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Edited Transcript of ACTG earnings conference call or presentation 26-Oct-17 8:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Acacia Research Corp Earnings Call

NEWPORT BEACH Oct 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Acacia Research Corp earnings conference call or presentation Thursday, October 26, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clayton J. Haynes

Acacia Research Corporation - CFO, Senior VP of Finance & Treasurer

* Edward J. Treska

Acacia Research Corporation - Executive VP, General Counsel & Secretary

* Robert B. Stewart

Acacia Research Corporation - Principal Executive Officer & President

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Presentation

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Operator [1]

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Good afternoon, and welcome ladies and gentlemen, to the Acacia Research Third Quarter 2017 Earnings 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.

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Robert B. Stewart, Acacia Research Corporation - Principal Executive Officer & President [2]

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Welcome, and thank you for joining today's Third Quarter 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 overview our financial performance and Ed will review the status of some of our current licensing and enforcement programs. I will then provide an overview and brief business update of 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 on our forward-looking statement disclaimer. Today's call the terms we, us and our, refer to Acacia Research Corporation and its fully and majority-owned operating subsidiaries. All rights, acquisitions, development, licensing and enforcement activities are conducted solely by certain Acacia Research Corporation's fully and majority operating subsidiaries.

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

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Clayton J. Haynes, Acacia Research Corporation - CFO, Senior VP of Finance & Treasurer [3]

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Thank you, Rob, and thank you to those joining us for today's third quarter 2017 earnings conference call. Third quarter 2017 revenues totaled $36.6 million compared to $64.7 million in the comparable prior year quarter. For the third quarter of 2017, 1 licensee individually accounted for 96% of revenues recognized. In the comparable prior year quarter, 2 different licensees individually accounted for 60% and 27% of revenues recognized.

For the third quarter of 2017, we reported GAAP net income of $158.5 million or $3.13 per share versus GAAP net income of $7.1 million or $0.14 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 third quarter 2017 non-GAAP net income of $167.6 million or $3.31 per share, as compared to non-GAAP net income of $16.1 million or $0.32 per share for the third quarter of 2016. 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.

The GAAP and non-GAAP third quarter 2017 results include an unrealized investment gain totaling $159 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 requirements to mark our Veritone investment to market as of September 30, 2017.

Third quarter 2017 contingent legal fees expense increased 58% to $12.2 million, due to lower average contingent legal fee rates for the portfolios generating revenues in Q3 2016 as compared to the portfolios generating revenues in Q3 2017. There were no inventor royalty expenses for the third quarter of 2017, primarily due to preferential returns on portfolios generating revenues during the quarter.

Average margin for the third quarter of 2017 increased to 67% as compared to 60% in the comparable prior year quarter. Third quarter 2017 litigation and licensing expenses decreased $3.3 million or 45% 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.

Third quarter 2017 general and administrative expenses, excluding noncash stock compensation expense, decreased 44%, due primarily to a reduction in personnel cost in connection with our recent reductions in headcount, a decrease in corporate general and administrative costs, a decrease in variable performance-based compensation cost and a decrease in employee severance costs.

Third quarter 2017 noncash stock compensation expense increased to $9.5 million, due to the increase in the fair value of our Veritone related profits interest units, consistent with the increase in the fair value of our related Veritone investment during the period. The increase also reflects the impact of the full vesting of the profits interest units during the third quarter of 2017. Compensation expense for the profits interests is adjusted each reporting period for changes in fair value, which is primarily based on the quoted market price of Veritone common stock. All unrecognized stock compensation related to profits interest totaling $8.2 million was required to be recognized upon full vesting of the profits interest during the third quarter of 2017.

Vesting was based on Veritone's sustained achievement of certain market capitalization hurdles. Third quarter 2017 noncash patent amortization charges decreased to 13%, reflecting a decrease in scheduled amortization on existing patent portfolios, due primarily to various patent portfolio impairment charges previously recorded in Q4 2016. In addition, patent impairment charges totaled $2.2 million in Q3 2017.

From a balance sheet perspective, cash and investments totaled $158.6 million, as of September 30, 2017, versus $158.5 million as of December 31, 2016.

Looking forward from an operation standpoint. We continue to expect our 2017 fixed SG&A expense, excluding noncash charges, severance and certain variable expenses, to be in the range of $11.5 million to $12 million. We also expect 2017 scheduled patent amortization expense to be approximately $22.2 million. We expect 2017 noncash stock compensation expense to be approximately $14 million, including the impact of the acceleration of the $8.2 million of stock compensation expense related to the Veritone profits interest recorded in the third quarter of 2017.

Thank you for joining us today. And I will now turn the call over to Ed Treska for a review of the status of some of our current licensing and enforcement programs.

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Edward J. Treska, Acacia Research Corporation - Executive VP, General Counsel & Secretary [4]

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Thank you, Clayton. Today, I will provide updates for some of the litigation activity in Acacia's CCE, St. Lawrence and Limestone subsidiaries. Beginning with Cellular Communications Equipment or CCE, as we previously announced, CCE resolved its dispute with Apple, including cases pending in the U.S. and Germany. CCE has additional pending suits against HTC, ZTE and Verizon. Trials for these remaining defendants are currently scheduled to begin in late 2018. CCE is also awaiting an appellate ruling from the Federal Circuit with respect to an IPR proceeding that was part of the 3 IPR proceedings argued together. And as we announced before, CCE has already prevailed in the other 2 IPRs at the Federal Circuit.

Moving on to St. Lawrence. The patent searching cases against Apple have not been resolved and the trial against Apple in the U.S. is still scheduled for February of 2018. With respect to the St. Lawrence trial victory against Motorola in March of this year, the U.S. District Court is still considering St. Lawrence's post trial motion based on willfulness for enhanced damages and attorney's fees. In Germany, the injunction against Motorola was appealed and the District Court of Mannheim has upheld the injunction and corresponding sanctions against Motorola for violation of that injunction order.

I'll turn now to Limestone Memory Systems. Limestone's actions against various hardware manufacturers have been stayed since early 2016, pending resolution of various IPR proceedings. Limestone has prevailed on 3 of the IPRs, and just last week, the patent trial and appeal Board, granted Limestone's petition to terminate the proceedings on the final pending IPR. Limestone now has 4 patents, which can continue in this litigation. And Limestone will be filing a joint stipulation with the court to lift the stay, and we anticipate the litigation will become active, again, near the end of this year.

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.

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Robert B. Stewart, Acacia Research Corporation - Principal Executive Officer & President [5]

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Thank you, Clayton and Ed. As our current litigation is progressing, we are encouraged by Acacia's patent assets and licensing programs. However, as stated in previous conference calls, we continue to experience the challenges in the existing patent environment, including the challenges surrounding quality patent intake.

As Clayton mentioned in his remarks, Acacia's third quarter financial performance, included licensing revenue totaling $36.6 million for the quarter, an increase in working capital from $118 million to $134.9 million quarter-over-quarter, an increase of nearly $17 million, a continued downward trend in fixed operating expenses and an increase in the fair market value of our Veritone investment. We consistently want to remind our investors, 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.

As previously communicated, we intend to leverage our patent licensing brand, expertise, relationships and data into new opportunities. Consistent with this theme, we continue to be excited about Acacia's investment in Veritone. Since the IPO in May of this year, Acacia's investment of Veritone has risen, with the stock closing at $45.45 on September 30, 2017. This resulted in an unrealized gain reflected in Acacia's Q3 financial statements.

In response to inquiries we received, let me clarify Acacia's ownership in Veritone. Acacia currently owns 4,119,521 common shares of Veritone and 1,120,432 common stock purchase was of Veritone with a $13.61 start price. For more information of Veritone, please visit Veritone's website.

We're also excited about the progress and opportunities associated with our investment and partnership with Miso Robotics. Miso Robotics is revolutionizing into restaurant and food industries with innovative robotics and artificial intelligence solutions. Miso leverages robotics and AI technology to help increase the productivity, reduce cost and drive profitability. Again, for additional information on Miso Robotics please visit Miso's website.

As we move forward, our intent is to continue our success in patent licensing and partner with exciting innovative companies like Veritone and Miso Robotics.

I want to thank everyone 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.

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Operator [6]

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