AutoNation Q4 2023 Earnings Call Transcript

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March 14, 2024

There are 7 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Acacia Research 4th Quarter and Year End 2023 Financial Results Call. At this time, all participants are in a listen only mode and the floor will be open for questions following the presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Rob Fink, Investor Relations. Rob, you may begin.

Speaker 1

Thank you, operator. Thank you everyone for joining us. Hosting the call today are MJ McNulty, Chief Executive Officer and Kirsten Hoover, Interim Chief Financial Officer. 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 relate to the company's plans, objectives and expectations for future operations and are based on the current estimates and projections, future results or trends.

Speaker 1

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 described in Acacia's annual report on Form 10 ks and quarterly reports on Form 10 Q that are filed with the SEC. I would also like to remind everyone that a press release disclosing the financial results was issued this afternoon just after the close of market. This release may be accessed on the company's website under the Press Release section of the Investor Relations tab at acaciaresearch.com. With that said, I would now like to turn the call over to MJ.

Speaker 1

MJ, the call is yours.

Speaker 2

Thanks, Rob, and thanks to everyone for joining our call this afternoon. We're excited to share the details of 2023 with you all. We have a very active year and 2024 is starting out in the same fashion. While the team focused in the first half of last year on rationalizing our cost structure and maximizing value in our legacy asset base, our focus for the second half was and continues to be on growing our business through acquisitions and identifying opportunistic situations where our research, execution and operating partners can drive earnings and book value per share growth in discipline and unique ways. Both in our existing operating business and non controlled positions we have on our balance sheet.

Speaker 2

Let me speak to these achievements. Our new management team acquired our first business and approximately 50% and growing stake in Benchmark Energy. Our intellectual property team had meaningful success in its Wi Fi 6 licensing initiatives. We believe there's still additional opportunities to monetize these portfolios. In the Q4 of 'twenty three, we agreed to the sale of our position in ARRIS Biosciences.

Speaker 2

We believe we achieved an attractive price for the sale of these shares. And last month, we had set our oil and gas business benchmark sign an agreement to acquire a very attractive group of assets, further validating the strategy of partnering with the Benchmark team to build a larger oil and gas platform, which we think is a nice complement to our acquisition initiatives in Industrials, Technology and Healthcare sectors. As a result of Akeshia's recent business activity, we generated $82,000,000 in gross proceeds from intellectual property teams Wi Fi 6 licensing initiatives, dollars 57,100,000 in cash from the sale of our ARIK shares and additional income from our public markets activities and interest income from our substantial cash and equivalents balance. As you know, Acacia's business model is to allocate capital to increase book value per share for our investors. We acquire undervalued businesses and assets.

Speaker 2

We apply disciplined operating and governance practices and grow earnings and cash flow to redeploy into the highest return opportunities, whether that's back into our existing businesses or for new acquisitions. In Benchmark's growth in connection with its recently signed purchase and sale agreement we mentioned earlier. Simultaneously with this increased cash, our very experienced transaction team continues to evaluate acquisitions of additional operating businesses. Our pipeline of both public and private opportunities in our target industries continues to advance and mature under our new sourcing and acquisition evaluation process. Finally, we continue to prudently manage our fixed costs to align with the interest we're generating on our cash and cash equivalents.

Speaker 2

The net amount of this activity was to increase book value per share for FY2023, which is a metric we watch closely from $5.18 at the end of 2022 adjusted for the transaction to clean up our balance sheet to $5.90 per share at the end of 2023. Recall that Acacia's corporate team's incentive compensation is tied to growth in book value per share, which we believe very closely aligns with our shareholders. As we think about sources and uses of funds, we can walk through each in more detail. For 2023 and running into the Q1 of this year, we had 2 significant sources of cash. First, in our last call, we announced that we'd signed an agreement to sell our stake in Eric's Biosciences, our last publicly traded life sciences asset from the portfolio that we acquired in 2020.

Speaker 2

This transaction closed early in the Q1 of this year, delivering cash of approximately $57,000,000 I'd like to note that the gain on the sale is approximately equal to the expected second investment into Benchmark. We have now generated more than $560,000,000 in total proceeds from those life sciences from that life science portfolio and the assets in that portfolio after investing $301,000,000 in 2021. We continue to hold positions in 3 private life sciences companies and we remain excited about their prospects including AMO Pharma, clinical stage specialty biopharma company focused on rare childhood onset neurogenetic disorders with limited or no treatment options, we believe there's still more value to unlock in these remaining holdings. 2nd, turning to our IP monetization business. We previously communicated we had favorable licensing and settlement events related to our Wi Fi 6 patents.

Speaker 2

At the end of 2023, we entered into licensing and settlement agreements relating to this patent portfolio with aggregate revenue of approximately 82,000,000 dollars The amount ultimately received was net of customary legal fees and other expenses. Importantly, these agreements establish a stronger foundation from which we can pursue further licensing agreements and settlements. Our Printronix business is operating more efficiently. We've been working diligently to reduce ongoing operating costs in the business to enable Printronix to deliver sustainable cash flow. This effort will facilitate Printronix's ability to further sell its high margin reoccurring consumables, so effectively ink, with a streamlined operating structure.

Speaker 2

We believe that over time this business will represent a nice source of cash flow for Acacia. We also generated cash from our public markets activities in 2023. We view public market investments as a catalyst for moving acquisition targets forward with the ability to monetize our public position often as a profit at a profit if we are unsuccessful in acquiring a business. We were successful in this way during the Q4. As we have mentioned before, we are unable to publicly discuss the companies we have invested in and pursued its acquisition targets, but investors should note that we have generated returns from this activity.

Speaker 2

Against this backdrop of significant sources of cash, let me now turn to our uses of cash. In November, we acquired a majority stake in Benchmark Energy 2 LLC, an independent oil and gas company engaged in the acquisition, production and development of low decline oil and gas assets in mature resource plays in Texas and Oklahoma. As discussed in our prior call, Benchmark has unique advantage in acquiring producing oil and gas reserves and then operating them to increase production over and above how we value the underlying acquisition and at the same time exercising prudent hedging strategies. The net result is high return, predictable cash flows with a conservative risk management philosophy. We're attracted to the oil and gas sector and we believe there's significant opportunity to be had here at attractive valuations.

Speaker 2

Before acquiring this stake, we evaluated several different opportunities. Our decision to partner with Benchmark was born out of the desire to work with successful teams and to own a majority stake in an actual operating business rather than viewing these as financial assets. Owning and controlling oil and gas assets enables our team to generate the most value from operating them better. In February, we announced a significant acquisition as part of the Benchmark platform. We entered into an agreement to acquire a group of upstream assets also in Texas and Oklahoma from a private seller.

Speaker 2

This acquisition once closed will significantly expand the Benchmark portfolio adding approximately 140,000 net acres of land and approximately 470 operated producing wells in what's called the Western Anadarko Basis throughout the Texas Panhandle and Western Oklahoma. These assets are liquids rich, which means they're predominantly oil based with low decline profile and include a production base of approximately 6,000 barrels of oil a day equivalent. Further, the assets are a perfect fit for Benchmark's strategy of acquiring mature cash flowing properties, improving operations, maximizing production and most importantly, returning capital. The team at Benchmark is deeply familiar with these assets and there is ample opportunity to deploy various field enhancements including artificial lift optimization, a more active well maintenance program and opening up previously closed wells. Enhancing production is a key part of the Benchmark strategy and this is one of the reasons we decided to work with Kirk and his capable team at Benchmark.

Speaker 2

While the primary focus of Benchmark and this acquisition is to maximize cash flow, the asset base we acquired also provides Benchmark with meaningful exposure to the emerging Cherokee development play through both operated acreage and non operated arrangements with best in class operators. Benchmark will likely seek to monetize this value through partnerships rather than standing up its own drilling operation. This is an example of finding value where others didn't and the strategy that we're pursuing producing existing producing wells. Upon closing, Benchmark will hedge a significant amount of production, mitigating a large part of the commodity risk. This is another key consideration that attracted us to Benchmark.

Speaker 2

They focus on improving the operation of wells and use hedges to mitigate as much of commodity price fluctuation is practical, taking near term price volatility out of the picture allows the operating team to focus on operating the business better. The assets we have acquired are prime targets for this approach. In November, Vacation invested $10,000,000 in Benchmark resulting in a 50.4 percent ownership. The acquisition announced last month will include an incremental investment of approximately $57,500,000 which is expected to bring our total ownership to approximately 73%. The timeline of the second opportunity illustrates our ability to scale the platform quickly.

Speaker 2

Transaction is expected to close in the Q2 of this year. Pro form a for the closing of this acquisition, we anticipate having deployable cash and marketable securities at the parent level, the Acacia level of more than $400,000,000 We look forward to a bright future for our new larger benchmark. As you can see, our strategy is coming into focus. We look to acquire valuable businesses at attractive valuations and deploy disciplined operating and capital allocation methods to create value. Our book value per share has grown and in the last quarter this growth was significant.

Speaker 2

We have meaningful optionality across our portfolio giving us access to innovative strategies, financing structures and collaborations that can leverage our expertise, our network of highly talented and successful operating executives and our capital base to grow our portfolio. Scale drives incremental scale. Our pipeline of opportunities is growing and our existing cash flows are growing as well, bolstering our capital position. We're just getting started here. I'd now like to turn the call over to Kiersten to discuss the Q4 financial results.

Speaker 2

Kiersten, the call is yours.

Speaker 3

Thank you, MJ. We ended 2023 with $340,000,000 of cash and cash equivalents and reported GAAP net income of $67,100,000 or $0.58 per diluted share for the year. Our GAAP book value at December 31, 2023 was $589,600,000 or $5.90 per share. Our book value reflects the exercise of the Series B warrants through a combination of note cancellation and limited cash exercise and the conversion of the preferred stock, which occurred on July 13, 2023 as part of the recapitalization transaction. Let me now turn to the 4th quarter results.

Speaker 3

Total revenues were $92,300,000 compared to $13,100,000 in the same quarter last year. Let me break this down. The intellectual property business generated $82,800,000 in licensing and other revenues during the quarter, compared to $2,500,000 in the same quarter last year, reflecting the licenses and subsequent payments MJ has mentioned. Printronix generated $8,600,000 in revenue during the quarter compared to $10,600,000 in the same quarter of last year. Benchmark generated $800,000 in revenue in the quarter subsequent to the completion of the acquisition, which closed on November 13, 2023.

Speaker 3

General and administrative expenses were $10,600,000 compared to $15,900,000 in the same quarter of last year, with the 33% decrease due to the decrease in costs related to the Starboard recap transaction and a decrease in severance expense. Operating income of $55,900,000 compared to an operating loss of $14,500,000 in the same quarter of last year, with the increase due to higher revenues generated. Printronix contributed $500,000 in operating income, which included $700,000 of non cash depreciation and amortization expense. Benchmark contributed $100,000 operating loss, which included $200,000 of non cash depreciation and depletion expense as well as $100,000 of other non cash charges. GAAP net income of $74,800,000 or $0.75 per diluted share compared to GAAP net loss of $18,400,000 or $0.50 per diluted share in the Q4 of last year.

Speaker 3

Net income included $12,600,000 in unrealized gains related to the increase in the share price of certain holdings and the Aerex forward sale contract. Turning to the full year results. Total 2023 revenues were $125,100,000 compared to $59,200,000 in the prior year period. Printronix generated $35,100,000 in revenue compared to $39,700,000 last year. The intellectual property business generated $89,200,000 in licensing and other revenue compared to $19,500,000 last year.

Speaker 3

General and administrative expenses decreased to $43,700,000 compared to $52,700,000 last year due to the decrease in compensation costs related to reduced headcount and a decrease in legal and other fees related to the Starboard recap agreement. Operating income was 20 point $9,000,000 compared to operating loss of $40,100,000 in the prior year period. GAAP net income was $67,100,000 or $0.58 per diluted share compared to GAAP net loss of $125,100,000 or $3.13 per diluted share last year. Net income included $10,900,000 in realized losses, offset by $31,400,000 in unrealized gains related to the increase in the share price of certain holdings and the Aerex forward sale contract. The company recognized non cash income of $8,200,000 related to the changes in the fair value of the warrants and embedded derivatives and gain on exercise of the Series B warrants.

Speaker 3

For the year, including the Eric's forward sale contract, Acacia generated $19,000,000 in gains from the Life Sciences portfolio. As of December 31, 2023, our NOL totaled approximately $18,000,000 We will continue to evaluate the most efficient ways to maximize this asset. Turning to the balance sheet. Cash, cash equivalents and equity securities at fair value totaled $403,200,000 at December 31, 2023, compared to $349,400,000 at December 31, 2022. Of note, during the quarter, we paid $10,000,000 for the acquisition of Benchmark.

Speaker 3

All of our receivables related to the license agreements executed in the Q4 of 2023 were received in 2024. Equity securities without readily determinable fair value totaled $5,800,000 at December 31, 2023, which amount was unchanged from December 31, 2022. Investment securities representing Equity Method Investments totaled $19,900,000 at December 31, 2023, net of non controlling interest, which amount was unchanged from December 31, 2022. Acacia owns 64% of Mallin J1, which results in a 26% ownership stake in ViaMet Pharmaceuticals for Acacia. The company currently carries no debt at parent, following the conversion of the senior secured notes in July 2023.

Speaker 3

On a consolidated basis, Acacia's total indebtedness was $10,500,000 at December 31, 2023, which includes $10,500,000 in non recourse debt at the Benchmark subsidiary. We continue to believe that cash per share is an important metric for measuring our progress. As of December 31, 2023, our cash per share stood at $3.40 More details on these results have been made available in the press release issued this afternoon and in our annual report on Form 10 ks, which we will file with the SEC later today. With that, we'd be pleased to take your questions.

Operator

Thank you very much. We will now open the floor for questions. Your first question is coming from Anthony Stoss of Craig Hallum. Anthony, your line is live.

Speaker 4

Thanks. Good afternoon, MJ. The question I get asked from investors the most is whether or not you guys are still open and actively looking for kind of non oil and gas related potential acquisitions industrial technology if you're going to go headlong into oil and gas? And then I have

Speaker 2

a couple of follow ups. Yes. Hey, Tony, nice to hear your voice. So we are not becoming an oil and gas company. As we've always said, we're opportunistic and we're seeing a lot of opportunities in oil and gas right now.

Speaker 2

We really like this Revolution acquisition. We think there are a lot of interesting elements. 1, it enables the team to do what they do really well is take existing producing reserves and manage them better in order to increase the earnings from those reserves. And it's very similar to the way we look at companies outside of oil and gas. So the team philosophically is aligned.

Speaker 2

This also has this, I'll call it an option that was included with the deal on this Cherokee play, which we think is really interesting. And so, we were very enthusiastic to do this. We will take some portion of our capital and continue to invest it in this strategy where we see really good deals. But not with the intent of necessarily becoming an oil and gas business with the intent of being opportunistic. We mentioned we have a really strong pipeline of other opportunities outside of oil and gas.

Speaker 2

Those include we don't have as much healthcare, but we do have a reasonable number of things that we're spending time on in the industrial space and the technology space. So we will continue to pursue those and hopefully acquire some of those businesses.

Speaker 4

And then just one question on oil and gas and I've got another one after that. The new benchmark investment closes in Q2, what's expected either quarterly or kind of annual revenue that you think you could drive off that investment?

Speaker 2

I mean, we kind of look at it as cash flow. And I think we said 45 at the asset level, which is kind of before G and A. Now we're rolling that into the Benchmark platform, which has some G and A against it. I think we need to add a little bit to it, but then there's not much reinvestment into that business. And so from a cash flow standpoint, we own we consolidate all of it because of our ownership position.

Speaker 2

We own 73% of it. So I think you could take that number and kind of you can it's pretty consistent, so you can kind of divide it by 4 and look at the quarterly number.

Speaker 4

And then on the WiFi 6, congrats on the new license. I think that makes 2 substantial licensees today. How many more do you have on the list that you could target?

Speaker 2

Look, we think so we think there's a lot of opportunity left in that portfolio. The strength that we have coming off of the TP Link jury award was public. And then we've had a couple of few substantial agreements that 2 came subsequent to that, one came early in the life of the portfolio. But we still think there's a material amount of incremental capital that we can generate from that Wi Fi portfolio. And recall, we own 4 other portfolios that don't have the same magnitudes associated with them, but have a very consistent set of settlements and licenses that generate a nice level of base cash flow.

Speaker 4

Got it. That's all for my questions. Best of luck, guys. Thank you.

Speaker 2

Yes. Thanks, Tony.

Operator

Thank you very much. Your next question is coming from Brett Reiss of Janney Montgomery Scott. Brett, your line is live.

Speaker 5

Yes. Hi, MJ. Hi, Kirsten. Good work. Keep it up.

Speaker 5

Piggybacking on Tony's questions, to try to get a sense of how much juice is left to be squeezed from the ripe orange of that Wi Fi 6 portfolio. In the Q3, you mentioned there were 7 trial dates. Are they still on the calendar or were some of those part of the $82,000,000 settlement?

Speaker 3

So currently

Speaker 2

Go ahead, Kirsten.

Speaker 3

Yes. Sure. Currently, we have one trial date within the next year. So bridging from the 7 that we reported for the Q3 earnings, some of those were settled in Q4 and some were settled in Q1, but the current number is 1.

Speaker 5

Okay. And

Speaker 2

so Brett, it's important to remember there that not all settlements happen in a trial process. There are kind of settlements that happen outside of the legal process as well.

Speaker 5

Okay. And the gorilla in the room, Apple, are they still a defendant or they're part of the settlement?

Speaker 2

Yes. I mean, look, we can't comment on that, Brett.

Speaker 5

I appreciate

Speaker 2

the nature of the question. We just can't comment on that.

Speaker 5

Okay. Now the NOL was 85,000,000 dollars last quarter. Have we how much is left now?

Speaker 3

It's around $18,000,000

Speaker 5

Okay. And I noticed an 8 ks was filed. You've gone to the protocol of being able to buy back stock on a 10b5, which should increase your flexibility and not having these narrow windows constrict you being able to buy back stock. Is that true?

Speaker 2

Yes. Brent, you're right. The Board did authorize a buyback, which was press released. And we're looking at executing on that.

Speaker 5

Right, right. Did you buy back any stock in this last quarter?

Speaker 2

No, we didn't buy any stock in the last quarter.

Speaker 5

Okay. The remaining private equity positions from the U. K. Biotech Portfolio, Can you give us just a little bit more color on what remains? And could there be any hidden positive surprises that we could enjoy in the near to intermediate term future on the remaining portfolio?

Speaker 2

Yes. So when you look at the remaining positions, it's really and I think we've disclosed this in the past, AMO, which we're enthusiastic about, which is a drug for pediatric myotonic dystrophy. There's some news out there on the drug and some of the developments on that drug, which I'm sure you found. So we're enthusiastic about that. And then there's this ownership share we have in ViaMed.

Speaker 2

And the best way our shareholders usually figure kind of get more color on ViaMed is Maylin Pharmaceuticals, which is an Irish company actually publishes on this. They're an owner in the cap table with us as well. Look, we're enthusiastic about that one as well. So I can't make any promises on surprises, but we certainly think that they're both very attractive businesses and drugs.

Speaker 5

Great. Thank you for taking my questions. I'm going to drop back in queue, but good show on the quarter.

Operator

Your next question is coming from Todd Selter of 88 Management LLC. Todd, your line is live.

Speaker 6

Thank you. Congratulations on a very robust Q4. You made reference to some settlement on the WiFi patent in Q1. Am I to assume those numbers are not reflected in the $82,000,000 that you referenced for Q4?

Speaker 2

Yes. Sorry, Tom. The delineation we were trying to make was the settlements that we made in Q4, we received the cash for those in February early March. So we just wanted to be clear, the settlement was a 2023 event. The receipt of proceeds from that settlement was a 24 event.

Speaker 6

Got you. Got you. Just trying to someone who's very involved in this name text me this question. What makes this company uniquely positioned to create shareholder value in energy? And as a follow-up, what is the market not seeing or believing with this strategy?

Speaker 6

And I guess it's because of the somewhat ephemeral bump and the total give back that we noticed over the last couple of weeks subsequent the announcement.

Speaker 2

Yes. I think that's a 2 part question. I'll take the second part first, which is I don't want to speculate on that. I think you may have a view and others that are around the table and shareholders in here may have a view that they can share with your friend. On the first question, our model is to partner with really excellent operating executives and accomplished operating executives to pursue these opportunities.

Speaker 2

And that's exactly what we've done in Benchmark. We partnered with somebody that we've known for a long time that has been long term successful in the oil and gas space. And they are kind of our eyes and ears on the ground in the oil and gas space where we allocate capital. So that's kind of piece 1. Piece 2, unlike general oil and gas, we are not pursuing acquiring land, drilling wells, business model, which means we're looking at harvesting cash flow from these assets.

Speaker 2

And so it's really operating the wells better than the prior owners that operated them. And the wells and the packages of wells that we're acquiring with Benchmark are legacy kind of under loved, under managed, under worked fields, where the team that we have has very successfully over a long period of time been able to run those wells better on a less expensive basis in order to generate more cash from them. And the valuations that we're buying them at are very attractive.

Speaker 6

Great. Last question, sell side coverage. We appreciate Tony covering the stock. At what point do you think we could start shining a light and trying to attract other analysts or potentially be more aggressive at pursuing the buy side to look at this undervalued very attractive investment?

Speaker 2

Yes. I think that's a great question, and it's one that we ask ourselves a lot. For those that have been with us for the last year and been on their earnings calls, we told you what we were going to do and you said, okay, go do it. And now we've started to do it. And so we're getting to the point where we can start having those conversations about how people view us now that we're a business that's executing against the strategy instead of telling you what strategy we're going to execute against.

Speaker 2

And so we are reluctant to pound the table and wave our arms in the air for people to cover us until we have earned the right to be covered and for the market to pay attention to us.

Speaker 6

Understood. Thank you. Continue the good work.

Speaker 2

Thanks, Todd. Appreciate the questions.

Operator

Thank you very much. Well, that appears to be the end of our question and answer session. I will now hand back over to MJ for any closing

Speaker 2

comments. Jenny, thanks very much. Everyone, thank you for joining us this afternoon, following us, believing in us. We look forward to talking to you next quarter.

Operator

Thank you very much. And that does conclude today's conference. You may now disconnect your phone lines and have a wonderful rest of the day. Thank you for your participation.

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