock compensation charges of $3.8 million, Acacia Research reported net income for the nine months ended September 30, 2007 of $4.3 million, as compared to net income of $4.9 million for the comparable 2006 period.

Third quarter 2007 total operating expenses, which includes inventor royalties and contingent legal fees, totaled $14.8 million, as compared to $9.9 million in the third quarter of 2006.

The primary components of the quarter-to-quarter change in operating expenses include a $3million increase in inventor royalties and contingent legal fees expense related to the increase in license fees quarter-to-quarter and, to a greater extent, due to a significant portion of third quarter 2006 license fees being generated from portfolios that had a lower average inventory royalty percentage, and that did not have a contingent legal fee arrangement associated with them, as described earlier.

Two, an increase in personnel costs related to the addition of licensing, engineering, and business development personnel since the end of the prior quarter, and an increase in patent acquisition and business-development-related research and consulting costs, both of which are reflective of the continued growth and expansion of our ongoing business.

Three, an increase in facilities costs and other corporate general and administrative costs related to ongoing operations.

And lastly, an increase in employee non-cash stock compensation charges related to the issuance of additional equity-based incentive awards to new and existing Acacia Technologies' employees.

Third quarter 2007 patent-related legal expenses decreased to $2 million in the third quarter of 2007 from $2.4 million in the third quarter of 2006.

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

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 fiscal 2007, estimated fixed costs are expected to be in the range of $12 million to $12.5 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 fiscal 2007, excluding inventor royalties and contingent legal fees, are expected to be in the range of $6 million to $7 million.

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, licensing, 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 third quarter of 2007 totaled $612,000 versus $230,000 in the third quarter of 2006.

Moving on to a brief summary of our financial position as of the end of the third quarter of 2007, total assets related to continuing operations totaled $74.4 million as of September 30, 2007, compared to $65.4 million as of December 31, 2006.

As of September 30, 2007, cash and short-term investment balances totaled $55.4 million, versus $45 million as of December 31, 2006.

We had positive net cash inflows from operations for the nine months ended September 30, 2007 totaling approximately $8.8 million, versus net cash inflows from operations of $8 million for the nine months ended September 30, 2006.

Accounts receivable from licensees totaled $1.2 million at September 30, 2007, compared to $269,000 as of December 31, 2006.

The majority of receivables at 9/30/07 have been collected subsequent to quarter end, in accordance with the terms of the underlying license agreements.

Net cash outflows related to patent portfolio acquisitions for the nine months ended September 30, 2007 totaled $1.6 million, versus $1 million for the nine months ended September 30, 2006.

In conclusion, Acacia's management looks forward to continuing to build on our year-to-date growth and results throughout the remainder of fiscal 2007, and on into fiscal 2008.

I will now turn the call back over to Paul Ryan to begin the Q & A portion of today's conference call.

Thank you, Clayton.

Operator, if you could now open up the call for questions, please?

Thank you.

The question and answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

And the first question comes from Bennett Notman with Davenport.

Good afternoon, gentlemen.

Paul, could you talk a little bit about the rate at which new programs are becoming money-generating?

It seems like over the last couple quarters the ability to add new programs and make them money-generating has slowed a bit.

I'm just wondering if anything's changed in the landscape?

No, nothing has changed.

We have a number of portfolios, as you know, that we've acquired, roughly between 18 and 24 months.

And generally it takes at least 18 months to start generating revenues, so we certainly expect a number of those portfolios acquired in those time frames will start producing income this quarter, the fourth quarter of '07, and certainly into the beginning of '08.

So we do have a lot of new licensing programs that our IP executives have launched, and we're waiting to get first deals done in a number of those portfolios.

Is there something that's making these newer ones take longer maybe than previously, their size or just complexity?

Is there anything different, or is it just it's not a smooth process, so you can never really predict?

Well, no, I think we're staying within the norm.

I think the acquisition of Global--kind of some of those were already--had begun generating licensing.

So when we did the acquisition of Global Patent, a number of those started producing significant revenue, because they had already had time to start maturing in the licensing process, where all of the new ones we have to start from the very beginning.

So I think we're very much on course and the good news is that, if we stay on course, it should--we should have a lot of new programs start kicking in this quarter and in the beginning of next year.

Okay.

And then could you talk a little about the $235,000 write-off?

What was that about?

It's one of the patent portfolios that we have acquired that we do not think, realistically, that there's remaining licensing revenue.

So, appropriately in doing our quarterly testing for impairment, the Executive Committee decided to write off that asset, because we do not see the commercial potential for licensing at this time.

And was the $235,000--is that a price you paid for it, or was that the investment you had in it in doing your research on it, or how was that number arrived at?

It's just the remaining non-amortized basis in the portfolio.

Okay.

And then, should we look at the $5.45 million G&A level as sort of the run rate going forward, Clayton?

No.

In that number, Bennett, is--that number includes fixed costs and variable costs.

The fixed cost estimate for fiscal 2007 is between $12 million and $12.5 million.

And so that's what we're looking for for the rest of fiscal 2007.

And then, at this point in time it looks like that should be consistent for what we're looking for in 2008 as well.

So is the $5.45 million a little bit of a high number, because of the variable aspect, or was it--?

Yes.

Yes, exactly.

Included in that number is roughly $612,000 of what we'd consider to be variable-type costs.

Okay.

And then on the amortization of patent lines, that was up from the last few quarters.

Was that just a reflection of the patents purchased in the second quarter and starting to amortize those?

Yes, for the most part, yes.

All right.

Great.

Well, I've got some more, but I'll cede the floor and get back in the queue.

Thank you.

Okay.

Thanks, Bennett.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment.

The next question comes from Rob Ammann with RK Capital.

Yes, a quick follow-up to Bennett's question.

Can you give us the fixed costs year-to-date in the MG&A line, as well as the variable cost year to date in the MG&A line?

Yes, do you want fixed cash costs or including non-cash costs as well?

Including non-cash--whatever equates to the $612K variable cost that was in the MG&A line this quarter.

So if you have that for the prior two quarters, as well as the fixed component for the prior two quarters?

On the fixed-cost side of--the fixed costs year to date as of 9/30/2007 is roughly in the $8.5 million to $9 million range.

And on the variable-cost side, excluding patent-related legal cost, it is approximately--approximately $1.5 million.

And that's excluding patent-related legal cost.

Okay.

And a head count number at the end of the quarter?

Head count number at the end of the quarter is roughly 50 employees, of which roughly 10 of those are part-time employees.

Yes.

There's 41 full-time employees as of the end of the quarter.

We have some interns, who are a modest cash cost.

Okay.

And it was a very strong quarter with respect to licensing portable storage devices with links, like a very large number of deals.

But I'd have to say I was a little surprised that the revenue number didn't come through a bit higher, given my thought at least, in terms of what the average-sized deal look like for that piece of IP.

Maybe you could just talk about the average deal size in the quarter, what may have impacted that positively or negatively?

And, in general, if the initial deals you've done on a PSD with links are a little smaller than what you had hoped to monetize going forward there?

Well, no, they're within our expectations.

It's simply a function of the usage of that technology by the companies that we license.

Mm hmm.

Though you can't necessarily correlate the overall size of a company with the appropriate licensing rate for that product, and some of the companies we licensed use the CD with links widely and some of them may use it only in one or two product lines.

I guess that's what I'm getting at.

Of those that used it, were those generally smaller users than what you would look at for the average user in the portfolio of potential infringers overall in the quarter?

Or was it fairly typical in your opinion?

Well, no, I think it was fairly typical.

There was a blend, but there were some companies who are large companies who have limited use of that particular patented technology and therefore the royalty rates that they appropriately pay are not as large as one might have expect if they were paying on all their product lines.

Right.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

The next question comes from Bennett Notman with Davenport.

Yes, could you talk about the number of active litigations you're currently involved in, and maybe what new ones were instig--initiated during the quarter?

Yes.

I think we gave an aggregate number.

Going forward, Bennett, we are not going to list each and every litigation in the quarter.

We're simply going to give a summary number.

It's really not in our shareholders' best interests for us to detail out specifically which companies we have filed litigations with initially.

But currently, as of the end of the quarter, or at the current time, we have 44 total ongoing litigations.

So there were a number added in the quarter, certainly, but we're no longer going to break out each and every litigation and who the defendants are in each litigation.

But will there still be a list in the Q?

Is that required, or is that something you guys were doing just optionally?

We were doing that optionally.

It's not required and we're not going to continue to do that.

And the reason is, it's really not in our shareholders' best interests for us to necessarily telegraph in each and every portfolio specifically what the initial litigation is and which companies are in that litigation.

We will continue, of course, to provide the aggregated numbers, but as we continue to expand the business and move from here--you've seen our growth rate over the last year.

And certainly, as we continue to expand the business, I think it doesn't really serve a purpose and it is potentially negative for our shareholders and our company by telegraphing too many specifics.

And sort of building on the last question on average deal size, as some of these newer portfolios come on in 4Q and beyond, should we be seeing the average deal size creep up?

And, again, I know that's hard to predict, depending on what goes on in the quarter.

But is that a metric that, in general, should be rising?

I think overall it probably will, simply because a number of the portfolios that are generating our current revenues oftentimes were portfolios where there were smaller dollar revenues attached to them, whereas I think the newer portfolios we've brought in on average probably have revenue opportunities.

But we're going to continue to--license, for instance, on credit card fraud, which I'm sure you're familiar with.

It's a large volume of licenses at fairly small rates, which kind of skew the average deal size.

But as we complete some of those larger licensing programs, I'm sure you'll see the average deal size go up.

But if you look at the ones that you think are most likely to become revenue generating in 4Q and into early '08, are they ones that would tend to be average--larger average deal sizes, or would they be more like this with links, where we're sort of seeing something that's relatively consistent with what you've had before?

I think overall, relatively larger deal sizes.

Okay.

And then, Clayton, the stock comp number that we had this quarter--is that one that we should see recurring going forward, or was that front-end loaded for some of the hiring that you had done, or how should we think of that?

The increase in the stock compensation number does reflect additional awards to both existing and new employees, and so that number is going to be a consistent number rolling through each quarter for at least the next fiscal, couple of fiscal years.

Yes.

As we add IP executives who are going to drive the value of the Company, obviously we want them to have a meaningful stake from an equity standpoint.

And as we perform, and as our stock price rises in order to give them that equity stake, I think that number is going to continue to creep up.

But that'll be good news.

It means our stock is performing well on behalf of our shareholders, and we're continuing to attract high level IP executives who are going to continue to drive the performance of the Company.

And then on the legal expense patents line, I know there was some DMT activity in the quarter, so maybe that had inflated it a little bit.

Should we look for that to come down a little bit from Q3 levels or is that going to rise again as the Microsoft trial kicks off?

Wait a second, which specific line item were you referring to, Bennett?

The legal expense patents, $2 million in this quarter.

It really varies.

It's very, very difficult to predict, given the stage of litigation.

There's certainly--it's going to vary quarter to quarter, as some of these litigations move toward trial.

Obviously there's larger expense items, and in some cases we are sharing the hard cost with our law firm partners.

So it just depends on the progress of the litigation and what stage they at, and what the mix of them are in a particular quarter.

So it's very difficult--I mean there's no trend that you can predict, or no consistency.

But I know like DMT you guys do out of pocket.

That wasn't a disproportionate percentage of the third quarter expense relative to previous quarters that maybe won't be recurring in the fourth quarter?

Yes, you're correct.

DMT we are paying for the litigation, which is self-funded from the existing and recurring royalty rates that we're generating.

And so, to the degree that we have larger expenses relative to the DMT litigation, we're bearing the cost of that directly.

And that would disproportionately show up, because as you know, most of our litigations are being done on full contingency.

And therefore, our only financial cost is really sharing or paying certain hard costs, and those tend to only be significant when you get near trial and you have lots of expert witnesses and expert damage testimony that you need to prepare for.

And then if we look at the number of portfolios that contributed revenue in the quarter, it was seven, sort of eight last quarter, and it's been sort of running around this level for the last few quarters.

As we get into Q4 and maybe some more of these first-time licenses kick in, should we start to see that number go up on an absolute basis as well?

We would certainly hope so, yes.

We've got a number of licensing programs that are at the early stage and I think it's reasonable to assume that over the next couple of quarters a number of those will start generating first licenses.

And, hopefully, that will create momentum in the licensing programs similar to what you've seen with CD with links.

Okay, great.

Thank you.

Sure.

(OPERATOR INSTRUCTIONS).

We'll take another question from Rob Ammann with RK Capital.

Yes, could you provide an update on the Fund?

No, we don't really comment, nor would it be appropriate for us to.

I mean, when we have something to say, we will.

But it's--if we do the Fund, it's obviously--it's a sale of a private limited partnership interest, so we really are prohibited from commenting on that.

And we don't have anything to report at this time.

Mr.

Ammann, do you have any further questions?

No, thanks.

The next question comes from David Block with Block Capital.

Hi.

Just following up on that last one, Paul.

You answered, "If we do the Fund." Is there any contemplation of maybe not doing the Fund at this point?

Well, nothing's changed.

We continue the marketing, but it just--it's not appropriate for us to--publicly to comment on our activities.

But no, there's been no change and that certainly is our intent and direction.

Okay.

And then the Microsoft trial is coming up.

Can you maybe just talk a little bit--I know you can't probably say much, but maybe on start date, expected length of trial, given norms in that district, etc.?

What we do know is the start date is November 6th.

Trials sometimes can take their own courses, but we reasonably expect it would probably be two weeks.

That would be a reasonable expectation for a resolution of it, the trial.

Okay.

Thank you.

Sure.

Thanks, David.

We have a question from Seth Teich with Apex Capital.

Good afternoon.

I was wondering perhaps if you can give us a status on the cases that are on appeal, please?

We don't have that readily at hand.

I mean, there's a handful of them at various stages of appeal, but I don't have anything in front of me.

I think that if you want to follow up on a call, I can pull that information together with you on a case-by-case basis, but we don't have anything here at the moment that I could readily refer to.

Seth, traditionally--this is Chip.

Traditionally, it's taken about a year for the Federal Circuit to rule.

So when we get a final verdict on anything that we want to have the Federal Circuit review, on average it's taken about a year, maybe 14 months.

Might give you a better time line.

Okay.

Perfect.

But we're in the middle of that, obviously, with a number of cases.

But I just don't have all that in front of me.

But if you want to call in, we can give you that.

Perfect.

Thanks.

Okay.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment.

This will conclude the question and answer session.

I would now like to turn the conference back over to Mr.

Ryan for any additional remarks.

Okay.

Thank you, operator.

And I want to thank you all for being with us, and look forward to talking with you on our fourth quarter call.

And in the meantime, if there are any question you need answered, you can certainly give me a call or call Rob Stewart, our VP of Investor Relations.

Thanks for being on the call.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-203-1112, or 719-457-0820, with the ID number of 3738064.

Again, that's 888-203-1112, or 719-457-0820, with the ID number of 3738064.

The replay will be available through November 23.

This concludes our conference for today.

Thank you for participating.

Have a nice day.

All parties may now disconnect.