Acacia Research Corp (ACTG) 2016 Q3 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research Third Quarter Earnings Release Conference Call. (Operator Instructions) I will now turn the conference over to Mr. Marvin Key. Please go ahead, sir.

Good afternoon, and thank you for joining today's third 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 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 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 third quarter, Acacia generated over $64 million in revenue, and reported $15.8 million in non-GAAP earnings, one of the best quarterly financial results in the Company's history.

The quarter included a series of licensing transactions involving patent portfolios from Silicon Image, ST Micro, Nokia Networks, Renesas, and VoiceAge. There were a number of significant positive events for the quarter. First was our patent trial victory versus Apple from our portfolio obtained from Nokia Networks. The jury awarded Acacia $22 million in damages and also found Apple willfully infringed our patent. Because the jury found willful infringement, the Judge has the option of increasing the award to Acacia.

Second, the licensing agreement announced with SK Hynix of Korea was a soft license. A soft license is significant for our Company because it means the license agreement was reached with no litigation of any kind. Management is hopeful we can negotiate additional soft license agreements with other infringing companies.

Third, as previously announced, Acacia invested $10 million in a convertible note issued to Veritone, Inc. Veritone is developing a next generation open artificial intelligence platform with technology that uses multiple cognitive engines to analyze, index, and search audio and video data. Veritone's open platform renders every frame and every second of audio and video searchable for its content. This technology has the ability to revolutionize audio and video search and discovery.

Veritone has the option of borrowing an incremental $10 million under similar terms. Acacia may also exercise warrants for an additional $30 million should Veritone achieve certain financial milestones.

Lastly, Acacia brought in two new patent portfolios in the quarter. One portfolio came from our long time patent partner, Renesas Electronics of Japan, and is comprised of 24 U.S. and 12 foreign patents governing such technologies as semiconductor chips for power management, system-on-chip architecture and microprocessors, and packaging technology in memory and semiconductors. The second portfolio from Rom Lapis contains 29 U.S. and 31 foreign patents covering circuits used in DRAM and flash memory.

Acacia continues to work diligently to drive our revenue line and reduce our expenses with the goal of consistent and sustained profitability. Through nine months of 2016, revenues are up 49%, while litigation, licensing, amortization, and MG&A expenses are collectively down 25%, as compared to the same period in 2015.

I will now turn the call over to Clayton Haynes for the quarterly financial review.

Thank you, Marvin, and thank you to those joining us for today's third quarter earnings conference call. Third quarter 2016 revenues totaled $64.7 million, as compared to $13 million in the comparable prior year quarter. Across multiple portfolios two licensees individually accounted for 60% and 27% of revenues recognized in Q3 2016, as compared to three licensees individually accounting for 54%, 15%, and 13% of revenues recognized in Q3 2015. We continue to expect license fee revenues to be uneven from period to period.

For the third quarter of 2016, we reported GAAP net income of $8 million or $0.16 per share versus a GAAP net loss of $27.3 million, or $0.55 per share for the comparable prior year quarter. On a non-GAAP basis, excluding non-cash stock compensation and patent amortization charges totaling $7.8 million, we reported third quarter 2016 net income of $15.8 million or $0.31 per share, as compared to a non-GAAP net loss of $11.5 million or $0.23 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.

Third quarter 2016 inventor royalties expense increased over and above the 398% increase in related revenues due to higher average levels of cost recovery related to (inaudible) returns on revenues generated in the third quarter of 2015, as compared to the third quarter of 2016. The third quarter of 2016 contingent legal fees expense increased 291%, as compared to the 398% increase in related revenues due to lower average contingent legal fee rates for the portfolios generating revenues in the third quarter of 2016, as compared to the portfolios generating revenues in the third quarter of 2015.

As a result, average margins for the third quarter of 2016 were 60%, as compared to 84% in the comparable prior year quarter.

Litigation and licensing expenses decreased $3 million or 29% 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.

Third quarter 2016 general and administrative expenses excluding non-cash stock compensation expense decreased due primarily to a reduction in personnel costs, including non-recurring employee severance costs in connection with our recent headcount reduction activities.

The decrease was partially offset by an increase in corporate legal, administrative, and consulting fees, and an increase in variable performance based compensation costs consistent with the increase in revenues quarter-to-quarter.

Third quarter 2016 non-cash stock compensation expense decreased 37% due primarily to the reduction in employee headcount period-to-period.

Cash and investments totaled $160.4 million as of September 30, 2016, as compared to $145.9 million as of December 31, 2015. Please note that the Acacia-Veritone transaction is reflected in today's earnings release based on preliminary accounting with the final accounting expected to be completed at the time of the filing of our Q3 2016 10-Q. The preliminary balance sheet reflects the loan receivable balance of $10 million. The final accounting is expected to allocate the loan amount between the debt security and the common stock purchase warrants received, and also reflect interest income and accretion of a debt security discount in the statement of operations.

Looking forward, as Marvin indicated, we have continued to lower our operational cost structure. Year-to-date 2016 compared to year-to-date 2015, excluding severance, variable corporate legal, variable performance, and stock based compensation expense, we have realized a 28% decrease in SG&A expense and have also reported a 20% decrease in litigation and licensing expenses.

We expect our 2016 fixed SG&A expense, excluding non-cash charges and certain variable expenses to be in the range of $18 million to $18.5 million.

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

Thank you, Clayton. Operator, may we now open the call to questions, please?

Thank you, sir. (Operator Instructions) Mark Argento, Lake Street Capital Markets.

Hi, guys. Good afternoon.

Hey, Mark. How are you?

Hi, Mark.

Good, thanks. Congrats on a solid quarter here. Just a handful of questions. First, on the--I just want to clarify that the jury verdict wasn't--with Apple--the $22 million wasn't reflected in any numbers at this time. Right?

That's correct.

And then, in terms of the--first off, on the soft license deal you did with SK Hynix, I haven't seen one of those in a while. Maybe talk about the--how that deal came to be and if this is something we should look for more of out of you guys.

I can't go into a lot of detail on the actual negotiations or anything like that. But I would say that I--we're certainly constructive and it does show and validate in our opinion our approach in the current licensing environment and the current licensing negotiations. We also think it validates the value and quality of our IP and confirms that some companies are respecting patents and patent rights.

We--it's premature to understand whether this is going to lead to any kind of change in behavior but we are constantly negotiating with other parties and we're hopeful that it leads to more soft licenses in the future.

Great. And are these structured as term deals like you used to do on the [pass], or is this kind of like a fully paid perpetual type agreement, or is there some ratable recognition here from a revenue perspective?

This is--this deal--license agreement with SK Hynex was perfectly consistent with how we normally do. It's a one-time paid-up license.

Got it. All right. And then, last and then I can hop back in the queue. In terms of the legal calendar and the pipeline of activity, what does your calendar look like for the next six months? Do you have any kind of notable trials that are supposed to take place?

In terms of the calendar, we have one trial that was--had been scheduled for November 7. That's our Puma portfolio versus Apple. That has been stayed. So that trial will not be taking place. We also have a trial on December 5 scheduled versus LG on our IDT portfolio. IDT is also scheduled in the first quarter, in February, versus Lenovo, and versus Vizio in March. And then, to wrap up the first quarter we have two St. Lawrence trials - one versus Motorola and one versus ZTE scheduled for March 6.

Great. Thanks, guys. Congrats on a good quarter.

Thanks, Mark.

Darren Peller, Barclays.

This is James Barclay for Darren. Thanks for taking my questions. Just first, I'm just curious how you guys came across Veritone and just does the investment there--would the convertible notes represent a shift in focus or strategy from purely patent licensing?

Yes, thank you. We came across--we discovered Veritone in the normal course of our patent business. We were out kind of scouring the landscape for quality patents and came across the Company and its technology. While doing that diligence we found the technology very compelling and we believed ultimately that an investment in the company would potentially be a very significant opportunity for Acacia shareholders. And that's the reason that we pursued it.

It's also true that this investment is dissimilar from what Acacia's done in the past. I think it's probably premature to classify this kind of investment as a change in strategy. But the Acacia management, we will continue to be open to opportunities for deploying capital in situations where we think it will benefit the shareholder.

Okay, great. Thanks. And then, just a quick follow up. Free cash was negative, but I saw that accounts receivable picked up a lot there. I know you guys previously spoke to I think around $100 million or so--a little bit more than $100 million in terms of revenue being a breakeven revenue amount versus free cash. Could you just talk about the timing, like the nuance, what's going on there? And just reconfirm that target--that revenue target. Thanks.

Sure. So I believe you're referring to the information in the cash flow statement included in the release today. As it relates to, for example, our accounts receivable, that's going to fluctuate quarter-to-quarter based upon the timing of when we're doing deals. And so, to the extent that we're executing license agreements around the end of the quarter, then most likely the payments associated with those license agreements will be reflected as accounts receivable as of the end of the quarter. And I think that's what you're seeing. It's purely just the timing associated with when the particular deals are being done close to quarter end.

And from the standpoint of our breakeven level, yes, that continues to be around the $90 million to $95 million range.

Okay, perfect. Thank you very much.

Thank you.

Mike Latimore, Northland Securities.

Hey, guys. This is Nick Altmann filling in for Mike. Thanks for taking my questions.

Hey, Nick.

First question being is do you guys feel like you have enough new patent assets to achieve your goals for 2017, or would you guys need to acquire more?

Well, I think that as I've mentioned for the past several quarters and mentioned in my prepared remarks, patent intake is our primary focus at the Company. It's absolutely job one. That said, we're being thorough and methodical and objective to source everything we can find and to find things that meet--are qualitative in financial metrics. So I can't give you anything much more than that other than to say we are continually looking for new IP and we're doing our best to bring it in as expeditiously as possible.

Okay, thanks. And then, I guess, can you guys just elaborate a little bit more on your partnership with the Japanese semi manufacturer?

Are you referring to Renesas, the source of our--of one of our portfolios this quarter?

Yes, correct.

Well, the Renesas relationship has been in place for a number of years now. And with our agreement we have the opportunity to review and bring in new patents from Renesas on a quarterly basis. Renesas is one of the largest patent owners in the world. So from our standpoint we consider the Renesas relationship very important to our Company and we've got an excellent working relationship with them. And we will continually look and analyze patents that we see from them to put together new licensing programs.

Great, thanks. And then, if I could just squeeze one more in here. Other--looking at 2017 again, are there any specific patent groups that hold the most promise for you?

Well, we like the patents that we have and that we currently control certainly for next year. Our St. Lawrence patents and our CCE patents I would say are ones that we're particularly focused on.

Great. Thank you.

You're welcome, Nick.

David Huff, Private Investor.

Hi. Good afternoon. Congrats on the great quarter. I had a couple quick questions. If I could start with the Nokia Siemens portfolio. $22 million from Apple in the jury verdict. It's now going to enter into the 50(b) phase. It could be tripled and then there's going to be ongoing royalties. Do you have any expected timeline, best case scenario, of when an actual check might be cut?

Hey, David. This is Ed Treska. We obviously can't predict when a check will be cut. Apple has traditionally fought these cases through appeal. Right now we're in the post-trial briefing stage, which should take us probably through--into January before we get rulings on our post-trial motions. And then, we'll see what happens from there, if we need to go up on appeal or not. But I don't think we can put a specific date obviously on when we'll get a check.

Okay. And any final judgment with the appeal going well will or should include an ongoing royalty for about $0.11 per unit for the next 11 years. Is that about right?

Well, that's certainly our contention and what we'll be pushing for, but that has yet to be decided by the court.

Okay. Can you give an update on the German side of the Apple litigation? I know there is also an opposition proceeding that Apple has filed. Can you give some color on that?

Well, in terms of the Apple proceeding, we're still waiting for the court essentially to set a hearing date in Germany. So we don't really have more--any more of an update than that.

Okay. I guess last on the Nokia Siemens. Is there an opportunity to get another Nokia Siemens, or I guess Alcatel Lucent portfolio at this point? Are there any discussions there?

Well, we can't comment on any of the ongoing discussions we may or may not be having with Nokia Siemens.

Okay. I guess moving onto the new Renesas portfolio and the unnamed Japanese portfolio. Can you give an idea of the number of potential licensees that might be out there? Is it a dozen? Is it two dozen? Maybe more?

David, I'm just--I'm not willing to go there yet. As we formulate licensing programs the number of potential licensees or potential defendants vacillates and changes from time-to-time based on our analysis of a portfolio. So we're just not willing to comment on that at this time.

Okay. Is the plan to file litigation for anyone that's not willing to negotiate by the end of the year or early next year? Is that the plan?

Well, we certainly file litigation as quickly and as expeditiously as possible, whether it's by the end of the year--and once again, I can't say, because there's a lot of moving pieces on when we do that. But rest assured that we're going to be doing that as quickly as we--is feasible.

Okay. Is it--I'll pass on that question. I guess my last one really is on the status of the Boston Scientific with Medtronic. I know it's--things were kind of on hold. You guys won the appeal on the patent review, but it seems like it's stuck in Purgatory at this point. Just wondering if there's an update.

Yes. We obviously did prevail on Medtronics' IPR challenge. We are now in the process of having the stay in the litigation lifted and we will then proceed with the early stages of litigation versus Medtronic. But you're right, it has been a slow moving process, but we are now free to begin to move on that one.

Okay. I'm going to sneak in one last question. I ask it every quarter. Any plans to attend any investor conferences or I guess industry conferences to get the word back out there that you guys are doing well and still in business?

We are open to doing so and hope to be doing so in the near future.

Okay, that's it for me. Thank you.

Thank you, David.

This will conclude the question-and-answer session. I will now turn the conference back to Mr. Key for any final remarks.

Thank you, Operator, and thank you all on the line for your continued and ongoing interest. Please give us a call if you have any further questions. Have a good day. Thank you.

This does conclude today's conference. Thank you for your participation.