Executives: Marvin Key - Chief Executive Officer Clayton Haynes - Chief Financial Officer Ed Treska - General

Counsel
Operator: Good afternoon and welcome ladies and gentlemen to the Acacia Research Fourth Quarter and Year End Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Mr. Marvin Key. Please go ahead, sir.

Marvin Key: Good afternoon and thank you for joining today’s fourth quarter and year end 2016 shareholder conference call. I am Marvin Key, CEO of Acacia Research. With me this afternoon are Clayton Haynes, CFO and Ed Treska, our General Counsel. Today, Clayton will review our financial performance and then I will provide an overview of 2016 and a brief business update. First, our Safe Harbor statement.

Today’s call may involve what the SEC considers to be forward-looking statements. Please refer to our earnings release filed with the SEC today as an exhibit to our 8-K for our forward-looking statement disclaimer. In today’s call, the terms we, us and our refer to Acacia Research Corporation and it’s wholly and majority-owned operating subsidiaries. All patent rights acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly and majority-owned operating subsidiaries. Now, I will hand the call off to Clayton Haynes for the financial review.

Clayton Haynes: Thank you, Marvin and thank you to those joining us for today’s fourth quarter and year end 2016 earnings conference call. Today, I will provide a summary of the quarterly results and full year 2016 results and provide an update of our financial condition and 2017 expense outlook. Fourth quarter 2016 revenues totaled $22 million as compared to $37.5 million in the comparable prior year quarter. Three licensees individually accounted for 48%, 19% and 18% of revenues recognized in Q4 2016 as compared to two licensees individually accounting for 64% and 19% of revenues recognized in Q4 2015. We continue to expect license fee revenues to be uneven from period-to-period.

For the fourth quarter of 2016, we reported a GAAP net loss of $10.6 million or $0.21 per share versus a GAAP net loss of $115.9 million or $2.33 per share for the comparable prior year quarter. On a non-GAAP basis, excluding non-cash stock compensation, patent amortization and patent impairment charges totaling $11.7 million, we reported fourth quarter 2016 net income of $1.1 million or $0.02 per share as compared to non-GAAP net income of $4.5 million or $0.09 per share for the comparable prior year quarter. Please refer to our disclosures regarding the presentation of non-GAAP financial measures and other note in today’s earnings release and 8-K filed with the SEC. Fourth quarter 2016 inventor royalties expense decreased 57% compared to prior year quarter relatively consistent with the related 41% decrease in revenues quarter-to-quarter. Fourth quarter 2016 contingent legal fees expense increased 9% as compared to the 41% decrease in related revenue due to higher average contingent legal fee rates for the portfolios generating revenues in the fourth quarter of 2016 as compared to the portfolios generating revenues in the fourth quarter of 2015.

As a result, average margins for the fourth quarter of 2016 were 66% as compared to 69% in the comparable prior year quarter. Litigation and licensing expenses decreased $5.9 million or 52% quarter-to-quarter due primarily to a net decrease in litigation support cost associated with patent trial and a decrease in patent prosecution and litigation expenses associated with ongoing licensing and enforcement program. These expenses will continue to fluctuate period-to-period based on future activity levels in those periods. Fourth quarter 2016 general and administrative expenses, excluding non-cash stock compensation expense decreased 6% due primarily to a decrease in personnel cost resulting from net staff reductions occurring during 2016 and 2015 and a decrease in non-recurring employee severance costs. Fourth quarter 2016 non-cash stock compensation expense increased to 34% due primarily to the grant of stock options with market-based performance conditions with great investing features resulting in higher non-cash stock compensation expense during the earlier stages of the applicable service period.

Fourth quarter 2016 non-cash patent impairment charges totaled $2.2 million. Fourth quarter 2015 net results reflect a non-cash goodwill impairment charge totaling $30.1 million and $74.7 million of non-cash patent impairment charges as previously reported. Next, I will provide a brief summary of full year 2016 results. Fiscal year 2016 revenues were $152.7 million as compared to $125 million for fiscal year 2015. For fiscal 2016, three licensees individually accounted for 26%, 23% and 11% of revenues recognized as compared to three licensees each individually accounting for 24%, 20% and 16% of revenues recognized in fiscal year 2015.

We have reported a fiscal 2016 GAAP net loss of $54.1 million or $1.08 per share versus a GAAP net loss of $160 million or $3.25 per share for fiscal 2015. Excluding the impact of non-cash patent impairment, scheduled patent amortization and stock compensation charges totaling $85.6 million, fiscal 2016 non-GAAP net income was $31.5 million or $0.62 per share as compared to non-GAAP net income of $9 million or $0.18 per share for fiscal 2015. As previously reported for the second quarter of 2016, we recorded $40.2 million of non-cash patent impairment charges primarily reflecting changes in estimates of cash flows on certain patent portfolios for which the underlying licensing programs were concluded. Our average margin for fiscal 2016 was approximately 68% as compared to 72% for fiscal 2015. 2016 marketing, general and administrative expenses, excluding non-cash stock compensation expense decreased $3.3 million or 12% year-over-year.

Fiscal year 2016 non-cash stock compensation expense decreased $2 million or 18%. The full year decreases were due to similar factors affecting the quarter-to-quarter variance for the same line items discussed earlier. 2016 litigation and licensing expenses decreased $11.5 million or 29% due primarily to a net decrease in litigation support and third-party technical consulting expenses associated with patent trials and ongoing licensing and enforcement program. Tax expense for fiscal 2016 and 2015 reflects the impact of foreign taxes withheld on revenue agreement executed with foreign licensees in foreign jurisdictions and the impact of full valuation allowances recorded for foreign withholding tax credits for both periods and for net operating loss carry-forward in 2015. As of the end of 2016, our net operating loss carry-forwards totaled approximately $148 million and foreign tax credits available for use in future periods totaled approximately $52 million.

Cash and investments totaled $158.5 million as of December 31, 2016, versus $145.9 million as of December 31, 2015. As previously reported in August, 2016, we formed a strategic partnership with Veritone whereby Acacia provided $20 million in funding to Veritone in the form of two $10 million loans convertible into equity. Acacia’s December 31, 2016 financial statements reflect an allocation of the loan amount between the debt security and the common stock purchase warrants received and also reflects accrued interest income and accretion of the debt security discount. Please refer to about 10-K and previous filings with the SEC for additional details regarding our strategic partnership with Veritone. Looking forward from an operation standpoint, in 2016 we continued to lower our operational cost structure.

Year-to-date 2016 compared to year-to-date 2015, excluding severance costs, variable corporate legal, variable performance and stock based compensation expense, we have realized a 22% decrease in SG&A expense and have also reported a 29% decrease in litigation and licensing expenses. We expect our 2017 fixed SG&A expense, excluding non-cash charges and certain variable expenses to be in the range of $11.5 million to $12 million. We expect 2017 scheduled patent amortization expense to be approximately $22.3 million. We expect 2017 non-cash stock compensation expense based on outstanding grant as of December 2016 to be approximately $6.2 million. This concludes our summary of the fourth quarter and full year 2016 results.

I will now turn the call back over to Marvin Key.

Marvin Key: Thank you, Clayton. The team at Acacia Research continues to maximize the value of our patent assets for the benefit of our shareholders and our patent partners. In 2016, thanks to the hard work of our employees, Acacia achieved the following; for the year, Acacia generated over $152 million in revenue, an increase of 22% over 2015. Additionally, Acacia was able to cut costs and increase operational efficiencies.

The net result was Acacia was able to generate non-GAAP cash flow of over $31 million, one of the best pro forma annual financial results in the company’s history. As previously stated in past calls, the challenge for 2017 remains finding high quality patent portfolios in a current environment that meet our time and risk and financial return metrics. In 2016, Acacia brought in two new portfolios covering technologies such as semiconductor chips for power management, system on chip architecture and microprocessors and packaging technology in memory and semiconductors along with patents covering circuits used in DRAM and flash memory. Additionally, there were a number of positive events for Acacia in 2016. First was our patent trial victory versus Apple from our CCE portfolio obtained from the Nokia Networks.

On September 14, the jury awarded CCE over $22 million in damages and also found Apple willfully infringed our patent. Because the jury found willful infringement, the judge has the option of increasing the award. The post trial motions addressing enhanced damages for willful infringement and certain other issues raised by CCE and Apple were argued to the District Court in late-January and are awaiting a ruling. Second, the license agreement announced with SK Hynix of Korea in Q3 was a soft license. Soft license is significant, because it means the license agreement was reached through direct negotiation without the need for any litigation.

Third, Acacia invested $20 million in a convertible note issued to Veritone Inc. Veritone is developing a next generation open artificial intelligence platform with technology that uses multiple cognitive engines to analyze, index and search audio and video data. Veritone’s open platform renders every frame and every second of audio and video data searchable for its content. This technology has the capability to revolutionize audio and video search and discovery. Acacia may invest an additional $30 million should Veritone achieve certain milestone.

In 2016, our German St. Lawrence subsidiary also had trial wins and injunctions in Germany resulting in licensing agreements from HTC and Vodafone and currently has injunctions against ZTE and Motorola. Although, no date has yet been set, it is expected that St. Lawrence will also go to trial against Apple in Germany later this year. Our U.S.

St. Lawrence subsidiary has a trial against Motorola scheduled for the week of March 13 in Marshall, Texas. Second trial is scheduled to follow against ZTE under the same patents. Another trial against Apple under the St. Lawrence portfolio is currently scheduled in Marshall, Texas later this year.

As Acacia moves into 2017, we are committed to maximizing the value of our current patent assets for our patent partners and shareholders. We are also committed to maximizing the value of the Acacia brand, our talent, our patent expertise and knowledge and our balance sheet for the future growth of Acacia. Thank you again for your time and interest in Acacia. If you have any specific questions, please feel free to contact me or the company.

Operator: Ladies and gentlemen, this concludes our conference call for today.

Thank you all for participating and have a nice day. All parties may now disconnect.