Acacia Research Corp (ACTG) 2015 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 for question and answer after the presentation.

I will now turn the conference over to Mr. Matthew Vella. Please go ahead, sir.

Thanks, Don. Thanks 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 its wholly- and majority-owned operating subsidiaries. All patent rights, acquisitions, development, licensing, and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly- and majority-owned operating subsidiaries.

With me today are Clayton Haynes, our Chief Financial Officer, and David Rossman, our Executive Vice President of Licensing. Clayton will start our call by taking you through the numbers for this past quarter. Clayton?

Thank you, Matthew, and thank you to those joining us for today's earnings conference call.

As detailed in our earnings release today, second quarter 2015 revenues totaled $40.3 million as compared to $50.1 million in the comparable prior-year quarter. Second-quarter 2015 revenues were comprised primarily of 20 new license agreements executed in the quarter as compared to 15 new license agreements executed in the comparable prior-year quarter. As we have discussed on previous conference calls, license fee revenues continue to be uneven from period to period.

For the second quarter of 2015 we reported a GAAP net loss of $3.7 million, or $0.18 per share (sic - see press release, "$0.08") versus a GAAP net loss of $12.9 million, or $0.27 per share, for the comparable prior-year quarter. On a non-GAAP basis, we reported net income of $12.7 million, or $0.25 per share, as compared to non-GAAP net income of $7.9 million, or $0.16 per share, for the comparable prior-year quarter.

As discussed on previous conference calls, non-GAAP net income or loss excludes the impact of certain noncash charges. Please refer to our disclosures regarding the presentation of non-GAAP financial measures and other notes in today's earnings release and 8-K filed with the SEC.

On a combined basis, inventor royalties and contingent legal fees expense decreased 62%, primarily due to the 19% decrease in related revenues quarter to quarter and a higher percentage of revenues generated during the second quarter of 2015 having no inventor royalty obligations as compared to the revenues generated during the second quarter of 2014. As a result, average margins for the second quarter of 2015 were 83% as compared to 65% in the comparable prior-year quarter.

Litigation and licensing expenses decreased 17% to $9 million due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing and new licensing and enforcement programs commenced since the end of the comparable prior-year quarter. These expenses will continue to fluctuate period to period based on future activity levels in those periods.

MG&A expenses, excluding noncash stock compensation charges, decreased 19% quarter to quarter due primarily to a net decrease in variable performance-based compensation costs, corporate general and admin costs, and employee-severance-related costs.

Second quarter 2015 noncash patent amortization charges decreased 15% due primarily to a decrease in accelerated amortization related to patent portfolio dispositions totaling $2.7 million, which was partially offset by a $1 million increase in amortization for patent-related investments made at the end of the prior-year quarter.

We ended Q2 2015 with $166.9 million of cash and investments versus $193 million as of December 31, 2014. Q2 2015 patent-investment-related upfront advances and scheduled milestone payments totaled $1.8 million as compared to $21.1 million in the comparable prior-year quarter. Cash outflows for Q2 2015 also reflect quarterly cash dividends paid to shareholders totaling $6.4 million.

Looking forward with respect to our cost structure, consistent with our continued focus on reducing our general and administrative costs, on a year-to-date basis we have reduced our headcount from 57 full-time employees at the beginning of the year to 44 full-time employees as of today, an approximate 23% reduction, which results in an annual savings of approximately $6 million on a GAAP basis and $3.2 million on a non-GAAP basis.

As a result, we expect our 2015 fixed MG&A expense, excluding noncash stock compensation and variable performance-based compensation to be in the range of $24 million to $25 million, including the impact of an estimate of Q3 2015 severance-related charges. Based on our cost structure reduction activities to date, 2016 fixed MG&A expenses, excluding noncash stock compensation and variable performance-based compensation, would be in the range of $21 million to $22 million.

Based on current outstanding grants of restricted stock, we expect scheduled noncash stock compensation charges for fiscal 2015 to be approximately $11.7 million, down from the original 2015 estimate of $13 million as a result of the reductions previously discussed.

For fiscal 2015 we expect patent-related litigation and licensing expenses to be in the range of $34 million to $35 million, depending on net patent portfolio litigation, international enforcement, and strategic patent prosecution activities occurring in Q3 and Q4 2015. Excluding any additional 2015 patent portfolio investments, scheduled fiscal year 2015 patent amortization expense is expected to be approximately $52.3 million.

Thank you again for joining us today. I will now turn the call back over to Matthew Vella.

Thanks, Clayton.

Acacia continues its mission of charting for its patent partners a path to financial returns for the unauthorized use of their patented technologies. To date, we have earned well over $1 billion of license revenue and have returned nearly $700 million to our partners, our customers. We remain confident in our strategy and operating focus and continue to expect revenue to ramp through the balance of 2015.

This past quarter Acacia generated over $40 million in revenue and nearly $13 million in pro forma net profit, despite the absence of a significant revenue catalyst in this period. Though our expectations for the first half of 2015 were certainly higher, we did just deliver 19% year-over-year growth over the first half of 2014 while operating in a particularly challenging business environment that resulted in the brief, but nonetheless unanticipated, postponement of several key trial dates this past quarter and that also resulted, despite three consecutive legal Voice/Age victories in Germany, in German courts choosing to stay product injunctions subject to those victories.

This quarter's performance speaks to the robustness of Acacia's business model, the breadth and strength of our marquee portfolios, and our ability to operate regardless of the legal and regulatory climate.

Turning to Voice/Age and Adaptix, though we expected adjudicated trials for our Voice/Age and Adaptix portfolios to be the revenue drivers this past quarter, both those revenue drivers were postponed by one to two quarters. As of now, our first two Adaptix base station trials, originally scheduled for June, will now occur in August and in November.

Also, with the clarification of the European Union law regarding standard-essential patents, such as the Voice/Age patents as a result of last week's patent owner favorable decision in Huawei/ZTE at the European Court of Justice, Acacia is in a position to do what we thought we would be able to do last quarter, seek injunctions on the three Voice/Age patents we have successfully tried in Germany over the next quarter. We will also proceed to trial in three other Voice/Age patents we have asserted in the next two to three quarters.

With these postponements, Acacia's upcoming trial calendar is even more densely populated over the next several quarters. We continue to believe that the rapid onset of approaching trial dates, coupled with the historical correlation at Acacia between trial dates and revenue events, will result in significantly enhanced revenues in the latter half of 2015 and into 2016.

As always, you can see a description of Acacia's upcoming trial calendar under the Portfolio tab on our website.

Turning to our challenging operating environment, there is no doubt that patent reform has changed the nature of the patent licensing industry, including Acacia's business, as evidenced by the aforementioned Voice/Age and Adaptix postponements. More specifically, it is clear to us that the America Invents Act of 2011 has increased the time to money on our assets. We see two key factors contributing to this outcome.

First, we have witnessed an increase in the effectiveness of legal and procedural mechanisms such as IPRs in America, and such as willing licensee defenses on standard-essential patents in Europe that allow defendants to postpone patent trial remedies even in cases where the application of the mechanisms does not significantly reduce the value of our patents. We saw an example of this in our German Voice/Age matter where willing licensee defenses were used to postpone, albeit probably briefly, applications of injunctions after we prevailed at trial.

The second factor contributing to this challenging operating environment stems from the fact that patent law has undergone its most radical transformation in decades. Any change in patent law has the potential to upend case-specific assumptions in which our licensing and litigation strategies have been built, resulting in revenue driver postponements as occurred this quarter in our Adaptix case versus Apple.

These effects have delayed revenue in the short term, they have not fundamentally damaged our business or our long-term outlook. We have recently won, in fact, many critical IPRs, including a few relating to our Adaptix and Nokia Siemens portfolios.

We believe that other industry players, however, with fewer and weaker patent assets, lower capital reserves, and a less experienced team, are more vulnerable to these current obstacles in the current licensing environment. Longer term, we expect these headwinds to abate for us, and we expect to be a stronger competitor for having navigated this business climate.

On the flip side of patent reform, it is worth noting that as competition diminishes because of patent reform, unanticipated benefits might soon result. For example, we believe that the 2011 America Invents Act has reduced the total number of patent litigations proceeding to trial, meaning many of our newly filed patent cases are receiving significantly quicker trial dates than ever before.

Accordingly, Acacia may unexpectedly be in a position to capitalize on faster trial dates and potentially faster time to money on a few portfolios. As a case in point, our Nokia Siemens portfolio litigation filed earlier this year has recently received speedy trial dates.

Also on the flip side of patent reform, uncertainty surrounding patent reform efforts continue to enable Acacia to acquire rights to world-class portfolios requiring only modest capital outlays. As we have said in previous earnings calls, patent reform efforts have unfairly targeted inventive patent holders, leaving them to derisk legally and financially by turning to Acacia as their preferred patent licensing partner. This has allowed Acacia to partner with some of the world's most inventive companies for relatively modest capital outlays.

Recently, for example, Acacia added to its rich and broad set of high quality patents by partnering with owners of two additional valuable portfolios. One of the portfolios will be Acacia's first marquee portfolio in the energy space. The other relates to the improved operation of e-commerce server farms.

Consistent with Acacia's strategic shift towards a smaller number of higher value portfolios, marquee portfolios, our portfolio intake pipeline remains filled with several deep and promising patents from the technology, automotive, and energy verticals, as inventors and companies seek out the best partner to navigate patent licensing's complex operating environment. Our marquee portfolio count now stands at 13 and we continue to target 15 to 17 marquee portfolios by year end.

On the expense side, as was mentioned by Clayton, Acacia continues to examine its cost structure as we focus on fewer patent assets. Litigation and legal costs have increased over the past couple of years, as Acacia's marquee strategy has placed a premium on exhaustive diligence of patent portfolios prior to intake, and on more costly litigation and prosecution efforts in defense of marquee portfolios.

We still expect to arrest and reverse the growth of these costs. Moreover, with fewer portfolios coming into Acacia, significant work has been done on reaching appropriate staffing and SG&A levels in an effort to maximize profitability. Please reference Clayton's earlier remarks for specifics in this regard.

On the regulatory front, what appeared earlier in the year to be inevitable patent legislation seems to have moderated, at least for the time being. The Innovation Act in the House of Representatives and the Senate's Patent Act are winding their way through committees on Capitol Hill. As opposed to earlier iterations, however, the opposition to varying and controversial elements of the legislation appears more strident and robust this time around.

Our stance remains the same with respect to the judicial initiatives falling under the patent reform rubric. We generally support legislation that will eradicate abusive and frivolous patent litigation. Acacia has always benefited on the whole from any legislative initiative the unintended effect of which is to increase the complexity, expense and financial risk of patent litigation by drawing higher quality portfolios into our company.

In closing, over the past several quarters Acacia has continued to pursue its marquee portfolio strategy, honing in on a smaller number, but ultimately more financially rewarding, set of patent portfolios. This strategy remains in place. We continue to believe that these marquee portfolios, with highly defensible claims [reading] on high revenue markets, will be significantly more rewarding for our customers as well as for our shareholders.

Accordingly, Acacia now controls the best assets in our Company's history and now possesses more future revenue opportunity than at any point in the history of this company. We have encountered unforeseen adversity in 2015 as we continued the resurgence of our business. And we believe our relative performance bodes well for our strategy and that Acacia remains very well positioned for high-caliber, long-term performance, including in the upcoming quarters.

Thank you for ongoing interest in and support of Acacia.

Operator, we can now open the call up for questions.

Thank you, sir. The question-and-answer session will now begin. (Operator Instructions) Mark Argento; Lake Street Capital Markets.

Maybe we could touch on gross margins in the quarter. Looked higher than normal. Could you talk a little bit about what drove the gross margins higher?

Sure. Each quarter the gross margins are based upon which portfolios are contributing to revenues in a particular quarter. And it just so happened that in this particular quarter, one of the programs that contributed a significant portion of the revenues, from an economic standpoint the embedded royalty on that particular program were next to zero. And so that translates to higher margins for that particular portfolio in the quarter.

Got you. And do you know -- I know in the Q you typically break out the top two or three contributors on a percentage of revenue basis. Do you happen to have that handy?

Yes. And we included that in the release as well. In the second quarter of 2015 one licensee contributed or comprised 74% of the revenues in the quarter.

All right.

And that's compared to, I believe, 54% and 30% in the prior quarter.

And, Mark, I will add that in general when we deploy capital, when we have deployed capital, as we've said publicly, we do seek to have preferred rates of return on licensing proceeds until we've recovered that capital. And in some cases we're able to obtain those preferred rates of return even beyond capital recovery. So I think part of what you're seeing is that principle put into operation.

All right, good to hear. And then, capital allocation, I know capital's at a premium in this industry right now, especially just given the amount of turmoil. Looks like you guys probably generated a little bit of cash, given the results in the quarter. Thoughts on buyback? I know you still have some authorized. I don't -- I'm guessing you didn't buy any stock back. With the stock under $10, have you guys given any more thought? Or maybe you just remind us on what the criteria there is other than just kind of continuously evaluating. Is there anything more that your guys are looking at? Or is it just too choppy of an environment right now to want to buy more stock?

Well, first of all, we obviously discussed it at length and we'll obviously keep discussing it at length. We're not happy with the stock price performance. Having said that, the dividend now stands at 6% and that's always been the Board's preferred mechanism for returning capital to shareholders. We've, just to recap, declared and paid $63 million in dividends and we've bought back around $35 million of stock.

Having said that, the dividend is the preferred capital return mechanism. We thought it would be imprudent to layer a buyback on top of the dividend at this time. But, since a lot is going on with the Company in terms of prospectively very good revenue opportunities and a lot of very high profile trials coming up in just the next two months, you can rest assured that we will continuously monitor the situation and then continuously consider whether or not we should be reinitiating a buyback authorization.

Great. And then last question -- in terms of Europe, obviously you have gotten a lot more active in Europe and for obvious reasons. Is that trend going to continue or are you starting to see any of the courts, at least in the US, start to act a little bit more, I don't want to say rational, but not as activist as maybe they had at one point in the continuum?

Well, two things. I think there's two separate issues in there. One, we will continue to increase our presence in Europe. And that's simply because the court systems there, as evidenced by that recent Huawei/ZTE decision, is well suited for certain kinds of patent licensing matters, specifically, standards-essential patents.

In the US, turning to a different issue, I wouldn't call the courts activist. I just think that the courts, like us, have been dealing with a lot of churn, a lot of procedural mechanisms that weren't there before. What we're finding, just as we've learned to live with the procedural mechanisms and we've learned to navigate them as you can see from our recent IPR records, for example, our recent records on claim constructions, the courts have to go through that same process as well. And as they stabilize and catch up to the changes, we find things are operating more efficiently.

The other thing we find as I mentioned in my remarks, is our impression seems to be that fewer matters are going to trial. Not ours -- we seem to be [taking them in] at the same rate more or less. But we seem to see fewer matters in general, which means that we're getting speedier trial dates. And that makes the US system look a little more interesting than it did perhaps three months ago.

Okay, appreciate it. Congrats on a decent quarter, guys.

Bryan Prohm; Cowen & Company.

Matthew, in your prepared remarks I believe you said that revenue would ramp through the back half of 2015. And while you don't guide, that certainly sounds like you're at least expecting higher revenue in the back half versus the first half, based on the visibility into Adaptix and Voice/Age and some of the trials that you spoke to earlier.

So, give us a better sense of how optimistic you are [with] the back half. Is this really an inflection point where all of the business model changes put together over the last 18 to 24 months are finally starting to come together and trial delays have reached the point where they can no longer be pushed further out in the calendar and some favorable rulings out of Europe and some recent Markman opinions make it sound like -- to lend credence to your optimism? Thanks.

The short answer is yes. No, I mean, obviously I can't give you too lengthy an answer. But the slightly longer answer is we've been pretty forthright in telling folks that the initiation of our revenue ramp was going to come on the back of Adaptix and Voice/Age.

And so, when Adaptix -- just to reiterate, we don't think those trial dates are going to get pushed out any more. Now, they always could; you never know what can happen. But at this point, we really don't think they're going to get pushed out. They've already been pushed out a couple of times. And it seems that -- our impression from the cadence of the rulings and their nature is that they are locked in now.

On the Voice/Age matter, it's a touch murkier, but really not that much murkier because, again, unlike Adaptix, there we actually have the three trial wins. Those don't go back. That's there. And now we seem to have a clearer path into what German and other European courts will do with those wins.

And so, if that reasoning holds up, then I come back to what I've been saying about the revenue ramp. It will happen on the backs of those portfolios initially. And they seem well positioned accordingly.

Okay. So, then how many specific trial dates or major revenue events are there from here until year end? Is it more than 10? I mean, I know you've given ranges on these numbers in the past. But off the top of my head, there are at least three Adaptix and, depending on the number of defendants, of the number of Android [AMs] that are infringing Voice/Age, that seems like a reasonable number. Is that fair?

Well, it depends on the chunk of revenue you're talking about. There's far more than 10 if we're talking about revenue drivers, period, because we have trials coming up in Labyrinth. We have trials coming up in Promethean. They're not marquees, but they're very valuable portfolios, and those are revenue drivers potentially as well.

I will keep my remarks contained to Adaptix and Voice/Age because that's the data I have off the top of my head. On Adaptix we have two trial dates scheduled on the base station side. On the handset side we still haven't been scheduled as of yet. What we've gotten is a bit of clarification on how -- we think we've gotten some clarification on how courts are going to handle -- I'm going to call it res judicata inaccurately, but how they're going to handle basically the impact of the unfavorable Apple decision we received last February that leads us to believe that we should be getting scheduled. When we get scheduled, though, we don't know as of now. So there's two there.

On Voice/Age it's a little more variable. Let me hand it over to David, but I think basically you're looking at -- you have to sort of decouple the revenue events from the trials. Right? There's three trials coming up. There's two injunctions that might be enforced and there's really three licensees that are positioned to reach license agreements with along with a number of others that are talking to us. But maybe I'll hand it over to David for detail.

Yes. Just summarizing on Voice/Age, recall we've already won this year on three patents in Voice/Age. And the Court was prepared to move into the remedy phase, in which case an injunction would be the typical remedy to apply in this case, but they were put on hold pending the resolution of a European Court of Justice decision.

That decision came down on July 16, and we think that allows us to move forward not just on the three cases that we've already won, and move forward in a very positive way. But, it opens the door now for the remaining three cases that are going to proceed over the next three months to move to resolution without the cloud of uncertainty that has now been resolved by the European Court of Justice.

And we believe that the decision that the European Court of Justice rendered allows -- gives us tools to compel infringers to actually face the fact that they're infringing the patents as opposed to take shelter in the ambiguity that existed prior to this decision. So we think it's very positive.

Great. Thanks for the color on that. I appreciate the detail. Last -- follow-up question on capital returns. So, if dividend is the preferred method of return, does that mean we could see special dividends, one-time dividends, if you get some home runs, some grand slams, on some of these trials that are upcoming? Thanks.

Yes.

Okay. That was a quick answer. I'll pass on to the next. Thanks. And I'll get back in the queue if I need to.

Mike Latimore; Northland Capital.

Just back on Voice/Age. It sounds like there's a number of positive events there. But I guess, are there clear revenue events in the third quarter around Voice/Age at this point?

Well, what happened is when the courts were waiting for the European Court of Justice to rule -- and keep in mind that case in the European Court of Justice has been pending for almost two years -- the courts really didn't know what remedies they could render on standard-essential patent. They know now. We know now. But most importantly, the infringers know now that they can't rely upon that ambiguity. So we expect that they are going to, based on what the Court has ruled, have to negotiate in good faith to either enter into an agreement with us or face an injunction in Europe. So that's -- yes, if that answers your question.

And are there scheduled meetings where these injunctions would be kind of determined? Are there dates for those?

Yes. Yes, there are scheduled court hearings over the next several months. We've actually had hearings in March and June where the Court has found patents to be infringed and has simply stayed the final judgment on infringement pending the ECJ decision. Now that that is resolved, we are going to go on those first three patents that were found infringed and discuss the injunction issue on September 22nd. In addition, we have another hearing on August 5th in Munich, where we're going to be taking up all those issues and then again in early -- in January of 2016.

So we're going to be addressing our additional patents that are infringed and also addressing the resolution now, the final resolution of the patents that have already been found [to] infringe. And that can only, in our view, facilitate settlement in those cases.

Okay. And then, for the large settlement in the second quarter, was that with the marquee portfolio? And I guess are there other potential licensees for that?

Yes and yes.

Okay. And you mentioned, I thought you mentioned, that you have a new marquee portfolio in the energy space and then one in the e-commerce server farm arena. So you're announcing two new marquees today? Is that right?

No. For now, one. You'll recall in previous calls that sometimes it might take us a few months to figure out whether something hits that status or not. Right? With one we're confident; that's the energy one. With the other one we have to wait and see how certain things pan out.

I see. Okay. Thank you.

(Operator Instructions) David [Huff]; private investor.

Great quarter. Really interesting to see a lot of different things that are going on in the docket. Two quick questions; I'll try to make them brief. The Breed portfolio has basically -- most of cases have been dismissed. When I'm running my model, is that something I should continue to expect new events, new litigation to be filed? Or is that something that's kind of wrapped up?

Well, first of all, you're more than a private investor. Your reports make for very interesting reading. But, that aside, on Breed, no, there is more coming up and that does need to be modeled. Let me pass it to David for some clarification.

Yes. And I would say that there will be additional Breed cases that are going imminently filed. We talked about some of the developments seem to be moving in our direction. One of those was the elimination of the SAWS program within the PTL that was a secretive, highly controversial program but had the effect of essentially burying valuable patents that were pending through the process.

Specifically with Breed, we had valuable families of patents that were pending for seven years within the PTL. With the suspension, or the elimination, of the SAWS program in March of 2015, those patents issued almost immediately. And so, we think those are very valuable patents, just to take an example, and we will bringing those to bear very soon.

Okay, that's good to know. I guess the second question is, the 74% license, looked like that deal was done shortly after the Markman hearing and right before the Markman opinions were issued against the other defendant. Looks like it was done at competitive rate, probably at a discount. (Inaudible) the remaining defendant, should we look at even better rates going forward? Because there might be --

Well, I know the difficulty -- I'm having a little bit of difficulty trying to figure out what's confidential and what's not. But let me answer --

I understand that.

Let me answer with some general observations. We have at times entered into agreements well before trial date. And when we do it, we will offer people very, very attractive early adopter discounts. When they don't take those discounts and we go to trial, we will get very much higher rates. And so, for any situation where we've done early deals, even the ones we've gotten quite a bit of money in and quite a big of profit in, the rates do significantly increase -- increase is probably too soft a word. They soar as we get towards trial. And that's simply because the costs and risk soars.

And so that's the way we price and that's the way we're always going to price. And it's good business for us to license early. It's good business for licensees to take their licenses early. But if they don't want to go that way, everyone's going to pay more.

I just had a quick follow-up question in that portfolio. Did that put that portfolio close to the black or in the black?

I can't comment on individual portfolios. But I can say that for all the portfolios we licensed this quarter, the ones at least that come to mind, we're very happy with the P&L on those.

Okay. That's it for me. Thank you.

This will conclude the question-and-answer session. I will now turn the call back to Mr. Vella.

Well, again, thanks for your support. And stay tuned; it's going to be I think a very interesting and hopefully positive quarter. Bye for now.

Ladies and gentlemen, if you wish to access a replay of this call you may do so by visiting www.acaciaresearch.com. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.