Executives
Joe Lambert – Director of Marketing, Singular Research
Paul Ryan – Chairman and CEO
Acacia Research Corporation (ACTG) Singular Research's Annual "Best of the Uncovereds" Conference Presentation September 4, 2008 1:50 PM ET
Joe Lambert
Well, welcome back. This is Joe Lambert with Singular Research. Now, Paul Ryan will be up here in just a moment and I will introduce him momentarily. But I just want to let you know that for the webcast you see the caption Joe Lambert there. Well when Paul Ryan comes up it will be Paul Ryan and not Joe Lambert. So, anyhow just one thing that we couldn’t change about the technology on this presentation today.
I am very pleased to introduce our analyst has a ‘buy’ recommendation on Acacia Research. Price target is $11 per share and I will reiterate a couple of points, one is that our analyst will not put a ‘buy’ recommendation, initiate coverage on a stock unless it has appreciation potential in what they believe is going to be a 30% or greater appreciation in the next six to 12 months. And that’s what our minimum price target is then.
One other thing that I would like to mention also is that this is webcast but it is also carried on Seeking Alpha and they will actually be doing transcripts for this, so the distribution of this presentation as well as all the other ones that we do today will have pretty wide distribution resources with Seeking Alpha assisting us and providing the transcript and simulcast webcast right now.
With that, I would like to introduce the Chairman and CEO Paul Ryan of Acacia Research Technologies.
Paul Ryan
Thank you, Joe. Thank you for being with us today.
Acacia is building the leading patent licensing company in the country. We are serving a large and rapidly growing market in intellectual property. We basically partner with small and mid-size companies who develop important new technologies covered by patent and we take over the worldwide licensing basically to larger companies to use these technologies.
To-date we have basically partnered with 97 different companies and control 97 different patent portfolios covering different technologies. Tremendous earnings leverage in the business model for our shareholders. Basically our cash operating break-even, given our cost structure or over it’s about $15 million a year. We have got 50 people, mostly very experienced patent attorneys, licensing executives, patent-savvy engineers. Our break-even is about $50 million a year. Last year we did $53 million, so we were slightly cash flow positive from operations.
And obviously as we continue to ramp revenues with fixed cost, it provides the potential for significant earnings leverage. We have grown cash over the last two or three years. We currently have little over $45 million in cash and investments with no debt, so we are very solid financially.
To give you a perspective of the rapid growth of licensing revenue in the United States economy, it grew 10x in the 90s from $15 billion to $150 billion, from 1990 to 2000. And it’s estimated by Deloitte & Touche that last year licensing revenues were about $500 billion in the U.S. economy. So this is a very large business.
Why the growth and the size? If you can look at companies like Qualcomm, as an example, they basically got out of the low-margin handset business and got into the 90% margin patent licensing business. With the vast majority of their revenues they will probably generate well in excess of $2.5 billion of 90% margin revenue this year from their patent portfolio.
Lesser know is IBM that quietly generates $1.5 billion to $2 billion per year in pure patent licensing, a huge component of their bottom line. Companies like Philips Electronics and Thomson basically would be money losing companies or break-even companies without the $400 million or $500 million a year they generate from patent licensing. Companies – lately that have kind of come out stronger Hewlett-Packard it’s kind of gone from a very modest amount I believe– the numbers are estimated about $350 million this past year.
So more and more companies are wanting to recoup their R&D investment that’s basically represented in their patent portfolios by going out and generating licensing revenues, which again are obviously extremely high margin revenues.
There is a dichotomy in the marketplace. Large guys like Qualcomm and Broadcom know how to get paid for their IP. Indeed, the large companies in the U.S. only generate about 40% of the patents, yet they generate 99% of all the licensing revenue. The smaller companies, universities, and research labs, although they invest 60% of the technologies and hold 60% of the patents, currently receive less than 1% of patent licensing revenue. And the reason is very simple. They simply do not have the scale, the experience, or the expertise to go out and license and enforce their patents.
And that’s why we have built basically an outsource company to partner with them to generate that revenue. So we have a very large market opportunity, obviously, with the majority of the patents currently only generating less than 1% of the revenue.
You can see the growth in our asset base for our shareholders. We have basically built the expertise. We probably look at 10 patent portfolios to take one under serious consideration and do in depth due diligence, which some will take another 90 days or so, and generally only about 40% of those make it through the filter. So, we are very selective in the patent portfolios we chose to partner and represent and go out and license.
The benefit to our shareholder is that we have developed this expertise and due diligence, which we think is unparallel in the industry. We don’t know of anyone who has got the teams of patent-savvy engineers, patent attorneys, and seasoned licensing executives who know what realistic licensing rates are and judge what the revenue potential would be and therefore we can partner and our track record of success is driving more and more deal flow to us and partnering deals and the benefit to our shareholders are we are rapidly increasing basically the fundamental book value of our company that’s embedded in our basic 50% ownership or control of these patents without coming out with any capital. In most cases we simply partner, there is no upfront money. Occasionally, if a smaller company needs cash, we will partner and then we will buy down some of their points [ph] and provide them with some operating cash if that’s necessary. So essentially, we are acquiring 50% control without any financial risk to our shareholders, which is a great model.
The second metric are the number of portfolios that have begun to generate licensing revenue. We now have 37 different patent portfolios that have begun. There is about a 18-month to two-year life period from the time we take on the patent portfolio until realistically we start getting large companies to write you checks. You got to go through the process. You got to get engaged with the other companies. You got to demonstrate the infringement. Obviously, have them focused on the issue. So, you can pretty much judge our performance then you will have a pretty good idea and a window into our future revenue performance because we have had historically a very consistent ratio of about – most of our patents where we are going out and licensing 15 or 20 companies, those types of patents after about two years, about 80% of the ones we brought in today within two years were generating money. So we have had a consistent record of proving up those patent portfolios and we have decided to partner with and converting them into revenue for producing portfolios.
So it’s a good metric to hold us accountable with and certainly there is a high correlation between the last chart, this chart, and the next chart, which is the growth of our annual revenues. From a very low base, we have ramped up very quickly from $5 million to $20 million to $35 million to $53 million, and that’s a direct outflow, and there is a very high correlation, if you go back to the last three charts, if you look at the correlation between the assets we are bringing in, a two-year life period to the beginning of revenue production, and its translation into annual revenues for the company.
So we think while individual portfolios may be difficult to value and model certainly our overall business is certainly quantifiable and modelable from an investment standpoint as long as we keep these historic ratios growing the way they have in the past.
To give you an idea of some of the different types of technologies we are licensing and the types of companies that we license, on the upper left you will see the digital media transmission, which is one of the very first portfolios we began with on video on demand. Companies like Bloomberg, and LodgeNet, and the Disney Company pay us quarterly. We generate about $4 million a year revenues off this portfolio. And we still have a long ways to go in licensing. Most of the major cable companies have not agreed to license share and so we are in litigation with them. Many small cable companies are paying us. So that’s got a great deal of future potential and revenue growth.
If you look at interactive television, companies like Matsushita, Samsung, Sony, Thomson; in the middle column if you look at the resource scheduling, 3M, GE, McKesson, Siemens, Rockwell; laptop connectivity, Sony, IBM, Fujitsu. So you see that there is a wide variety of types of technology most of it in the IT space in the early stages.
We have now done 570 licensing agreements covering 37 different technologies and we have licensed virtually all of the major companies at one time or another and a number of companies, Sony, IBM, I think we have done three, four or five deals. And as we continue to license, it makes us generally a little bit faster. Once you have a relationship with a company, you have done certain licensing deals – to get people to pay you money is always difficult, but at least if you have a history of negotiations with them, it helps us to smooth the path and leads to quicker negotiations.
So these are some of the portfolios, historically, and many of these will contribute to our future revenue growth. I think what we want to highlight today, which we haven’t really talked about much to the investment community in the past is that a number of our new licensing programs, and these are programs that are either just beginning to generate revenue or we believe will start generating revenue in the not-too-distant future. And many of them have a great revenue potential, which I think you will see from the types of technologies they are.
The first portfolio is covering cell phone location based services. This is a hugely lucrative market for the cell phone companies, covering the E911 service. If you look at your mobile telephone bill, you will probably see a charge of $1 to $2 per month per customer. So, that’s somewhere an average $15, $20 per year for every cell phone user in the United States. And this is a technology that is patented. We believe it’s an extremely profitable business for the company. They have extremely low cost in delivering us and therefore we think it could be a large revenue producer for us. We have initiated litigation against all the major carriers and it’s probably a total of 60 or 70 regional and local companies to be licensed as well. So going forward this could be and we expect will be a big licensing program for us.
The second one is another patented technology that relates to the same industry covering over air programming of cell phones. We are initiating the enforcement of this patent starting in Europe. We have both European and U.S. patents, so both of these portfolio, obviously, given the large size of these markets have very nominal royalty rates that generate very significant revenues for us.
The compiler technology is a fairly new portfolio that covers software object pre-compilation and linking in software compilers. And again, very, very large market.
Computer memory cache coherency. This is a portfolio we have done an initial license to AMD. We have litigation pending with Intel and VIA. We are actually preparing to go to trial. We are awaiting the outcome of the Court’s decision on a summary judgment motion. If it’s favorable to us, we will expect that we would get a trial day very shortly and with either – then obviously an opportunity to negotiate a settlement with those companies or go to trial.
The last one in this first page, database access has the potential to be one of our very largest revenue producers. It covers a function in software system that facilitates the inter-operation between databases and applications. Obviously, this is widely used. We have initiated discussions with a number of companies. We have, again, filed litigation initially against Oracle in this portfolio.
The next group, ecommerce pricing, covers Internet auctions and competitive transactions. Logical licensees here are Google, Yahoo, and Microsoft.
Encrypted media and playback devices. This is basically the copy protection technology that’s embedded in the new Blu-Ray player. Blu-Ray within the last year has kind of won the battle. Looks like it’s going to be dominating the marketplace, which is good for us. The logical licensees here are companies like Samsung, Sharp, Philips, Pioneer, Matsushita, Panasonic, and Funai.
Flash memory technology. This covers NOR flash memory that’s extensively used in cell phones. The companies that use this technology we believe will be Intel, STMicro, Sony Ericsson, Spansion, Akia, Motorola.
The next one is heated surgical blades. This is a very interesting story from a human perspective. Dr. Shaw is our partner. Dr. Shaw basically invented the heated surgical blade. If you did a lookup on the Internet the Shaw Blade is universally known and adopted as the quite (inaudible) and is used universally in surgery. He was the – held up in the patent office for an unbelievably long period of time. And the patent (inaudible) finally issued last year and we have partnered with him. So the good news is it’s got a full 18 years of licensing life and widespread use by companies like Cordis and Boston Scientific, Medtronic, St. Jude, Bard – it’s basically universally used in surgical instruments.
Another medical portfolio we partnered with (inaudible) this was for medical image stabilization. This is used by large companies like the Siemens and Philips of the world.
We are developing also an expertise, which is new in the medical technology space. We initially started out purely in IT and we will continue to broaden out into other technology sectors. We are not confined to simply information technology. We think we will develop a very large scale business certainly in the medical side.
The next portfolio, again, another medical portfolio, medical picture archiving systems. We have completed the first license there with Siemens and usually getting a first license done from a momentum standpoint usually often acts as a catalyst in getting subsequent deals done. Oftentimes everybody waits to see whose going to take the first license and if it’s a major company that usually increases the probability of other companies deciding to take licenses. And other companies in this case would include Philips, GE, Fuji, McKesson, they are all in that business and we believe using this technology.
Microprocessor enhancement. This is one we have had a while and added on the list because we just recently received an appellate court ruling confirming the validity of the patent. We were in a district court trial with Texas Instruments and the court ruled against us and ruled that certain claims of our patents were invalid. We took it up on appeal to the appellate court and basically they agreed with our position. So we are now in a much stronger position. We have gotten patent claims consented to by the appellate court and so we probably will move forward with the case now with Texas Instruments from a time standpoint.
Multi-dimensional database compression enables the compressed information accessible in real time and generates real cost savings in enterprise storage. There is logical companies there that I don’t want to get into because I don’t typically name companies unless we have already filed litigation. Oftentimes we are in negotiations with those companies and if only negotiations don’t go well then we will file litigation to start the dialog.
Online ad tracking, which deals with click throughs. Basically we believe is directed on Google’s AdWords and AdSense, which is obviously a very, very large market.
Online auction guarantees. This is a technology that we believe is one of the core functions on eBay and we have initiated litigation there.
Peer to peer communications. Our first tough case on these patents is with Skype and we are pretty far through the process and I believe we may get to litigation before mid-point of next year on this case.
Projector technology, we have just recently done the first couple of deals, again, in that technology which is always a good omen. And most – all of the major consumer electronics companies have products that relate to this category. So again another potentially broad licensing program.
Remote management of imaging devices. We have recently licensed Toshiba and Matsushita and their U.S. counterpart Panasonic, which is a good omen. Very early in the process of licensing and therefore we think we have got good potential to get several more licenses done there. Companies that widely use this technology are Samsung, Hewlett-Packard, obviously Kodak, Xerox, and so that’s got significant revenue potential.
And to just kind of round out these early ones, rule based monitoring. We have already licensed Computer Associates, SAS, and we have remaining to go a lot of companies including Oracle’s, IBM’s, SAP’s.
Storage technology. This is a program that’s fairly early. We haven’t litigated, so I won't mention any one’s names, but we are in discussions with potential licensees there.
And the surgical catheters, again another large medical portfolio. We will probably on the medical side there is an opportunity now that we are kind of becoming the aggregation point for these patents. There will be opportunities to do multiple licenses to the same companies because a number of these technologies are embedded and used in products by the same companies like Medtronic’s and Boston Scientific’s and J&Js’ and Ethicon. So hopefully that will lead to maybe some simultaneous licenses on a number of these technologies that relate to the same companies.
And then just quickly, last telematics. We have licensed basically the entire first round of companies that we started negotiating with. We are expecting to get another license done there in the not-too-distant future. We probably got another 15 companies to go in that technology, so that’s always a good sign when you get a number of high quality companies taking licenses early in the licensing program. It increases the probability that you are going to get the licensing program completed without having to go into expensive litigation.
So what we want to do is highlight just a handful of these – there are only like 20 of our 97 portfolios but they are ones that we think they are kind of on the cusp of generating revenues or just beginning to generate revenues in addition to the legacy ones that I showed you earlier.
So, in summary, we are building the leading U.S. patent licensing company serving a very large unmet market need from small companies who don’t have the ability to do this themselves and make sense to partner with us to do it. Huge growth in the IP licensing market. We think that’s going to continue as more and more value of products is recognized that is embedded in the patent. Great earnings leverage for our shareholders in the business model. We don’t believe we are going to have to expand our cost structure, only normally, while growing revenues. We are kind of at that critical phase now at the $50 million run rate where we can grow this business, the top line significantly without adding to the cost structure.
We have got a growing base of assets. We are bringing in on average – our target now is to bring in about 24, 25 portfolios, about one every two weeks out of the screening and obviously that means we are looking at over 100 portfolios in the front end and screening them. But every time we bring one in we think we are adding assets to the balance sheet, but they don’t recognized financially but we think from a practical business standpoint we are significantly increasing the assets of the company.
And the good news is we are at a very early stage of generating revenues of those portfolios we’ve started licensing. Many of them were only 2% to 5% of our licensing revenue generated today. So in many of these new portfolios we have just barely begun generating revenue, so we have got a lot of embedded revenue growth. And I think if you track our new acquisitions you are going to get a two, three year look into our revenue growth as it continues to translate the same historical ratios.
So we are very excited about the future we have got. Very well financed. Our cash has been growing. Been adding great people, and actually for the Q&A if you have got questions, Brad Brunell is here with me today. He is in town on some business matters. Brad joined us about nine months ago from Microsoft where he was for 16 years. One of his positions there he was General Manager of Intellectual Property Licensing where he was responsible for inbound and outbound licensing. And certainly he brings a great perspective to Acacia because he represented the kind of companies that we need to license on a regular bases and Brad is working on a lot of strategic initiatives for us including partnering with outside financial capital to acquire portfolios that have a significant upfront cost to expand this business model.
We are going to keep growing our partnering model, which works great for a lot of small companies who want to share in those licensing revenues with us on a 50:50 basis. There is also a very large opportunity amongst mid- and large-sized companies and particularly in this climate. With the economy being where it is more and more large companies are willing to monetize or want to get value out of their balance sheet for their patents. And in the past some of them have been very lazy about that.
So we are seeing a lots of opportunities to acquire now portfolios from large companies and many of these portfolios have had significant licensing done already or may have already been extensively through the litigation. So they are a little more proven portfolios and to – a part of those we would do that in combination with financial partners and for our shareholders the good news would be we will expand the revenue base and the potential earnings without any dilution to our shareholders. Because basically what we will be doing – currently we are partnering with the original IP holder and when we litigate we are doing it on contingency, so we are making the law firm our financial partner, which has been a great risk-averse model and has enabled us to grow cash from modest amounts up to where we are today.
On the larger acquisitions, basically we will substitute a financial partner for that IP partner and will offer our partner we will do billable hours, which will increase our percentage returns on the one when we prevail. And so basically the margins will be the same to our shareholders. It doesn’t really matter – it shouldn’t matter to our shareholders who the other partners are. In the partnering business it’s going to be the original owner and the law firm and on the other side of the business the additional business would be financial partners. But again, we would expect to earn about the same 40% margins that we do in the existing business.
So it will enable us to take the company to the next level and Brad is playing a key role and helping us get to that next level in terms of both accessing portfolios that has that kind of revenue potential as well as developing the relationships with financial partners.
A little comment – a couple of people have asked me to comment, obviously, a lot of stocks are down. Ours, we feel inordinately we are selling in the threes with $1.5 of cash. So our enterprise value is now less than what it was when we started and had our first patent portfolio. And we now have 97. So we recognize the psychology of market changes. Certainly, we think we are a more valuable company than we have ever been. Great talent, great cash, and a great revenue line up going forward. So hopefully if we continue to execute, yes, the stock price will follow that. I did want to make that comment.
So why don’t I take – we have got a few minutes here, just a couple of minutes if you have some questions and then Brad and I can meet with anybody who is interested for a few minutes after this.
Question-and-Answer Session
Paul Ryan
Yes?
Unidentified Participant
What has happened has been the kind of stock was recommended by Singular a year ago and presently to (inaudible) decline in the stock (inaudible) the company’s portfolio and programs (inaudible).
Paul Ryan
Sure. Yes, the question is the correlation between Singular and the recommendation. I actually think Singular goes back earlier with earlier recommendations that may have been one you are saying but Singular identified this as a great potential opportunity investment wise a couple of years ago and we are thankful they have just stayed with us. And the stock price, obviously, doesn’t bear any relationship fundamentally to our business. The only thing that really has occurred of any fundamental nature was last November we did have the only case we have ever gone to trial with. To give you a perspective, in patent litigation only about 3% of these litigations ever actually go to trial. Generally they are a backdrop for business negotiations and only if there is a huge disparity in the (inaudible) that you go trial. And we did and we lost. So that’s certainly was a negative for that one portfolio but certainly that has – to lose 90% of our enterprise value with 97 patent portfolios around one of it – on one portfolio and again in that’s case it was a partnering deal. We had not paid any shareholder capital for the assets. And it was done on full contingency by one of the leading patent enforcement litigation groups in the country, McKool Smith. So we had a small sharing cost on some of the out-of-pocket expenses. So it wasn’t a financial hit to us, it was just a missed opportunity. And we have guided everybody that there is a small component of our business. The bulk of our business, 80% of it where we are taking the technology and going out and licensing 10 to 25 companies. We also on occasion, as with some of these newer portfolios, they only essentially read most of the revenue would come from one company and we call those binary cases and because you have to get all that money from one company and it’s a big dollar number. Those are the portfolios that more likely would go to litigation and go to a trial. So it’s a small component of our business. But we partner with companies that we believe have developed these technologies that are important to these singular companies and if can identify law firms and economically efficiently enforce it, we will do that. And we have cautioned everybody that win rate is usually a 50-50 proposition. It’s not just us but if you look at the last 20 years and high stakes patent litigation, there is a 50:50 proposition and that’s usually why people settle because it’s risky for both sides, the outcome. So we happened to lose that case. But other than that our fundamentals have grown. We have continued to add higher and higher level of talented people out of industry, people who were running – were VPs of Intellectual Property of major companies are joining our company. Our cash has grown and obviously our assets are growing and our new licensing programs are expanding. So, fundamentally we are worth more today than we were a year ago, that’s for sure. Yes?
Unidentified Participant
What was the reason that you lost that case, was it miscalculation by the law firm, was it perceptions on your part (inaudible) patent? What was it that–?
Paul Ryan
The question is do we know why we lost that case and that’s a million dollar question, it’s a $100 million question. Unpredictability of juries. One of the aspects of patent litigation, in fact (inaudible) you generally have (inaudible) listen to a highly technical and legal arguments on both sides and no one in history has been able to handicap jury decisions on patent litigation and we felt we had a very compelling case. Obviously the jury thought otherwise. In this case neither side was allowed to talk to the jury afterwards to discern the reasoning. So we will never know. But certainly the McKool Smith firm, which is one of the most highly regarded litigation firms in the country, had a lot of partnering money in the stakes. Obviously they thought it was a very winnable case and generally if you survive all the summary judgments to get to trial, you have got a very good case. You don’t get to trial in patents with a weak case because you usually get knocked out for a variety of reasons. So you got to have a strong case. So we will never know. We weren’t able to talk to the jury to understand their mindset of why they didn’t agree with our assessment. Yes?
Unidentified Participant
We were offline.
Paul Ryan
That’s okay.
Unidentified Participant
Anybody behind who want to ask, please be quick.
Unidentified Participant
You were trying to raise a fund over a year ago to invest in intellectual property. What’s the status on that?
Paul Ryan
Yes, the question is around our – I did mention earlier we were seeking financial partners to jointly acquire some of these portfolios because we still don’t have the size balance sheet that would be required for some of these opportunities. We are continuing in that process and in one structure or another we have had conversations with a lot of parties with significant capital who want to be in this space. It’s a matter of how we structure and package a group of deals to give them comfort from risk diversification. So we are in the process of doing that right now. We are still very encouraged and we think that in the not-too-distant future we will probably start acquiring some portfolios with financial partners. So we are very much continuing that effort. Yes?
Unidentified Participant
You said that new licenses take two or three years to develop commercially from your perspective. What you put on the screen is a big list of impressive looking data. Is this all two to three years away or are some already providing significant–?
Paul Ryan
Well the new portfolios that I mentioned, there is a number of them. Telematics already has the first deal out. We did the deal with Siemens. So a number of those have had one or two or three deals. The printing technology Matsushita and Toshiba. So I would say there is probably six to seven or eight of those that have already started having initial licensees and the other ones, we are at the stage in the process where we realistically think we could start completing licensing agreements. So all of them are in the near term time horizon. Except for the cases that are more binary, the ones relating to ecommerce and online auctions where it’s only one company. It’s more likely that those will go – or longer time period on the litigation process.
Unidentified Participant
You have stated before that 90 some odd percent of all licensing discussions end with an agreement and that litigation is quite rare. That we settle litigation is quite rare. With your loss last November, does that change the dynamic – management’s point of view, your law firms that you work with (inaudible).
Paul Ryan
Yes, the question is around the lone loss that we did have in the quarter has that changed our behavior or the people on the other side of our perspective. The answer is no. Both we and the other parties look at these as individual transaction. It doesn’t create any trend or any basis. What it does is sustain – again I think if you look at all the licensing we have done, 570 deals in 37 technologies, we only had to go to trial once. I think it bodes well and says that we are realistic about our licensing. We have got talented people and in the vast majority of the cases we are going to go out and roll these programs out without having to go to trial. It will only be the ones probably with very large dollar numbers that the other side is going to be resistant to licensing, which is going to force us to do that. And again our assessment is we are going to be no better or no worse than other companies and probably have a 50:50 win rate on those cases that do happen to go to trial.
Okay. Thank you. I am getting cut off here. Thanks.
Joe Lambert
Yes, let’s give a round of applause. Thank you.
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