Acacia Research Corp (ACTG) 2017 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research 2017 Fourth Quarter and Year-end Earnings Release Conference Call. At this time, I would like to inform you that this conference is being recorded. (Operator Instructions)

I will now turn the conference over to Mr. Rob Stewart. Please go ahead, sir.

Welcome, and thank you for joining today's fourth quarter and year-end 2017 shareholder conference call. I am Rob Stewart, President of Acacia Research. With me this afternoon are Clayton Haynes, our CFO; and Ed Treska, our General Counsel.

Today, Clayton will review our financial performance and Ed will review the status of some of our current licensing and enforcement programs. I will then provide a business update for Acacia.

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 or 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 Acacia Research Corporation's wholly and majority-owned operating subsidiaries.

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

Thank you, Rob, and thank you to those joining us for today's fourth quarter and year-end 2017 earnings conference call. Today, I will provide a summary of the fourth quarter and full year 2017 results and provide an update of our financial condition and 2018 expense outlook.

First, I will summarize the fourth quarter 2017 results. Fourth quarter 2017 revenues decreased 84% to $3.5 million compared to $22 million of revenues in the comparable prior year quarter.

For the fourth quarter of 2017, 2 licensees individually accounted for 43% and 36% of revenues recognized as compared to 3 licensees individually accounting for 48%, 19% and 18% of revenues recognized during the fourth quarter of 2016.

For the fourth quarter of 2017, we reported a GAAP net loss of $110.2 million or $2.18 per share versus a GAAP net loss of $10.6 million or $0.21 per share for the comparable prior year quarter.

On a non-GAAP basis, excluding noncash stock compensation, patent amortization and patent impairment charges, we reported a fourth quarter 2017 non-GAAP net loss of $103.7 million or $2.04 per share as compared to non-GAAP net income of $1.1 million or $0.02 per share for the fourth quarter of 2016.

The GAAP and non-GAAP fourth quarter 2017 results included an unrealized investment loss totaling $104 million, comprised of an unrealized loss related to the application of the fair value method of accounting to our equity investment in Veritone and the requirement to mark our Veritone investment to market each period. The unrealized loss resulted from the net decrease in Veritone's stock price during the 3 months ended December 31, 2017. 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 2017 inventor royalties expense was not material, primarily due to preferential returns on portfolios generating revenues during the quarter.

Fourth quarter 2017 contingent legal fees expense decreased 85% to $646,000, consistent with the related decrease in license fee revenues in the fourth quarter of 2017 as compared to the prior year quarter.

Average margins for the fourth quarter of 2017 increased to 81% as compared to 66% in the comparable prior year quarter.

Fourth quarter 2017 litigation and licensing expenses decreased 12% to $4.8 million compared to the prior year quarter, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing licensing and enforcement programs and an overall decrease in portfolio-related enforcement activities.

Fourth quarter 2017 general and administrative expenses, excluding noncash stock compensation expense, decreased 33% to $3.8 million, due primarily to a reduction in personnel costs in connection with our recent reductions in headcount, a decrease in corporate, general and administrative costs and a decrease in variable performance-based compensation costs consistent with the decrease in revenues for the 2017 versus 2016 quarterly periods.

Fourth quarter 2017 net noncash stock compensation expense decreased $7.5 million, primarily due to a credit totaling $5.2 million, reflecting the reversal of previously recorded expense for our Veritone-related profits interest liability, which is adjusted each reporting period for changes in estimated fair value, based primarily on the quoted market price of Veritone common stock.

Excluding the impact of the Veritone profits interests, stock compensation expense decreased $2.3 million or 69% in the fourth quarter of 2017 due to a reduction in scheduled expense related to options with market-based performance conditions with graded vesting features, which resulted in higher noncash stock compensation expense in Q4 2016 as compared to Q4 2017.

Fourth quarter 2017 noncash patent amortization charges decreased 13% to $5.4 million, reflecting a decrease in scheduled amortization on existing patent portfolios, due primarily to various patent portfolio impairment charges previously recorded in Q3 2017 and Q4 2016.

Turning now to a brief summary of our full year 2017 results. Fiscal year 2017 revenues were $65.4 million as compared to $152.7 million for fiscal year 2016.

For fiscal year 2017, 3 licensees individually accounted for 54%, 21% and 10% of revenues recognized as compared to 3 licensees, each individually accounting for 26%, 23% and 11% of revenues recognized in fiscal year 2016.

We reported fiscal 2017 GAAP net income of $22.2 million or $0.44 per share versus a GAAP net loss of $54.1 million or $1.08 per share for fiscal 2016.

Excluding the impact of noncash patent impairment, scheduled patent amortization and noncash stock compensation charges totaling $33.3 million, fiscal 2017 non-GAAP net income was $52.4 million or $1.03 per share as compared to non-GAAP net income of $31.5 million or $0.62 per share for fiscal 2016.

The GAAP and non-GAAP fiscal 2017 results included an unrealized investment gain totaling $49.5 million, comprised of an unrealized gain related to the application of the fair value method of accounting to our equity investment in Veritone and the requirement to mark our Veritone investment to market each period. The unrealized gain resulted from the net increase in Veritone's stock price since its May 2017 IPO.

Fiscal year 2017 noncash patent impairment charges were $2.2 million as compared to $42.3 million for fiscal 2016, primarily reflecting changes in estimates of cash flows on certain patent portfolios, for which the underlying licensing programs were concluded.

Our average margin for fiscal 2017 was approximately 67% as compared to 68% for fiscal 2016.

2017 general and administrative expenses, excluding noncash stock compensation expense, decreased 28% to $17.1 million, due primarily to a reduction in personnel costs in connection with headcount reductions in 2016 and 2017, a decrease in variable performance-based compensation costs consistent with the decrease in revenues for the periods presented and a decrease in corporate, general and administrative costs.

Fiscal year 2017 total noncash stock compensation expense was flat year-over-year. However, fiscal year 2017 noncash stock compensation expense included $3 million of expense related to the fair value of our Veritone-related profits interests described earlier, which is adjusted each reporting period for changes in estimated fair value. The fair value of the profits interests is based primarily on the quoted market price of Veritone's common stock, which increased during the period from May 2017, the date of Veritone's IPO, and December 31, 2017.

2017 litigation and licensing expenses decreased 30% to $19.4 million, due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with ongoing licensing and enforcement programs and an overall decrease in portfolio-related enforcement activities.

Cash and short-term investments totaled $136.6 million as of December 31, 2017, versus $158.5 million as of December 31, 2016. The 2017 change in cash and short-term investments was primarily comprised of cash inflows from operations of $13 million, net of investments in Veritone and Miso Robotics totaling $35.5 million.

As of the end of 2017, our net operating loss carryforwards totaled approximately $180 million and foreign tax credits available for use in future periods totaled approximately $52 million.

As a result of our net operating loss generated in the current year and full valuation allowance for our net deferred tax assets, the 2017 Tax Reform Act did not have a material impact on our results for 2017.

Looking forward to fiscal 2018, we expect our 2018 fixed SG&A expense, excluding noncash charges and certain variable expenses, to be in the range of $8.5 million to $9 million. We expect 2018 scheduled patent amortization expense to be approximately $20.5 million.

We expect 2018 noncash stock compensation expense based on currently outstanding equity grants to be approximately $2.7 million. This estimate excludes stock compensation expense for our Veritone-related profits interests, which will fluctuate based on movements in Veritone's stock price during 2018.

This concludes our summary of the fourth quarter and full year 2017 results.

I will now turn the call over to Ed Treska.

Thank you, Clayton. I will provide updates for some of the litigation activity in Acacia's CCE, St. Lawrence and Limestone subsidiaries.

Starting with Cellular Communications Equipment or CCE, there are remaining lawsuits against HTC, ZTE and the major cellular carriers. Trials for HTC and ZTE are currently scheduled to begin on September 17, 2018. Second trial against the same 2 defendants is scheduled for February 2019.

On the call last quarter, I referred to 3 IPR proceedings against 3 CCE patents conducted on the same day, for which CCE prevailed, but which had subsequently been appealed to the Federal Circuit.

I reported that the Federal Circuit had affirmed 2 of those 3 IPR rulings in CCE's favor, but we awaited a ruling for the third. I can report now that the Federal Circuit also affirmed entirely the third IPR case for CCE. Additional IPR proceedings for other CCE patents are ongoing. For example, we recently received an adverse decision in a separate IPR proceeding, but that ruling does not impact the aforementioned trials.

Next, I'll address St. Lawrence and in particular, the case pending against Apple.

On January 22, in response to St. Lawrence's and Apple's joint motion to stay all deadlines and Notice of Settlement, the district court judge in Texas presiding over the case issued an order granting the requested 30-day stay. At this time, we do not have further comment on the status of the pending case against Apple.

For the St. Lawrence case against Motorola, for which St. Lawrence was awarded a jury verdict in March of 2017, our posttrial motion for enhanced damages was denied by the court, which we intend to appeal.

In addition, we are still awaiting final rulings on other postjudgment motions filed with and pending before the trial court, including St. Lawrence's motion to recover its attorney's fees.

With respect to Limestone Memory Systems, the various IPR proceedings brought against the Limestone patents have now ended. Limestone received favorable outcomes from the patent trial and appeal board during the IPR proceedings and there are 4 patents remaining in the litigation.

We already filed a joint stipulation to lift the stay, which the court has granted, allowing the litigation to proceed. The court also has adopted a preliminary schedule governing the proceedings in the case, which includes a trial date set for January of 2020.

We look forward to reporting on further developments in the cases just mentioned as well as litigation activity pending with other Acacia subsidiaries. Thank you.

Thank you, Clayton and Ed. As discussed on previous earnings calls, due to the nature of Acacia's business, our revenues can and will vary quarter-to-quarter. Our goal is not to manage the financial results of the company on a quarterly basis, but rather build long-term shareholder value. We continue to experience challenges in the existing patent and licensing environment, including challenges in identifying and acquiring new high-quality patent assets, which will impact future revenue opportunities from IP licensing. For example, as described on our previous quarterly conference calls, systematic changes to our business such as the introduction of Inter Partes Reviews or IPRs by defendants continues to be a significant factor contributing to the challenges in the patent licensing industry.

The IPR process can result in the loss of patent rights or can lead to significant delays and infringement litigation, increases in costs and increases in the overcomplexity of infringement actions. Despite these challenges, we will continue to invest in and monetize our existing quality patent assets.

We look forward to updating you on our portfolio license efforts throughout 2018. Our team's experience in identifying and evaluating complex IP and in developing and cultivating long-term business relationships provides us a unique window into innovation and technological advancement. We're increasing our efforts to leverage our expertise and experience to create new avenues, which we believe will lead to increased shareholder value.

In this regard, in addition to monetizing our existing IP assets, Acacia will increase its focus on opportunities to partner with high growth and potentially disruptive technology companies.

We will leverage our experience and expertise, data and relationships developed as a leader in the IP industry to pursue these opportunities and increase shareholder value.

Our activities will be focused on capitalizing on opportunities that we believe can benefit from our IP expertise and experience and which employ potentially disruptive technologies.

Examples of some of these technology areas include artificial intelligence or AI, machine learning, machine vision, robotics and blockchain technologies. Veritone is a good example of our initial execution of this strategy. Veritone completed its Initial Public Offering in May of 2017 and we continue to be excited about their business in the future of AI technology space.

Veritone is a leading artificial intelligence company that has developed a platform offering orchestrated, cognitive computing to transform and analyze structured and unstructured data for clients in a variety of markets, including media, entertainment, legal, compliance and government.

Our investment in Miso is another early example of our execution of this strategy and we are very pleased with the progress and achievements that Miso has made since our initial investment in June of 2017. Miso leverages robotics and AI technology to increase productivity, reduce costs and drive profitability in the restaurant and food service industries. Miso plans to debut its first commercial version of Flippy, their autonomous robotic kitchen assistant, at CaliBurger's Pasadena location in the very near future.

Miso and CaliBurger also plan to roll out additional autonomous robotic kitchen assistants to over 50 CaliBurger restaurants worldwide by the end of 2019.

Miso is also currently in discussions with several other significant restaurant groups, retailers and food service companies, who are interested in Miso's AI capabilities and robotic solutions.

Since our investments in Veritone and Miso, we've continued to build and cultivate our business development pipeline. We are currently evaluating a variety of new opportunities, where we believe we can leverage our IT expertise to collaborate and partner with high-growth companies with potentially disruptive technology. We expect future deal sizes to be at the level that will allow us to diversify our partnerships across a number of different opportunities in a variety of technology sectors.

We anticipate sharing more details about future partnerships as and when we make strategic decisions to proceed with any potential opportunities.

Acacia has a long history of adapting its business model to capitalize on changing macro environment. In 1993, Acacia began as a technology incubator company. On the heels of the tech downturn in early 2001, Acacia began to license its own IP. We rapidly transitioned from an incubator model into the first public, pure play outsource patent licensing company. And Acacia soon emerged as a leader in patent licensing and enforcement ecosystem. We look forward to sharing our progress with you as we move forward with the strategy we have just outlined.

As we announced earlier today, Acacia's Board of Directors has authorized a stock repurchase program for shares of the company's outstanding common stock. The stock repurchase program has been made effective today and may be implemented at the board's discretion. I want to thank everyone for joining us on this call. As always, if anyone has any questions, please do not hesitate to call Clayton or myself. Thank you very much, and we look forward to speaking with you next quarter.

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