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Acacia Research Corporation (NASDAQ:ACTG)

Q1 2009 Earnings Call Transcript

April 23, 2009 4:30 pm ET

Executives

Paul Ryan – Chairman and CEO

Clayton Haynes – CFO and SVP

Analysts

Jeremy Hellman – Singular Research

Bennett Notman – Davenport & Company

Doug Thomas – JET Investment Research

Steve Yash [ph] – Yash Financial [ph]

Hal Haskell [ph]

Operator

Good afternoon and welcome, ladies and gentlemen, to the Acacia Research first 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 questions and answers after the presentation.

I will now turn the conference over to Mr. Paul Ryan. Please go ahead, sir.

Paul Ryan

Thank you for being with us today. Today's call may involve what the SEC considers to be forward-looking statements. Please refer to our 8-K, which was filed with the SEC today for our forward-looking statement disclaimer.

With us today is Chip Harris, President of Acacia; Dooyong Lee, Executive Vice President; and Clayton Haynes, our Chief Financial Officer.

Today, I will give you an overview of the progress we are making in building the business, and Clayton Haynes will provide you with an analysis of our financial results. We will then open the call for questions.

Acacia Research executed 16,350,000 in licensing transactions in the first quarter of 2009, resulting in first quarter license fee revenues of $12,650,000, an increase of 40% compared to $9,048,000 in the year ago period.

We also generated $3,700,000 in pre-paid deferred revenues, which will be recognized in subsequent periods.

Acacia generated first quarter revenues from 28 new licensing agreements covering 16 different technologies, including initial revenues from four new licensing programs. We have now generated revenues from 52 different technologies.

Acacia Research's trailing 12-month revenues were $51.8 million, an increase of 42% compared to $36.5 million in the year ago period. Acacia's revenues of $44.7 million over the past three quarters set a new record for a nine-month period.

Acacia Research reported a first quarter net loss of $2.4 million, which included non-cash patent amortization and non-cash compensation charges totaling $3 million.

During the first quarter we increased cash and investments by $2.5 million and ended the quarter with $54 million. We also acquired control of five new patent portfolios for future licensing.

We currently have the largest number of licensing opportunities in our history. We are also seeing an increased level of interest by some companies to engage in licensing discussions at an earlier stage in our licensing programs.

On the business development side, our successful track record of generating revenues from 650 licensing agreements covering 52 different technologies is generating new interest from technology companies, universities, research centers, and individual inventors wanting us to take over the licensing of their patented technologies. Acacia is fortunate to be in a business, which is uncorrelated with current problems in the economy and is actually benefiting from those economic pressures from the heightened level of interest from technology companies wanting to generate revenues from their patents.

Last week we participated in the Federal Trade Commission hearings on the evolving intellectual property marketplace. The FTC hearings provided Acacia with a great opportunity to describe our role as the clearing house in the economy between large companies who use new patented technologies in their products and the small companies who invented and patented these technologies. For those of you who are interested, there is an archived webcast of the April 17th hearing posted on the Federal Trade Commission Web site.

As part of our presentation, we included 52 independent testimonials from inventors and patent owners who have partnered with us. I encourage you to read these testimonials that are now included on our Acacia Technologies Web site. These testimonials from our business partners are a strong verification of the exceptional efforts of Acacia’s business development, engineering and licensing executives who are creating value for both our shareholders and business partners.

This success continues to enhance our position as a market leader and is expanding opportunities to grow our business.

With that I would like to turn the call over to our Chief Financial Officer, Clayton Haynes.

Clayton Haynes

Thank you, Paul, and thank you to everyone joining us for today's first quarter 2009 earnings conference call.

As indicated in today's earning press release, on a consolidated basis, Acacia Research executed $16.4 million in licensing transactions in the first quarter of 2009, resulting in first quarter 2009 license fee revenues totaling $12.7 million as compared to $9 million in the first quarter of 2008.

$3.7 million of the $16.4 million in Q1 ‘09 licensing transactions is included in deferred revenues in our consolidated balance sheet. These deferred revenues represent upfront license fee payments received from licensees in the first quarter of 2009 that will be amortized as license fee revenues on a straight-line basis over the applicable contractual license terms.

Deferred revenues totaled $4.3 million as of March 31, 2009 compared to $318,000 at December 31, 2008. First quarter 2009 revenues included license fees from 28 new licensing agreements covering 16 of our technology licensing programs, including initial license fee revenues for our Surgical Catheter technology, Encrypted Media & Playback Devices technology, Child-friendly Secure Mobile Phones technology and Heated Surgical Blades technology. For a summary of additional technology licensing programs generating revenues during the first quarter of 2009, please refer to today's press release.

To date, on a consolidated basis our operating subsidiaries have generated revenues from 52 of our technology licensing programs. License fee revenues continue to fluctuate from period to period based on the various factors discussed on previous earnings conference calls and in our periodic filings with the SEC.

Consolidated trailing 12-month revenues totaled $51.8 million as of March 31, 2009 as compared to $48.2 million as of December 31, 2008, and $36.5 million as of March 31, 2008.

Our average margin defined as gross license fees less inventor royalties expense and contingent legal fees for the portfolios generating revenues during the period remained relatively flat quarter to quarter at approximately 47%.

Average margins fluctuate period to period based on the mix of patent portfolios that generate revenues each period and the related economics associated with the underlying inventor agreements and contingent legal fee arrangements if any.

For the first quarter of 2009, Acacia reported a GAAP net loss from operations of $2.4 million or $0.08 a share versus $4.5 million or $0.15 a share in the first quarter of 2008 as illustrated in today's press release and related 8-K filed with the SEC.

Excluding the impact of non-cash patent amortization charges of $1.1 million and non-cash stock compensation charges of $1.9 million, we reported first quarter 2009 net income of $628,000 as compared to a net loss of $1.3 million excluding non-cash charges for the first quarter of 2008.

Operating expenses for the first quarter of 2009 and 2008 included inventor royalties expenses of $3.5 million and $2.1 million respectively and contingent legal fees expenses of $3.2 million and $2.6 million respectively.

As indicated earlier, inventor royalties and contingent legal fees expenses fluctuate period to period based on the amount of revenues recognized each period and the mix of specific patent portfolios with varying economic terms generating revenues each period.

In the aggregate, inventor royalties and contingent legal fees expenses increased 41% during the first quarter of 2009 as compared to the first quarter of 2008 consistent with the 40% increase in related license fee revenues for the same period.

First quarter 2009 marketing, general and administrative expenses, excluding non-cash stock compensation decreased to $3.5 million from $3.8 million in the comparable 2008 period due primarily to a reduction in personnel costs resulting from a reduction in employee headcount since the end of the prior year period and a decrease in accounting and other corporate and general and administrative costs related to ongoing operations.

Patent related legal expenses increased to $1.4 million in the first quarter of 2009 from $1 million in the first quarter of 2008. The increase is primarily due to patent related legal expenses incurred on new licensing and enforcement programs commenced since the end of the prior year period.

Patent related research, consulting and other expenses decreased to $761,000 in the first quarter of 2009 from $977,000 in the first quarter of 2008. Patent related research, consulting and other expenses include third-party patent related research, development, consulting, licensing and patent maintenance costs incurred in connection with the identification, review, acquisition, development, licensing and enforcement, and maintenance of patent portfolios. These costs fluctuate period to period based on business development, patent related research, due diligence, and patent licensing and enforcement activities in each period.

The quarter to quarter decrease in patent related research, consulting and other expenses was primarily due to a reduction in expenses related to certain licensing and enforcement programs that are further along into related litigation and enforcement effort. This reduction was partially offset by an increase in expenses incurred in connection with new patent related business development and licensing and enforcement programs commenced since the end of the prior year period.

Previously, patent related research, consulting and other expenses were included as a component of MG&A. Beginning in Q1 2009, these costs are included in a separate line item in the statement of operations entitled ‘research, consulting and other expenses – patents’.

Looking forward, for fiscal 2009 we continue to expect MG&A excluding non-cash stock compensation charges to be in the range of $13 million to $13.5 million. For fiscal 2009, estimated patent related legal expenses together with patent related research, consulting and other costs are expected to be in the range of $7.5 million to $8 million.

From a balance sheet perspective, total assets as of March 31, ‘09 totaled $78.5 million compared to $73.1 million as of December 31, 2008. As of March 31, ‘09, cash and investment balances totaled $54 million versus $51.5 million as of December 31, 2008. Positive net cash inflows from operations for the first quarter of 2009 totaled $2.6 million versus net cash outflows from operations of $3.9 million for first quarter of 2008.

Net cash outflows related to patent portfolio acquisitions for Q1 ‘09 totaled $152,000 versus $1.6 million in Q1 2008.

Again, thank you for joining us for today's first quarter conference call. And I will now turn the call back over to Paul Ryan.

Paul Ryan

Thank you, Clayton. Operator you can open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) And, sir, our first question comes from Jeremy Hellman from Singular Research. Jeremy, you may state your question.

Jeremy Hellman – Singular Research

Thanks, good afternoon everybody. A question around the deferred revenue item – is that – it's a big jump from where you've been in the comparable numbers. Is there something more of a one-off in nature or is there a kind of a trend developing here where people that are – or entities – that want to license – get into license agreements with you guys are looking to do – pay in in that form and have a deferred over a longer period.

Paul Ryan

Yes, this is Paul Ryan. We are doing more deals where there is continuing royalties coming in. Most of our deals still are paid up transactions. The largest component in the quarter was a transaction. They’ve given it structure and, Clayton, I think you can – that $3.7 million is going to be recognized on a straight-line basis over, what, five quarters? So it will be amortized over a fairly short period of time given the structure of the licensing agreement. But I think as we continue to grow the business we are going to get into more structured and complex licensing agreements and they probably will have – so it is better to have pre-paid revenues which we prefer on deals that have that type of structure. I think right now we’ve got about, what, $4.3 million in prepaid? $4.3 million in prepaid revenues.

Jeremy Hellman – Singular Research

Okay, so they are looking forward, particularly with the economic where it is, we can expect to see some more within each quarter? Whatever number we might each model for a top line number or a certain slice of that may end up as more of a deferred amount? Is that a reasonable way of thinking about it?

Clayton Haynes

Yes, I think it’s is important to understand, though, we’ve already have the cash. We collected the cash in the first quarter, so it’s simply a matter of how we choose to amortize those revenues over a section of the licensing agreement given the structure of the agreement. So, we will typically, if given – if the person who is licensing wants that type of structure we will do it, but obviously we will do it where we are getting prepaid and have the cash up front.

Jeremy Hellman – Singular Research

Right. Okay. Thanks.

Clayton Haynes

Okay.

Operator

And sir, our next question comes from Bennett Notman from Davenport & Company. Bennett, you may state your question.

Bennett Notman – Davenport & Company

Good afternoon, and thanks for taking my question, guys. Paul, I counted, I think it was 30 or so licenses that were announced in the quarter and I think that number came out at 28. I am just wondering does that have something to do maybe with things that don’t count as being in the quarter because of deferred revenue or is there anything else going on there or am I just counting wrong?

Paul Ryan

No, there are a couple of deals that sometimes we get transactions complete, but by the time we get the approval from the licensee to issue the press release, you can have some slippage in time periods. So it would be that rather than the miscount.

Bennett Notman – Davenport & Company

Okay. So more that’s kind of in the current quarter versus the previous quarter?

Paul Ryan

Yes.

Bennett Notman – Davenport & Company

And then after the five quarters on the deferred revenue deals, does that license get renegotiated or is that just sort of a length of the patent life and that’s it?

Paul Ryan

Well, it’s actually structured as the first phase of a multiple element of potential transaction. And if the party wants continuing additional rights there would be significant additional payments that would be coming in 12 months from the origination date of the agreement and then 24 months. So, the structure of the license is such that the licensee if they wish to expand the scope of that license would be making significant additional cash payments in future periods.

Bennett Notman – Davenport & Company

Okay. So, this is one where they just sort of have access to it in a time period where they are then trying to figure out how much they are going to use it and if they are going to use it longer – more at that point in time, you would have a bigger payment?

Paul Ryan

Something of that kind, yes. Basically, we received a significant amount up front. A small amount of it actually got amortized in the first quarter, most of it will be through the subsequent five. And then there is additional trigger payments in the transaction if they continue to – want the expanded rights that would generate more revenue for us.

Bennett Notman – Davenport & Company

And then could you just give us an update on sort of the legal calendar? Any events that maybe upcoming whether it’s in a big Markman hearings – is there anything that trial dates that may have been set recently, anything like that that we should be aware of?

Paul Ryan

On the trial side, we have Markman’s happening every other week. So, I don’t have a definitive schedule of that. The next event that we are currently scheduled for I think is in three weeks from Monday we are scheduled to have a trial with Yahoo in a case. The next one that we currently just learned about is a trial that will be in June with Barco on the audio/video enhancement technologies. And then we’ve got some currently scheduled litigation regarding the location based cell phone services and they are currently scheduled to start those cases in December. And then we have another case actually pending in the I think it’s in the Virginia Courts that’s currently scheduled in the fourth quarter as well with the cell phone companies. So, right now, those are the ones that are currently on the docket. We do have a – I would expect there will be a growing list as we get further into the year. Most judicial districts actually wait until you get through the Markman and get through certain issues to actually set the trial dates. In some districts they set the trial dates early and we do have some of those and there is a number of them certainly next year. We’ve got, you know there is at least a dozen that’s practically one a month that’s currently scheduled for trials. But then again, we may negotiate and everyone may license by that time. But those are the upcoming ones. The next one will be in three weeks and that’s with Yahoo.

Bennett Notman – Davenport & Company

All right, great. I will seize the floor for now. Thank you.

Paul Ryan

Okay.

Operator

(Operator instructions) And we have a question from Doug Thomas from JET Investment Research. Doug, you may state your question.

Doug Thomas – JET Investment Research

Thanks. Congratulations Paul, especially seems like you guys are starting to regain some momentum. And I just wondered – I know Bennett asked most of my questions. But I just – for a second, if you could talk about your longer term view about the company? I know a lot of people get hung up in one quarter and another quarter. And I thought maybe I’d take an opportunity to ask you what your – where do you think this company sits, is positioned, a year from now or two years from now? I mean we talked about the potential to acquire some fairly significant portfolios. Clearly, there is some momentum building on the licensing side on the part of both the developers and the users. So there seems to be a lot going on. I am just curious how you kind of evaluate where the longer term picture looks like?

Paul Ryan

Sure, thanks for the question. We are at a very early stage. Obviously, we have not had any revenues from result of trials yet, although they are beginning to queue up. We probably got between now and next summer 16 scheduled trial dates, which oftentimes will lead to focused negotiations and lead to licenses and/or result in a trial. I think it’s important to note if you look at the last three quarters, up until the middle of last year we had never had two consecutive $10 million quarters. Now we’ve had consecutive quarters of 14 million, 18 million and 13 million. So, I think we are getting more consistency on the revenue side, or we’re beginning to, and it’s certainly at higher levels. Given the amount of portfolios that we currently have, not counting anything new coming in but if we just look at the assets that we currently have under management, certainly we think that just on regular licensing efforts we should be able to get above the $100 million type of run rate. Obviously the big question is how soon will that occur. I think we’ve got the product and the potential for that to occur. Beyond that certainly as we are now getting to the point as you know, in the past, we only ever had one trial. We are now getting to the point where assuming half or three-quarters of these, all of the defendants don’t settle with us. We are going to get into a point where we are probably going to be getting into almost a trial every month. So, I think that’s going to give tremendous potential upside to our base licensing revenue, which could if we are successful in some of these matters could take us to a whole other level. So, certainly, we are not – at the current run rate we’ve kind of been around this $50 million annualized run rate. We think certainly we have the assets under control currently to take that up very substantially. And with some good results in the court systems, it could go up quite dramatically.

Doug Thomas – JET Investment Research

Your ability to control your costs here, too, seems to me to be a positive and I am just wondering – it’s kind of maybe a two part question. But the cash that you’ve got on hand and your ability to generate additional cash going forward you obviously as you get into more of these suits, even though a lot of this stuff is on contingency that the expenses associated with conducting trials actually – the expenses will go up, correct?

Paul Ryan

Yes, generally speaking we split third party costs with our legal partners. And if you go to trial, you can probably expect those costs are going to run anywhere from $0.75 million to $1.25 million. So, probably on average $1 million, and we would have about $0.5 million of costs. But that’s a good thing, because what it means is most of those costs occur after you survived all motions for summary judgment. It means, obviously that you’ve got a trialable [ph] case and that puts you in a very good position either, a, to win the case or oftentimes in an enhanced negotiating position to settle the case. So, those financial obligations only occur when you got a very good case that’s about ready to go to trial.

Doug Thomas – JET Investment Research

Okay. And then so just in a related – in a sort of a related way. I know that you guys are very conscious of the flow and liquidity and so forth. But at some point don’t you have to look at the stock price and decide that you guys all own a lot of shares and have been buying stock. Insiders have been accumulating shares on weakness. At some point, don’t you – aren’t you tempted to take a portion of that cash and buy some shares back?

Paul Ryan

We’ve had that discussion with our Board. Their position is once we have a consistent quarterly basis of multiple quarters of generating cash then that would be appropriate. They are a little concerned until we get there that we reserve our cash and keep growing cash. So, yes, there may well come a point and certainly I would think that more logical thing would be if we do happen to have an event where we get a significant payment and don’t have to use for the capital we would either do a one-time dividend payout or perhaps buy some stock. But we certainly have thought about that and we are beginning to grow cash and get the consistent level of generating cash that would put us in that position.

Doug Thomas – JET Investment Research

All right. Again, thank you very much. Congratulations on a good quarter.

Paul Ryan

Sure. Thanks, Doug.

Operator

Okay, sir, our next question comes from Steve Yash [ph] from Yash Financial [ph]. Steve, you may state your question.

Steve Yash – Yash Financial

Paul, how do you feel that the patent legislation and the proposed Patent Reform Act of 2009 will affect the company and its earnings?

Paul Ryan

We don’t believe it will have any effect if it occurs. I was in Washington last week in addition to the FTC. I met with a number of people who have been involved in the IP business as part of the panel at the FTC. The feeling is the only major impactful change that would really occur in the legislation would be on the damage side and it looks like that is definitely not going to prevail. There was a – Diane Feinstein kind of interjected ourselves into the committee level. And basically it looks like the whole damages thing will be pretty much left intact. It will be up to the judges to advise juries on that. So we don’t see anything in the pending legislation that’s of great concern to us. It simply going to make things a lot more complex and time consuming for the small entities. And we believe as has happened in the past with some of these court decisions, that will make our services even more valuable. The more difficult you make some of the technical aspects of getting patents and enforcing patents the more small entities need to partner with someone like Acacia. So, we think this year it will pass but it will be quite diluted. We think the legislation will probably go through in the summer session. Then we think the most likely things to occur will be around the first to invent versus first to file and probably a limited opposition period – a one-time limited opposition period within 12 months. Those are the most likely significant changes. So we don’t see it really having any fundamental change on our business. Does that answer your question, Steve?

Steve Yash – Yash Financial

Yes, thank you very much.

Paul Ryan

Okay.

Operator

Okay, sir, our next question comes from Bennett Notman from Davenport & Company. Bennett, you may state your question.

Bennett Notman – Davenport & Company

Yes. Hi, Paul, could you just talk a little bit about the – you mentioned that the current economic stresses are bringing more larger companies with sort of maybe richer IP to talk to you guys. And could you just talk a little bit about maybe the differences between trying to attract those customers versus your normal customers and then also maybe any difficulties or advantages in trying to monetize those larger portfolios that I would think have maybe more applicability or broader applicability than your average portfolio.

Paul Ryan

Sure. Well, our business development teams under Dooyong, we have a number of people and some of them are focused on those companies. Some are focused on younger venture capital companies, some of our business development people are focused on doing partnerships with more substantial, more mature companies. What we’ve certainly seen over the last 12 months is a dramatic change in perspective before many of those companies, those larger companies where hesitant to generate revenues off their patents for whatever reason. And that attitude has changed dramatically. So, we’ve opened up discussions with a number of them and we think that’s going to be probably a pretty big area for us. Going forward not only will we be kind of the champion of the small entity, but there is mid size and even some larger companies that we’re in discussions with. Look, the more of that – in economic situation like this, people look at what an IBM has done in terms of its bottom line for its shareholders and I think increasingly more large companies understand that it’s incumbent upon them as fiduciaries for their shareholders to get a return on their R&D. And many of these companies have valuable patent portfolios, believe me, our teams know who have them. We contact those people and I think we are probably – part of it also I think it is the economy, part of it is the fact that we’ve now developed a successful track record, which I think would make these larger companies more inclined to partner with us certainly than they would have two or three years ago when we didn’t have the track record. So, I certainly think that will become a – or it certainly has the potential to become a significant component of our business in the future.

Bennett Notman – Davenport & Company

Thank you.

Operator

And our last question comes from Hal Haskell [ph], a private investor. Hal, you may state your question.

Hal Haskell

What’s the latest on Comcast?

Paul Ryan

The latest on Comcast, well if you are referring to the video on demand litigation, we are still in the claims construction in the Northern District of California. We have – our outside legal counsel has filed motion requesting that we have the ability to take up the claims construction that have been done to date to the appellate court for clarification. And we are awaiting a response from the Northern District of California regarding that matter. We would like to get the claims construction – there are three key claims that really are at issue here which are fundamental for us to prevail a trial. And that district has had multiple ruling some of them – they've ruled one way one time and another way. So we really need to get up to the appellate court and get a final clear ruling on the claims construction at which time, then we would be ready to go to trial. But from a time table from a practical standpoint probably the earliest we are going to get that go-ahead from the Northern District Court would be another three months. And certainly, could be longer. It’s up to them when they let us go. But that would probably be the earliest.

Hal Haskell

Thanks.

Operator

This will conclude the question-and-answer session. I will now turn the call back over to Mr. Ryan.

Paul Ryan

Well, thank you all for being with us. If you have any questions that occur to you after the call, please feel free to either give me or Rob Stewart a call, and look forward to speaking with you next quarter. Thanks.

Operator

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-346-3949 or 404-260-5385, with pin code 6542296, then dial 4 for replays and enter confirmation code, 20090311196046.

This concludes our conference for today. Thank you all for participating and have a nice day. All parties now disconnect.

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