Acacia Research Corp (ACTG) 2016 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research fourth-quarter and year-end earnings release conference call. At this time, I'd like to inform you that this conference is being recorded.

(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 fourth-quarter and year-end 2016 shareholder conference call. I am Marvin Key, CEO of Acacia Research. With me this afternoon, are Clayton Haynes, CFO; and Ed Treska, our General Counsel.

Today, Clayton will review our financial performance, and then I will provide an overview of 2016, and a brief business update. 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.

Now, I will hand the call off to Clayton Haynes for the financial review.

Thank you, Marvin, and thank you to those joining us for today's fourth-quarter and year-end 2016 earnings conference call.

Today I will provide a summary of the quarterly result and full-year 2016 result, and provide an update of our financial condition and 2017 expense outlook. Fourth-quarter 2016 revenues totaled $22 million, as compared to $37.5 million in the comparable prior-year quarter. Three licensees individually accounted for 48%, 19%, and 18% of revenues recognized in Q4 2016, as compared to two licensees individually accounting for 64%, and 19% of revenues recognized in Q4 2015. We continue to expect license fee revenues to be uneven from period to period.

For the fourth quarter of 2016, we reported a GAAP net loss of $10.6 million, or $0.21 per share, versus a GAAP net loss of $115.9 million, or $2.33 per share, for the comparable prior-year quarter. On a non-GAAP basis, excluding non-cash stock compensation, patent amortization, and patent impairment charges, totaling $11.7 million, we reported fourth-quarter 2016 net income of $1.1 million or $0.02 per share, as compared to non-GAAP net income of $4.5 million, or $0.09 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. Fourth-quarter 2016 inventor royalties expense decreased 57%, compared to the prior-year quarter, relatively consistent with the related 41% decrease in revenues, quarter to quarter.

Fourth-quarter 2016 contingent legal fees expense increased 9%, as compared to the 41% decrease in related revenues, due to higher average contingent legal fee rates for the portfolios generating revenues in the fourth quarter of 2016, as compared to the portfolios generating revenues in the fourth quarter of 2015. As a result, average margins for the fourth quarter of 2016 were 66%, as compared to 69% in the comparable prior-year quarter. Litigation and licensing expenses decreased $5.9 million or 52% quarter to quarter, due primarily to a net decrease in litigation support costs associated with patent trials and a 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.

Fourth-quarter 2016 general and administrative expenses, excluding non-cash stock compensation expense, decreased 6%, due primarily to a decrease in personnel costs resulting from net staff reductions occurring during 2016 and 2015, and a decrease in non-recurring employee severance costs. Fourth-quarter 2016 non-cash stock compensation expense increased to 34%, due primarily to the grant of stock options with market-based performance conditions with great investing features, resulting in higher non-cash stock compensation expense during the earlier stages of the applicable service period. Fourth-quarter 2016 non-cash patent impairment charges totaled $2.2 million. Fourth-quarter 2015 net results reflect a non-cash goodwill impairment charge totaling $30.1 million, and $74.7 million of non-cash patent impairment charges, as previously reported.

Next, I will provide a brief summary of full-year 2016 results. FY16 revenues were $152.7 million, as compared to $125 million for FY15. For FY16, three licensees individually accounted for 26%, 23%, and 11% of revenues recognized, as compared to three licensees, each individually accounting for 24%, 20%, and 16% of revenues recognized in FY15. We reported a FY16 GAAP net loss of $54.1 million, or $1.08 per share, versus a GAAP net loss of $160 million, or $3.25 per share, for FY15.

Excluding the impact of non-cash patent impairment, schedule patent amortization, and stock compensation charges, totaling $85.6 million, FY16 non-GAAP net income was $31.5 million, or $0.62 per share, as compared to non-GAAP net income of $9 million, or $0.18 per share, for FY15. As previously reported for the second quarter of 2016, we recorded $40.2 million of non-cash patent impairment charges, primarily reflecting changes in estimates of cash flows on certain patent portfolios for which the underlying licensing programs were concluded. Our average margin for FY16 was approximately 68%, as compared to 72% for FY15.

2016 marketing, general and administrative expenses, excluding non-cash stock compensation expense, decreased $3.3 million, or 12% year over year. FY16 non-cash stock compensation expense decreased $2 million, or 18%. The full-year decreases were due to similar factors affecting the quarter-to-quarter variances for the same line items discussed earlier. 2016 litigation and licensing expenses decreased $11.5 million, or 29%, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with patent trials and ongoing licensing and enforcement programs. Tax expense for 2016 and 2015 reflects the impact of foreign taxes withheld on revenue agreements executed with foreign licensees in foreign jurisdictions, and the impact of full valuation allowances recorded for foreign withholding tax credits for both periods, and for net operating loss carry-forward in 2015. As of the end of 2016, our net operating loss carry-forwards totaled approximately $148 million, and foreign tax credits available for use in future periods totaled approximately $52 million.

Cash and investments totaled $158.5 million as of December 31, 2016, versus $145.9 million as of December 31, 2015. As previously reported, in August, 2016, we formed a strategic partnership with Veritone, whereby Acacia provided $20 million in funding to Veritone in the form of two $10 million loans convertible into equity. Acacia's December 31, 2016, financial statements reflect an allocation of the loan amount between the debt security and the common stock purchase warrants received, and also reflects a crude interest income and accretion of a debt security discount. Please refer to our 10-K and previous filings with the SEC for additional details regarding our strategic partnership with Veritone.

Looking forward, from an operation standpoint, in 2016, we continued to lower our operational cost structure. Year-to-date 2016 compared to year-to-date 2015, excluding severance costs, variable corporate legal, variable performance, and stock-based compensation expense, we've realized a 22% decrease in SG&A expense, and have also reported a 29% decrease in litigation and licensing expenses. We expect our 2017 fixed SG&A expense, excluding non-cash charges, and certain variable expenses, to be in the range of $11.5 million to $12 million. We expect 2017 scheduled patent amortization expense to be approximately $22.3 million. We expect 2017 non-cash stock compensation expense, based on outstanding grants as of December 2016, to be approximately $6.2 million.

This concludes our summary of the fourth-quarter and full-year 2016 results. I will now turn the call back over to Marvin Key.

Thank you, Clayton.

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 2016, thanks to the hard work of our employees, Acacia achieved the following. For the year, Acacia generated over $152 million in revenue, an increase of 22% over 2015. Additionally, Acacia was able to cut costs and increase operational efficiencies. The net result was, Acacia was able to generate non-GAAP cash flow of over $31 million, one of the best pro forma annual financial results in the Company's history.

As previously stated in past calls, the challenge for 2017 remains finding high-quality patent portfolios in the current environment that meet our time in risk and financial return metrics. In 2016, Acacia brought in two new portfolios covering technologies such as semiconductor chips for power management, System-On-Chip architecture in microprocessors, and packaging technology in memory and semiconductors, along with patents covering circuits used in DRAM and flash memory.

Additionally, there were a number of positive events for Acacia in 2016. First was our patent trial victory versus Apple from our CCE portfolio, obtained from Nokia Networks. On September 14, the jury awarded CCE over $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. The post-trial motions addressing enhanced damages for willful infringement, and certain other issues raised by CCE and Apple, were argued to the District Court in late January, and are awaiting a ruling. Second, the license agreement announced with SK Hynix of Korea in Q3 was a soft license. Soft license is significant, because it means the license agreement was reached through direct negotiation, without the need for any litigation.

Third, Acacia invested $20 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, every second, of audio and video data, searchable for its content. This technology has the capability to revolutionize audio and video search and discovery. Acacia may invest an additional $30 million should Veritone achieve certain milestones.

In 2016, our German Saint Lawrence subsidiary also had trial wins and injunctions in Germany, resulting in licensing agreements from HTC and Vodafone, and currently has injunctions against ZTE and Motorola. Although no date has yet been set, it is expected that Saint Lawrence will also go to trial against Apple in Germany, later this year. Our US Saint Lawrence subsidiary has a trial against Motorola scheduled for the week of March 13 in Marshall, Texas. Second trial is scheduled to follow against the ZTE under the same patents. Another trial against Apple, under the Saint Lawrence portfolio, is currently scheduled in Marshall, Texas, for later this year.

As Acacia moves into 2017 we are committed to maximizing the value of our current patent assets for our patent partners and shareholders. We are also committed to maximizing the value of the Acacia brand, our talent, our patent expertise and knowledge, and our balance sheet for the future growth of Acacia.

Thank you again for your time and interest in Acacia. If you have any specific questions, please feel free to contact me or the Company.

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