Acacia Research Corp (ACTG) 2016 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 question and answers after the presentation. I will now turn the conference over to Mr. Marvin Key. Please go ahead, sir.

Good afternoon, and thank you for joining Acacia's first quarter shareholder call. I'm Marvin Key, CEO of Acacia Research. With me today is Clayton Haynes, CFO, and Ed Treska, our General Counsel. Today I will provide a brief business update. Clayton will review our financial performance, and then we will open the call for questions.

First, our Safe Harbor statement. Today's call may involve what the SEC considers to be forward-looking statements. Please refer to our earnings release, which was filed with the SEC today, as an exhibit to our 8,-K or 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. The team at Acacia Research remains committed to maximizing the value of our patent assets for the benefit of our shareholders and our patent partners.

In the first quarter despite the ongoing industry headwinds and extensive structural changes at Acacia, the Company generated nearly $25 million in revenue. This number included a series of licensing transactions involving patent portfolios from Boston Scientific, Silicon Image, Nokia Networks, Benuti, Adaptix, and Cover Tech. The team at Acacia is also pleased to report we finally received and recognized payment from our trial verdict in 2011, for the case lighting ballast control against Universal Lighting, a litigation which ultimately led us to the United States Supreme Court.

As we mentioned during our previous shareholder call, Acacia is focused on improving our business, and the team is working diligently to improve both our revenue line and our expense line, with the goal of sustained profitability. From a top line perspective, Acacia is continuing our effort to attract broader and more diverse revenue opportunities. We are exploring business development options, from both an individual portfolio perspective, and from a potential licensee perspective as well. In the first quarter as previously announced, our business development team brought in a new portfolio consisting of 90 issued US patents, as well as various additional foreign counterparts. This portfolio contains strategic IP assets in flash memory components and controllers, SSD drivers, and other systems which use flash memory. In addition to this portfolio we're actively pursuing other compelling portfolios in the United States, Japan, and Europe. While the number of patent transactions in the marketplace overall has declined, and while we are not satisfied with our patent intake we believe our decision to move beyond solely the pursuit of very large patent portfolios to also sourcing smaller yet strategic patent portfolios, will increase the scale of our business development effort, lead to an increase in our IP asset intake, and generate better predictability for our business.

Notwithstanding the difficult environment in the patent monetization business, the Management Team at Acacia continues to pursue a healthy pipeline of revenue opportunities. These stem from valuable portfolios including VoiceAge, Nokia Networks, Rambus, Renaissance and Silicon Image, and we remain cautiously optimistic about our revenue-generating opportunities for 2016.

Moving to the expense side of our income statement, Acacia's cost structure is receiving continual oversight as we review all line items. Our team continues to work diligently to identify inefficiencies in our business, and to analyze additional opportunities to lower our cost structure. And our headcount now stands at 29 professionals. We plan to continue aligning our resources with the needs of the business, to reach cash flow breakeven and profitability for our shareholders. In the midst of the significant management changes and headcount reductions in the first quarter, Acacia received several unsolicited inquiries and overtures from third parties interested in pursuing a transaction of some sort with our Company.

As previously disclosed, the Board of Acacia unanimously rejected an unsolicited takeover attempt from Unilok Corporation. As a result of this and other overtures the Board prudently acted to protect the Company's net operating loss carry-forwards, NOLs, by unanimously approving the adoption of a tax benefits preservation plan. The Company's tax benefits preservation plan is similar to tax protection plans adopted by other public companies with significant tax assets and loss carry-forwards. And has been described in our recent SEC filings.

This plan is designed to reduce the likelihood that the Company will experience an ownership change or takeover attempt, that would subject the Company to an annual limitation on certain of its pre-ownership tax assets. A limitation arising from an ownership change could, depending on the value of Acacia's common stock at the time of such ownership change, could reduce the Company's tangible common equity. Currently Acacia has over $160 million in federal income tax NOLs. Recently on March 31st Acacia was pleased to receive a positive ruling in our St. Lawrence V Vodafone litigation in the court in Dusseldorf, Germany. The Court ruled that Vodafone has infringed our St. Lawrence patents, and granted Acacia's request for an injunction against Vodafone. Vodafone immediately appealed this ruling and has requested that the Court of Appeals stay the enforcement of the judgment. We plan to respond to Vodafone's motion by April 22nd, and our German counsel expects the Court of Appeals to render a decision soon thereafter. If Vodafone's request to stay the enforcement of the injunction is denied, Acacia plans to quickly post the required bond, after which the injunction will go into effect in Germany. Acacia is hopeful the German court's strong validation of our patent rights will lead to reasonable settlement discussions with Vodafone and other infringing companies. I will now turn the call over to our CFO, Clayton Haynes, who will provide a more thorough review of our financial results for the quarter.

Thank you, Marvin. And thank you to those joining us for today's first quarter 2016 Earnings Conference Call. As detailed in our earnings release today, first quarter 2016 revenues totalled $24.7 million, as compared to $34.2 million in the comparable prior-year quarter.

First quarter 2016 revenues were comprised primarily of 12 new license agreements executed in the quarter, as compared to 23 new license agreements executed in the comparable prior-year quarter. In the first quarter of 2016 four licensees individually accounted for 22%, 19%, 16%, and 11% of revenues recognized, as compared to two licensees individually accounting for 58% and 15% of revenues recognized during the first quarter of 2015. We continue to expect license fee revenues to be uneven from period-to-period.

For the first quarter of 2016 we reported a GAAP net loss of $9.96 million, or $0.20 per share, versus a GAAP net loss of $13.1 million, or $0.27 per share for the comparable prior-year quarter. On a non-GAAP basis excluding noncash stock compensation and patent amortization charges totaling $12.5 million, we reported first quarter 2016 net income of $2.5 million, or $0.05 per share as compared to non-GAAP net income of $3.2 million, or $0.06 per share for the comparable prior-year quarter. Please refer to our disclosures regarding the presentation of non-GAAP finance 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 $8.4 million, or 60% due to the 28% decrease in related revenues quarter-to-quarter, and a higher percentage of revenues generated in the first quarter of 2016, having lower average inventor royalty rates, primarily due to higher average levels of cost recovery related to preferred returns, as compared to the portfolios generating revenues in the first quarter of 2015. As a result average margins for the first quarter of 2016 were 77%, as compared to 59% in the comparable prior-year quarter. Licensing expenses decreased 11% quarter-to-quarter, primarily due to a net decrease in litigation support costs associated with upcoming patent trials.

These expenses will continue to fluctuate period-to-period based on future activity levels in those periods. First quarter 2016 general and administrative expenses, excluding noncash stock compensation expense decreased $1.1 million, or 15% due primarily to a reduction in personnel costs in connection with our recent headcount reduction activities, and a decrease in variable performance based compensation costs. The decrease was partially offset by an increase in non-recurring employee severance costs.

First quarter 2016 noncash stock compensation expense decreased $1.5 million, or 47% due to a decrease in the average grant date fair value for the shares expensed in the period, and a decrease in the number of shares expensed resulting from a net reduction in employee headcount, and a reduction in the number of shares vesting for current employees. First quarter 2016 other operating expenses totalled $1.7 million, as compared to $426,000 in the comparable prior-year quarter.

Other operating expenses include expense accruals for litigation related court ordered attorneys fees, and settlement and contingency accruals for various other matters. Cash and investments totalled $156.9 million as of March 31, 2016 versus $145.9 million as of December 31, 2015. Cash outflows for the first quarter of 2016 included patent related investment costs totaling $1 million, as compared to $16.9 million in the first quarter of 2015. Looking forward as Marvin indicated, we continue to work diligently with respect to lowering our operational cost structure.

Quarter-to-quarter we reported an 11% decrease in litigation and licensing expenses, a 24% decrease in G&A expenses, and a 48% decrease in research and consulting expenses. We have reduced our headcount from 57 full time employees at the beginning of 2015, to 29 full time employees as of today. And approximately a 49% reduction which results in an annual cost savings of approximately $5 million, excluding noncash stock compensation. As a result we expect our 2016 fixed G&A expense excluding noncash stock compensation, variable corporate legal, and variable performance based compensation expenses, to be in the range of $17.5 million to $18 million, representing an approximate 20% decrease from 2015 G&A expense levels excluding variable items.

We continue to assess and analyze our litigation and licensing expenses for potential cost reductions, and continue to expect to realize lower litigation costs in 2016 relative to 2015. Currently for fiscal 2016 we expect patent related litigation and licensing expenses to be in the range of $28 million to $30 million, depending on net patent portfolio litigation, international enforcement, IPR, and strategic patent prosecution activities occurring in 2016. Thank you again for joining us today. I will now turn the call back over to Marvin Key.

Clayton, thank you. Operator, feel free to open the call for questions, please.

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

Hi guys. Good afternoon.

Hey Mark.

Hi. A few questions around some of the changes you have made in terms of the cost structure. I know last quarter we talked a little bit about where you see breakeven. Obviously you did $25 million in revenue this past quarter, or just shy of $25 million, and were able to generate positive EBITDA and positive adjusted net income, and so maybe you could just walk me through where you see kind of the breakeven going forward. Does it come down even a little bit more with all of the other changes you made, but maybe help us think through what the operating model looks like here going forward?

Sure, Mark. Thanks for your question. Based upon our current estimates of costs we're looking at a breakeven of anywhere ranging from say $100 million top line to $105 million top line. Of course as Marvin indicated, we are continuing to try to find other areas to reduce costs and so those numbers can change throughout the year, but sitting here today right now, we're looking at between $100 million to $105 million.

And I would add to that, Mark, that we have yet to see the full benefit on a kind of a run-rate basis, to some of the changes that we've so far made during the first quarter.

You had said in your prepared remarks around legal. Do you think there's an opportunity to continue to work towards getting better rates from your partners on the legal side, and be able to work that down as a percentage of gross revenue?

I think that's reasonable and it's certainly one of the things that we continue to focus on. It's obviously a major component to the cost structure of the Company, and we continue to focus on that so you should consider that an ongoing effort, yes.

And one for Clayton. More housekeeping. I haven't had a chance to completely review the balance sheet yet, but did you collect the cash from the quarter from some of the larger deals you guys did? I'm just trying to juxtapose your $157 million in cash on the balance sheet, in terms of additional collections and adding to that total?

Sure. So with respect to the bulk of the revenues that were done in the first quarter, there's still a significant portion of that that is in Accounts Receivable as of quarter end, scheduled to be largely collected in the second quarter of 2016.

Great. And then, Marvin, maybe you could give us an update on the Board's process around a CEO search. Where is that at if anywhere, any update there?

Mark, there is no ongoing search for a new CEO, and I will be the CEO at Acacia until further notice.

Great. Last question for me and I will hop back in. I know it's a little bit of a hot button issue last conference call, but any thoughts, it looks like you guys are stockpiling a little bit of cash. Any thoughts on potentially teeing back up the buyback that you guys had in place, or thinking about taking advantage of a relatively low stock price?

This is certainly something that we've discussed regularly on shareholder calls, and with investors, and the Board is always considering the best use of our capital. We made a pretty concerted effort as we moved to turnaround this Company, that we're focused on sustained profitability, and the preservation of our assets, of which obviously cash is a significant component. There are no plans for a share buyback, or anything like that right now. However, you probably have seen announcements that individual directors, officers and different employees have been buying some stock, and will have the option of doing so going forward. So that's how, that's our indication of how we're supporting our outlook for the Company.

Great. I'll hop back in the queue. Thanks guys.

Thanks, Mark. Appreciate it.

We'll take our next question from Mike Latimore with Northland Capital Markets.

Great. Thank you. Marvin, you have been at the helm here for a quarter or so, you cut costs nicely, and sort of maybe backed off a little bit on the marquee portfolio strategy. I guess any kind of other key decisions that you see that you need to make, or do you feel like it's more a matter of kind of executing them?

I think a lot of what we have been doing to this point is things that any executive would do, in terms of improving the efficiencies and cutting costs, et cetera, and so kind of our central message, the bullet points are, maximize revenues, reduce costs, reverse the trends of the last several years, and enhance shareholder value, and we think we've made a terrific amount of progress in the first 90 to 120 days. So I think execution is absolutely paramount, and we're going to continue to work to bring in new assets, and we think that's our biggest challenge right now, is kind of making the intake of patent assets more robust.

Now on that topic, it seems like obviously the price of patents has come down, and there's less up front capital needed, but I guess could you also see maybe better revs here that might help gross margin long-term, or is that not part of the judgement?

I'm sorry. Did you say increased revenue share to our advantage?

Yes. I mean as you negotiate taking in patents, could you see just a higher percent for Acacia versus the patent owner potentially, which might help gross margins long term?

I don't think that's very likely to happen. If anything in a tougher environment our competitors are being price-sensitive, and you are seeing some situations where our competitors are willing to take revenue shares considerably lower than our 50%. We have not backed off of that at this point. So, if anything, as business has gotten tougher, as you might expect the people who are trying to compete against us are willing to cut prices to do it, and so we have not, we have held to our priceline, if you will, at a 50% net revenue share, and we expect to continue to do that in the future.

Okay. You said you were cautiously optimistic on the year. I guess any way to describe, in terms of how you view the activity levels, whether it's number of trials? How do you view fiscal 2016 versus fiscal 2015 in terms of respect to activity levels, is it similar, is it higher, lower?

Well, I think in terms of the trial dates and the litigation situation it is not changed materially in the last quarter. The third quarter is largely made up of CCE K cases, or representing the Nokia Networks patents, against defendants like Apple and Amazon, HTE and ZTE. So the third quarter is largely made up of those cases. In the fourth quarter a little bit more diverse. We have some more CCE/Nokia Networks trials against Samsung. We have some Puma cases against Apple and HTC and LG, and then we also have some cases in Texas for St. Lawrence, or our VoiceAge portfolio. So the fourth quarter is loaded with litigation, and so that has not changed for us. I would say the level of discussion in general at the Company is excellent. We're meeting, continually meeting with a lot of large multinational companies, in an effort to reach some reasonable settlement discussions, and we continue to do so and that activity is robust.

And just in terms of sort kind of revenue composition, do you have much revenue to-date that's coming from saying recurring royalty streams, or is that pretty minor?

We have a small percentage. I believe it's somewhere around, the 5% level, but our revenues today largely are of the one-time paid out nature.

Last question. You have that other expense in the quarter, the $1.7 million. Is that kind of a one-time event do you think, or would that repeat in the second quarter, something similar?

Those relate to specific matters, and I think as we have discussed before from time to time we will need to make accruals for those types of matters. Sitting here today I'm not aware of any that would occur in the second quarter, but sitting here today, I can't say that we won't have any additional in the second quarter.

Okay. Thanks a lot.

Appreciate it, Mike.

We'll take our next question from David Huff, a private investor.

Hi. Good afternoon. Pretty good quarter. Very pleased. I hope to ask a couple of quick questions. Cut me off if I am it going too long.

That's enough David.

Was there an update on VoiceAge and HTC? I don't think I heard it, but if you did can you please repeat it?

Well, in my prepared remarks we talked about what's going on in the German court, and just to recap, that we did hear on March 31st that the court in Dusseldorf, of course did rule that Vodafone is infringing our patents in VoiceAge, and the Court ruled at that time that they granted our request for an injunction against Vodafone, and so Vodafone then as you might expect immediately appealed that ruling. We have to respond to that ruling, and will do so by tomorrow, April 22nd.

Vodafone and HTC are tied together?

Correct. Vodafone is selling the HTC product.

Okay. I know there's also actions with ZTE and Motorola. Are those also tied together in the same action, or is that a separate action?

Well, David, this is Ed Treska. We have got a number of different actions. If you remember we had the Manheim action, which also involved HTC where injunctions were issued, but that is up on appeal, and we are still waiting for the Appellate Court to rule on that case, and then we have separate cases against Apple and Motorola and ZTE, which were filed in December of 2015 and early 2016, and so those cases are still in the pretty early stages.

Okay. Okay. I want to move on to there was an Adaptix license. It's obviously, is that like a situation of not throwing, I would say good money after bad money, or just another five year fight? That you had another case with newer patents, and I know you have been building the portfolio. Is this kind of just getting a resolution and moving on from it?

Well, I mean I think the realization of where the case is, we still have a lot of other patents that are involved in other cases, but with respect to Erickson in particular, that dealt with the upcoming trial in May dealt with the same patents, different claims but the same patents that we're litigating to trial in December.

Okay. Okay. I also know in Adaptix the Federal circuit heard the appeal, before I heard the recording I would say there was a 10% chance you would get a reversal on the handset side. After hearing it, I would say maybe it's 40%, is that something that the Company wants to keep pursuing the Adaptix handset side?

Well, we are pursuing it. I'm glad you listen to the Federal Circuit argument, and for those that did the Justices were very engaged in the argument, and certainly understood the points we were trying to make, so I agree with you any time you go up on appeal, the odds are technically against you, but I do feel the appeal went well and we will just have to wait and see. Obviously if it's reversed and we go back down to the District Court, we do intend to pursue those cases.

Okay. I have two more questions if I can ask them. I have talked in the past, or questioned in the past about bundling licenses. I checked the docket the other day and it looked like one of ever those finally happened, with possibly the largest handset maker in the world. Is that basically a function that you guys keep winning inner party reviews, final decisions, and getting them not instituted, yet you win three or four Markman opinions, I think maybe even five and six in this case, and you added Caldwell Cassidy, who is probably the best litigation firm in the country, is that kind of getting people to come to the table finally, and we will see some of these large quarters coming up in Quarter 2, Quarter 3, and Quarter 4?

David, there's a lot going on there. I would say that we're making every effort to be reasonable and conscientious in how we approach negotiations with all of the companies that we're negotiating with. There is a limit, I think, to how effective you can be, if you're constantly at odds, and you're constantly butting heads with your negotiating partner. So to the extent that we can work out something that we believe is reasonable in a less contentious manner, we're open to doing so.

Okay. That leads into my, I guess my last question. The patent pipeline, you guys didn't file too many cases in 2015. We're kind of pulling forward a lot of these larger deals and trials, getting rid of a lot of headline risk. Is there an acquisition target on how many portfolios you want to bring in?

We've acknowledged that patent intake is our biggest challenge right now, and it's also our biggest priority. It's getting a lot of focus at the Company, and everyone at the Company is zeroed in on that objective. In some respects when we were solely trying to attract major, gorilla-like portfolios, there are only so many of those to go around, but we are encouraged and hopeful, that by lowering the bar a little bit from a revenue perspective, that we are open to considering a more diverse set of opportunities, might be is going to open up the level of opportunity for the business development guys at the Company. So that's what we're expecting. We're still a little early in that process, but the intake is very important to the ongoing prospects for our Company, and we're laser focused on it.

Okay. A quick follow-up question then, and I'll be done. I promise. Was there a Renaissance portfolio that was transferred over recently? The last one I have was the Limestone memory, and the one before that was the Sota Semiconductor, which time to money was really quick. Limestone Memory just had IPRs that were basically very good decisions came out today, and hoping that one, another one has been in the pipeline to kind of keep building on this relationship.

Ed Treska is shaking his head no. He doesn't believe anything else from Renaissance has been transferred over.

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

Thanks, David.

We'll go next to Ryan Levenson with Privet.

Hey. Thank you for taking my question. Can you just clarify, I think it was Mark's question first about the additional AR that's coming in the next, in the second quarter?

Sure. Sure. So oftentimes when licensing deals are done sort of in the latter portion of a particular quarter, the contractual terms associated with the payment provides for payment after the end of that particular quarter, and so we will record those amounts as Accounts Receivable, and again, based upon the terms of those particular agreements the majority of those payments are scheduled to be received in the second quarter of 2016.

Okay. What kind of number are you talking about? That was really my question.

Well, the March 31 balance of Accounts Receivable is $25.2 million, and like I say the majority of that is scheduled contractually to be collected in the second quarter of 2016.

Okay. That was the clarification I needed. So you're really talking about a cash balance of more like $172 million?

Well, if you're going to look at it like that, you also have to take into account that we do have some current obligations as well too, that will also be paid out in the second quarter of 201,6 and so there's cash scheduled to come in, there's also some cash scheduled to go out.

Okay. All right. Now, on your business plan what kind of, I think you said $100 million to $105 million is roughly the breakeven. Is that a cash breakeven?

Yes. That is cash breakeven.

Okay. Is Q1 a fair extrapolation for the balance of the year on roughly a quarterly basis? From a revenue standpoint?

Yes. I guess we typically don't give forward revenue guidance so I'm not sure I can answer that.

Yes. I think. Go ahead.

As you're probably aware, our quarterly revenues can be quite volatile, but as David Huff before you observed, we're kind of at the cultivation stage on a number of different portfolios that we're currently working on, and so we feel constructive about the discussions that we're having, and as a result of that, we're hopeful that 2016 is a good revenue year.

Right. David's comments I think were very helpful in enumerating the positive things that are really in the very near-term pipeline, and I guess my question is really that do you anticipate the Company burning cash Q2, Q3, Q4, Q1 of next year? I'm just curious as to what you think the cash position would look like on a going forward basis?

Well, we certainly hope we don't burn cash, and we don't intends to burn cash but until we generate revenues we're going to continue to focus on something that we can control on a daily basis, which is the cost structure, and we're going to continue to make progress on that front, but we feel pretty good about the revenue side. So we are, it's our intention to generate free cash this year.

Okay. So that leads me to the obvious question of why you need $157 million of cash on the balance sheet, and that's going up. There's near-term receivables that are coming in, and you have a business plan that calls for free cash flow generation, so why you have it, I mean insiders are buying stock but why wouldn't you deploy some of the cash on the balance sheet to buy what you're insiders think is undervalued stock?

Well, that's a decision that the Board is always contemplating. I want to point out that it was only a couple of months ago that our stock was trading below cash, right? And investors were giving the Company zero credit for their patent assets at any level, and so I think there was a belief out there that this Company was at risk, and we've done everything we can, everything we can in the past 90 to 120 days, to kind of stabilize and reorganize and redirect this business, and I think we have made an incredible amount of progress in a short period of time in doing just that, but as we have repeated we're focused on sustained profitability and asset participation--.

Marvin, I need to ask you a question, though. So the day of the conference call, you really made a very troubling remark regarding the cash on the balance sheet, and the stock at that time was trading at $3 a share, and there was a ton of liquidity in the ensuing few weeks at 3, 3.25, 3.5, and yet the Company didn't see fit to buy any stock back at the time.

So what's your question?

Well, my question is still it's really my last question, which is why you are not buying back stock? Insiders think it's a good buy. We have more cash than you need. You have AR coming in, you have a free cash flow generative plan, and I'm just kind of confused as to why you're in a cash hoarding frame of mind?

All I can tell you is that the Board is continually considering their options for the best use of the capital of the Company, and that we are making every effort to sustain the business, make it sustainably profitable, and grow the business, and we believe at this time that maintaining the cash balance is the proper course to take. We are always willing to consider what we do in the future, and the Board will do so.

Okay. Can you shed a little bit more light on what, I mean obviously there was a low bid sent in during the quarter, and the Board just rejected it, and I think implemented a pill for fair tax preservation plan.

Yes.

Now, can you shed a little bit more light on those discussions, or was there discussion about revising the bid up, did you guys make an effort to see if this was a real acquirer that was, maybe that was their starting bid, or that they would potentially raise their bid?

Well, we put out a press release, the Board.

That rejected the bid, but I was just wondering what the discussions were in terms of maybe trying to cultivate that bid?

After we contacted Unilok, sent them a letter, and put out our press release that we were rejecting the offer, we received no further overtures from the Company.

Okay. Okay. That's it. I appreciate your time.

Certainly. Thank you.

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

Thank you Operator. Thank you for the questions. We appreciate everyone's interest, and feel free to give us a call if you need further clarification. Have a good day. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.