Acacia Research Corporation (ACTG) Q4 2018 Results - Earnings Call Transcript

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Acacia Research Corporation (NASDAQ:ACTG) Q4 2018 Results Earnings Conference Call March 14, 2019 11:00 AM ET

Company Participants

Rob Fink - IR

Al Tobia - Director

Clifford Press - Director

Conference Call Participants

Brett Reiss - Janney Montgomery Scott

Daniel Adler - Emys Capital

Operator

Good afternoon, and welcome ladies and gentlemen to the Acacia Research 2018 Quarter Four Year-End Earnings Call. [Operator Instructions]

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

Rob Fink

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 relates to the company’s plans, objectives and expectations for future operations and are based on the 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 section as 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 earnings 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 PM. This can be accessed from 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.

Al Tobia

Thank you, Rob, and good morning, everyone.

On our last conference call we focused our discussion on Acacia's three 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 three of our legacy patent portfolios. These engagements along with recurring license revenues from previous transactions resulted in a total of $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 eight 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 nine 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, and 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

Good morning. And I will 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 counter party and financial details.

As Al mentioned, we currently have nine active litigations, two of which have trial scheduled over the course of the 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 and 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 four 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 cost and expenses incurred in connection with the 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 a 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 World's Leading IP Strategist by Intellectual Asset Management 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 AIM marker, with current market capitalization of more than $4.5 billion U.S. 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 for Scholastic Corporation, the world's largest publisher and distributor of children's books. In this role she has significant experience with licensing rights, partnering with trademark and copyright owners and overseeing 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 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?

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Brett Reiss from Janney Montgomery Scott. Please go ahead line. Your line is open.

Brett Reiss

Good show on bringing the cost structure down here. I guess the 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 two to four 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?

Al Tobia

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 will be able to describe how we intend to deal with that.

Brett Reiss

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

Yes, as Al mentioned we think it's a attractive market and 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

Could you tell me because it sometimes the transparency from 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 I know we added the warrants?

Clifford Press

It’s in our K, we have approximately 800,000 - 800 approximately thousand shares outstanding and just over 1 million warrants.

Brett Reiss

Okay.

Clifford Press

As you’ll see in the K when it comes full details on what has been sold and what has been retained.

Brett Reiss

I am going to drop back in queue to allow other people to ask questions, but thank you for taking my questions.

Operator

We'll now take our next question from the Daniel Adler from Emys Capital. Please go ahead. Your line is open.

Daniel Adler

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 plans and if you could maybe hazard a guess, what the economic value of that stake is today versus the - what's on the books would have been invested in it?

Al Tobia

So the investment in Miso is carried at $8 million which is our - what we put into the company. So we haven’t made any adjustment for that or felt the need to make any adjustments to that. We have seated two independent Board members at Miso, and we maintain a healthy dialogue with them. 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

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

Al Tobia

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

Operator

And we’ll now take our next question from Brett Reese from Janney Montgomery Scott. Please go ahead. Your line is open.

Brett Reese

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?

Clifford Press

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 earmarked 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 - that’s the first sort of approach that were taking is to just get more programs and more deals going through the pipeline.

Al Tobia

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

Brett Reese

With respect to the cash buildup 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

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 are now in a position where we can execute on buybacks in that scenario.

Remember up until now there have been a lot of uncertainty about what had happened to this company, what we have 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 one of the few people who understood that we achieved at the company and where the cash levels and everything else stood. So now that’s all out in the market with the cash [we get] [ph] much more flexibility.

Brett Reese

Now you and Al have been at the helm now about six months, is it going on a year, I lose track at time, how much is it?

Clifford Press

It’s about seven or eight months.

Brett Reese

In the seven months you've been at the helm, could you share with me so one or two positive surprises that you found - that things were better than you thought they were going to be and is there one or two things that gee! was you didn't realize how bad things were?

Clifford Press

I think that as you know there is a highly, highly unusual situation. We ran a campaign, we were elected as two members out of the Board of seven, and then a few weeks after the shareholder vote, we were to sole two directors and we had to deal with the management of the business as it has then was and there was really no management team or senior management at the company either.

So it was somewhat daunting situation to find ourselves in. We were at that time concerned about such an unusual situation that we could make sure there will be assets were essentially findable and the matters they were no unknown challenges that hadn't been revealed.

I'd say the greatest positive surprise we found about is two, I think the company was relatively easily cleaned up. The cash, we were very pleased of consistently increase the cash every quarter since we've been involved. And the second positive surprise is we become quite familiar with the economics in the intellectual property investing business and I think there are some very significant opportunities that some of which lie in the traditional path of what Acacia has done and then there are other new expanding evolving areas which we are very interested in pursuing.

So I think that is probably the most positive things that we found and to be honest we were very, very pleased to find that there were very limited liabilities and there were no irregularities.

Al Tobia

Brett, I would just add all off those in terms of an upside surprise getting Marc Booth on as the Chief IP Officer and the work he has been able to accomplish in a short period of time has 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 Mark did.

Clifford Press

And I think Bob gets a lot of credit as it comes in a situation where there are literally some setting the IP business. They're entering into contracts to exit the business. I'm not really scrambled to get that $49.2 million of revenue done in the last seven months of last year, and a lot of credit to him for getting it done.

Brett Reese

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

I think when we deserve better coverage, which I think at 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 Reese

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

Clifford Press

Approximately it will at in a timely manner, and that will disclose the governance improvements and once we have a proper Board featured 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

Our next question comes from Richard [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst

I just had 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 company like yours might trade relative to the book value that you're trying to create?

Al Tobia

Well, there have been times when we've looked at companies in this sort of space where they traded below books, 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 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 the 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 the stated operation standpoint.

Operator

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.

Al Tobia

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

Operator

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

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