Acacia Research Corporation (ACTG) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon, and welcome, ladies and gentlemen, to Acacia Research Third 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. Marvin Key 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'll 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 Voice Age. 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 warrant 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, covering 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 [indiscernible] can change 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 were 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 50% 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 note in today's earnings release and 8K filed with the SEC. Third quarter of 2016, inventor royalties expense, increased over and above the 398% increase in related revenues due to higher average levels of cost recovery related preferred returns on revenues generated in the third quarter of 2015, as compared to the third quarter of 2016. 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 revenue in the third quarter of 2016 as compared to the portfolio 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 the future activity levels in those period. 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-period-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 loans 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 the 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 in 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] We will take our first question from Mark Argento with Lake Street Capital Markets.

Hi, guys. Good afternoon.

Hey, Mark. How are you?

Hi, Mark.

Good, good. Thanks. Grew out on solid quarter here. Just a handful of questions. First on the -- just want to clarify that the jury verdict wasn’t -- with the Apple $22 million wasn’t reflected in any of the numbers at this time, right?

That's correct.

Okay. And then, in terms of the, first off, on the soft license deal you did with SK hynix, 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 out of you guys.

I can't go into a lot of detail on the Apple negotiations or anything like that. But I would say that I -- we are certainly constructive and it does show and validate in our opinion, our approach in the current licensing environment, in the current licensing negotiations. We also think it validates the value and quality of our IPN [ph] 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. These structured as term deals, like it you used to be on the past or is this kind of a -- this is like a fully paid perpetual type agreement or is there some ratable [ph] recognition in your -- from a revenue perspective.

This is -- this deal was the -- license agreement with SK hynix was perfectly consistent without we normally do. It’s a one-time paid up license.

Got it. All right. And then, lastly, and I can hop back in the queue. In terms of the legal calendar, in a pipeline of activity, what is your calendar look like for the next six months yet? 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 taken 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 Visio in March. And then to wrap up the first quarter, we have two St. Lawrence trials one versus Motorola and one versus CTE scheduled for March 6.

Right. Thanks guys. Congrats on new quarter.

Thanks, Mark.

For next question, we will go to Daren Miller with Barclays.

This is James Bekely for Daren. Thanks for taking my questions. Just first, I was just curious how you guys came across Veritone and just does the investment there with 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 kind of scaring the landscape for quality patents, and came across the company and its technology. While doing that diligent, we found the technology very compelling and we believed ultimately that an investment in the company would potentially be a -- 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 has done in the past, I think it's probably premature to classify this kind of an investment as it 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 real quick follow up, free cash was negative. But I saw the accounts receivable picked up a lot there. I know you guys previously spoke to, I think around the $100 million or so, little bit more than a $100 in terms of revenue being breakeven revenue amount versus for $100 million terms of revenue being break even revenue amount versus free cash. Could you just talk about the timing or with the new ones, what’s going on there and just reconfirm that target -- that revenue target? Thanks.

Sure. Sure. So with -- 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 are doing deals. And so to the extent that we're executing license agreements around the end of the quarter than most likely the payments associated with those license agreements will be reflected as accounts receivable as of the end of the quarter. 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 the stamp point 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.

For our next question, we will go to Mike Latimore with Northland Securities.

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

Okay, Nick.

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

Well, I think that as I’ve mentioned for the past several quarters and mentioned in my prepaid remarks that patent in take is our primary focus of the Company, its 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 our qualitative and 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 awareness expeditiously as possible.

Okay. Thanks. And then, I guess, can you guys just elaborate little bit more on your partnership with the Japanese semi-manufacture?

Are you referring to Renesas, the source of our -- 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 stand point, 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 a new licensing programs.

Great. Thanks and then if I could just squeeze one more in here. Other -- looking to 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.

We will go to our next question from David Huff, Private Investor.

Hi, Good afternoon. Congrats on the great quarter. I just had a couple of quick questions. If I could start with the Nokia Siemens portfolio.. $22 million from Apple a majority verdict, it's now going to enter into [indiscernible], it could be tripled and then there is going to be ongoing royalties. Do you have any expected timeline that’s key scenario, when an actual check might be cut?

Hey, David. This is Ed Treska. We obviously can't predict when a check will be cut. And Apple has traditionally part [indiscernible] lease 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 a [indiscernible] emotions and then we'll see what happens from there if we need to go up [indiscernible], but I don’t think we can put a specific date obviously and when will we get a check.

Okay, And any final judgment with the appeals 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 will 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's 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 already have more trend, more of an update on that.

Okay. I guess, last one, the Nokia-Siemens, is there an opportunity to get another Nokia Siemens or I guess Alcatel Lucent portfolio at this point, are there any discussion there?

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

Okay. I guess moving on to 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?

You know 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 are just only willing to comment on comment on that this.

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 filed -- file litigation as quickly and as expeditiously as possible whether it's by the end of the year. Once again, I can't say, because just a lot of moving on when we do that. But rest assured that we are going to be doing that quickly as we -- its feasible.

Okay. Is it -- I will pass on the question. I guess my last one related on the status of the box and scientific with Medtronic. I know it's things were kind on hold. You guys wanted to appeal on the patent review, but it seems like a stuck and [indiscernible] at this plan. Just wondering if there is an update.

Yes, we obviously did prevail on Medtronic like you’re challenged, 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 that has been slow moving process, but we’re now free to begin a move on that one.

Okay. I’m going to speak in one last question, I ask at every quarter. Any plans to attend any Investor Conferences or I guess, Industry Conferences. If they were 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 from me. Thank you.

Thank you, David.

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

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

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