Acacia Research Corp (ACTG) 2008 Q2 法說會逐字稿

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

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

At the request of the Company, we will open up the conference 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 is 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 the call for questions.

As we just reported, Acacia's second quarter revenues were $7.1 million, compared to $5.9 million in the year-ago period.

Trailing 12-month revenues were $37.7 million, compared to $46.8 million in the year-ago period.

In the second quarter Acacia subsidiaries entered into 16 new licensing agreements, covering 11 different licensing programs, including initial revenues from 3 new licensing programs.

Acacia also acquired control of 6 new patent portfolios for future licensing and we now have generated revenues from 36 different licensing programs and control 95 patent portfolios.

Our cash, cash equivalents and investments totaled $45.7 million at the end of the second quarter compared to $46.1 million in the prior quarter.

As we stated in our earnings release, Acacia's long-term revenue growth potential continues to increase, based on several patented technologies which could commence generating revenues over the next year, as well as growth in our existing license programs.

As we have previously stated, the timing of our revenue generation can vary and quarterly revenues are therefore likely to remain uneven.

With $16.2 million in revenues in the first half of 2008, it is possible that we may not generate revenue growth this year over the $52.6 million recorded in 2007.

We are confident in the revenue potential of our patent portfolios, while recognizing that it's difficult to estimate the timing of completing negotiated licensing agreements.

Often these licensing negotiations take place with the backdrop of a court calendar and the timing of events in the court system are subject to change and in turn impact the timing of negotiations and resulting licensing agreements.

Our business outlook is very positive.

The licensing success we have achieved in negotiating over 570 licensing agreements and generating over $150 million in licensing revenues, combined with the scale we have achieved in acquiring control of 95 patent portfolios is enhancing our position in the marketplace and increasing our opportunities for strategic initiatives.

Acacia has a significant number of newer portfolios that we have not discussed on prior calls and that will be contributing to our revenue growth.

Some have just begun to generate revenues and others should begin generating revenues over the next year.

Today I thought it would be helpful to briefly describe just a few of these patented technologies to demonstrate why we are so positive in our business outlook.

First I would like to describe five of our medical technology portfolios which should help drive our revenues over the next couple of years.

Our picture archiving and communications systems technology relates to progressive downloading used in medical systems called PACS that enable multiple remote users to simultaneously access image data from remote display terminals and are commonly used by hospitals to transmit patient image data to multiple locations.

We signed our first license for the PACS technology with Siemens in the second quarter.

Next, our medical monitoring and medical image stabilization technologies -- these were both developed by a leading hospital research group.

The medical monitoring detects patient statistics or lab results such as vital signs or blood tests which are outside specified range and automatically pages medical personnel.

And the medical image stabilization technology can be used in stabilizing medical images for procedures such as catheter stents or visualization of arterial lesions.

We anticipate completing initial licensing agreements for these technologies this year.

Our heated surgical blades technology relates to surgical instruments that are heated to reduce bleeding and are widely used in a variety of surgeries.

They are commonly known as the Shaw blade, named after Dr.

Shaw, the inventor whom we partnered with.

We have just commenced this licensing program.

Our surgical catheter technology relates to surgical devices that are used to access the circulatory system and are used in cardiology and other surgical procedures.

Again, we anticipate completing initial licensing agreements for this portfolio this year.

Moving to the non-medical tech portfolios, our remote management of imaging devices technology relates to systems and methods that provide remote control and monitoring of network image devices such as copiers, printers and fax machines.

As you may be aware, we have started our licensing program this year and have completed five initial licenses, including agreements with Toshiba, Matsushita and its affiliate Panasonic Corp.

of North America.

This technology has very broad licensing opportunities to copier, printer and fax manufacturers.

Our Telematics technology relates to displaying mobile vehicle information on a map.

This technology can be used in navigation in fleet management systems that combine wireless communications with GPS tracking and map displays.

We commenced this licensing program in the past year and have completed seven initial licenses to date, including agreements with UPS and @Road.

Next, our computer memory cache coherency technology which relates to interface circuits used by intelligent peripheral devices with cache memory to communicate with the main computer's memory.

By synchronizing main computer memory and main cache memory, peripheral devices such as graphic processors could operate at much higher speeds without cost associated with their own memory.

This technology can be used in desktop, notebook and server computer systems.

We are currently awaiting the outcome of a motion for summary judgment and could go to trial shortly with Intel and Via.

Next our compiler technology -- this technology relates to software object pre-compilation and linking and software compilers.

The technology may be used in the development of application software such as operating systems, business software, video games, Internet commerce and enterprise software.

This technology has broad, significant licensing opportunities.

Our database access technology -- this generally facilities the smoother inter-operation between databases and applications and can deployed in a variety of markets including e-commerce, healthcare, telecom and finance.

We have just commenced our licensing and enforcement efforts and have initiated litigation with Oracle.

This technology is widely used in the market and could be a major revenue producer.

Next our e-commerce pricing technology -- this technology relates to transacting business over a network such as the Internet.

This technology can be used at auctions or competitive transactions where final price is based upon the buyer's actions.

We have initiated litigation with Google, Yahoo and Microsoft.

Encrypted media and playback devices -- this technology relates to encryption and decryption techniques used in media and players.

It covers the devices and methods used to play back movies and other content from encrypted media.

This technology is applicable to media such as high definition discs and stand alone players, as well as game consoles and PCs with high definition drives.

We have recently commenced licensing discussions related to this technology.

Our flash memory technology consists of 16 flash memory patents relating to architecture in manufacturing and operation of flash memory, including NOR flash.

The patented technology covers techniques for enhancing the performance and reliability of flash memory cells.

NOR flash memory is extensively used in cell phones and we have just initiated our licensing program for this technology.

Our location-based services technology -- this generally relates to the provision of cellular location-based services.

More specifically, the technology claimed by the patent is applicable to key aspects of several LBSs, including wireless emergency E911, Phase II service, handset-based navigation and many other LBSs that rely on knowing the precise location of the mobile user.

Given the widespread usage of this technology, this has the potential to be a large revenue producer for Acacia.

We have initiated litigation with AT&T, Verizon, Sprint, Alltel and T-Mobile.

Next is our microprocessor enhancement technology.

This generally relates to architecture employed in advanced pipeline microprocessors.

This architecture allows for conditional execution of microprocessor instructions and later determination of whether the instructions executed should be written back to memory, yielding significant improvements in microprocessor speed.

We have recently received an appellate court decision confirming the validity of this patent.

Next is our peer-to-peer communications technology, which generally relates to network communications between devices.

This technology can be used by the owners of network devices such as computers or MP3 players to share music, photos or other content.

We have initiated litigation with Skype regarding this technology.

Our projector technology relates to products and systems that include optics for projecting images.

This technology can be used in projectors for business and home theater applications, as well as rear projection TVs.

We announced our first license for this technology earlier this week and have identified over 20 companies that we will believe will need to license this technology.

And finally rule-based monitoring -- this technology can used to monitor a variety of hardware and software systems, such as network node servers, databases and applications.

We have completed six initial licensing agreements to date, including licenses to Computer Associates, SAS and BMC.

This is another program with significant licensing opportunities.

These 18 technologies represent just a fraction of our licensing opportunities going forward so you can understand why we are very positive in our business outlook.

In summary, Acacia is still in the early stages of building its business and has the opportunity to continue to build its position as the market leader in intellectual property.

We also think that the investment community is in the early stages of recognizing intellectual property as a major new asset class.

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

Thank you, Paul.

And thank you to everyone joining us for today's second quarter 2008 earnings conference call.

As indicated in today's earnings press release, second quarter 2008 license fee revenues totaled $7,116,000 as compared to $5,865,000 in the second quarter of 2007.

License fee revenues for the six months ended June 30, 2008 totaled $16,164,000, as compared to $31,050,000 for the six months ended June 30, 2007.

Second quarter 2008 license fee revenues included license fees from 11 of our technology licensing programs, including initial license fee revenues for our authorized spending accounts technology, picture archiving and communication systems technology and video editing technology.

Second quarter 2008 license fee revenues also included fees from the licensing of our audio communications fraud detection technology, credit card fraud protection technology, DMT technology, pop up internet advertising technology, portable storage devices with links technology, remote management of imaging devices technology, rule-based monitoring technology and telematics technology.

Second quarter 2007 revenues included license fees from 20 new licensing agreements covering eight of our technology licensing programs.

To date we have generated revenues from 36 of our technology licensing programs.

License fee revenues continue to fluctuate from period to period based on fluctuations in the dollar amount of individual 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.

Secondly, 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.

Trailing 12-month license fee revenues were $37.7 million as of June 30, 2008, as compared to $52.6 million as of December 31, 2007, and $46.8 million as of June 30, 2007.

The average margin, defined as gross license fees less inventor royalties expense and contingent legal fees for the portfolios generating revenues during the period, was approximately 42% for both the second quarter of 2008 and 2007.

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.

For the second quarter of 2008, Acacia Research reported a consolidated GAAP net loss from continuing operations of $5,041,000 or $0.17 a share, versus a net loss from continuing operations of $3,588,000 or $0.13 a share in the second quarter of 2007, 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 non-cash patent amortization charges of $1.2 million and non-cash stock compensation charges of $1.9 million, the second quarter 2008 net loss was $1.9 million as compared to a net loss, excluding non-cash items of $1.1 million for the second quarter of 2007.

For the six months ended June 30, 2008 Acacia Research reported a GAAP net loss of $9.5 million or $0.33 a share, versus GAAP net income of $847,000 or $0.03 a share for the six months ended June 30, 2007.

Excluding the impact of non-cash patent amortization charges of $2.6 million and non-cash stock compensation charges of $3.8 million, Acacia Research's net loss for the six months ended June 30, 2008 was $3.2 million, as compared to net income excluding non-cash items of $5.4 million for the six months ended June 30, 2007.

Operating expenses for the second quarter of 2008 and 2007 included inventor royalties expenses of $2.2 million and $1.6 million respectively and contingent legal fees expenses of $1.9 million and $1.8 million respectively.

Inventor royalty 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.

The second quarter 2008 increase in inventory royalties expense and contingent legal fees expense was primarily due to the increase in license fee revenues in the second quarter of 2008 versus the second quarter of 2007 as described earlier.

Second quarter 2008 marketing, general and administrative expenses, excluding non-cash stock compensation charges, increased $963,000 to $4, 009,000 from $3,046,000 in the comparable 2007 period.

The net increase was due primarily to the addition of licensing, business development and engineering personnel since the end of the prior year quarter; an increase in business development and licensing-related patent research and consulting expenses for new an on going programs; and an increase in corporate, general and administrative costs, all of which continue to be reflective of the growth and expansion of our operations and the operations of our subsidiaries since the prior year period.

Non-cash stock compensation charges increased by $794,000 in the second quarter of 2008 versus the second quarter of 2007, due primarily to the issuance of equity-based incentive awards to new and existing employees since the end of the prior year quarter, in accordance with our normal stock-based incentive compensation practices.

Patent-related legal expenses totaled $1.1 million in the second quarter of 2008 and 2007, remaining relatively flat quarter to quarter.

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, and fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period.

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

Looking forward for fiscal 2008 estimated fixed costs are expected to be in the range of $13.5 million to $13.8 million.

Fixed costs include employee salaries and benefits; facilities costs; corporate, legal, accounting and other general and administrative 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 $8 million to $8.5 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 second quarter of 2008 totaled approximately $692,000 versus $517,000 in the second quarter of 2007.

Total consolidated assets as of June 30, 2008 totaled $67.4 million compared to $71.1 million as of December 31, 2007.

As of June 30, 2008, cash and investment balances totaled approximately $45.8 million versus $51.4 million as of December 31, 2007.

Net cash flows from operations for the second quarter of 2008 were breakeven, versus net cash outflows from operations of $3.7 million for the second quarter of 2007.

Net cash outflows from operations for the six months ended June 30, 2008 totaled $3.9 million versus net cash inflows from operations for the six months ended June 30, 2007 of $3.6 million.

Accounts receivable from licensees totaled $4.4 million at June 30, 2008 compared to $1.4 million as of December 31, 2007.

The majority of receivables at June 30, 2008 were collected shortly after quarter end, in accordance with the terms of the underlying license agreements.

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 line for questions?

Certainly.

(OPERATOR INSTRUCTIONS) And please stand by for your first question.

(OPERATOR INSTRUCTIONS) And our first question will come from Bennett Notman of Davenport and Company.

Please ask your question.

Good afternoon, Paul.

I guess the question probably a lot of people are wondering is in the last 12 months you guys have added a lot of IT.

And you've added a lot of talented executives, but the revenue growth just doesn't seem to be coming.

Could you just talk a little bit about whether something has changed with the licensees that you're approaching?

Or maybe in the court system?

Or just in the overall environment that really seems to be sort of creating a bottleneck for you here?

We don't see anything from a fundamental standpoint.

I guess the only area, there probably is more IT litigation than there was three or four years ago.

And to some small degree, probably the litigation calendars are taking a little longer.

I know certainly we, over the past year, have filed some litigation, when appropriate, in the Eastern District of Texas and there the time to trials has grown from roughly 18 months to three years or more.

But aside from that we don't see any reason and, quite fundamentally, a lot of the new programs that I described in the prepared remarks are programs that are right at their inception.

And so we think that we will, certainly as we've indicated in our release, we expect a good long-term growth.

And again, our revenues are exclusively generated from negotiated licensing agreements.

And it's difficult to estimate when you're going to get to a conclusion on a negotiated deal.

As you could see today, Qualcomm was sideways with Nokia for a year and a half in an existing deal.

So even large guys sometimes wait 'til the courthouse steps for the settlements, but certainly in their case it paid off and they got $12 billion in market value from one license today.

So we are very optimistic about the value of these portfolios.

We are conscious that it takes time to negotiate these deals, not only with us but other people in the industry, including even Qualcomm.

And we're confident the monies will come in, but predicting the timing when your revenues are based on negotiated licensing agreements is unpredictable.

The short answer is we don't see anything in the climate that is negatively impacting our business.

We just think we're kind of at a little hesitation period.

We did have some pretty solid revenues that came in from the Global Acquisition, some things that had already been queued up and were two or three years into the licensing process.

And so there's a little bridge period where some of our newer portfolios that we've acquired over the last two years kind of have to get to that process in the licensing phase where they start yielding revenues.

And we think that will start in the second half and certainly next year.

I guess to ask the same question a different way, I mean, this is the first time where you guys have sort of said you might not have growth on a year-over-year basis.

Prior to this you've been anticipating that you would anyway.

I'm just trying to gauge maybe what changed or what went different so far this year versus maybe what you would have anticipated towards the end of last year when you were looking for growth year-over-year basis?

Well there are some newer programs that we had anticipated we'd have first deals in yet, which we don't yet, which hopefully will happen in the second half.

I guess if anything, it's just there's more of an inclination to push revenues a little further out.

Court calendars tend to slow down, not speed up.

Negotiations always take time.

So if anything it's just again trying to estimate within a window period of 12 months is always difficult to do.

And we've had such positive momentum that we've always had no problem with anticipating growth.

Obviously where we stand at mid-year with $16 million, we just think it's prudent to advise people that we may not get that growth this year because obviously that means we have to generate over $38 million in the second half.

And while that's certainly possible based on licensing discussions and programs we have, we just want to caution people that it may not occur this year.

But again, it's no impact on our long-term viability and growth.

It's just simply a timing issue related to the nature of these revenues.

Okay.

And then also just maybe one housekeeping item.

Unless my numbers are wrong, I thought you guys had 93 portfolios at the end of last quarter (inaudible) 6 and now you're sort of saying you have 95 active ones, which just makes me think maybe several either were finished or were otherwise rendered inactive.

And I'm just wondering sort of which ones they were?

And so what process leads to that occurring?

Yes.

You're correct.

The number we state is the net amount of portfolios that are we believe active and can generate revenues.

And off line I'll dig out the ones that we subtracted from that amount.

There were a couple of smaller portfolios that we think we've essentially concluded the licensing on.

So we took them off the list.

And then also we combined some and actually put them in as one combined portfolio.

So what we'll always do is just give the net number of total portfolios, but separately we'll give the amount of new ones that we've acquired during the quarter.

Okay.

Great.

Thank you.

Okay.

(OPERATOR INSTRUCTIONS) We'll take our next question from Phillip Lamoreaux from Lamoreaux Capital Management.

Hi, Paul.

This is Ashok Ramji for Phil.

Bennett just asked my housekeeping question so I have no further questions.

Okay.

Thanks.

And we'll take our next question Pat Galvin, a private investor.

Yes.

Were we part of that Qualcomm $12 billion deal?

No.

I wish we were.

It's just an indication certainly of the value that's resident in IT and also the difficulty sometimes of getting the user of the technology to agree to pay you.

That's all.

Just using it by way of example.

Thank you.

Sure.

And we'll take our next question from [Rangdon] Rajaratnam from Galleon.

Raj Rajaratnam; I'm with Galleon.

I just wanted to ask if there is any portfolios that you're excited about in terms of monetization in the next three or six months?

Any that you see on the horizon?

Well in answer to your question any or all of the 18 that I just went over earlier on the call.

Certainly our medical portfolios we think are about ready; they're at the stage.

You have to prepare.

You have to get the other side of a like mind.

You have to do a lot of upfront work to get to the point where you get into viable monetary negotiations over licensing agreements.

So we've been doing a lot of that work on these portfolios over the last year or so.

And then you get to the point where it's logical where you can start doing deals.

And we just did the first one with Siemens on the PACS technology and we have a lot of discussions going on on our other medical portfolios.

So we certainly expect that out of those, as well as I'm quite sure the continuation of a number of the programs that have just started generating money and deals, like the projector technology and the rule-based monitoring technology and telematics.

Yes, the odds are increasing.

Once you get three or four or five deals done, it is a momentum business.

Other users of the technology then are more inclined once several other companies decide to take a license, to fall in line and take a license.

It's always a little more difficult to get the initial deals done.

But we're pretty confident of those portfolios I went over earlier in the call, that based on where we are in discussions now it's highly probable that we're going to get initial licensing deals done in a number of those.

And that hopefully will lead to significant momentum in the licensing programs for those technologies.

Thank you.

Sure.

(OPERATOR INSTRUCTIONS) We'll go next to Rob Aaman from RK Capital.

Can you disclose the headcount at the end of the quarter?

At the end of the quarter we had 47 full time employees and six part-time employees.

And in the past when you've given that metric, have you disclosed the total or just the full time?

In the past it's been total.

Okay.

So basically unchanged versus last quarter at 53 total?

Yes.

Essentially.

Yes, Rob.

Yes.

We're pretty much where we need to be.

In the beginning of the year, as you know, we hired in a couple of very experienced licensing executives and a couple of senior engineers.

And we're pretty well set from a manpower standpoint.

Okay.

Maybe a little bit of splitting hairs here, but fixed expense guidance went up a little bit in terms of adjusting that range.

And I think it's the second time we've seen it adjusted this year.

Can you talk a little bit about, given that you're set on a headcount perspective?

And I understand not being able to track when revs come in.

But it seems like the expenses tend to creep a little faster than you normally expect, as well.

Let's see.

I believe the guidance for that was given in the first quarter, I believe was between $13 million and $13.5 million.

I think it was $12.5 million to $13.5 million, if my transcript is correct.

Okay.

Yes.

Yes.

It's kind of just based on what we're seeing, as the business progresses each quarter.

I try to take a look at it and update the guidance, just based upon the expenses as they are being incurred each quarter and look it out as far as the next couple of quarters are concerned.

We take a look at all aspects of the business and the expenses that we think that we're going to incur and just try to, I guess, to give a good benchmark as to what we think's going forward.

Okay.

Any thoughts in terms of the revenue run rate at which you're cash breakeven?

Yes.

If you look at it from a macro standpoint our breakeven is roughly $50 million a year, $12.5 million a quarter with 40% margins.

Okay.

Thank you.

Sure.

Thanks, Rob.

(OPERATOR INSTRUCTIONS) And that does conclude the question and answer session.

I'd now like to turn the call back over to Mr.

Ryan for any additional or closing remarks.

Okay.

Thank you, operator.

And thank you all for being with us.

If any of you have specific questions, please give Clayton or myself a call and we'll be happy to help you out.

Thanks so much and look forward to talking with you next quarter.

And 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 8648477.

This concludes our conference for today.

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

All parties may now disconnect.