U.S. Markets open in 2 hrs 55 mins

Edited Transcript of ACTG earnings conference call or presentation 14-Mar-19 3:00pm GMT

Q4 2018 Acacia Research Corp Earnings Call

NEWPORT BEACH Mar 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Acacia Research Corp earnings conference call or presentation Thursday, March 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alfred V. Tobia

Acacia Research Corporation - Director

* Clifford Press

Acacia Research Corporation - Director

================================================================================

Conference Call Participants

================================================================================

* Brett Reiss

* Daniel Adler

Emys Capital - Equity Portfolio Manager & Analyst

* Rob Fink

Hayden IR, LLC - EVP and General Manager of New York Office

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research 2018 Quarter 4 Year-end Earnings Call. (Operator Instructions)

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

--------------------------------------------------------------------------------

Rob Fink, Hayden IR, LLC - EVP and General Manager of New York Office [2]

--------------------------------------------------------------------------------

Thank you, operator. Hosting the call today are board members, Al Tobia and Clifford Press.

Before beginning, I would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on current estimates and projections of future results or trends.

Actual results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the risk factors described in Acacia's annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC.

In addition, the company will present non-GAAP financial measures. Please refer to the company's disclosures regarding presentation of non-GAAP financial measures and other notes that were included in yesterday's earning release as well as the 8-K that was filed with the SEC.

I would like to remind everyone that a press release disclosing the company's financial results was issued yesterday at approximately 4:05 p.m. This can be accessed on the company's website at acaciaresearch.com under the News & Events tab.

With all that said, I would now like to turn the call over to Al Tobia. Al, the call is yours.

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [3]

--------------------------------------------------------------------------------

Thank you, Rob, and good morning, everyone. On our last conference call, we focused our discussion on Acacia's 3 core assets: cash, IP and securities investments. I will update the progress that we have made in these areas.

Cash and short-term investments at year-end totaled $166 million, up $23 million from Q3 end. During the fourth quarter, we closed transactions with Nokia and Motorola related to 3 of our legacy patent portfolios. These engagements, along with recurring license revenues from previous transactions, resulted in a total $49.2 million in revenues in the fourth quarter. I would note that if we had not moved quickly, these opportunities and the associated revenues could have been lost forever. We received $27 million of the cash from these transactions with the balance expected to be received during the first half of 2019.

During the quarter, we also continued to eliminate areas of wasteful spending, notably excess administrative overhead and reallocated those costs in an effort to rebuild the team that oversees our IP business.

Our IP licensing team is now up to 8 professionals. This team moved quickly to evaluate our legacy portfolio and took action to generate licensing revenues. Simultaneously, we have begun the necessary work to restart the IP acquisition engine. We now currently have 9 portfolios in active assertion. Subsequent to the close of the fourth quarter, we initiated several new partnership opportunities with patent owners that are now under option. These new opportunities were identified and secured by our licensing team, allowing us to explore assertion opportunities in partnership with the patent owners.

We are evaluating additional opportunities and doing so in a methodical manner. Fundamentally, we believe maintaining significant liquidity at all times is critical to our effectiveness and necessary for our success. There are numerous opportunities to partner with patent holders in a variety of transactions. And we are moving to take advantage of these opportunities with creative structures and a disciplined approach. I want to stress that our focus is on long-term sustainable value-creation. Investors should, in our opinion, measure us on our book value, and we intend to systematically grow our book value over time.

Regarding our securities investment portfolio, which includes investments in Veritone and Miso Robotics, we continue to actively manage these positions. They are now approximately 10% of our capital base, which we feel is a more appropriate risk level.

Importantly, we have begun implementing significant improvements in corporate governance that will become evident in our upcoming proxy statement.

I'd now like to turn the call over to Clifford for a review of our Q4 results and a discussion of our progress on our go-forward strategy.

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [4]

--------------------------------------------------------------------------------

Good morning. I'll provide an overview of the fourth quarter financial results. But more detail is available in the press release issued yesterday and also in the upcoming annual report on Form 10-K we will file with the SEC.

Cash and short-term investments totaled $165.5 million as of December 31, 2018, as compared to $136.6 million as of December 2017.

Revenues for the fourth quarter were $49.2 million and $131.5 million for the full year.

We invest in intellectual property and related absolute return assets with the objective of generating a positive return over the life of the asset, irrespective of equity market fluctuations. To provide better visibility and to increase transparency, we will on our quarterly calls from here on in share: a, an overview of the acquisitions we have made each quarter in aggregate; and b, an overview of settlements that we have made with, when possible, details of the counterparty and financial details.

As Al mentioned, we currently have 9 active litigations, 2 of which have trials scheduled over the course of next 12 months. We expect to receive cash from fourth quarter settlements in the first quarter of 2019. But we do not project that we will close any material settlement transactions during the first quarter. While we do expect additional settlements of license revenues to be generated in the balance of 2019, these opportunities are likely the last significant revenues from our legacy portfolio.

Our new licensing and IP team is working to refill the patent portfolio pipeline. Deal flow has been very solid. We have 4 new engagement opportunities under option as of today, and there are many late-stage opportunities being considered.

In order to increase the usefulness of Acacia's financial reporting, we have changed the presentation of the income statement to show all patent-related direct costs in the section called Portfolio Operations. This includes the costs and expenses incurred in connection with Acacia's patent licensing and enforcement activities, including royalties paid to our patent partners, contingent legal fees and other patent-related legal expenses paid to external patent counsel, licensing and enforcement-related research, consulting and other expenses paid to third parties as well as the amortization of patent-related investments. Deducting all direct costs in portfolio operations from gross revenues produces a net revenue number, which is a more reliable measure of revenues flowing to Acacia. We believe this modification helps to provide significant clarity on the metrics of the IP-related business.

Subsequent to the close of the fourth quarter, we welcomed Maureen O’Connell and Katharine Wolanyk to our board. They bring significant intellectual property and public company experience to Acacia that will be immensely valuable as we scale our business. Katharine is the Managing Director at Burford Capital, a leading global finance and investment management firm focused on law with over $3 billion committed to the legal market. She was named a world's leading IP strategist by Intellectual Asset Magazine in 2015 through 2018 and has deep experience within the technology industry. She leads Burford's intellectual property business. Burford, for those who may not be familiar, is one of the top-performing listings on the London Stock Exchange's AIA market with the current market capitalization of more than $4.5 billion. Her domain expertise will be immensely valuable as we expand Acacia's intellectual property portfolio.

Maureen is a global business executive, Chief Financial Officer and Corporate Director recognized for significant value-creation. For more than a decade, Maureen served as the Chief Financial Officer of Scholastic Corporation, the world's largest publisher and distributor of children's books. In this role, she had significant experience with licensing rights, partnering with trademark and copyright owners and overseeing the protection and assertion of rights on a worldwide basis.

We are now working diligently to refine our go-forward strategy and appoint a new executive team, something we expect to unveil within the next quarter. We expect to add additional highly qualified independent directors as we complete the build-out of the governance and management structure of Acacia.

In terms of guidance, the remaining portfolio of Acacia has a limited number of remaining licenses to be negotiated. We do not expect significant revenues in the first quarter of 2019. For the full year 2019, we expect gross revenues of approximately $25 million, all from the existing portfolio, and net cash from operations of around $5 million before investing a budgeted $20 million in the new IP. We believe that our current IP team can research and process $20 million of new IP CapEx this year.

I'd now like to open the call for questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll now take our first question from Brett Reiss from Janney Montgomery Scott.

--------------------------------------------------------------------------------

Brett Reiss, [2]

--------------------------------------------------------------------------------

Good show on bringing the cost structure down, hear, hear. I guess, first question, since the revenues from the legacy portfolios are going to be winding down over the next couple of quarters and the gestation period for new revenues to come in from new portfolios in the past had been 2 to 4 years, starting in 2020, how does the company plan to pay the bills and earn a return on capital in this kind of gap period?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [3]

--------------------------------------------------------------------------------

Brett, you're correct. The current portfolio is winding down and the new intake will take the kind of time that you've referenced to produce full revenue for that. However, there are a number of transactions we're looking at which have shorter-term revenue opportunity. And I think when we get some of those accomplished, we'll be able to describe how we intend to deal with that.

--------------------------------------------------------------------------------

Brett Reiss, [4]

--------------------------------------------------------------------------------

Okay. Now these new engagement opportunities, in the past, it had been kind of a 50-50 split with us laying out the legal costs, because it seems to be more of a buyer's market. Do we have greater leverage to extract more favorable terms? Can you give us some color on how the market looks there?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [5]

--------------------------------------------------------------------------------

Yes, as Al mentioned, we think it's an attractive market. Now one of the aspects that we find attractive is that those ratios are susceptible to some significant improvement. And we're working on that.

--------------------------------------------------------------------------------

Brett Reiss, [6]

--------------------------------------------------------------------------------

Okay. Could you tell me -- because sometimes, I -- the transparency from the existing management team has been much better than in the past. So I salute you for that. But how much Veritone's stock do we have? Including -- and are we out of the warrants?

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [7]

--------------------------------------------------------------------------------

We haven't -- it's in our K. We have approximately 800,000 -- 800-approximately thousand shares outstanding and just over 1 million warrants. You'll see in the K, when it comes, full details on what has been sold and what has been retained.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

We'll now take our next question from Daniel Adler from Emys Capital.

--------------------------------------------------------------------------------

Daniel Adler, Emys Capital - Equity Portfolio Manager & Analyst [9]

--------------------------------------------------------------------------------

Al, if you could please discuss the stake in Miso Robotics? I didn't hear anything about that in your prepared remarks. Just sort of what the current percentage ownership is in Miso? What the sort of longer-term plan is? And if you could maybe hazard a guess what the economic value of that stake is today versus the -- what's on the books? What had been invested in it?

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [10]

--------------------------------------------------------------------------------

So the investment in Miso was carried at $8 million, which is our -- what we put into the company. We -- so we haven't made any adjustments to that or felt the need to make any adjustments to that. We have ceded 2 independent board members at Miso, and we maintain a healthy dialogue with them. That obviously, that robotics food service automation market has attracted significant outside capital from large-venture capitalists. And we continue to monitor the position.

--------------------------------------------------------------------------------

Daniel Adler, Emys Capital - Equity Portfolio Manager & Analyst [11]

--------------------------------------------------------------------------------

And in terms of longer-term plans in terms of what Acacia might be thinking about that stake?

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [12]

--------------------------------------------------------------------------------

We'll act as fiduciaries with this stake, if opportunities come up for us to exit and we think it's an appropriate time, we would do that. We -- it's a position that we inherited and we're monitoring it as appropriately.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

We'll now take our next question from Brett Reiss from Janney Montgomery Scott.

--------------------------------------------------------------------------------

Brett Reiss, [14]

--------------------------------------------------------------------------------

Great. The problem with the patent business has been the lumpiness of revenues. Are you looking into any ways to smooth that out, even if it involves maybe thinking outside of the box?

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [15]

--------------------------------------------------------------------------------

So the lumpiness of revenue is an issue -- one of the issues is because we have concentration of settlements, right? So one of the ideas is as we earmark money for CapEx and we have more licensing people, we get more programs going and the revenue stream should diversify itself. So for now, that's kind of the first -- that's the first sort of approach that we're taking is to just get more programs and more deals going through the pipeline.

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [16]

--------------------------------------------------------------------------------

But Brett, we would encourage investors to look at the business on the basis of book value, not multiples of revenue or earnings on a quarterly basis. And as long as we can steadily increase value over time, I think that would be the best metric to measure us on.

--------------------------------------------------------------------------------

Brett Reiss, [17]

--------------------------------------------------------------------------------

With respect to the cash build-up, I know it's the nature of the business that you have to always have a lot of cash on hand so that the other side doesn't think they can kind of wait us out in litigation. But is there a point where if the cash gets to x amount that the board would look at ways of sharing that with shareholders above a certain hurdle rate?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [18]

--------------------------------------------------------------------------------

Absolutely. As you correctly pointed out, size and liquidity are competitive advantages in this business. If we find that the stock is trading at a level where it makes an attractive investment for us, we feel we're now in a position where we can execute on buybacks in that scenario. Remember, up until now, there's been a lot of uncertainty about what had happened at this company, what we had found inside, and we were essentially waiting to get the K out so that people could have a clear picture of where things stand. And I think we feel much more freedom to act once that is in place because frankly up until now, Al and I have been really -- the few people who understood what we achieved at the company and where the cash levels and everything else stood. So now that it's all out in the market with the K, I think we have much more flexibility.

--------------------------------------------------------------------------------

Brett Reiss, [19]

--------------------------------------------------------------------------------

Right. Now you and Al have been at the helm now, what -- about 6 months? Is it going on a year? I lose track of time. How much is it?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [20]

--------------------------------------------------------------------------------

It's about 7 months -- 7 or 8 months.

--------------------------------------------------------------------------------

Brett Reiss, [21]

--------------------------------------------------------------------------------

Okay. In the 7 months you've been at the helm, could you share with me the 1 or 2 positive surprises that you've found? That things were better than you thought they were going to be? And is there 1 or 2 things that you didn't realize how bad things were?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [22]

--------------------------------------------------------------------------------

I think that, as you know, this is a highly, highly unusual situation. We ran a campaign, we were elected as 2 members out of a board of 7. And then a few weeks after the shareholder vote, we were the sole 2 directors and we had to deal with the management of the business as it then was and there was really no management team, or senior management of the company either. So it was a somewhat daunting situation we found ourselves in. We were, at that time, concerned about such an unusual situation that we could make sure that all the assets were essentially findable and the matter that there was no unknown challenges that hadn't been revealed. I'd say the greatest positive surprise we found about it is 2. I think the company was relatively easily cleaned up. The cash, we're very pleased to have consistently increased the cash every quarter since we've been involved. And the second positive surprise is we've become quite familiar with the economics in the intellectual property investment business. And I think there's very significant opportunities there, some of which lie in the traditional part of what Acacia has done and there are other new expanding -- evolving areas, which we are very interested in pursuing. So I think those are probably the most positive things that we found. And to be honest, we were very, very pleased to find that there are very limited liabilities and there were no irregularities.

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [23]

--------------------------------------------------------------------------------

Brett, I would just add also, in terms of an upside surprise, getting Marc Booth on as the Chief IP Officer and the work he's been able to accomplish in a short period of time has been a big positive. So a lot of the revenue that was brought in in the fourth quarter here from the legacy portfolio was as a result of some pretty smart maneuvering that Marc did.

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [24]

--------------------------------------------------------------------------------

I think, Marc gets a lot of credit as he had come in a situation where they were literally sunsetting the IP business. They were entering into contracts to exit the business. And Marc really scrambled to get that $49.2 million of revenue done in the last 7 months of last year, and a lot of credit to him for getting it done and with various counterparties as well.

--------------------------------------------------------------------------------

Brett Reiss, [25]

--------------------------------------------------------------------------------

Is the good story sufficiently in place that you're going to be more proactive in telling the story, trying to get coverage? Or is that still a couple of quarters off?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [26]

--------------------------------------------------------------------------------

I think when we deserve better coverage, which I think the moment will approach, yes, I think we expect to get better coverage. And we will be -- one of the things that we will be doing after we announce the governance improvements, which will come with the proxy, we intend to have a new shareholder presentation to explain the strategy and the opportunities.

--------------------------------------------------------------------------------

Brett Reiss, [27]

--------------------------------------------------------------------------------

And are you -- is there a ballpark target date you're shooting for on that?

--------------------------------------------------------------------------------

Clifford Press, Acacia Research Corporation - Director [28]

--------------------------------------------------------------------------------

Well, the proxy will be out in a timely manner and that will disclose the governance improvements. And once we have a proper board seated and voted by shareholders, which will happen shortly thereafter, I think we can get the board to endorse and promote a business plan that we will be able to share.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Our next question comes from Richard Vietor from [Arthur Wood].

--------------------------------------------------------------------------------

Unidentified Analyst, [30]

--------------------------------------------------------------------------------

I just have a question that it looks to me conservatively like your stock is trading around 25% below book value. Are there any other comparables that you look at or have any idea where a company like yours might trade relative to the book value that you're trying to create?

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [31]

--------------------------------------------------------------------------------

Well, there have been times when we've looked at companies in this sort of space where they traded below book certainly or traded at or below cash when the patent portfolio is going to go into a bit of a down cycle. And clearly, the stock looks undervalued here just based on liquidity and based on the fact that we're not going to burn a lot of cash on our forecast. We're talking about basically generating cash before CapEx. So prudently putting that IP CapEx to work should result in positive returns, we believe. And so we think that the stock is undervalued here relatively. However, there have been unknowns. And we know we're going into a period where we're going to be losing some money from a stated operations standpoint.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

It appears there are no further questions at this time. I would like to turn the conference back to Al Tobia for any additional or closing remarks.

--------------------------------------------------------------------------------

Alfred V. Tobia, Acacia Research Corporation - Director [33]

--------------------------------------------------------------------------------

No, just in closing, I'd like to thank everyone for attending. And we will be back to you next quarter.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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