Acacia Research Corp (ACTG) 2010 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 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 at the end of 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 and majority-owned operating subsidiaries.

All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain Acacia Research Corporation 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 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.

Acacia's second quarter revenues were $15 million, bringing first-half revenues to $55 million and trailing 12-month revenues to a new record $90.8 million.

During the second quarter, we brought in a record 12 new patent portfolios for future licensing, and with 23 new portfolios in the first half we are on pace for a record year for new portfolios.

This is significant because historically there has been a very high correlation between new patent portfolios and future revenue growth.

In fact, over the past five years, there has been an 85% correlation among our three key performance metrics, which are new patent portfolios, new revenue-producing licensing programs, and revenues.

During the quarter, we continued the recent trend of expanding our business platform by partnering with large companies and leading research institutes based in the US, Europe, and Asia.

Examples of our new partnering activity in the quarter were patents for GPS technology from a Fortune 100 company, patents for video and software technology from a leading international research institute, patents for energy trading from a major energy company, MEMS patents from a leading research institute, and mobile computing patents issued to a major technology company.

This recent expansion of our business is the direct result of Acacia building a great track record of patent licensing combined with the growing interest of 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.

Acacia's corporate partners are recognizing that we have built a unique and highly specialized company for patent licensing and that there are significant advantages to outsourcing this activity to us.

They are recognizing the value of our multi-disciplinary teams that can screen patent portfolios for licensing opportunities, our due diligence teams to validate those opportunities, our broad partnering relationships with leading law firms for enforcement, and our licensing teams with proven track records of generating revenues.

We continue to see a significant expansion in our business from these partnering agreements with large companies and research institutes.

The second new trend in our business is the growing interest of large companies and structuring agreements that will enable them to negotiate multiple licensing agreements to a number of our patent portfolios.

A number of companies are deciding that it may make more sense to structure business agreements to become an ongoing customer rather than a repeat defendant and are beginning to view Acacia more as a clearing house for in-licensing activity.

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

This trend could benefit Acacia and our IP partners by shortening the time to money, reducing legal expenses and other costs, and continuing to improve our margins.

With that, I would 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 earnings conference call for the second quarter of 2010.

As indicated in today's earnings press release, on a consolidated basis, second quarter 2010 revenues totaled $15 million, as compared to $14.4 million in the second quarter of 2009.

Second quarter 2010 revenues included license fees from 89 new licensing agreements covering 22 of our technology licensing programs, as compared to 22 new licensing agreements covering 16 of our technology licensing programs during the comparable prior year quarter.

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

We continued our trend of revenue growth with consolidated trailing 12-month revenues totaling $90.8 million as of June 30, 2010, as compared to $90.2 million as of March 31, 2010, and $63.4 million as of June 30, 2009.

Currently, on a consolidated basis, our operating subsidiaries have generated revenues from 75 of our technology licensing programs, up from 53 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.

Our average margin, defined as gross 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 59% for the second quarter of 2010, as compared to 49% 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 second quarter of 2010, Acacia Research reported a GAAP net loss from operations of $3.9 million or $0.12 a share, versus a net loss of $2.9 million or $0.10 a share for the comparable prior year quarter, as illustrated in today's press release and related 8-K filed with the SEC.

Excluding the impact of non-cash patent amortization charges and non-cash stock compensation charges, second quarter 2010 net results were slightly above breakeven, compared to net income of $318,000 for the comparable prior year quarter.

Inventor royalties expense and payments to non-controlling interests for the second quarter of 2010 totaled $2.6 million, as compared to $4.1 million during the comparable prior year quarter.

Contingent legal fees for the second quarter of 2010 were $3.5 million, as compared to $3.2 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 revenues decreased to 41%, as compared to 51% in the comparable prior year quarter, primarily due to lower inventor royalty rates for the portfolios generating revenues during the second quarter of 2010.

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

Second quarter 2010 marketing, general and administrative expenses, including non-cash stock compensation charges, increased 5% over the comparable prior year quarter, primarily due to a minor net increase in engineering and licensing personnel, an increase in variable performance-based compensation costs, and an increase in other corporate, general and administrative costs.

Consistent with guidance provided during Acacia's fourth quarter 2009 earnings call, second quarter 2010 litigation and licensing expenses decreased 21% to $4.4 million, as compared to $5.6 million for the fourth quarter of 2009.

Litigation and licensing expenses totaled $2.8 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 commencement of new licensing and enforcement programs in each period.

The increase in litigation and licensing expenses during the second quarter of 2010 versus the prior year quarter was due to an increase in expenses incurred in connection with certain of our licensing and enforcement programs that went to trial and concluded during the second quarter of 2010, our continued investment in certain of our licensing and enforcement programs with trial dates scheduled for 2010 and 2011, and new licensing and enforcement programs commenced since the end of the prior year quarter.

The increase was partially offset by a decrease in costs related to certain of our enforcement programs that went to trial and/or otherwise concluded in periods prior to the second quarter of 2010.

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 acquisition, development, licensing and enforcement activities.

Looking forward, for fiscal 2010 we expect MG&A, excluding non-cash stock compensation charges, to be in the range of $15 million to $15.5 million, again due primarily to increases in variable performance-based compensation costs and certain other corporate administrative costs.

For fiscal 2010, based on the number of cases we currently have outstanding, the consideration of the timing of upcoming trial dates and the consideration of which of these cases may or are likely to settle, we estimate that patent-related litigation and licensing expenses incurred for 2010 will be approximately $13.5 million to $14 million.

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 June 30, 2010, compared to $53.9 million as of December 31, 2009.

Working capital increased 60% to $57.5 million as of June 30, 2010 from $36 million as of December 31, 2009.

Net cash outflows from operations, including non-controlling interests, for the second quarter of 2010 totaled $3.2 million versus cash inflows of $6.6 million for the second quarter of 2009.

Net cash inflows from operations for the six months ended June 30, 2010 totaled $13.4 million versus net cash inflows of $9.2 million for the six months ended June 30, 2009.

Patent portfolio acquisition costs for the second quarter of 2010 totaled $959,000, as compared to $250,000 during the comparable prior year quarter.

During the second quarter of 2010, our operating subsidiaries acquired a total of 12 additional patent portfolios for future licensing and enforcement, which compares to eight patent portfolios acquired in the comparable prior year quarter.

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

Paul Ryan.

Thank you, Clayton.

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

Thank you, sir.

(Operator Instructions) Our first question comes from the line of Mark Argento of Craig-Hallum Capital.

Please state your question.

Hi.

Good afternoon, guys.

Hi, Mark.

Could you talk a little bit now, I know in your prepared remarks you had mentioned that it sounds like there is a lot of other large IP players, operating companies that are reevaluating the -- how they're looking at the IP in terms of single deals or more in a kind of bulk deals or multiple license deals?

Do you think that -- has that had any impact on kind of your day-to-day business in terms of our guys waiting?

Are you kind of waiting to kind of work through some deals versus actually booking the onesie-twosie deals that you'd normally see in the quarter or so, is that -- could that lend some additional lumpiness for the quarters going forward?

And then -- that'd be, I guess, my first question.

And a follow-up to that would be, what are the -- are there any additional trends that you're starting to see emerge now?

I know, for instance, NTP had just sued I believe Apple and Google recently, how are the big guys looking at IP from a business positioning or strategy perspective?

And how have you guys seen that change over the last year or two or really three years or since you've been in the business, I guess?

Okay.

Well, let me take a crack initially at the first question.

Yes, certainly we are engaged in some discussions and negotiations with certain large companies that could result in multiple licensing offers.

And to some degree, we under certain circumstances kind of will freeze the licensing process while we're engaging in those negotiations.

So it is possible that in some circumstances it could slow it down slightly, while trying to negotiate a larger contextual deal with a large company.

But hopefully, as we saw it on the first quarter and as hopefully we will in subsequent quarters see the results of some of those structured licensing deals, they will be worth doing it from our shareholders' standpoint.

On the second question, I think certainly there's companies, there's a lot of suits certainly in the smartphone area.

I think companies are becoming less resistant or less shy about engaging, certainly Apple and even Microsoft to some degree and other companies now are getting fairly aggressive in asserting their IP.

And again, I think the trends you're seeing where companies like Micron are outsourcing huge portions of their patent portfolios to third parties, we think those are the kind of trends that will increase, as more and more companies realize they really have a fiduciary obligation to realize a financial return from their R&D investments.

And so, we continue to see that trend emerging.

And you brought in a lot of IP over the last two quarters.

In terms of your expectations of the kind of the time to money or being able to monetize those newer, bigger pieces of IP, do you expect those, kind of the time to money on those to be longer, shorter than kind of, say, your average over the last couple of years?

Well, it really depends on the total dollar amount that's appropriate for the licensing, obviously the larger dollar amounts on some of these new portfolios.

Practically we've seen from an historical basis, it takes a little bit longer to negotiate those deals where larger dollar amounts are involved and certainly we have a lot of new portfolios.

And if you just look at the cell phone market, we've got portfolios that cover over-the-air programming, we've got portfolios that cover location-based services, we've got portfolios that cover the mobile synchronization of cell phones.

So we've got a lot of portfolios that impact a certain number of companies that are in that business.

And these are significant portfolios that we think deserve significant payments and that always takes a little bit longer than the ones that are smaller payments.

And then in terms of your -- the amount of activity not only on the licensing side, but of course on the patent acquisition side, [which is] the pipeline of additional new potential patents or IP under management, does that look as robust as your licensing pipeline?

Absolutely.

Probably even more so we're engaged in a number of discussions, including some discussions where we would probably take over the management of very large portfolios of patents from large companies.

And we think that'll continue to be a significant trend.

I think companies are looking at us appropriately as a very specialized patent licensing company that makes sense to outsource in certain circumstances and so we are engaged in discussions and we see that as an increasing trend and certainly a larger and growing component of our business.

Great.

Any updates to the legal calendar?

I know you guys don't have one that you proactively put out there, but are there any large cases that are set to go to trial here in the next quarter or so?

The only one with a firm date at the present moment, I believe, is the one with Software Tree against Red Hat and Novell, and I believe that dates October 12.

I think that's the next significant date that I'm aware of on a fixed trial date.

Great.

Thanks for your time.

Appreciate it.

Okay.

Thank you, Mark.

Bye-bye.

Our next question comes from the line of Jonathon Skeels of Davenport & Company.

Please state your question.

Yes.

Could you talk about gross margins in the quarter, obviously they're nearly 60%, which is well above -- absent the first quarter well above the range you've seen historically, are there certain portfolios where your economics are much more favorable than the 50-50 split?

The short answer is yes, but I would let Clayton give you a more sophisticated answer than that.

Certainly we have certain portfolios where we've negotiated sometimes with upfront payments where the splits are higher components to us.

But, Clayton, why don't you address, is it more sophisticated than that?

Yes, that's basically the primary driver.

It's based upon the various patent portfolios that are generating revenues during any particular period of time and in a lot of cases, we've been able to negotiate lower back-end percentages [to inventors] in exchange for upfront payments, but it's really a function of the different portfolios that are generating revenues each period.

Hey, Jonathon, this is Chip.

I think what we're seeing out there is the value that we offer to an IP owner is significant and we're able to cut better and better deals.

Where appropriate we've taken some of our shareholders' capital and bought bigger back ends.

But as you remember, going back years ago, we were probably in the mid-30s, we moved into the mid-40s with the goal of getting it consistently over the 50% margins.

So I think it's just an execution that we've been able to do that we said that we thought we would accomplish in years past, we're actually seeing the successful implementation of that goal.

And just on competition, I mean, are you guys seeing any competition out there in terms of partnership with some of these larger companies?

Sure.

I mean there's still -- you don't have to look very far, you look at the Micron deal where they went after a -- went into partnerships with a very high-profile patent litigator from a New York-based law firm, a very talented guy and they decided that the best course of action for a large portion of their patents were to basically assign them to that new company the guy put together.

So you're seeing a lot of companies try to decide what is their IP strategy going to be.

I think that what's happened in the smartphone is really indicative of what's going on, it's become a very litigious, very hot area, but I think the big manufacturers realize that the commoditization of the actual handset itself starts right away.

And the only way they can really defend their margins is through the use of IP.

So it just shows that more and more companies are becoming more and more sophisticated with regard to IP.

Now are we going to get every deal?

No.

But we think the more companies really start to do an analysis of their IP and how they're going to monetize it opens up huge opportunities for us.

And our goal very simply is for us in the second part of this year to put together one big huge corporate deal like that Micron did, and then we think there'd be some very substantial returns for our shareholders going forward.

And on the structured type licensing deals, can you just maybe talk about what helps to drive the discussions there, is it the rate of new portfolios and maybe the quality of new portfolios you're bringing in that gives you some confidence that you can sign additional deals like that?

I think it's a combination of both.

I think the rate in which -- we've got probably the best business development staff out there that really understands where it is, what it's worth and how to get a hold of it, that and it's not unlike the money management business.

If you've been a successful money manager for years and years and years and you put up big numbers, it's always easier to attract assets, we're starting to find that.

We don't really have to go out and sell anybody on our ability to monetize IP anymore.

As we've said before in the past, three years ago, four years ago, almost every deal that we brought in, we mined internally, which means we looked at the IP, we found it, we cold called people and tried to convince them that we were the right person to monetize their IP.

Nowadays, I will bet that over half of the deals we take on and it's a bigger number too, as evidenced by the 25 we've done in the first six months of this year come to us.

They come through people like you, through our shareholder base, through other licensees, it comes from a lot of different places and it's that maturation of the asset class that patents are plus the new interest that everybody has and realizing how valuable it is, not everybody knows how to monetize it and they're looking more often than not at companies like Acacia and there aren't a lot of us out there to help them with that process.

So we just -- we're really bullish on this whole business development opportunity that's come in.

And Jonathon, on the structured deal side, obviously, the bigger portfolios we have with the new ones coming in is driving behavior.

But the companies that we've licensed multiple times that are logical candidates to do this, the decisions really being driven by a desire on their part of achieving some kind of financial budgeting certainty and to reduce their internal and external costs associated with these repeat litigations, which really are kind of a waste for both companies, and to basically eliminate the risk of large court losses.

So the companies on the other side that we've traditionally done a lot of licensing with that we begun having these discussions with about having a structured relationship, those are the motivating factors for those companies.

Okay.

And then just lastly, as the business continues to grow, you guys are generating some cash, the cash balance continues to grow.

Can you just update me on the strategy or the thinking there?

Sure, we've -- cash, I think, grew another $2 million or $3 million this quarter.

We mentioned on the last call, we kind of moved up our parameters to about the $100 million level.

We think that's an appropriate amount of cash given the discussions we're having with some multinational companies regarding taking over significant components of their portfolios for licensing.

They obviously want to partner not only with a company with a good licensing track record, but one that's got a very solid financial base.

So we think that level of capital is appropriate given the nature of partnering relationships that we're in discussions with.

Great, and congratulations on a good quarter.

Okay.

Thanks, Jonathon.

(Operator Instructions) Our next question comes from the line of [Harry Haskell, Jr.], a private investor.

Please state your question.

Hey, Paul.

If you had to describe the talent that your Company has, would it be that you can figure out a better patent that can bring you more money from your people or what is the talent that you really have?

The talent is in the teams, that's really in a multi-disciplinary team approach (inaudible) where you have patent-savvy engineers combining with very talented patent attorneys combined with very experienced licensing executives, who basically can look at a patent portfolio and realistic assess its licensing and revenue potential.

And you really need all of those disciplines working together.

And I think there's no question that we have the most talented team that's out there.

And now that this team has been working together for a number of years, they're just very good at what they do, there's nobody better at handicapping what the value of patents are than people who actually have to go out and license them and generate the revenues.

So I think we have a very realistic approach.

So that's the talent is being able to look at patent portfolios and first of all determine whether there is real licensing opportunity and a significant revenue opportunity and then validate that licensing opportunity and then go out and execute on it.

And you need these teams and we've built them over the past few years and they're working together extremely well.

And those teams in turn have groups of consulting experts, technical experts, damage experts, but now that they reference.

So we've just built very specialized expert teams in the patent licensing business.

And those teams are -- to expand them you do it through contractors rather than adding your own personnel?

Well, right now, we've indicated that we think we can continue to grow the business significantly with our existing internal personnel.

And one of the reasons we can do that, as a lot of our engineering and licensing and patent attorneys have enabled to leverage networks of outside consultants, who are highly specialized that we can call on when we need them without having that continuing overhead.

So it's, I think, the intelligence of leveraging the talent pools the way we have.

Okay.

Thanks, Paul.

Surely.

Our next question comes from the line of [Marilyn Patterson], a private investor.

Please state your question.

Hi.

I was wondering if you could give some color as to why you feel you may be losing the trial cases that you lose, is it the lawyers incompetent or is it -- can you give some feedback to that?

I think over the course of time, probably our average will be about the same as everybody else in the industry, which at a trial level is kind of 50-50.

These trials are in front of juries, lay juries and there are highly sophisticated technical and legal issues involved.

And even the most sophisticated people in the business will tell you how unpredictable jury awards can be.

And so I think probably overall we've got very good legal talent lined up and I think the portfolio, certainly the ones that we brought in the last year or two and many of the ones that if they do go to trial, I think we'll probably have about the same success with other companies do in the patent enforcement business.

Hey, Marilyn, here's how I'd look at it.

Our best portfolios never go to trial, people settle.

We're probably -- we probably -- if you consider that as part of the process, we've won 25, lost two and lost three and -- so it's a little different.

Our whole goal is to have arm's length licensing programs.

The litigation is a costly necessity with a lot of companies out there, but when you consider the portfolios that we've licensed everybody with very little litigation, you tend to -- people tend to be realistic and you settle those out when you -- and so those are really wins for us.

So to go all the way through, we have a huge difference of an opinion of what it covers.

So I would think we are far better than the average, but if you just look at when you walk into trial and what a jury of nine or 11 people come out with, it's a little misleading just to say (inaudible) and you've lost a couple.

So it's not as easy as just picking that.

The ones that do go to trial, they seem to tend to be larger and do you suppose that they are letting them go to trial, the company with the idea that they have a 50% chance of winning versus just paying upfront?

Surely that could impact.

The cases that typically go to trial are the larger dollar ones and you're exactly right, it's usually because if it's a 50-50 opportunity and a company can invest $10 million or $15 million in a trial to avoid a $100 million royalty, economically a lot of companies will make that decision.

So certainly if the larger cases -- the larger potential dollar cases that tend to get -- go to trial for that reason.

But again that's sometimes misleading too, because we have one family of patents that has generated over $100 million in its lifetime and never been to trial.

That's true, yes.

So it's hard just to say that's an absolute.

It could be the position of the potential licensee.

We're just not going to [sell as] anybody.

We've had defendants go to trial for a very small amount and they end up benefiting us with a huge amount, a many excess times what we wanted from them.

It's so many subjective factors, it's hard just to say, well, you've been to three trials and you've lost two out of those three you got a problem here.

We don't look at it that way.

Okay.

Okay, well, thank you so much for your input.

I appreciate it.

Surely.

Okay, bye.

(Operator Instructions) Our next question comes from the line of Phil Lamoreaux of Lamoreaux Capital.

Please pose your question.

Hi, guys.

This is Ashok for Phil.

I just had a quick question about -- you guys had 89 new licensing agreements entered into this quarter, but yet the topline showed it was like $15 million or so, which was light compared to the past few quarters.

Was there any sort of deferral that was going on in deferred revenue?

No, the answer to your question, Ashok, is there was one large licensing agreement on the credit card fraud technology that I think there was over 35 companies that license that simultaneously for fairly small dollar amounts.

(inaudible) portfolio that we brought in that we -- basically I think of a license of 130 companies thus far, but the settlement amounts given the nature of the technology have tended to be fairly small, so that's changed the average.

What percentage would you say roughly going to be new licensing agreements were from that credit card fraud, which has expired, correct?

You were just sort of --

Yes.

The patents have actually expired three years ago, but again to show our tenacity in the marketplace, we've continued to enforce those patents to companies that we'd put out a notice prior to expiration.

I mean, I would say -- Clayton, I don't know if you've got the numbers, but I think about half the deals in the quarter were related to that one portfolio, right?

I think it was about 40 of the agreement.

Okay.

Okay.

And then just could you also just define overall again when you use the terminology licensing programs and then versus patent portfolios [how you] -- these are the metrics, could you just give us a definition overall of these again?

Sure.

[Well, it would] relate to one technology and generally we have eight patent portfolio or in some cases patent portfolios relate to different technologies, but we count them in a patent portfolio that we have partnered with.

So basically our metric is, if we partnered with a company on two patents or 30 patents we consider that a patent portfolio.

And obviously revenue-producing licensing programs are the category, once we've initiated the program and have begun licensing and generating revenues from that program.

Okay.

All right, great.

Thank you.

Okay.

This will conclude the question-and-answer session.

I will now turn the call back to Mr.

Ryan.

I want to thank you all for being with us this quarter.

If you have any questions after the call, feel free to either get myself or Chip or Rob Stewart in Investor Relations a call and if not look forward to speaking with you again 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 82701473.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may disconnect now.