Acacia Research Corp (ACTG) 2007 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research fourth quarter release earnings 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 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 with the SEC today, for our forward-looking statement disclaimer.

With us today are Chip Harris, President of Acacia, 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 up the call for questions.

Acacia had a great year in 2007.

We grew our annual revenues by over 50% and also grew our Company's assets, represented by the number of patent portfolios we control, by over 50%.

In 2008 we expect another year of growth in all aspects of our business.

As we just reported, Acacia's fourth quarter revenues were $12 million compared to $7.3 million in the prior year.

In the fourth quarter Acacia generated revenues from 22 new licensing agreements, covering 10 different licensing programs, including initial revenues from 3 new licensing programs.

Acacia also acquired control of 8 new patent portfolios for future licensing in the quarter.

Acacia's fourth quarter revenues contributed to record annual revenues of $52.6 million, up 51% from $34.8 million in the prior year.

In 2007 Acacia acquired control of 31 new patent portfolios for future licensing and ended the year with 88 portfolios, which was up 54% from the prior year.

Acacia also started generating revenues from 8 new licensing programs in 2007 and had begun generating revenues from 28 programs by the end of the year, which was up 40% from the prior year.

Over the past year we also expanded our team of talented and experienced [IP] executives and also attracted an expanding group of leading law firms who have partnered with us.

As you are aware, during the fourth quarter we went to a jury trial on our computer acceleration technology and lost.

We were obviously disappointed in the outcome but, as we have advised shareholders, outcomes of jury patent trials are highly unpredictable and the national historic averages indicate approximately 50/50 outcomes between plaintiffs and defendants.

We only go to trial when our licensing efforts and settlement discussions do not succeed.

The national average indicates that only 3% of patent litigation results in trials, so only a limited number of our licensing programs will likely go to trial.

Over the long term our success rate in trials will probably be the same as the industry average of approximately 50%.

As you know, we have grown revenues at a very high rate over the past three years without any revenues coming as a result of jury verdicts, so while we may receive trial awards in the future they are not fundamental to the growth of our business.

In 2008 we expect continued growth in revenues, new licensing programs, and new patent portfolios for future licensing.

Our success in completing over 540 licensing agreements to date, covering 28 different technologies, is generating interest from technology companies, universities, and research centers, wanting us to partner with them and take over the licensing of their patent technologies.

These new portfolios will increase opportunities for future revenue growth.

We continue to meet a huge unserved need in the market from these technology companies, universities, research labs, and individual inventors who do not have the scale, experience, or expertise to effectively execute patent licensing and enforcement programs.

Acacia's market opportunity is very large.

Our potential partners generate over half of all technology patents, yet currently generate only 1% of patent licensing revenues.

By partnering with Acacia these groups now have the opportunity to generate significant revenues from their research and development efforts.

Dooyong Lee and his Business Development Team continue to do an exceptional job in identifying great patented technologies and working to complete partnering agreements.

Acacia continues to be in the early stages of the growth of its 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 the number of patent portfolios we control over the next year.

Acacia is also at an early stage in generating revenues from our current portfolios.

We have only begun generating revenues from 28 of our 88 patented technologies, and have realized only a small percentage of revenue from a number of these 28 current licensing programs.

Our recent additions of experienced licensing executives will contribute to the growth in the number of new licensing programs in 2008.

Acacia is well positioned with talent and assets to grow our business, and we are fortunate to be in a business which is uncorrelated to current difficulties in the economy.

As you know, 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 significantly exceed those of the past 12 months, as we will be launching a number of new licensing programs and have a number of existing licensing programs that are just beginning to generate revenue.

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

Thank you, Paul.

For purposes of my prepared remarks today, all references to revenues, expenses, net results, and all financial data will refer only to revenues, expenses, net results, and financial data from the continuing operations of Acacia Research Corporation for all periods discussed.

For information on the consolidated net results, including the impact of the discontinued operations of [Compumatrix Corporation], please see our consolidated net results included in our earnings press release and related 8-K, filed with the SEC earlier today.

As indicated in today's earnings press release, fourth quarter 2007 license fee revenues totaled $12 million as compared to $7.3 million in the fourth quarter of 2006.

During the fourth quarter of 2007 we generated revenues from 10 of our technology licensing programs, including initial license fee revenues from our Electronic Address List Management technology, Vehicle Magnetic Braking technology and Telematics technology licensing programs.

Fourth quarter 2007 license fee revenues also included fees from the licensing of our DMT technology, Audio/Video Enhancement and Synchronization technology, Image Resolution Enhancement technology, Audio Communications Fraud Detection technology, Portable Storage Devices with Links technology, Pop-up Advertising technology, and Credit Card Fraud Protection technology.

To date, Acacia Research Corporation's subsidiaries have generated revenues from 28 technology licensing programs.

License fee revenues continue to fluctuate from period to period based on fluctuations in 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 the specific licensee.

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

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

Acacia's 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.

Consolidated trailing 12-month revenues totaled $52.6 million as of December 31, 2007 as compared to $46.8 million as of June 30, 2007, and $34.8 million as of December 31, 2006.

Our average margin for the fourth quarter of 2007 defined as gross license fees less inventor royalties expense and contingent legal fees for the portfolios generating revenues during the period was approximately 47%, as compared to 33% for the fourth 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 event or agreements and contingent legal fee arrangements, if any.

The fourth quarter 2007 versus fourth quarter 2006 gross margin variance was due primarily to lower average inventor royalty percentages associated with certain of the portfolios generating revenues in the fourth quarter of 2007 as compared to the fourth quarter of 2006.

For the fourth quarter of 2007 Acacia Research reported a GAAP net loss from continuing operations of $3.5 million or $0.12 a share versus $3.1 million or $0.11 a share in the fourth quarter of 2006 as illustrated in our comparative income statements provided in today's press release and related 8-K filed with the SEC.

Excluding the impact of noncash patent amortization charges of $1.5 million and noncash stock compensation charges of $2.1 million the fourth quarter 2007 results from continuing operations were nearly breakeven as compared to a net loss excluding noncash charges of $750,000 for the fourth quarter of 2006.

Operating expenses for the fourth quarter of 2007 and 2006 included inventor royalties expenses of $2.3 million and $2.5 million, respectively, and contingent legal fees expense of $3.7 million and $1.9 million, respectively.

As indicated earlier, inventor royalties and contingent legal fees expenses fluctuate period to period based on the amount of revenues recognized each period and the mix of specific patent portfolios with varying economic terms, generating revenues each period.

Certain of the patent portfolios generating revenues in the fourth quarter of 2007 had lower average event or royalty rates associated with them, resulting in the 9% decrease in inventor royalties expense in the fourth quarter of 2007 as compared to the fourth quarter of 2006, despite the 64% increase in license fee revenues over the same period.

Fourth quarter 2007 marketing, general, and administrative expenses excluding noncash stock compensation charges discussed earlier increased 29% to $3.9 million from $3 million in the comparable 2006 period.

The net increase was due primarily to the addition of licensing, business development, and engineering personnel, and increase in patent related research and consulting expenses for new and ongoing licensing programs, and an increase in corporate, general, and administrative costs related to the continued growth and expansion of our operations and the operations of our subsidiaries.

The increase was partially offset by a decrease in consulting expenses due to the expiration of the consulting agreement with the former CEO of Global Patent Holdings, LLC in January 2007 and a decrease in professional fees related to the split-off of Compumatrix Corporation.

Fourth quarter 2007 patent related legal expenses increased to $2.6 million from $977,000 in the fourth 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.

Specifically, patent related legal expenses include case related costs billed by outside counsel for discovery, depositions, economic analysis, damages assessments, expert witnesses, and other consultants, case related audio-visual presentations for the court and other litigation support and administrative costs.

The increase in patent related legal expenses in the fourth quarter of 2007 as compared to the fourth quarter of 2006 is primarily due to a net increase in the number of ongoing patent enforcement litigations and an increase in litigation support related out-of-pocket expenses incurred in connection with certain of our patent portfolios that are further along in the prosecution of the related litigation and certain of our patent portfolios that have proceeded to trial and concluded.

We expect patent related legal expenses to continue to fluctuate quarter to quarter based on the factors summarized earlier in connection with current and future patent commercialization and enforcement programs.

I will now provide a brief summary of results for the fiscal year ended December 31, 2007.

As indicated in today's earnings press release, fiscal 2007 license fee revenues increased 51% to $52.6 million as compared to $34.8 million in 2006.

During 2007 we generated revenues from 16 of our technology licensing programs.

Our average margin for 2007 was approximately 42% as compared to 46% for 2006.

For fiscal 2007 Acacia reported a GAAP net loss from continuing operations of $7.4 million or $0.26 a share versus $5.4 million or $0.19 a share in 2006 as illustrated in our comparative income statements provided in today's press release and related 8-K filed with the SEC.

Excluding the impact of noncash patent amortization charges of $5.6 million and noncash stock compensation charges of $5.9 million, we reported net income from continuing operations of $4.1 million as compared to net income excluding noncash charges of $3.9 million for 2006.

Operating expenses for 2007 and 2006 included inventor royalties expense of $12.1 million and $9.6 million, respectively, and contingent legal fees expenses of $17.2 million and $7.5 million, respectively.

A portion of 2006 revenues were comprised of license fees from patent portfolios without a contingent legal fee arrangement associated with them, resulting in the 128% increase in contingent legal fees expense in 2007 compared to 2006, as compared to the 51% increase in license fee revenues for the same periods, as discussed earlier.

Marketing, general, and administrative expenses for 2007, excluding noncash stock compensation charges described earlier, increased to $14.1 million from $10.2 million in the comparable 2006 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 and expansion of our operations and the operations of our subsidiaries.

The increase was partially offset by a decrease in consulting expenses due to the expiration of the consulting agreement with the former CEO of Global Patent Holdings in January 2007.

Fiscal 2007 patent related legal expenses increased to $7 million in 2007 from $4.8 million in 2006.

The increase in patent related legal expenses in 2007 as compared to 2006 is primarily due to a net increase in the number of ongoing patent enforcement litigations and an increase in litigation support related out-of-pocket expenses incurred in connection with certain of our patent portfolios that are further along in the prosecution of related litigation and certain of our patent portfolios that have proceeded to trial and concluded.

Looking forward, for fiscal 2008 estimated fixed costs are expected to be in the range of $12.5 million to $13.5 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 2008, excluding inventor royalties and contingent legal fees, are expected to be in the range of $7 million to $8 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 period to period based on business development, licensing enforcement, research, and prosecution activities each period.

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 2007 totaled approximately $650,000 versus $240,000 in the fourth quarter of 2006.

Variable costs included in MG&A for fiscal 2007 totaled approximately $1.9 million versus $694,000 in fiscal 2006.

Moving on to a brief summary of our financial position as of the end of the year, total assets as of December 31, 2007 totaled $71.1 million compared to $65.4 million as of December 31, 2006.

As of December 31, 2007 cash and short-term investment balances totaled $51.4 million versus $45 million as of December 31, 2006.

Positive net cash inflows from operations for 2007 totaled approximately $5.5 million versus net cash inflows from operations of $6.2 million for 2006.

Net cash outflows related to patent portfolio acquisitions for the fourth quarter of 2007 totaled $2.2 million.

Net cash outflows related to patent portfolio acquisitions for fiscal 2007 totaled $3.8 million versus $1 million in 2006.

I want to thank our talented teams of licensing executives, business development executives, and engineers for all of their efforts and for making this record year of performance for Acacia and our partners possible, and I look forward to continuing with this trend of growth in 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, can you open up the call for questions?

Yes, sir.

Thank you.

(OPERATOR INSTRUCTIONS.)

And we'll take our first question from Bennett Notman with Davenport.

Good afternoon, and congratulations on a nice finish to the year.

Thank you.

Paul, could you talk a little bit, how much Microsoft expense was in the legal expense line in the fourth quarter?

I believe it was approximately $900,000.

Okay.

And then, Clayton, when you talk about the variable costs in the quarter being $650,000 I guess I get confused because I kind of think of the whole legal expense line as being part of the variable costs.

What exactly is in the $650,000 that's variable versus other stuff in the legal expense line, that is?

Yes, those costs are variable costs that are included in MG&A and are comprised of patent related research, consulting, and other patent related commercialization costs that we consider to be variable but those are included in the MG&A line.

Of course, the other major component of variable costs is the patent related legal costs, which we do break-out separately.

Okay.

So the $7 million to $8 million is all those things combined, it's not something separate from the legal costs line?

Yes, the $7 million to $8 million includes the legal costs and the variable portion of the costs, which we include in MG&A.

Okay.

Great.

How many lawsuits are -- do you guys currently have pending?

I don't know an exact number.

It's certainly probably in excess of 40, but I don't have an exact count of what it is.

And then the IP that you purchased in the quarter, this is separate from the previous acquisition that had been announced.

What was the IP that was purchased in the quarter?

We have not put out a release on that.

We don't think it's in our shareholders' best interests at this time to disclose the nature of the technology, because we're working on a proposed licensing program so we probably won't discuss that until we launch our licensing program.

Was the entire dollar amount spent on one portfolio or did you buy a couple of portfolios, or how should we think of that?

A substantial amount was on one portfolio, but there were other payments, and including advances on other portfolios, as well.

As you know, from time to time if we have the opportunity with partners or potential partners to buy-down their backend interest, we'd want to use cash to do that, so but a substantial amount of it went out in the acquisition of one portfolio.

Okay.

And then can you just tell us which of the portfolios in the quarter are the ones that had the higher gross margin contribution for you, where you have the lower inventor royalty?

I don't think we have that information here, maybe in a separate call we could kind of break that down, but we don't have that available at this moment.

Okay.

And then could you just, without naming names but maybe just tell us sort of the ballpark dollar size of maybe the top, the two biggest deals in the quarter?

I don't know.

Well, that will be in the Q on a quarterly basis, percentage of revenue concentration; right, Clayton?

Yes, but since it's the fourth quarter I'm thinking I'm not going to get it in the K because the ones from the first quarter will probably show-up and (inaudible).

Yes, in the yearend, do we summarize both the annual concentration revenue, as well as fourth quarter, or just the annual?

No, no, just the annual.

I'm sorry, you're looking for just the --?

Concentration of revenue, what percentage is the top three?

Yes, just the ballpark dollar amount of percentage amount of the top couple of deals for deal size?

Roughly 35%.

Yes, it's roughly 35% to 40% of -- as far as the top three or four.

Top three or four, and there's no way -- can you break them down by sort of how much the top one or two were?

The top one and two were roughly 10%.

Okay.

All right.

That's out of 22, the top 3 probably represented 30% or 35% of the total revenues; right?

Yes, yes, yes.

Uh-huh.

Okay.

Well, I've got a few more, but I'll get back in queue and let others join.

Thank you.

Okay.

Thanks, Bennett.

And the next question comes from Mr.

David Block of Block Capital.

Hi, good afternoon.

Hi, David.

Hi.

I was wondering if you could go into a little more detail on the interest you're getting from some of the institutions you outlined, the tech companies, universities, research centers, and what should we expect to see from partnership opportunities out of those institutions?

Well, certainly, as we get more visible and our track record increases, we're a much more desirable and mature licensing company for them to partner with and, obviously, many of the fiduciaries of these companies are officers of public companies, the more established track record we have, the more likely they are to want to entrust the licensing of their intellectual property to us.

So it's just a continuing trend.

I don't think there's any singular dramatic event, but obviously as we get more visibility and increase our track record, we just see more opportunities that both are coming to us and ones that we're going out and identifying through our Business Development Teams.

Okay.

Thank you.

Sure.

Thank you, David.

(OPERATOR INSTRUCTIONS.)

And we'll go to Mr.

[Ron Lang].

Yes, Paul?

Yes?

Yes, we've talked on the phone before.

I'm just a shareholder and a small businessman, and I look at the stock and I see it at its lowest point in the last two years.

I see the outstanding shares go from 28.2 million to 30 million, and I guess my question is, the business model, is it -- are we changing it, at all, or what are we going to do for the shareholder?

Well, the business model is great.

Obviously, you can see that we've executed on every metric over the past couple of years.

We have exceptional growth rates and we're adding new assets, basically, at no financial risk to the shareholders and in most cases on a very rapid basis.

So, certainly, the fundamental value of the Company has increased significantly.

Certainly over the past year or two years it's increased very significantly.

And, as you know, stocks fluctuate, and so if we keep executing we think the value of our stock will reflect the inherent value of the Company.

So what we're going to do is keep executing and keep growing, and keep delivering value, and hopefully the marketplace will recognize that value.

Are you out talking to different institutions now and promoting the Company?

Well, we routinely attend conferences.

Actually, this morning I was at a conference here in California, a very large investor conference, and we've attended some in New York, so -- and we go to the AEA, so certainly we have visibility at a number of the leading investment conferences around the country during the year.

Okay.

Thank you very much.

Okay.

And we have a follow-up question from Bennett Notman.

Yes, Paul, could you just talk a little bit maybe about where we are and sort of the revenue generation cycle of some of the new people that you've brought onboard and sort of how we should think about them contributing or the timeframe in which they really start to have an impact on your financials?

Oh, sure.

I mean obviously we've brought in a couple of licensing executives just a few weeks ago, and certainly the earliest they would be able to start contributing would be late in this year.

But, as you know, we added a number of people in '07 who will obviously start generating additional revenues and new licensing programs for us this year.

So, you know, we've assigned a number of new portfolios to some of the people who've come in and, as you know, it takes on average oftentimes up to 18 months to start generating revenues from these programs.

So I think you'll see us continue to add licensing executives.

It's about our only gating factor, quite frankly.

The pipeline of deals we have and the growth of assets we feel very comfortable about, and it's primarily being able to get experienced people out of industry, which we've been very fortunate to get a lot of top level people to generate revenues from these licensing programs.

So I think you can see us, you know, we'll probably be adding a few more licensing executives during the year and to maintain the growth of the assets that we have.

Yes, Bennett, this is Chip.

If you look, last year, early last year we added significantly to the Business Development side, which is kind of the first cog of the wheel, and that was reflected by the number of, we increased the number of portfolios.

And after you start to develop the Business Development side you have to support it with the licensing side, and you've seen us add some significant resources on the licensing side, so it is pretty sequential.

Okay.

And this may be for Clayton.

You know, given that Microsoft was $900,000 of the legal expense in the most recent quarter, and I'm guessing it was probably a good chunk in the third quarter, too, should we expect that number to drop-off for the next couple of quarters or are there equally intense litigations that are coming on that would keep it up around the $2 million, $2.5 million level?

Well, at this point, I'm not sure how many cases we do have scheduled to --

Yes, I would think it would be less, but you never know with trial dates and various aspects of litigation, but I think you could reasonably expect that probably certainly in the first and second quarter we'll be lower than that because we're not at this stage moving into a trial date where it requires more expenses and particularly third-party out-of-pocket expenses.

So certainly over the first half of the year I would guess it would be probably be lighter than that.

And then given the rate at which you guys added portfolios sort of late in '06 and early into '07 it seems like the number of litigations you'll probably be in and portfolios you have ready to go to revenue should accelerate pretty markedly in the back half of the year.

Is that how we should think of sort of both the revenue and expenses, at least from an opportunity standpoint?

Yes, I think that's a good overall assessment.

Certainly, if you look at the flow of when we brought in portfolios, there are a lot of them that will be hitting that period where we will have had them under our control for a length of time where we can reasonably start to expect revenue generation, so that probably will happen and increasingly so probably in the second half of the year.

And then it does look like you've been able to get a few portfolios licensed in, you know, in 12 months or less recently.

I mean have you noticed the compression in the time the first revenue from when you bring an IP in, now maybe that you've got more licensing executives and more infrastructure and more of a name?

I don't know that there's any discernible trend to date.

It really depends oftentimes on whether the people that we're going to need to license or the companies, if we've done prior deals with them and have relationships sometimes that can shorten the time cycle.

So it really just depends on the specific technology and more than likely whether we've done deals with the companies we're going to need to license before, which would shorten it up a little bit.

All right.

Thank you.

Sure.

(OPERATOR INSTRUCTIONS.)

And, Mr.

Ryan, it appears there are no further questions.

At this time, I'd like to turn it back to you for any closing remarks.

Okay.

I want to thank you, all, for being with us on this call.

We're looking forward to a great year, and we will be having our first quarter conference call probably late April.

And, in the meantime, if you have any questions of Management, please feel free to give us a call, and thank you for your interest.

Bye-bye.

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.

Please use the conference code of 3836459.

This concludes our conference for today.

Thank you, all, for participating, and have a nice day.

All parties may now disconnect.