Acacia Research Corp
NASDAQ:ACTG
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Acacia Research Corp
Earnings Call Analysis
Summary
Q2-2024
Acacia reported robust financial and operational results for Q2 2024 with a 227% increase in revenue to $25.8 million, largely driven by a strategic acquisition in the energy sector. The intellectual property business saw significant growth, generating $5.3 million, and the energy segment reported $14.2 million in revenue. Industrial operations, although down in revenue, managed cost improvements. Adjusted book value per share increased to $6.07, excluding a one-time legal accrual. The company remains focused on acquiring businesses with stable cash flow and leveraging market opportunities despite current volatility.
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Good afternoon, ladies and gentlemen, and thank you for joining us for Acacia Research Second Quarter 2024 Earnings Conference Call. My name is Bria, and I will be your conference operator today paybacks. 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 these remarks, there will be time for questions. Analysts and investors are reminded that any additional inquiries can be directed to Acacia calling today's call at irtshares.com. I would now like to turn the conference over to Mr. Brent Anderson of Gagnier Communication. Mr. Anderson, you may begin your conference.
Thank you, operator. Leading today's call are MJ McNulty, Acacia's Chief Executive Officer; and Kristen Hoover, Acacia's Interim Chief Financial Officer. Before MJ and Kirsten 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-K and quarterly reports on Form 10-Q filed with the SEC. 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. MJ McNulty. Over to you.
Brent, thanks very much, and thank you all for joining us today for our second quarter earnings call. As many of you have heard me say, case is a value-oriented acquire businesses across both the public and private markets, we acquire 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. This is important, and we believe it's our differentiator for creating long-term value for shareholders of corners. 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. I raise these points on today's call because I believe Acacia's efforts to build excellent businesses are paying off as our second quarter 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 second quarter. The company generated $25.8 million in consolidated revenue up by 227% compared to the second quarter of last year and up 121% compared to the first 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 $4.9 million year-over-year due to an increase in the number of license agreements executed during the quarter. Our energy operations delivered revenues of $14.2 million in Q2, including the impact from the acquisition completed in mid-April of this year. And while our industrial operations revenue decreased a little by about $1.2 million 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. In terms of adjusted EBITDA, the intellectual property business generated $8.5 million in adjusted EBITDA during the first 6 months of 2024, Pentronic generated $2.3 million in adjusted EBITDA during the first 6 months of the year and benchmark generated $8.4 million in adjusted EBITDA during the first 6 months of the year.
Our corporate parent generated an adjusted EBITDA loss of $8.8 million. However, as we've mentioned in the past, the expenses at corporate were offset by $10 million 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. 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 $12.9 million 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.
Book 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 interest at this stage in our company's life. Kirsten will cover the additional details of our quarterly results in a few minutes, 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 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. Acacia now owns 73.5% of the Benchmark Energy subsidiary following the recent acquisition of these assets.
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 oklahama Basin throughout the Texas Panhandle in 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 optimization, a more active well maintenance program and reopening previously closed wells to enhance the status quo production profile and pursue our goal of maximizing cash flow for benchmarks assets. During the second quarter, the experienced team began implementing its operational improvement plan, a meaningful part of the strategy.
In the second quarter, our energy operations delivered consolidated revenues of $14.2 million, including the impact from the acquisition completed on April 17 of this. Further, in terms of adjusted EBITDA, benchmark reported $7 million 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. 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 to our technology vertical, where our intellectual property business generated $5.3 million in licensing and other revenue during the quarter compared to $400,000 in the same quarter last year. 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 group opportunities.
Now turning to our industrials business. When we acquired the Pentronic operating business in October of 2021, we believed it represented an attractive price relative to the potential cash flow generation. We also recognize there would be operational and strategic restructuring requirements. In early 2023, the team began replacing the Pentronic's management team and brought in an operating adviser to significantly reduce costs and improve efficiency. We are pleased with the progress of Pentronic as it transitions its business mix from lower-margin printer sales to higher-margin consumables products, including in 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. Pentronic generated $6.3 million in revenue during the quarter compared to $7.5 million in the same quarter last year. Despite the lower revenue, we were pleased with the turnaround work that the Pentronic team continues to undertake, including a key focus on top line initiatives, and we anticipate Pentronic to continue to generate free cash flow on an annual basis.
Turning now to M&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 underlying businesses. Prior to the recent market volatility, the M&A environment remains constructive with a strong pipeline of potential public and private opportunities, we believe additional opportunities may be created as the volatility works its way through the system. Our team continues to evaluate opportunities to acquire new businesses where our research execution and operating partners can drive attractive 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 second quarter financial results.
Thank you, MJ. Our GAAP book value at June 30, 2024, was $596.7 million or $5.95 per share. Excluding the impact of the additional accrual of $12.9 million in the first 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 $25.8 million compared to $7.9 million in the same quarter of last year. Our intellectual property business generated $5.3 million in licensing and other revenue during the quarter. up over 200% compared to $0.4 million in the same quarter of last year due to the increased number of license agreements executed quarter-over-quarter and higher average license fees. Our industrial operations business generated $6.3 million in revenues during the quarter, down compared to $7.5 million in the same quarter of last year due to a decrease in printer sales.
Benchmark generated $14.2 million in revenues in the quarter. As Acacia'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 second quarter financial results. General and administrative expenses were approximately $10 million compared to $9.4 million in the same quarter of last year, with the increase due to the increase in G&A for the addition of our Energy segment, partially offset by a decrease in parent legal fees and a decrease in Pentronic G&A. The company recorded an operating loss of $4.8 million, down 62% compared to an operating loss of $12.5 million in the same quarter of last year due to higher revenues generated.
Pentronic contributed $0.2 million in operating loss, which included $0.7 million of noncash depreciation and amortization expenses. Benchmark contributed $3.2 million in operating income, which included $3.5 million of noncash depreciation, depletion and amortization expenses and does not reflect $0.1 million of realized derivative gains. GAAP net loss attributable to Acacia Research Corporation in the second quarter was $8.4 million or $0.08 per share compared to GAAP net loss attributable to Acacia of $18.8 million or a loss of $0.36 per share in the second quarter of last year. The net loss for the second quarter of 2024 included $4.7 million in unrealized losses related to the fair value of our remaining equity securities. The second quarter included $0.8 million in nonrecurring 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 second quarter of 2024 would have been $0.02 per share. As of December 31, 2023, our NOL totaled approximately $18 million. 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 $405.2 million at June 30, 2024, compared to $403.2 million at December 31, 2023. The increase in cash was primarily due to timing of payments received from licensees offset by $59.9 million paid to acquire the Revolution assets. Equity securities without readily determinable fair value totaled $5.8 million at June 30, 2024, unchanged from December 31, 2023. Investment securities, representing equity method investments net of noncontrolling interest, totaled $19.9 million at June 30, 2024, unchanged from December 31, 2023. Acacia owns 64% of MalinJ1, which results in a 26% ownership stake in Viamet Pharmaceuticals for Acacia. The parent company's total indebtedness was 0 at June 30, 2024. On a consolidated basis, Acacia total indebtedness was $82 million in nonrecourse 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 second 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.
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. Fourth, we have significant resources and the flexibility to take advantage of uncertain environments and dislocated situations. Fifth, 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.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Adam Eagleston with Formidable.
So my question was going to be around the share count. It didn't look like that change. So how are you all thinking about the buyback now?
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.
And your next question comes from the line of Anthony Stoss with Craig-Hollum Capital.
PMG and Kirsten, since the second benchmark purchase was kind of intra-quarter, I'm wondering if you can give us a kind of an expected range of revenues that you might think about for your benchmark assets for the September quarter?
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 the 17. And so I think you can probably interpolate the revenue estimates for the third quarter based on some of the data that's out there.
All right. I'll give it a look.
And your next question comes from the line of Brett Reiss with Janney.
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?
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. 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.
Right, right. MJ, with benchmark, is the increase in revenue is 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?
Yes. So we follow a PDP strategy. So we acquired and only paid for producing production at these assets in the Western Anadarko basis. 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. And so that's kind of piece on 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. I 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 one. And so they're also working on that. That's not top line. That ends up becoming a reduction in costs. And then the third, 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, so we're not out to drill wells. However, we can partner with folks that can take the drilling risk doing that acreage and we have a very capital light way to potentially create additional revenue in that sort of a structure.
Okay. Now in the body, the release there was addition to G&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?
Yes. So we are -- we own 73.5% of benchmark. And so we own 73.5% of the costs to run the business. There was a little bit of G&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 no interest in that deal, it will fully consolidate onto our P&L. And then Kirsten can correct me where I'm wrong, it will be adjusted for in the minority interest section of the P&L.
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?
Now we don't talk about that, Brett.
We schedule in the upcoming 12 months. So that is disclosed in our 10-Q, those upcoming 2.
Okay. I'll look there. Now the turnaround that you're trying to implement in Pentronicsif it doesn't gain traction, how long will you try the turnaround before you throw in the towel and exit that business?
Well, so first, the turnaround is actually doing quite well. 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 cost to match what we want the profitability to be on the consumables piece of the business. 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.
Operator, are there any more questions?
[Operator Instructions] Our next question comes from the line of Todd [indiscernible] with [indiscernible].
MJ, Christine, a quick question under key business highlights. I see generated $71 million in operating cash flow for the first half of 2024. That seems like such a robust number considering the run rate for Q1 and Q2. How do we get to $71 million.
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 first 6 months of the year, which is driving a big portion of that.
And there are no further questions at this time. I would like to turn it back to MJ McNulty for closing remarks.
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. 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, and we look forward to talking to you soon.
Thank you. This concludes today's conference call. You may now disconnect.