Acacia Analyst Day

Acacia (ACTG) held an analyst day on November 5, 2014, which I was glad to attend.  The webcast replay can be found here and the presentation can be found here.  I recommend investors to attend next year.

I arrived at the Palace Hotel very early after taking the bus into the city.  I checked in and started to introduce myself to members of the team who I have not met with before.  Everyone at Acacia are extremely nice and personable.  A quickly met with a number of attendees who I have either communicated with along with some new ones.

The presentation started with an introduction of management and Matt Vella, CEO started the presentation.  He gave an overview of where they were last year and where the company is at currently with.  The company has a split, 40% to the partner, 40% to Acacia, and 20% in legal fees.  Acacia currently has 11 marquee portfolios and reiterated they intend to have 12-15 before 2014 ends.

Objectives:

• Acacia maintains 100% preferred rate of return until all
deployed capital is returned
• Recover advanced capital in 18 months
• Upon return of capital infusion, net profit revenue share
with patent partner begins
• 3x return of capital in 5 year

I got the sense the company has just started getting rewarded from their business model change in 2012/2013.  They are stepping on the gas as it pertains to patent intake and monetization.  Q2 and Q3 should be the early stages of this change.  2015 and 2016 are starting to fill up with court dates such as Markman hearings and jury trials.  Historically these events serve as trigger points for negotiations and licensing agreements.

Next up was Jaime Siegel, EVP of Licensing & Litigation who gave a run down of the revenue pipeline.  It included discussions of the marquee portfolios and what technologies they cover.  There was a slide with the various 2015 and 2016 events already on the schedule and noted they were subject to change:

The opportunities continue ramping up throughout 2015 including:
• Multiple Adaptix trials – EDTex and ND Cal (Q1-Q2)
• Adaptix hearings – Japan (Ongoing Q1-4)
• Endotach (Rhodes) v. Cook trial – SDIN (Q1)
• Bonutti v. DePuy trial – D.Mass (expected Q2-Q3)
• Bonutti v. Biomet trial – NDIN (likely Q3-4)
• Multiple St. Lawrence (VoiceAge) trials – Germany (Q1-2)
• PUMA (STMicro) trials – EDTex (Q4)
• Lifescreen (Boston Sci) trials – DDel (Q4)
• IDT (Rambus) trials – EDTex (Q4)

• 2016 promises to continue the momentum from 2015, including:
• CCE (NSN) trials set for 2016
• Lifeport (Boston Sci) trials set for 2016
• Additional Adaptix trials in 2016
• Data Engine (Borland) trials in 2016
• Patent portfolios continue to grow
• Over 90 new litigations filed in Q1-Q3 2014 without Markman or Trial
dates yet
• Trials likely to be set for 2016 and 2017

Up next was David Rosmann, EVP who presented a case study of the VoiceAge portfolio, which included a background of the technology, how it was partnered, and the results so far:

• Signed up largest cellular device manufacturer within 90 days to
comprehensive global license
• Settlement achieved without litigation
• Early time to money
• High margin return for Saint Lawrence and partner (90% net revenue)
• Strong licensing comp for subsequent licensees and litigations
• Launched multi-pronged assertion campaign in Germany
• Trial of first German cases within six months of filing complaints
• Strong incentive for settlement with largest player licensed
• Companion litigation filed in U.S. to leverage prior comps and Euro
enforcement
• Pursuing binding arbitration arrangements with large manufacturers to
further reduce friction and push toward a more fluid high margin IP market

There was then a brief Q&A period for 15 minutes.  I asked a question related to RPX agreements impacting the 40/40/20 split, which should cut some of the 20% legal bills down. 

Next up was Alfredo Lezama, SVP whose presentation focused on business development.  There is a demand and a need by a large base of companies who are seeking to monetize their patent portfolios.  Acacia has the talent and expertise to fulfill that role.  Acacia has generated over $1B in revenue to date and has returned a substantial number to their partners, over $600M.  Acacia provides liquidity to the patent market, reduced risk, and faster time to revenue.

Last was Clayton Haynes, CFO who gave an overview of the financials and certain measures the company is using to decrease expenses.  Key points from his presentation:

• We believe that there continues to be significant leverage with respect to our MG&A
cost structure such that we can continue to grow the business with relatively consistent
MG&A going forward
• Focused on costs, including cost budgeting and monitoring, and ways to reduce costs
going forward in all categories of operating expenses
• We are focused on cost reductions as one way to favorably impact overall profitability
• Increase in litigation and licensing expense is directly correlated to increase in
Marquees over the past couple of years
• Increased level of litigation and licensing costs reflect current investments in / leading
indicators of future potential revenue generating opportunities
• Due to nature of high quality marquee patent portfolios, increased costs are expected
to be offset by higher levels of revenues in future periods

Matt Vella then provided closing remarks followed by a Q&A session.  My questions were the following:

What is the success rate of ADR's such as Adaptix?  A: Still too early in the process and have not held a session yet.

Why are certain deals announced and others aren't?  A:  Only revenue generating deals are announced.

Any updates at the Unified Patent Court (UPC) in Europe?  A:  Proposals are still outstanding and nothing is set in stone.

What are the costs for Inter Partes Reviews?  $200-$250K.

Conclusion:

The analyst day was very informative and I recommend investors or potential investors to listen to the webcast replay.  I am hopeful there will be a transcript made available.  The team was very willing to share information and I was able to get a lot of questions answered.  I can now focus on some key areas in my research that should prove to be very valuable.