Acacia Research Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for joining us for Acacia Research Second Quarter 2024 Earnings Conference Call. My name is Prilla, and I will be your conference operator today. All lines are currently on mute to prevent any background noise. I would like to remind you that this conference is being recorded today and is available through audio webcast on the company's website. Following the speakers' remarks, there will be time for questions.

Operator

Analysts and investors are reminded that any additional inquiries can be directed to Acacia following today's call iracatias.com. I would now like to turn the conference over to Mr. Brent Anderson of Gagne Communications. Mr. Anderson, you may begin your conference.

Speaker 1

Thank you, operator. Leading today's call are M. J. McNulty, Acacia's Chief Executive Officer and Kerstin Hoover, Acacia's Interim Chief Financial Officer. Before M.

Speaker 1

J. And Kerstin begin their prepared remarks, please be reminded that information provided during this call may contain forward looking statements relating to the 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 operation and are based on current estimates and projections, 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 described in Acacia's annual report on Form 10 ks and quarterly reports on Form 10 Q filed with the SEC.

Speaker 1

A press release disclosing the financial results was issued this afternoon. This release may be accessed on the company's website under the Press Releases section of the Investor Relations tab at acaciaresearch.com. The company also posted a new corporate overview presentation and Q2 2024 earnings presentation to its website, which can be found under the Events and Presentations tab. I would now like to turn the call over to Acacia's Chief Executive Officer, Mr. M.

Speaker 1

J. McNulty. Over to you.

Speaker 2

Brent, thanks very much, and thank you all for joining us today for our 2nd quarter earnings call. As many of you have heard me say, cases of value oriented acquire businesses across both the public and private markets. We acquired businesses where we can tap into our deep industry relationships, our significant capital base and transaction expertise to materially improve performance. We're focused on sourcing execution and improvement and we find unique situations, bring a flexible and creative approach to transacting and relationships and expertise to drive continual improvement in operating performance. We approach this as business owners and operators rather than purely as financial investors.

Speaker 2

This is important and we believe it's our differentiator for creating long term value for shareholders. We define value through free cash flow generation, book value appreciation and stock price growth. These are the pillars of the Acacia story. Acacia creates value by building relationships and providing transaction expertise to create acquisition opportunities where we can meaningfully improve performance. We do so by being focused on opportunities with asymmetric risk reward characteristics within the technology, energy and industrial segments.

Speaker 2

I raised these points on today's call because I believe Acacia's efforts to build excellent businesses are paying off as our Q2 results highlight the evolution, strength and trajectory of the company's core technology, energy and industry verticals, industrials vertical. Acacia delivered strong financial and operating results in the Q2. The company generated $25,800,000 in consolidated revenue, up by 2 27% compared to the Q2 of last year and up 121% compared to the 1st 6 months of 2023, driven in large part by the completion of our transformative acquisition of operated producing wells in the Western Anadarko Basin through our benchmark subsidiary. In terms of consolidated revenue, our intellectual property operations increased by $4,900,000 year over year due to an increase in the number of license agreements executed during the quarter. Our energy operations delivered revenues of $14,200,000 in Q2, including the impact from the acquisition completed mid April this year.

Speaker 2

And while our industrial operations revenue decreased a little by about $1,200,000 due to lower printers sold, we were pleased that it was accompanied by a lower year over year operating loss as a result of our continual cost improvement program as we continue to generate cash from this business. Terms of adjusted EBITDA, the intellectual property business generated $8,500,000 in adjusted EBITDA during the 1st 6 months of 2024. Printronix generated $2,300,000 in adjusted EBITDA during the 1st 6 months of the year and Benchmark generated 8.4 dollars in adjusted EBITDA during the 1st 6 months of the year. Our corporate parent generated an adjusted EBITDA loss of $8,800,000 However, as we've mentioned in the past, the expenses at corporate were offset by $10,000,000 in interest income. More detail on our adjustments is provided in our press release and accompanying corporate presentation, which we posted to the website today.

Speaker 2

Our book value per share on June 30, 2024 was $5.95 a share compared to $5.90 a share at the end of 2023. Excluding the impact of an additional accrual of $12,900,000 related to the AIP matter, which has now been settled and closed and which is discussed in greater detail in our 10 Q, our adjusted book value per share on June 30 would have been $6.07 per share. The AIP matter relates to a closed legal matter involving a profits interest plan adopted by prior members of management and the Board in 2017. While value per share is a key metric and is the primary metric by which our team's compensation is based, We believe this aligns management and shareholder interests at this stage in our company's life. Kiersten will cover the additional details of our quarterly results in a few minutes.

Speaker 2

But first, let me speak briefly about our core verticals, including technology, energy and industrials. First on energy. As you know, in November of last year, Acacia acquired a majority stake in Benchmark, an independent oil and gas company based in Austin, engaged in the acquisition, production and development of oil and gas assets and mature resource plays in Texas and Oklahoma. In April of this year, Benchmark completed the acquisition of certain liquids rich, predominantly oil based and low decline upstream assets and related facilities in the Western Anadarko Basin. Vacation now owns 73.5% of the Benchmark Energy subsidiary following the recent acquisition of these assets.

Speaker 2

Following the latest acquisition, our energy business consists of over 150,000 net acres and over 500 operated wells producing approximately 6,500 barrels of oil equivalent per day in the Western Basin throughout the Texas Panhandle and Western Oklahoma. Benchmark's recent acquisition brings the company increased geographic density and financial scale. The acquisition included significant undeveloped acreage in the valuable Cherokee and Cleveland formations, which could be monetized through a variety of capital light solutions. As we mentioned before, Benchmark deploys a PDP strategy focused on acquiring predictable and shallow decline cash flowing oil and gas properties with minimal capital intensity that can be enhanced through a field optimization strategy and risk managed through robust commodity hedges and low leverage. Our strategy is to acquire mature long lived assets and deploy various field enhancements including artificial lift a more active well maintenance program and reopening previously closed wells to enhance the status quo production profile in pursuit of our goal of maximizing cash flow for Benchmark's assets.

Speaker 2

During the Q2, the experienced team began implementing its operational improvement plan, a meaningful part of the strategy. In the Q2, our energy operations delivered consolidated revenues $14,200,000 including the impact from the acquisition completed on April 17 this. Further in terms of adjusted EBITDA, Benchmark reported $7,000,000 during the quarter. Again, this represents a partial month of results. I would also note that you will now notice the realized and unrealized derivative gains and losses coming through the other income and expense line on our income statement.

Speaker 2

This line represents both the mark to market of the hedges on future production we are seeking to protect through our previously discussed hedging program, as well as the realized gains or losses associated with maturing hedges. I would note that our hedge book is significant representing roughly 70% of our net oil and gas production over the next 3 years. And as a result of the size of the hedge book, sometimes these movements will be significant. We continue to disclose the realized versus unrealized component of these accounting figures to help you better understand the cash impact of our hedge book on the enterprise. Turning on to our technology vertical, where intellectual property business generated $5,300,000 in licensing and other revenue during the quarter compared to $400,000 in the same quarter last year.

Speaker 2

These agreements further bolster our position to pursue additional licensing agreements and settlements and our team is advancing discussions with other potential licensees. The Wi Fi 6 patent portfolio continues to represent a lucrative opportunity for periodic cash events and we believe there's significant incremental value in these patents. Additionally, we continue to evaluate potential additional capital investments into this business to acquire new patent portfolios when we believe there are attractive risk reward opportunities. Now turning to our industrials business. When we acquired the Printronix operating business in October of 2021, we believe that represented an attractive price relative to the potential cash flow generation.

Speaker 2

We also recognized there would be operational strategic restructuring required. In early 2023, the team began replacing the Printronix management team and brought in an operating advisor to significantly reduce costs and improve efficiency. We are pleased with the progress of Printronix as it transitions its business mix from lower margin printer sales to higher margin consumables products, including ink cartridges and specialty ribbons and believe this dual hardware and consumables business model combined with its streamlined operating structure represents a nice source of cash flow for Acacia. Printronix generated $6,300,000 in revenue during the quarter compared to $7,500,000 in the same quarter last year. Despite the lower revenue, we're pleased with the turnaround work that the Printronics team continues to undertake, including a key focus on top line initiatives and we anticipate Printronix to continue to generate free cash flow on an annual basis.

Speaker 2

Turning now to M and A. Acacia remains focused on acquiring and building businesses that have stable cash flow generation with an ability to scale, while retaining the flexibility to make opportunistic acquisitions with higher risk adjusted return characteristics. We've been keeping a close eye on the recent volatility in the markets and remain cautious about the current market environment. However, given our long term approach and disciplined focus, we expect the overall impact of the current market volatility to be negligible to our interwoven businesses. Prior to the recent market volatility, the M and A environment remained constructive with a strong pipeline of potential public and private opportunities.

Speaker 2

We believe additional opportunities may be created as the volatility works its way through the system. Earnings and book value per share growth. We continue to believe the oil and gas business represents an attractive complement to our acquisition initiatives in Industrials and Technology, where we continue to evaluate operating businesses to acquire. I'd now like to turn the call over to Kirsten to discuss our 2nd quarter financial results.

Speaker 3

Thank you, MJ. Our GAAP book value at June 30, 2024 was $596,700,000 or $5.95 per share. Excluding the impact of the additional accrual of $12,900,000 in the 1st 6 months of 2024 related to the AIP matter that MJ discussed earlier, which has now been settled and closed, our book value per share at June 30, 2024 would have been $6.07 per share. Total revenues were $25,800,000 compared to $7,900,000 in the same quarter of last year. Our intellectual property business generated $5,300,000 in licensing and other revenue during the quarter, up over 200% compared to $400,000 in the same quarter of last year due to the increased number of license agreements executed quarter over quarter and higher average license fees.

Speaker 3

Our industrial operations business generated $6,300,000 in revenues during the quarter, down compared to $7,500,000 in the same quarter of last year due to a decrease in printer sales. Benchmark generated $14,200,000 in revenues in the quarter. As Akase's initial investment in Benchmark closed on November 13, 2023, there is no comparable revenue in the same quarter of last year. As a reminder, in April, we closed Benchmark's first acquisition following Acacia's initial investment. Results from this acquisition have been reported as part of our 2nd quarter financial results.

Speaker 3

General and administrative expenses were approximately $10,000,000 compared to $9,400,000 in the same quarter of last year, with the increase due to the increase in G and A for the addition of our Energy segment, partially offset by a decrease in parent legal fees and a decrease in Printronix G and A. The company recorded an operating loss of $4,800,000 down 62% compared to an operating loss of $12,500,000 in the same quarter of last year due to higher revenues generated. Printronics contributed $200,000 in operating loss, which included $700,000 of non cash depreciation and amortization expenses. Benchmark contributed $3,200,000 in operating income, which included $3,500,000 of non cash depreciation, depletion and amortization expenses and does not reflect $100,000 of realized derivative gains. GAAP net loss attributable to Acacia Research Corporation in the 2nd quarter was $8,400,000 or $0.08 per share compared to GAAP net loss attributable to Acacia of 18,800,000 or a loss of $0.36 per share in the Q2 of last year.

Speaker 3

The net loss for the Q2 of 2024 included $4,700,000 in unrealized losses related to the fair value of our remaining equity securities. The 2nd quarter included 800,000 dollars in non recurring general and administrative charges. Excluding the impact of the additional accrual related to the AIP matter, which represented $0.06 of earnings per share, our loss per share for the Q2 of 2024 would have been $0.02 per share. 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.

Speaker 3

Cash, cash equivalents and equity securities at fair value totaled $405,200,000 at June 30, 2024 compared to $403,200,000 dollars at December 31, 2023. The increase in cash was primarily due to timing of payments received from licensees offset by $59,900,000 paid to acquire the Revolution assets. Equity securities without readily determinable fair value totaled $5,800,000 at June 30, 2024, unchanged from December 31, 2023. Investment securities, representing equity method investments, net of non controlling interest totaled $19,900,000 at June 30, 2024, unchanged from December 31, 2023. Acacia owns 64% of Mallin J1, which results in a 26% ownership stake in ViaNet Pharmaceuticals for Acacia.

Speaker 3

The parent company's total indebtedness was 0 at June 30, 2024. On a consolidated basis, Acacia's total indebtedness was $82,000,000 in non recourse debt at Benchmark as of June 30, 2024. We continue to believe that cash per share is an important metric for measuring our progress. As of June 30, 2024, our cash per share stood at $3.86 For more information on Acacia's 2nd quarter results, please see our press release issued this afternoon and our quarterly report on Form 10 Q, which we will file with the SEC later today. With that, I'd like to turn the call back over to MJ.

Speaker 2

Our strategic relationship with Starwood expands our sourcing and operating network and resources providing the company with expanded access to industry expertise and an expanded network of operating partners with whom we evaluate potential acquisition opportunities, which enhances the oversight and value creation of our business. 4th, we have significant resources and the flexibility to take advantage of uncertain environments and dislocated situations. 5th, we have cultivated a deep and experienced operating executive network, which supports sourcing and evaluation of our acquisition opportunities. And finally, as I know many of you have reminded me, we're trading below book value, which represents a compelling opportunity for investors. With that, we'd be pleased to take any of your questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Adam Eggleton with Formidable. Please go ahead.

Speaker 4

Hey, MJ. How are you today?

Speaker 2

Hey, Adam. How are you?

Speaker 4

Good. Doing well. Thank you. So my question was going to be around the share count, didn't look like that changed. So how are you all thinking about the buyback now?

Speaker 2

Well, as you know, it's authorized. And we are just evaluating the timing of executing on that buyback. So we still very much are enthusiastic about it as is our Board and it's just a matter of timing that buyback.

Speaker 4

All right, fair enough. Thank you.

Speaker 2

Yes.

Operator

And your next question comes from the line of Anthony Stoss with Craig Hallum Capital. Please go ahead.

Speaker 5

Hey, MJ and Kristen, since the second benchmark purchase was kind of intra quarter, I'm wondering if you can give us kind of an expected range of revenues that you might think about for your benchmark assets for the September quarter?

Speaker 2

Yes, Tony, I think it's a great question. I mean, we I would encourage you to take a look at the investor deck that we put out, because we've broken out the revenue. We have the date of 2017. And so I think you can probably interpolate the revenue estimates for the Q3 based on some of the data that's out there.

Speaker 5

Okay.

Speaker 2

All right. I'll give it a look. Thank you. Thanks,

Operator

Johnny. And your next question comes from the line of Brett Reiss with Janney. Please go ahead.

Speaker 6

Hi, MJ. Hi, Kirsten. How are you?

Speaker 2

Hey, Brett. How are you doing?

Speaker 6

Good, good, good. The operating income on Benchmark was like 22.5% of revenues. Is that kind of what the ratio is going to look like going forward?

Speaker 2

Yes. So that's a great question. I think we've given some of the reconciliations from operating income to EBITDA. And the way we think about it is the EBITDA related to revenue. And so I think that may be a better metric to look at in terms of how you think about the profitability of that business.

Speaker 2

But we had previously disclosed some of the metrics around cash flow and price and so on and so forth. And so far the business is performing how we had underwritten it to perform. Now it's early. It's a little over half a quarter, but the business is performing as expected.

Speaker 6

Right, right. Now MJ, with Benchmark, is the increase in revenues going to be driven by drilling more wells on the acreage you have or extracting more oil from existing wells or just bolt on acquisitions? What's going to drive increased revenue in that part of the business?

Speaker 4

Yes.

Speaker 2

So we follow a PDP strategy. So we acquired and only paid for producing production at these assets in the Western Anadarko Basin and for that matter the initial set of benchmark wells. They will have a natural curve associated with them, a production curve associated with them. And so that's kind of the base. The reason we picked the team that we picked to do this with is because they historically have been very good at reducing the natural curve of reduction for the wells that they own.

Speaker 2

And so that's kind of piece 1 above the base is what can we do operationally to your point to get more oil and gas out of the wells we own. So as I mentioned, the team has kind of fully implemented its strategy there from a revenue standpoint. Now remember, there are other things that we can do with the business to optimize the cost structure and take advantage of the scale that we now have with 2 sets of assets as opposed to 1. And so they're also working on that. That's not top line.

Speaker 2

That ends up becoming a reduction in costs. And then the 3rd and it's early for this, but I think we have mentioned it is that we did get acreage with the deal, in the Cherokee and that Cherokee acreage could be interesting. I think it's early, but it could be interesting. And we are not drillers of wells. Our strategy is PDP focused.

Speaker 2

So we're not out to drill wells. However, we can partner with folks that can take the drilling risk in that acreage and we have a very capital light way to potentially create additional revenue in that sort of a structure.

Speaker 6

Okay. Now in the body of the release, there was an addition to G and A from the addition of new energy segment operations. So is a portion of benchmarks overhead picked up by us? Could you give us some more color on that?

Speaker 2

Yes. So we are we own 73.5 percent of Benchmark. And so we own 73.5 percent of the costs to run the business. There was a little bit of G and A that came along with the new deal, again in the context of what we underwrote and in line with how we were viewing the business and the economics of it. And so because we're consolidating the Benchmark acquisition and then showing a minority interest in that deal, It will fully consolidate onto our P and L.

Speaker 2

And then Kirsten can correct me where I'm wrong. It will be adjusted for the minority interest section of the P and L?

Speaker 6

That's right. Okay. Different part of the business, what is the trial calendar on the patent portfolio look like over the next couple of quarters?

Speaker 2

We don't talk about that, Brett. Okay.

Speaker 3

We do schedule in the upcoming 12 months. So that is disclosed in our 10 Q, those upcoming 2.

Speaker 6

Okay. I'll look there. Now the turnaround that you're trying to implement in Printronics, If it doesn't gain traction, how long will you try to turn around before you throw in the towel and exit that business?

Speaker 2

Well, so first, the turnaround is actually doing quite well. Okay. We have a step plan of moving that business towards higher margin consumables that we sell and continuing to reduce the costs to operate the business on a regular basis. So it's not as if we said, let's decide what we want to do, cut some costs and then go back to status quo. We're continually reducing costs to match what we want the profitability to be on the consumables piece of the business.

Speaker 2

So we are not thinking about throwing in the towel. We actually are quite pleased with the progress that the team has made on that turnaround over the last little over a year, maybe 5 quarters here. And so more to come on that, but it's looking promising.

Speaker 6

Great, great. Thank you for taking my questions and both of you enjoy the rest of the summer.

Speaker 2

Yes, likewise, Brett. Operator, are there any more questions?

Operator

Your next question comes from the line of Todd Stelter with 88 Management LLC. Please go ahead.

Speaker 4

Hi, MJ, Kristen. Quick question. Under key business highlights, I see, generated $71,000,000 in operating cash flow for the first half of twenty twenty four. That seems like such a robust number considering the run rate for Q1 and Q2. How do we get to $71,000,000

Speaker 2

Yes. So you got to remember Todd that we had the patent settlements that we recorded as revenue in Q4 of last year because the deals were struck and agreed to in Q4 of last year came through in the first half of this year. And so a lot of that cash came through in the 1st 6 months of the year, which is driving a big portion of that. Got you.

Speaker 4

Great. Appreciate it. Thank you.

Speaker 1

Yes, of course.

Operator

And there are no further questions at this time. I would like to turn it back to M. J. McNulty for closing remarks.

Speaker 2

I appreciate everyone joining. I hope everyone's having a great summer and enjoys the rest of the summer. Please take a look at our website and see the corporate deck that we put out. I think it answers a lot of questions that we've talked about in the past. I think it gives a really good view of who we are and where we're going.

Speaker 2

I know a lot of the folks on the call here have followed us and we appreciate that. But it puts a little bit more meat around the story. So we appreciate you joining. We look forward to talking to you soon.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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