Acacia Research Corp (ACTG) 2010 Q1 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research First Quarter Earnings Release Conference Call.

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

At the request of the company, we will open the conference up for 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.

In today's call, the terms "we," "us" and "our" refer to Acacia Research Corporation and/or its wholly owned and majority-owned operating subsidiaries.

All intellectual property acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority-owned operating subsidiaries.

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're making in building the business, Clayton Haynes will provide you with an analysis of our financial results, and we will then open up the call for questions.

Acacia had a great first quarter.

We had record revenues of $39.8 million, record 12-month trailing revenues of $90.2 million, a record 13 new licensing programs that began generating revenues in the quarter and, importantly, a record 11 new patent portfolios for future licensing.

Our business development, engineering, and licensing teams all delivered exceptional performance in the quarter.

Today I would like to highlight two emerging trends that are beginning to accelerate the growth of Acacia's patent licensing business.

These inflection points are a direct result of Acacia's building a great track record of patent licensing success and rapidly growing the scale and quality of our patent assets.

The first trend is the growth of our business partnerships with large companies and leading research institutes in the US, Europe, and Asia.

We are seeing a growing interest by major multinational companies in monetizing their patent assets.

As the number one outsource patent licensing company, we are seeing many new opportunities as large companies seek to generate financial returns on their R&D investments and M&A activities.

Our discussions with these companies range from our taking over the licensing of certain noncore patent assets to our participating and identifying potential licensing opportunities within all of their patent portfolios.

Our corporate partners are recognizing that Acacia has built a unique, highly specialized, patent-centric company that has multi-disciplinary teams that can screen patent portfolios for licensing opportunities; due diligence teams to validate licensing opportunities; broaden partnering relationships with leading law firms for enforcement; and licensing teams with a proven track record of generating revenues.

Examples of our new partnering activity are reflected in recent announcements of 120 patents covering wireless and communication technologies from a leading research institute; 49 patents covering storage networks and disk arrays from a major technology company; 97 patents covering DRAM, DSP, microprocessor technologies from a major semiconductor company; patent portfolios covering MEMs and chip stacking from a leading international research institute; 31 patents for mobile computer synchronization technology, the majority of which that were issued to a major electronics company; and 59 patents covering digital video enhancement technology, which were issued to a major consumer electronics company.

We are increasing our business development efforts by making sure large companies know of our capabilities as the leader in outsource patent licensing.

We want to be at the epicenter of this new trend.

The second trend is the growing interest of companies in engaging with us to enable them to simultaneously negotiate multiple licenses to a number of our patent portfolios.

This trend is the result of the scale we are building in total patent portfolios, our accelerating growth in new portfolios, and the increasing depth and quality of many of our newer portfolios.

Some companies are deciding that it makes more sense for them to become an ongoing customer rather than a repeat defendant and are beginning to look to Acacia as a clearinghouse for necessary in-licensing activity.

The benefits to companies who enter into these simultaneous multiple portfolio licenses are to achieve financial budgeting certainty, reduce their internal and external costs associated with these repeat litigations, and eliminate the risk of large court awards.

This trend could benefit Acacia and our IP partners by shortening the time to money, reducing legal expenses and other costs of enforcement, and improving the margins for both us and our IP partners.

The combination of these two emerging trends could enable us to both rapidly grow our asset base and bring efficiencies to the licensing process that reduce time to money and improve operating margins.

With that, I would like to turn the call over to our CFO, Clayton Haynes, for the analysis of financials for the quarter.

Thank you.

Thank you, Paul, and thank you to everyone joining us for today's earnings conference call for the first quarter of 2010.

As indicated in today's earning press release, on a consolidated basis, first quarter 2010 license fee revenues were a record $39,772,000 as compared to $16, 957,000 in the first quarter of 2009.

First quarter 2010 revenues included license fees from 40 new licensing agreements covering 29 of our technology licensing programs as compared to 28 new licensing agreements covering 16 of our technology licensing programs during the comparable prior-year quarter.

First quarter 2010 revenues included initial license fee revenues for 13 of our technology licensing programs.

Refer to today's earnings press release for a summary of technology licensing programs contributing to the revenues during the quarter and a summary of the technology licensing programs generating initial licensee revenues during the quarter.

Continuing our trend of revenue growth, consolidated trailing 12-month revenues totaled $90.2 million as of March 31, 2010, as compared to $67.3 million as of December 31, 2009, and $56.1 million as of March 31, 2009.

Currently, on a consolidated basis, our operating subsidiaries have generated revenues from 73 of our technology licensing programs, up from 52 technology licensing programs as of the end of the comparable prior-year quarter.

License fee revenues continue to fluctuate from period to period based on the various factors discussed on previous earnings conference calls and in our periodic filings with the SEC including the dollar amount of agreements executed each period, which is primarily driven by the nature and characteristics of technologies being licensed and the specific terms and conditions of agreements executed in each period.

Our average margin defined as growth license fees less inventor royalties and payments to non-controlling interests and contingent legal fees for the portfolios generating revenues during the period was approximately 78% for the first quarter of 2010 as compared to 47% for the comparable prior-year quarter.

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

For the first quarter of 2010, Acacia Research reported GAAP net income from operations of $18.5 million, or $0.55 a share on a fully diluted basis versus approximately breakeven for the comparable prior-year quarter as illustrated in today's press release and related 8K filed with the SEC.

Excluding the impact of noncash patent amortization charges and noncash stock compensation charges, we reported first quarter 2010 net income of $22.1 million compared to net income of $2.7 million for the comparable prior-year quarter.

Inventor royalties expense and payments to non-controlling interests for the first quarter of 2010 totaled $4.4 million as compared to $5.4 million during the comparable prior-year quarter.

Contingent legal fees for the first quarter of 2010 were $4.4 million as compared to $3.5 million during the comparable prior-year quarter.

On a combined basis, inventor royalties, net income attributable to non-controlling interests and contingent legal fees as a percentage of total license fee revenues decreased to 22% as compared to 53% in the comparable prior-year quarter.

Inventor royalties and contingent legal fees fluctuate period to period in relation to license fee revenues based on the same factors that impact average margins as described earlier and on previous conference calls and periodic filings with the SEC.

First quarter 2010 marketing, general, and administrative expenses including noncash stock compensation charges increased to 18% during the first quarter of 2010 primarily due to an increase in variable performance-based compensation costs.

Consistent with the guidance provided during Acacia's fourth quarter 2009 earnings call, first quarter 2010 litigation and licensing expenses decreased 34% to $3.7 million as compared to $5.6 million for the fourth quarter of 2009.

Litigation and licensing expenses totaled $1.7 million during the comparable prior-year quarter.

Litigation and licensing expenses continue to 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.

The increase in litigation and licensing expenses during the first quarter of 2010 versus the prior-year quarter was due to an increase in litigation and licensing expenses incurred in connection with our continued investment in certain of our licensing and enforcement programs with trial dates scheduled for 2010 and a net increase in costs related to new licensing and enforcement programs commenced since the end of the prior-year period.

We expect litigation and licensing expenses to continue to fluctuate period to period in connection with upcoming scheduled trial dates and our current and future patent acquisitions, development, licensing and enforcement activities.

Looking forward for fiscal 2010, we continue to expect MG&A, excluding noncash stock compensation charges, to be in the range of $14 million to $14.5 million.

For fiscal 2010, based on the number of cases we have outstanding and consideration of which of these cases may or are likely to settle.

And given that a portion of costs related to these cases were incurred and expensed during mid to late 2009, we continue to estimate that patent-related litigation and licensing expenses incurred for 2010 will be less than the $14 million in expenses incurred during fiscal 2009.

We will continue to assess our expectation with respect to the level of litigation and licensing costs for 2010 and will provide you with quarterly updates to these expectations on future earnings conference calls.

From a balance sheet perspective, cash and cash equivalents and investments totaled $69.7 million as of March 31, 2010, compared to $53.9 million as of December 31, 2009.

Working capital increased 54% to $55.4 million as of March 31, 2010, from $36 million as of December 31, 2009.

Net cash inflows from operations including payments to non-controlling interests for the first quarter of 2010 totaled $16.6 million versus cash inflows of $2.6 million for the first quarter of 2009.

Patent portfolio acquisition costs for the first quarter of 2010 totaled $1.3 million as compared to $162,000 during the comparable prior-year quarter.

During the first quarter of 2010, our operating subsidiaries acquired a total of 11 additional patent portfolios for future licensing and enforcement, which compares to five patent portfolios acquired in the comparable prior-year quarter.

Again, thank you for joining us for today's earnings conference call, and I will now turn the call back over to Mr.

Paul Ryan.

Thanks, Clayton.

Operator, can you open the call for questions, please?

Thank you, sir.

(Operator Instructions) Mark Argento, Craig-Hallum Capital.

Congratulations on a great breakout quarter for you guys.

Thank you.

Clearly, it looks like the size and scope of some of your licensing arrangements is increasing fairly significantly.

You alluded to some of the different types of business that you're doing, going forward.

Could you talk a little bit about how you look at the pipeline of the larger-type transactions.

In particular, how should we start thinking about your ability to replicate what we saw this quarter?

Well, I think the opportunity certainly has -- we have scaled the business and now have well over 140 patent portfolios.

I think the issue for a number of companies is that, based on that scale, we may, over time, see a shift from the repeat litigation model to the engagement and ongoing discussion model where we will probably enter into multiple portfolio license negotiations simultaneously with these companies.

And, hopefully, resolve a number of licensing issues and perhaps even set in place some mechanisms for go-forward licensing.

And because the concentration of some of these large portfolios is with major companies, that provides significant revenue opportunity because of the size and usage of the companies on a unit basis as well as the number of portfolios.

So I think the issue for our shareholders is certainly if you watch us continue to scale the assets, and if we continue to execute on this level, it's going to give more opportunities, I think, to engage in broader ongoing licensing relationships with major US corporations and corporations offshore as well.

And the benefit to us and our IP partners, because, as you know, the vast majority of time we are partnering on these assets and splitting revenues, the more efficiencies we can drive into the process the higher margins for both our shareholders and for our partner IP holders.

And on the other side of the equation, I think some large companies are realizing that there's -- and there was a recent article in Business Week that was mentioned by some large companies, and we concurred with them, that litigation is a very inefficient way to conduct licensing activities.

The litigation costs themselves sometimes far outweigh the actual underlying licensing of that.

So I think more large companies are realizing that we are here to stay.

We're a broad platform, we are a source of licensing, we are a great screening (audio break) in the patent community.

More than, hopefully, will choose to engage us on a regular business basis.

Good.

And it looks like you the amount of IP you brought in the quarter was very impressive.

I know on the wireless side and DRAM, clearly the size and scope of these portfolios are increasing, which I assume will help the other part of the business in terms of the size and scope of license deals.

But how quickly are you able to take IP and actually start to license it?

Meaning have you -- some of the portfolios you brought in -- have those already been licensed out this quarter?

And is that time to market really shrinking now that the quality is there in your relationships clearly with a lot of the larger players are improving?

Well, certainly, there's the possibility of the time shrinking dramatically.

As you know, historically, we have given indications that it's kind of a minimum of a year and oftentimes two years to expect any revenue out of a new portfolio.

The practical matter is if we're engaged in simultaneous negotiations, basically, companies wishing to settle all outstanding issues with us, or look at all of our portfolios, certainly newer ones that have come in generally will get swept up in those licensing efforts as well.

And some of that occurred this quarter, where we had a number of new portfolios that were licensed very early stage in certain transactions that we entered into.

So, yes, that definitely will begin to happen, depending on which portfolios are needed to be licensed by which companies.

But certainly if we're in negotiations, I think the increasing trend is they are going to want to resolve all issues and (audio break) take licenses to those portfolios that they need to, irrespective of whether we've filed litigation or how long the litigation has been ongoing.

Great.

Well, it's nice to see the model starting to really click and congratulations again.

Thanks.

Okay.

Thank you, Mark.

Jonathan Skeels, Davenport.

Hey, guys, congratulations on the quarter -- very good number.

I guess, first, just, can you discuss any detail around how these multiple licensing agreements are structured?

Are they for a period of time?

And is there any recurring nature to any of the revenues from them?

We can't discuss, obviously, any specific agreements.

I would say, generally -- well, how we describe them is companies engaging us to basically complete licensing of all the portfolios that we and they think are appropriate.

In terms of any timing or term or anything, I think, going forward, there probably will be a variety of arrangements with companies.

I don't think there will be any absolute standard or -- yeah, we're flexible.

If we want to get our IP partners patents licensed the most efficient and quickest way we can and generate the revenues for us -- for our shareholders and for them.

And so we're certainly probably going to enter into a variety of relationships with large companies.

It's not uncommon, as you know, in cross-licensing, where companies periodically meet and resolve these issues and don't litigate each and every matter.

So, certainly, if we can move our relationship to that type of a format, even though we don't need licenses flowing the other way.

If you think of it in terms of how most major companies conduct cross-licensing, our activities would probably parallel those types of arrangements.

But we can't give any specific details because -- and, quite frankly, I think there will be a variety of them.

There will be no one standard agreement.

Okay.

And then just on the balance sheet, I see the deferred revenue balance picked up pretty nicely in the quarter.

And I guess are some of the agreements you are signing now, do they now include some portion of deferred revenue that you haven't recognized in a quarter, and should we expect more of that, going forward?

Well, if there were any deferred revenue, it would be in the financials.

Yes.

And so, for example, in the March 31, 2010, column, you'll see that deferred revenue actually is a fairly small number as of the end of the first quarter of 2010.

We had a balance of $1.5 million as of the end of last year, and that $1.5 million was actually recognized in the income statement during the first quarter of 2010 when the revenue recognition criteria associated with that particular dollar amount was satisfied.

So deferred revenue as of the end of the first quarter is actually a fairly small number.

Okay, sorry.

And I guess lastly on just the cash balance -- what do you plan on doing with the cash?

Obviously, your business doesn't require too much capital investment.

I know from time to time you do acquire some portfolios.

Can you just talk about what your plans are with the cash?

Well, one of the issues is as we expand the scope of our business to enter into partnering agreements with major multinational companies, having a strong balance sheet is important to them.

And so I can see -- I know in the past, we gave guidance that we want to have a $35 million, $40 million minimum threshold.

I would say we're moving our perspective now that we'd like to have a balance sheet with $100 million-plus in cash for dealing with these major multinational companies on partnering deals.

And I think they'd like to see that kind of balance sheet as well.

Bennett Notman, Wisco.

Good afternoon, and let me add my kudos for your great performance across the board.

Thank you.

Could you just talk a little bit -- you had, obviously, a very strong gross margin line, or very low cost of revenue in the quarter.

I'm guessing that was probably influenced by the timing of some larger deals that last, over time.

How will that pan out, over time, and will you have to have some expenses in future quarters for new portfolios that are brought in under these multi-portfolio licensing deals that might not have initial revenue in these later quarters because they're covered by those previous payments, if you get my drift.

Which can leave a well impact on margins?

Well, there wouldn't be any forward costs based on the transactions we completed in the first quarter.

Any costs we have were recognized in the first quarter.

And, again, there's going to be, I think, significant variability quarter-to-quarter.

As we have known in the past, our revenues have been uneven.

Fortunately, they've been uneven in a progressively higher level.

Similarly, I think our effective margins are going to be uneven, quarter to quarter, depending on, again, as Clayton described the mix of transactions and whatever arrangements we have in terms of the law firms on the outside, their participation, as well as our individual partnering deals with IP owners.

So it is going to be variable.

We want to caution people that this is not a permanent move to a higher margin-level business.

It's going to fluctuate quarter-to-quarter, but I would say more on the norm, probably our margins are going to be closer to the 45%, 50% traditional mark than they are this particular quarter.

So obviously this quarter was significantly higher than we've ever seen before.

Was this just driven by the absence of legal expense in some of the larger deals that got done because they were settled without having needed the lawyers?

No, it was really based on the mix of transactions that we did that had any kind of obligations to both law firms and IP partners as well.

It was a combination.

But, beyond that, we can't really -- without, you know, violating the confidentialities of individual deals, go into the details of that.

But I think the important takeaway is that we want to caution people that the high level of margins we achieved this quarter isn't necessarily new norm.

The more likely norm is going to be in our traditional range, and we'll probably have quarters like this where we'll have significantly higher margins but don't expect it on a regular basis.

All right, great.

And then, obviously, adding 11 portfolios in the quarter was fantastic.

Is the pipeline such that we should start thinking of normal [adds] more in the 8 to 10-plus range as opposed to the 4 to 6 range?

Or should we generally think that you're at a higher pipeline for new portfolios now?

Well, we'd like to exceed at our target that we've indicated to people is about 30 portfolios per year.

And, obviously, we're running ahead of that pace now, and we'd like to overachieve.

But that's kind of the basis -- 30 -- to be expected.

I think one of the issues, though, is certainly you can see some of the portfolios we're bringing in had much larger numbers of patents and probably broader licensing opportunities.

So I think definitely the licensing revenue per opportunity per portfolio is probably increasing and, hopefully, we'll overachieve on the 30 target for the year.

Yes, some of you -- this is Chip -- some of you have seen our stockholder presentation where we talk about the dissemination of IP between large companies and smaller companies, research institutions, and universities.

About 40% of the patents out there is held by what we would consider large companies.

Traditionally, our business has been driven by the 60% side -- the universities and research centers and the small companies.

As we've talked about in the last couple of quarters, we've seen significant interest from these large companies as evidence by the releases we've had over the last two and a half quarters.

And if you think about adding 40% of the market into our potential -- you know, we're not abandoning our legacy business.

We like that, and we've done a very good job of it.

But, incrementally, we're adding significant opportunities from major corporations who are seeing the evolution of patents as an asset class.

And as they look at it, we're not the perfect partner for everybody, but we're a good partner for a lot of people.

There are a lot of big companies that already have these kind of groups within their corporation.

There are others that don't and look to us to extend our partnering model just like we would with a university, into these large corporations.

And I think you're seeing that manifest itself in the number of deals that we're currently looking at.

We're putting them under contract for due diligence and the numbers of deals we're closing on.

(Operator Instructions) Doug Thomas, Jet Investments.

I wanted to add my word of congratulations, I guess.

Not too many of these calls have gone more than a half-hour, so I think that's a testament to where we're headed.

And, Paul, I thought it was funny, the headline in the Business Week article was "The Company Tech Loves to Hate." You know, which to me is sort of indicative of -- I mean -- I guess you'd say even bad publicity is good to have, I suppose, but I just wanted to --

Sometimes headlines don't reflect -- I mean, we're engaged in a lot of good conversations with many of these major companies.

Yes, of course, I know that.

I think they, for the most part, they take in-licensing responsibly.

So I think the headlines sometimes really don't indicate what's really going on in the marketplace.

And I think, certainly, our direct negotiations and discussions with many of these major companies are very productive, and I think both sides are looking to bring efficiencies to the process to both sides' advantage.

I wouldn't get too carried away with the type of headline stuff.

No, I kind of thought it was funny, actually.

But it did bring publicity for a small company is always good.

Absolutely.

What I wanted to ask you was the two initiatives, which you mentioned today and have talked about -- certainly, over time, they have to add to your visibility and to the legitimacy with which you pursue some of these negotiations prior to making the decision to go to court.

It appears to me like some of the best traction that you seem to gaining is in terms of, really, the court of credibility when it comes to the value that these patents have to your partners.

Yes, I agree.

I think that we've had to earn our stripes and build a track record.

We have gone to trial when we've need to, and people haven't settled with us.

So we've shown that we will pursue it.

As you know, we are licensing patents in one case that expired several years ago.

We're tenacious.

People can't really outwait us.

And eventually I think you earn people's respect in the licensing market.

But, most importantly, I think the professionals that are here at this company have the respect of their counterparts at major companies.

They are realistic about licensing rates and negotiations of what needs to be done.

And, over time, you earn that credibility, and I think we're starting to benefit from that in terms of, perhaps, taking some of the friction out of the process and making the process a little more efficient.

And part of it just comes with time and repeat deals.

As we negotiate licenses with some of these very large companies, once you negotiate the third, fourth, fifth licenses, the people involved get to know each other.

They gain more confidence and respect for each other, and I think that's certainly helping right now expedite a lot of licensing agreements as well.

And I also wanted to ask you -- it seems like how you've been able to attract some of the best talent around.

Obviously, there's been a lot of news surrounding what a tough environment it's been for most law firms and lawyers, in general.

And I just wonder if, given the acceleration and opportunities for you, if you're not seeing the sort of people come out -- good people come out of the woodwork and really want to make Acacia the place where they do business.

Certainly, we're having more opportunities there.

When we first started, this was a unique business that didn't have a history.

But the more important thing for us is retaining the great team we've put in place.

We've had exceptionally low turnover here the last couple of years, which I think is indicative of people liking to work here and seeing the upside.

And we think we can leverage the business model as we've indicated previously.

One of the things that I find most exciting about the business model is all of our people want to take on more responsibility.

So I think we can significantly grow revenues and maintain costs, and that's certainly going to be very beneficial to our shareholders.

So the issue for us right now, the primary issue, is retaining the talented people that have joined.

They have now been working together in teams the past few years and are extremely efficient.

What we have also seen with this slowdown in the legal industry is that the best firms aren't cutting their best people loose.

But they do have additional time on their hands.

They're not fully able to leverage the time on a fee basis.

So firms that in the past had not embraced a contingent model are quickly embracing a contingent model, which, under our relationship, has paid off very handsomely for some.

And so it has really opened up another big area of opportunity for us when we're looking around for law firms to help us monetize these portfolios.

Thanks.

You know, the thing of it is, anybody who wants to leave, you can't leave now, you're just getting rolling.

What's funny is -- I don't know if you remember this, Paul, but the fall of '03, October of '03, was the -- I think Acacia was the first company that I recommended to clients when I first started Jet, and it's been -- I just wanted to say congratulations, and it's nice to see you guys really doing well.

Well, we appreciate your support.

Yes, I remember it well.

At that time you were -- certainly, we were at our infancy, and you were the only company following us, yes.

I do really think with the momentum you've got, it seems extremely positive.

Okay, thank you, Doug.

This will conclude the question-and-answer session.

I will now turn the call back to Mr.

Ryan.

Okay, I want to thank you all for being with us.

If you have any questions following the call, you can call myself or Rob Stewart, our head of Investor Relations and, if not, we look forward to speaking with you next quarter.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 800-642-1687, or 706-645-9291 with confirmation code 61384901.

This concludes our conference call for today.

Thank you for participating and have a nice day.

All parties may now disconnect.