Acacia Research Corp (ACTG) 2016 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 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 today's Acacia Research second quarter 2016 shareholder conference call. I'm Marvin Key, CEO of Acacia Research. With me this afternoon is Clayton Haynes, CFO, and Ed Treska, our General Counsel.

Today I'm going to provide a brief business update. Clayton will review our financial performance, and then we will open up 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 filed with the SEC today, as an Exhibit to our 8-K, 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. The team at Acacia Research continues to maximize the value of our patent assets for the benefit of our shareholders and our patent partners.

In the second quarter Acacia generated over $41 million in revenue. The quarter included a series of licensing transactions involving patent portfolios from Silicon Image, ST Micro, Nokia Networks, [Venuti], Diamond-Grading Technologies, Borland and VoiceAge.

A strong revenue number, coupled with our significant and ongoing effort to manage the Company efficiently, resulted in improved cash flow generation of $11.8 million in the quarter. Our results included a write-off of carrying value for ADAPTIX, as we proceed to wind down that program and resolve the cases against the remaining defendants.

Acacia continues to work diligently to improve our revenue line and reduce our expense line, with the goal of consistent and sustained profitability. Our team is focused on attracting broader and more diverse revenue opportunities, and we are actively pursuing compelling patent portfolios in the United States and increasingly in Europe.

Management has acknowledged previously that we are not satisfied with our current patent intake, and therefore we have altered our patent sourcing strategies. We are encouraged these changes will lead to more opportunities to increase our IP asset intake, creating better revenue predictability for our business.

We remain optimistic about our future revenue pipeline from current licensing efforts on multiple patent portfolios. In addition to our ongoing negotiations with various potential licensees, we are preparing for trial dates in both the third and fourth quarters of this year.

On September 6 we go to trial against Apple and other defendants to enforce our Nokia Networks patents in the Eastern District of Texas. On October 3, also in the Eastern District, we have a trial scheduled against Apple, HTC and LG on our ST Micro patents.

Additionally, we have a trial slated for December 5, when we will litigate our Rambus patents against LG Display in Delaware. Our VoiceAge case against HTC, Motorola Mobility and ZTE, also originally scheduled for December 5, has been postponed until March of 2017.

Before I hand the call off to Clayton Haynes for the quarter's financial review, I want to strongly emphasize that Acacia remains focused on rigorous financial discipline, maximizing the risk-adjusted returns of our patent portfolios and the intake of high-quality patent assets for future monetization. Our professionals are working diligently to forge new business relationships for the future benefit of our shareholders.

I will now turn the call over to Clayton Haynes.

Thank you, Marvin.

For my prepared remarks today, consistent with feedback received from shareholders, I will briefly touch on some of the more significant aspects of our Q2 2016 results. For additional information, please refer to the more detailed information provided in our earnings release filed earlier today.

Second quarter 2016 revenues totaled $41.4 million, as compared to $40.3 million in the comparable prior-year quarter. In the second quarter of 2016 one licensee individually accounted for 85% of revenues recognized across multiple portfolios, as compared to one licensee individually accounting for 74% of revenues recognized during the second quarter of 2015. We continue to expect license fee revenues to be uneven from period to period.

For the second quarter of 2016 we reported a GAAP net loss of $40.6 million, or $0.81 per share, versus a GAAP net loss of $3.7 million, or $0.08 per share, for the comparable prior-year quarter. On a non-GAAP basis excluding noncash stock compensation, patent amortization, and patent impairment charges totaling $52.4 million, we reported second quarter 2016 net income of $11.8 million, or $0.23 per share, as compared to non-GAAP net income of $12.7 million, or $0.25 per share, for the comparable prior-year quarter. 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.

As Marvin mentioned in connection with our quarterly patent impairment review process, we recorded $40.2 million of noncash patent impairment charges, primarily reflecting changes in estimates of cash flows on certain patent portfolios for which the underlying licensing programs are concluding.

On a combined basis inventor royalties and continent legal fees expense increased $3.6 million, or 54%, due to the 3% increase in related revenues quarter to quarter and certain patent portfolios generating revenues in the second quarter of 2016 having higher contingent legal fee rates as compared to the portfolios generating revenues in the second quarter of 2015. As a result, average margins for the second quarter of 2016 were 75%, as compared to 83% in the comparable prior-year quarter.

Litigation and licensing expenses decreased $1.7 million, or 19%, quarter to quarter, primarily due to a net decrease in litigation support costs associated with current and pending patent trials and a net decrease in patent prosecution and litigation expenses associated with ongoing licensing and enforcement programs. These expenses will continue to fluctuate period to period based on future activity levels in those periods.

Second quarter 2016 marketing, general and administrative expenses, excluding noncash stock compensation expense, decreased 5%, due primarily to a reduction in personnel costs in connection with our recent headcount reduction activities. The decrease was partially offset by an increase in corporate legal, administrative, consulting and variable performance-based compensation costs.

Second quarter 2016 noncash stock compensation expense decreased $1.7 million, or 54%, due primarily to the recent reduction in employee headcount.

Cash and investments totaled $186 million as of June 30, 2016, versus $145.9 as of December 31, 2015. Looking forward, as Marvin indicated, we continue to work diligently with respect to lowering our operational cost structure.

Year to date 2016 compared to 2015 excluding severance, variable corporate legal, variable performance and stock-based compensation expense, we've realized a 26% decrease in SG&A expense and have also reported a 15% decrease in litigation and licensing expenses. We continue to expect our 2016 fixed SG&A expense, excluding noncash charges and certain variable expenses, to be in the range of $17.5 million to $18 million.

I will now turn the call back over to Marvin Key to begin the Q&A session.

Clayton, thank you for your comments.

Operator, you may now open the call to Q&A.

Thank you, sir.

(Operator Instructions)

Mark Argento, Lake Street Capital Markets.

Hey, Marvin, nice quarter.

Hey, Mark. Thank you.

Maybe you could talk a little more about on the IP intake side. Obviously it seems like you guys have done a nice job, a little more pragmatic on the outlicensing. But in terms of the intake, and I know it's a priority, but could you go maybe into a little bit of detail as to what you're doing to -- on the business development front in terms of kind of priming the pump for more IP and bringing more assets in?

Yes, absolutely. You're right. I mean, we're disappointed in the patent intake, as I mentioned in the prepared remarks, and it's absolutely the top priority from a company standpoint. And since the beginning of the year we've been focused on improving that effort.

We continue to have a very rigorous vetting process. The good news is the number of portfolios we're analyzing is increasing.

So based on our history of patent intake, considering the breadth of our pipeline, we are encouraged, and in fact more so than we have been in some time. So we have a lot in the till. So that's encouraging.

But, in addition to the traditional in-house efforts that we've always employed, we're much more engaged with the law firms as a source of referrals. We're leveraging relationships with private equity groups. We are consistently approaching and analyzing valuable IPS sets from other MPEs, as well.

So we're -- while we're not happy with the intake, we're encouraged by the pipeline and are hopeful that there'll be some news in the not-too-distant future.

That was helpful. And can you tell me how many professionals you guys have currently at the firm?

I think we're at 28 right now.

And then in terms of the overall IP environment, at least from my vantage point it appears that things might be, I guess, in aggregate improving. It seems like the courts are maybe getting a little more -- moderating a little bit, and it seems like maybe deals are starting to get done. Any thoughts at least in terms of your perspective on the environment and the space and does that impact some potential -- the opportunity with some larger companies which you've successfully worked with in the past in terms of monetizing some of their IP?

You know, I think that everyone's certainly aware that this has been an extraordinary environment for this industry over the last several years. And, while I don't think that we've necessarily turned the corner at all, I would concur with you that things seem a little less bad than they used to. So we're encouraged by that.

And I think that you're correct, and you noted in your earlier question about BD, that we seem to be engaged with a number of different negotiations on the licensing side. I would agree with that. We are very active in that department, and are continuing to work to license and negotiate license agreements on a very pragmatic, the word you used, and reasonable fashion.

So we're encouraged by that. So while it's certainly not a healthy environment, I think that we're encouraged by the signs.

Last question for me, it looks like you're sitting at about $186 million in cash, almost $3.70-plus a share. Any opportunity to revisit a potential buyback or any other reallocations of capital just given that the total cash balance is up pretty substantially over the last couple of quarters? Any thoughts or conversation with the Board there?

Our position on our cash balance and dividend or buyback hasn't changed. We've addressed that question repeatedly on prior calls, and our position is as it was. The Board is always reviewing it. The Company will buy back stock if the Board believes it to be the appropriate course. But no, we haven't changed that stance.

Thanks, Marvin.

David Huff, private investor.

I just had a couple of questions. The quarter was very good, obviously. Trying to get a status update on VoiceAge in Germany. I know there was a settlement with Vodafone. Is that in fact the HTC injunction, and is additional bond needed for the remaining defendants in Germany?

The injunction is still in place on the Vodafone case, you are correct. So that is in place and is intact at this time.

The Motorola ZTE case, that's a separate litigation, and in the event that we prevail in that case, we would need to post an additional bond at that time, yes.

Okay. I guess moving on to the medtech, you guys won the IPR at the PTAB, and then subsequently won the appeal at the Federal Circuit. There is one remaining defendant in the Boston Scientific case, probably one of the larger ones. Is there plans to resume that case? I know there's a stay. Or is it likely that it'll settle in quarter three or quarter four?

Well, I have no idea when it will settle, but we have reached out to that defendant, and at this point they have not reengaged, but we are making an effort to do so. But you're correct. We did prevail in a couple of legal rulings that were positive for us, and we're waiting to hear back from them.

Okay. Has there been any changes on licensing discussions post the Halo decision from the Supreme Court? And I guess (inaudible) would be thrown in there, too, even though it went the other way?

Yes, hi, David, this is Ed Treska. You know, we haven't seen any specific changes that we could directly tie to that decision, but I think as you realize that's a decision that's helpful to patent owners and hopefully that is part of what we feel will be the pendulum swinging back in the patent owners' favor.

But we're encouraged by that decision. But I can't say that we can link any changes to discussions directly to that yet.

Do you think it would be more likely when new acquisitions are announced to do some more soft licensing without litigation, with the threat that enhancement is now back on the table and easier to prove? Is that something that we can kind of start modeling?

Well, I mean, I don't know about modeling, but obviously that's certainly our hope and goal, that all of those -- that the Halo decision and any other benefits that we see would lead to soft licensing discussions. That's been our goal since Acacia began the licensing business, and to the extent we can get back and focus on that aspect of it, that would be beneficial.

Okay. Last question on the acquisition and pipeline, is there any target for number of deals you would like to get done for the rest of the year?

Well, certainly as many as we can. But we have internal targets, certainly, but it's not anything that we want to acknowledge publicly. But we're certainly moving full speed ahead to do the best we can to refill the pipeline.

As I've repeatedly, it's our number one priority. We consider it an issue. We know the shareholders consider it an issue. And we are all hands on deck on addressing the problem internally.

Thank you. That's it for me.

(Operator Instructions)

Nick Altmann, Northland Capital Markets.

Hey, moving forward, how should we be thinking about gross margin? What's a good number to model going forward?

This is Clayton here. So, I mean, the gross margin is a function of the various patent portfolios that are contributing to revenues in any particular quarter. And so it's not necessarily something that we can sort of look out ahead and sort of predict, because it is based on which portfolios are contributing in a particular period.

I guess one could take a look at what the historical margins have been and sort of use that as an estimate, but, like I say, it's a difficult thing to sort of model out, because it is based upon facts and circumstances in any particular quarter. If you take a look at, for example, the current quarter, the margins are somewhere in the 70% range, but, again, that's based upon the deals that we did in the quarter.

Okay. Thanks. And in the future do you guys plan on doing any more, or more international litigation versus the US?

Absolutely to the extent that we can. We've obviously had very good success at this point, particularly in Germany. As well, we continue to look for, as I said in my prepared remarks, we're looking for European patents, as well. So where it makes sense and where it is feasible it's absolutely something we will continue to consider. Yes.

Okay. Thanks.

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

Thank you, operator.

Thank each and every one of you for joining the call today, and feel free to give us a shout if there's anything else we can help you with. And we'll speak to you in three months. Take care.

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