Acacia Research Corp (ACTG) 2018 Q1 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research 2018 First Quarter 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 first quarter 2018 shareholder conference call.

I'm Rob Stewart, President of Acacia Research.

With me this afternoon are Clayton Haynes, our CFO; and Ed Treska, our Head of Licensing and 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 exhibit to our 8-K on 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.

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 first quarter 2018 earnings conference call.

Today, I will provide a summary of the first quarter 2018 results and update of our current financial condition and a recap of our 2018 expense outlook.

As reported today, first quarter 2018 revenues increased to $62.1 million compared to $8.9 million of revenues in the comparable prior year quarter.

In the first quarter of 2018, one licensee individually accounted for 96% of revenues recognized.

In the first quarter of 2017, 2 different licensees individually accounted for 73% and 12% of revenues recognized.

For the first quarter of 2018, we reported a GAAP net loss of $32 million or $0.63 per share versus a GAAP net loss of $11.8 million or $0.24 per share for the comparable prior year quarter.

On a non-GAAP basis, excluding general and administrative noncash stock compensation and patent amortization charges, we reported a first quarter 2018 non-GAAP net loss of $26 million or $0.51 per share as compared to a non-GAAP net loss of $4.2 million or $0.08 per share for the first quarter of 2017.

Excluding the impact of the change in fair value of our equity investment in Veritone, non-GAAP net income for the first quarter of 2018 was $15.1 million or $0.30 per diluted share.

The GAAP and non-GAAP first quarter 2018 results included an unrealized investment loss totaling $41.1 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 NASDAQ-quoted stock price during the 3 months ended March 31, 2018.

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.

First quarter 2018 inventor royalties expense totaled $21.7 million as compared to $666,000 in the comparable prior year quarter, primarily due to the significant increase in revenues quarter-to-quarter.

First quarter 2018 contingent legal fees expense totaled $15.8 million as compared to $627,000 in the comparable prior year quarter, primarily due to the same increase in revenues quarter-to-quarter.

First quarter 2018 operating expenses also included $4 million in other direct costs of revenue.

Average margins for the first quarter of 2018 were 33% as compared to 85% in the comparable prior year quarter.

The first quarter 2017 margin reflects higher levels of upfront cost recovery-related preferred returns for the licensing programs generating revenues in the first quarter of 2017.

First quarter 2018 litigation and licensing expenses decreased 57% to $2.7 million compared to $6.4 million in 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.

First quarter 2018 general and administrative expenses, excluding noncash stock compensation expense, decreased 8% to $4.4 million compared to $4.8 million in the comparable prior year quarter, due primarily to a reduction in personnel costs in connection with headcount reductions in 2017 and a decrease in corporate, general and administrative costs.

Noncash stock compensation expense decreased due to a decrease in expense for market-based performance stock options expensed on an accelerated basis in the first quarter of 2017 and a decrease in the fair value of our Veritone-related profit interest units, consistent with the decrease in fair value of the underlying Veritone warrant during the first quarter of 2018.

Profits interests-related noncash stock compensation expense is adjusted each reporting period for changes in estimated fair value, which is primarily based on the quoted market price of Veritone common stock.

Cash and short-term investments totaled $179.6 million as of March 31, 2018, versus $136.6 million as of December 31, 2017.

Working capital totaled $139.2 million as of March 31, 2018, versus $130.1 million as of December 31, 2017.

The change in cash and short-term investments during the first quarter of 2018 was primarily comprised of cash inflows from operations of $50 million and our February 2018 additional investment in the Miso Robotics Series B financing totaling $6 million.

From a working capital standpoint, inventor royalty and contingent legal fee obligations totaling $39.9 million related to Q1 2018 revenues are generally payable during the second quarter of 2018.

As of the end of the first quarter of 2018, our net operating loss carryforwards totaled approximately $172 million, and foreign tax credits available for use in future periods totaled approximately $52 million.

Turning to a brief recap of our fiscal 2018 expense outlook.

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 noncash 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 interest, which will fluctuate based on movements in Veritone's stock price during 2018.

This concludes our summary of the first quarter 2018 results.

I will now turn the call over to Ed Treska.

Thank you, Clayton.

Today, I will provide brief updates for litigation activity in Acacia's CCE, St.

Lawrence and Limestone subsidiaries.

Overall, since our last report on February 13, there have been limited changes to the pending cases we are reporting on today.

Starting with CCE, trials for HTC and ZTE are still on track to begin on September 17, 2018.

The second trial against the same 2 defendants is scheduled for February of 2019.

An important hearing for the upcoming September trial addressing multiple summary judgment motions from all parties will be heard on May 17 at the district court in Texas.

The results from the May 17 hearing will shape many of the disputed issues at the September trial.

In addition, the district court in Texas lifted a stay in the third set of cases against HTC and ZTE.

After the patent trial, an appeal board upheld the validity of the primary patent in those cases.

For our St.

Lawrence subsidiary and following the resolution of the cases with Apple, we continue to press forward with our remaining cases against Motorola.

In the U.S., we are still awaiting final ruling on post-judgment motions filed with the trial court, including St.

Lawrence's motion to recover its attorney's fees.

In Germany, we recently prevailed against the validity challenge to one of our primary patents, which will allow us to continue the proceedings on that patent as we seek to recover infringement damages from Motorola.

With respect to Limestone Memory Systems and as we announced during our last earnings call, the cases are proceeding against the defendants with 4 patents in suit.

We are still at the early stages of this litigation, with the Markman hearing date scheduled for fall of 2019, and the trial scheduled in early 2020.

We will continue to update you on further developments in the cases just mentioned as well as significant litigation activity pending with other Acacia subsidiaries.

Thank you, and I'll turn the call back over to Rob.

Thank you, Clayton and Ed.

As Clayton mentioned, in Q1 of 2018, our team at Acacia generated licensing revenue of $62 million, which ranks as one of the highest revenue-generating quarters in the company's history.

We are pleased with these results and our license success in the quarter.

Acacia remains committed to investing in and monetizing our quality patent assets for the benefit of our shareholders and our IT partners.

As stated during our previous earnings calls, our goal is not to manage the financial results of the company on a quarter-by-quarter basis but rather, to maximize the value of our assets and build long-term shareholder value.

We want to remind shareholders that due to the nature of patent licensing, our revenues may vary significantly quarter-to-quarter.

As many of you know, several years ago, our board and management team recognized developing headwinds in the IP license environment.

It was important to address these challenges without jeopardizing our ability to continue to prosecute our IP and generate licensing revenue.

The headwinds in patent license business have not subsided.

Just last week, the Supreme Court ruled that IPRs are constitutional and may continue to be used to invalidate patents.

IPRs, or Inter Partes Reviews, can result in the loss of previously established patent rights or can lead to significant delays and infringement litigation.

The continuing threat of IPR proceedings undoubtedly increases the cost, risk and complexity of infringement actions.

The growing challenges in the IP licensing resulted in a strategic and focused response from our board and management to drive efficiencies in our IP business.

Since early 2016, we have reduced our fixed G&A-related expense run rate by over 50% and reduced our headcount by more than 70%.

We have also reduced our legal costs, both as a percentage of revenue and in absolute terms.

At the same time, we have intensified our focus on maximizing the value of our existing IP assets and opportunities.

As a result, during the same period, Acacia generated more than $280 million in licensing revenue.

Earlier this year, the board formed a strategic review committee in an ongoing effort to identify, evaluate and implement potential strategic opportunities.

The board has also added new directors with extensive financial and technology investment experience as we seek to capitalize on opportunities to increase shareholder value.

For example, Acacia recently added Paul Falzone to the board.

Mr. Falzone has decades of technology, operating and investing experience.

The board has vetted Paul for over a year, and we are pleased he finally accepted the invitation to join the board.

We also recently added Joe Davis, a respected and experienced financial executive, auditor and financial expert.

Business transformations are challenging and complex.

However, our management team and board are committed to Acacia to build long-term shareholder value.

We continue to be excited about our investments in Veritone and Miso.

On our last earning call, we mentioned that Miso was planning to debut its first commercial version of Flippy, Miso's autonomous robotic kitchen assistant.

The team at Miso has made significant progress, and I'm pleased to share that Flippy has received all necessary regulatory approvals to begin cooking for the public at CaliBurger's Pasadena location this week.

This is a great milestone and accomplishment for Miso.

Real-world success for their robotic operating platform establishes a firm footing for ongoing discussions with significant restaurant groups, retailers, food service companies that can utilize Miso's AI and robotic solutions.

Recently, we have received some questions from our shareholders, which stem from the current proxy contest and inaccurate allegations asserted by 2 small funds.

I want to take a moment to clarify certain statements and mention a few other important factors.

As detailed in the company's preliminary proxy statement, our compensation practices have evolved over several years in response to both institutional shareholder input and our own restructuring initiatives.

For example, to align our management with shareholder interest, in 2016, we discontinued the company's prior practice of granting restricted stock awards that vested merely upon the passage of time.

With the assistance of an independent compensation consultant, the board instituted a more shareholder-friendly equity compensation structure, with concentration on performance-based option grants.

In fact, a large block of the equity incentive options held by management and the Executive Chairman have a strike price of $5.75 and do not fully vest until Acacia reaches prices between $8 and $10 a share prior to August 1, 2020.

With our compensation consultant's assistance, the board also developed programs that tied our executive compensation directly to the returns earned on Acacia's investments.

An effort to create a structure that is similar to how we incentivize our team based on the performance of our patent portfolios, our consultant recommended a profits infrastructure.

For Veritone, this profits interest approach aligns compensation of those participating with the returns earned by Acacia and our shareholders on Veritone.

It is important to note that the profits interest plan does not include any Acacia-owned Veritone common shares but rather, involves a portion of Acacia's Veritone warrants.

Performance-based compensation is a continuing goal of the board, and we thank our shareholders for appreciating this and approving our executive compensation arrangements during last year's annual meeting with more than 97% voting in favor of this approach.

The 2 fund investors now seek to replace 2 of our board members at this year's upcoming annual meeting.

We are always open to suggestions for improving the business, and we recently met with one of the representatives.

Frankly, we're disappointed that they were unable to provide any insight into our patent license business or any thoughts on future plans or strategies for Acacia.

We are also surprised to learn, through their SEC filings, that one of the fund's principles was short our stock over 2 years and was personally short Acacia shares while his fund was buying Acacia stock.

The short position was not closed out until days before nominating representatives for Acacia's board.

We feel it is more prudent to take a longer view.

Our Executive Chairman, Mr. Graziadio, for example, along with his family trust, have invested more than $5 million in open market purchases of Acacia's stock.

This represents more shares of Acacia's stock than is owned by either BLR Partners or Sidus, the 2 companies who are seeking to add representatives to Acacia's board.

Additionally, Mr. Walsh, the other board member up for reelection, has also purchased nearly $2 million of Acacia stock.

The stock purchases of Mr. Graziadio and Mr. Walsh reflect their commitment to Acacia and positive long-term view.

The IP licensing business has been difficult for everyone, and we are well aware of our stock price decline and that of our competitors.

We are working with outstanding external advisers to refine our strategy and analyze various opportunities.

We anticipate sharing more news with you in the future about our efforts to create substantial value for our shareholders.

We welcome any shareholder feedback as we pursue these opportunities.

And look forward to speaking with you over the coming weeks prior to our Annual Shareholders' Meeting.

We've had discussions with many of you over the past several months, and we value your opinions and the opportunity to communicate and discuss our business or any concerns you may have.

As always, if anyone has any questions, please do not hesitate to call Clayton or me.

Thank you very much for joining us on today's call.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating, and have a nice day.

All parties may now disconnect.