Acacia Research Corp (ACTG) 2010 Q4 法說會逐字稿

Good afternoon.

Welcome, ladies and gentlemen to the Acacia Research fourth quarter earnings release conference call.

At this time I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode.

At the request of the Company we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Mr.

Paul Ryan.

Please go ahead, sir.

Thank you for being with us today.

Today's call may involve what the SEC considers to be forward-looking statements.

Please refer to our 8-K which was filed with the SEC today for our forward-looking statement disclaimer.

In today's call the terms we, us and our refer to Acacia Research Corporation and its wholly and majority owned operating subsidiaries.

All Intellectual Property acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority owned operating subsidiaries.

With us today are Chip Harris, President of Acacia, Dooyong Lee, Executive Vice President, and Clayton Haynes, our Chief Financial Officer.

Today I will give you an overview of the progress we are making on building the business.

Clayton Haynes will provide you with an analysis of our financial results, and we will then open the call for questions.

Acacia had another record year in 2010, it was our best year so far as we continued to build the leading patent licensing company.

We nearly doubled our performance from the prior year in most of our key metrics.

In 2010 Acacia generated record annual licensing revenues of $132 million compared to $67 million in the prior year, an increase of 96%.

Our growth was driven by 221 new licensing agreements, compared to 117 in the prior year, an increase of 89%.

We generated revenue from 58 different licensing programs, compared to 30 in the prior year, an increase of 93%.

We generated initial revenue from 31 new licensing programs during the year, compared to 12 in the prior year, an increase of 158%.

We increased our cash and investments to $104 million from $54 million at the end of the prior year, an increase of 94%.

And importantly, we achieved this exceptional growth with virtually no increase in head count, and generated record GAAP net income of $34 million.

I thank all of the talented and dedicated people at Acacia for another outstanding year, as we continue to build Acacia's reputation as the premier patent licensing company.

Acacia also had a record year in acquiring control of 36 new patent portfolios for future licensing, which continues to increase the potential for future revenue growth.

Based on our successful track record an increasing number of companies are selecting Acacia as their partner for patent licensing.

Turning to the fourth quarter, we generated revenues of $13.1 million, compared to $19.9 million last year.

Revenues were generated from 41 new licensing agreements.

We generated revenue from 25 different licensing programs, including four programs generating initial revenues.

We also acquired nine new patent portfolios for future licensing, and ended the year with over 170 patent portfolios.

Clayton Haynes our CFO will provide more detail on the fourth quarter results following my comments.

Going forward, Acacia is beginning to demonstrate the value we have created in building a leading outsource patent licensing company.

The scale of our asset base, over 170 patent portfolios and growing, and the experience we have gained in successfully negotiating over 960 licensing agreements covering 91 different technologies places Acacia at the forefront of this emerging industry.

We are seeing a rapidly growing interest in patents as a new asset class from both corporations and the investment community, and think Acacia is extremely well positioned to continue playing a leadership role.

Acacia is also beginning to benefit from two major trends which are impacting our business.

The first theme is the rapidly growing interest of large companies in the US, Europe, and Asia, and generating revenues from their patent portfolios, to earn a return on investment from their R&D and M&A activities.

Even companies who historically have not generated any revenues from their patent assets are now beginning to consider generating a revenue base, if only to offset their patent payment obligations to other companies.

As more and more companies realize that he have a fiduciary obligation to generate returns from the use of their valuable assets by others, companies are starting to focus on their IP balance of payments.

As the number one outsource patent licensing company, we are seeing many new opportunities as large companies seek to generate financial returns.

Acacia's business model is very attractive to companies who want to generate returns without having to make any additional investments of capital or human resources to earn those returns.

Acacia's corporate IP partners are recognizing that we have built a highly specialized company for patent licensing, and that there are significant advantages to outsourcing this activity to us.

They increasingly recognize the value of our multidisciplinary teams of engineers, patent attorneys and licensing executives, who have screen large patent portfolios for licensing opportunities.

Our due diligence teams that can validate licensing opportunities, our broad partnering relationships with leading law firms for enforcement, and the proven track record of our licensing teams in generating revenues.

A good example of this is our recent strategic patent licensing alliance with Renesas Electronics, the world's third largest semiconductor company, which has a portfolio of over 40,000 patents.

Renesas Electronics is a Tokyo Stock Exchange company with over $14 billion in annual sales, which has been formed by Hitachi, Mitsubishi, and NEC.

Renesas has selected Acacia as its partner, and we have rapidly condensed a number of initial licensing programs of Renesas patent portfolios, and have already begun generating revenues.

We see a significant expansion of Acacia's business from these IP partnering agreements with large companies, and we are currently in discussions with a number of well known technology companies.

The second major trend that is beginning to impact our business is the growing interest of large companies in entering into structured agreements with Acacia, which enable them to in-license patent portfolios from us.

Companies are determining that it makes economic sense for them to enter into structured agreements with Acacia, that will facilitate periodic licensing negotiations and license renewals and reduce litigation.

This trend is being driven by the scale we are building in total patent portfolios, the accelerating growth of our intake of new portfolios, and the increasing depth and quality of many of our new portfolios.

This trend could benefit Acacia and our IP partners by bringing more certainty to the licensing process, shortening the time to money, reducing legal expenses, and improving profit margins.

We entered 2011 with the largest number of licensing opportunities in our history, Acacia expects continued growth in new licensing programs, and the addition of new patent portfolios for future licensing, as we continue to build our leadership position in this industry.

Our quarterly revenues will continue to be uneven.

Our key internal performance metrics, our growth of 12 month trailing revenues, growth in patent assets for future licensing, growth in new licensing programs generating initial revenues, and growth in annual profits.

With that, I would like to turn the call over to our Chief Financial Officer, Clayton Haynes.

Thank you, Paul.

And thank you to everyone joining us for today's fourth quarter and fiscal 2010 year end earnings conference call.

As indicated in today's earnings press release, on a consolidated basis Acacia reported fourth quarter 2010 revenue of $13.1 million, as compared to $19.9 million in the fourth quarter of 2009.

Fourth quarter 2010 revenues included license fees from 41 new licensing agreements covering 25 of our technology licensing programs, as compared to 32 new licensing agreements covering 21 of our technology licensing programs during the comparable prior year quarter.

For more details, please refer to today's earnings press release for a summary of technology licensing programs contributing to revenues during the quarter.

We continued our trend of trailing 12-month revenue growth over the comparable prior year quarter with consolidated trailing 12-month revenues totaling a record $131.8 million as of December 31 2010, as compared to $67.3 million as of December 31 2009.

Currently on a consolidated basis our operating subsidiaries have generated revenues from 91 of our technology licensing programs, up from 60 technology licensing programs as of the end of the comparable prior year quarter.

License fee revenues continue to fluctuate from period to period, based on the various factors discussed on previous earnings conference calls, and in our periodic filings with the SEC.

For the fourth quarter of 2010 Acacia Research reported a net loss of $5.3 million, or $0.16 per share, versus a net loss of $4.7 million, or $0.15 per share for the comparable prior year quarter.

Included in the fourth quarter 2010 net loss are noncash patent amortization charges and noncash stock compensation charges totaling $2.9 million, as compared to $2.8 million in the comparable prior year quarter.

Our average margin defined as gross license fees less inventor royalties and payments to noncontrolling interests and contingent legal fees for the portfolios generating revenues during the period was approximately 53% for the fourth quarter of 2010, as compared to 42% for the comparable prior year quarter.

Average margins continue to fluctuate period to period based on the mix of patent portfolios that generate revenues each period, the terms and conditions of license agreements executed each period, and the related economics associated with the underlying inventor agreements and contingent legal fee arrangements if any.

Inventor royalties expense and payments to noncontrolling interests for the fourth quarter of 2010 decreased 38% to $3.8 million versus $6.1 million for the comparable prior year quarter.

Relatively consistent with the related decrease in revenues, which was partially offset by an increase in average margins for the same periods.

Contingent legal fees for the fourth quarter of 2010 decreased 58% to $2.3 million versus $5.4 million for the comparable prior year quarter, again consistent with the related decrease in revenues which was partially offset by an increase in average margins for the same periods.

On a combined basis, inventor royalties, noncontrolling interests, and contingent legal fees as a percentage of total revenues decreased to 47% as compared to 58% in the comparable prior year quarter, primarily due to lower inventor royalty rates and lower contingent legal fee rates if any, for the portfolios generating revenues during of the fourth quarter of 2010.

Fourth quarter 2010 marketing general and administrative expenses including noncash stock compensation charges increased to $6.3 million, versus $5.2 million for the comparable prior year quarter, primarily due to an increase in variable performance based compensation costs, and increase in stock based compensation related charges, and a minor net increase in engineering and licensing personnel costs when compared to the prior year quarter.

Fourth quarter 2010 litigation and licensing expenses decreased to $2.9 million as compared to $5.6 million for the comparable prior year quarter, primarily due to lower net levels of litigation support, third-party technical consulting, and professional expert expenses associated with our continued investment in ongoing licensing and enforcement programs.

The decrease was partially offset by an increase in litigation and licensing expenses incurred in connection with our continued investment in new licensing and enforcement programs commenced since the end of the prior year quarter.

Next I would like to provide a brief summary of the results for the full fiscal year ended December 31, 2010.

As Paul indicated, fiscal 2010 revenues were a record $131.8 million, as compared to $67.3 million in 2009.

Our average margins for 2010 were approximately 63% as compared to 45% for 2009.

We reported record fiscal year 2010 GAAP net income from operations of $34.1 million, or $1.05 per share, and $0.97 per fully diluted share, versus a net loss of $11.3 million, or $0.38 per share in 2009.

Included in fiscal year 2010 net income our noncash patent amortization charges and noncash stock compensation charges totaling $14.1 million, as compared to $11.7 million in fiscal 2009.

Inventor royalties and noncontrolling interests for 2010 totaled $28.5 million, as compared to $21.3 million for fiscal 2009.

Contingent legal fees expenses for 2010 totaled $19.9 million as compared to $15.9 million for fiscal 2009.

The increase in inventor royalties including noncontrolling interests and contingent legal fees, primarily reflects the increase in related revenues for fiscal 2010.

On a combined basis inventor royalties including noncontrolling interests and contingent legal fees as a percentage of total revenues decreased to 37% in fiscal year 2010, as compared to 55% in fiscal year 2009.

Marketing general and administrative expenses increased 19% to $25.1 million in fiscal 2010 from $21.1 million in fiscal 2009, due primarily to an increase in variable performance based compensation costs, and a net increase in engineering and licensing personnel in fiscal year 2010.

Litigation and licensing expenses were relatively flat in fiscal 2010 as compared to fiscal 2009, reflecting relatively comparable net levels of related patent enforcement and prosecution activity associated with our continued investment in ongoing licensing and enforcement programs, and new licensing and enforcement programs commenced since the end of the applicable prior year period.

The increase in our tax expense in the fourth quarter and full fiscal year 2010 versus the comparable prior year periods reflects the impact of the suspension of the use of NOLs by the state of California pursuant to the budget passed in October of 2010, and the calculation of tax expense for financial reporting purposes without the excess tax benefit related to the exercise investing of equity based incentive awards in fiscal year 2010.

The excess tax benefit is available to offset taxable income on our 2010 consolidated tax return, and accordingly the tax expense calculated was credited to additional paid in capital not to taxes payable.

As a result of the excess tax benefit realized in 2010, our state taxes payable in fiscal year 2010 related to the 2010 tax year totaled $170,000 primarily relating to California state minimum taxes related to the 2010 tax year.

Looking forward for fiscal 2011 we expect MG&A excluding noncash stock compensation charges, to be in the range of $18 million to $18.5 million, including the impact of variable based performance compensation costs, which for purposes of the range provided are estimated to be similar to fiscal 2010 levels.

For fiscal 2010 we estimate that patent related litigation and licensing expenses incurred for 2010 will be between approximately $13.5 million to $14 million.

From a balance sheet participant cash and cash equivalents and investments totaled $104.5 million as of December 31 2010, compared to $53.9 million as of December 31 2009.

Working capital increased 156% to $92.3 million as of December 31, 2010 from $36 million as of December 31, 2009.

Net cash inflows from operations for the fourth quarter of 2010 totaled $14.6 million versus net cash inflows of $10.2 million for the fourth quarter of 2009.

Including cash flows from investing and financing activities, cash inflows for the fourth quarter of 2010 totaled $19.1 million, as compared to $8.9 million for the fourth quarter of 2009.

Net cash inflows from operations for the full fiscal year 2010 totaled $44.9 million versus net cash inflows of $16.1 million for fiscal year 2009.

Including cash flows from investing in financing activities, cash inflows for fiscal year 2010 totaled $50.8 million as compared to $3.5 million in the fiscal year 2009.

Again, thank you for joining us for today's earnings conference call.

And I will now turn the call back over to Paul Ryan.

Thanks, Clayton.

Operator, you can open the call for questions?

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Mark Argento of Craig-Hallum Capital.

Please state your question.

Hi, good afternoon, guys.

Hi, Mark.

Talk a little bit about the Renesas relationship.

I know you mentioned in your prepared remarks that you have already seen some revenue from that relationship.

Can you talk a little bit about how you are working with them, kind of the different patent selection process, and how material and meaningful that business could be in the coming year?

Sure, absolutely.

I think it is indicative of the growth of our business.

I think we will be doing more of these strategic alliances where we will be licensing multiple portfolios from the same IP partner.

Historically over the first few years as we built the business we were basically dealing in single patent portfolios.

I think now, with the interest in large corporations in monetizing their patents, there will be a much greater opportunity for us to come in and really be a strategic partner in a broad sense looking at all of their patent portfolios.

In some cases I think there will be companies, not necessarily Renesas, but there will be some companies we will either be advising on patents that they may want to abandon, ones that they my want to improve on, and focus on portfolios that they have that they can generate money.

But as I said in my comments, there is a tremendously increasing interest in the IP balance of payments of companies.

Many companies who have not historically generated any money from patent licensing, and understand the dynamic in the marketplace.

There are some very good companies in patent licensing, the Qualcomms and IBMs of the world, but quite frankly a large number of companies, historically the IP group has been a staff function of reporting to operating divisions to defensively protect products, and in this new era many companies really don't have the talent and resources in place to identify monetization opportunities, and to execute on them.

We think it will be a very big growing part of our business and Renesas is kind of the first prototype example of that.

And in terms of kind of the, how quickly you ramp up with Renesas, how do you work with them?

Do you sit down and kind of put a plan together as to which IP you want to bring to market, or how do you work with these guys?

Well, we have done several already.

What we do is we look at their portfolios, we sit down, identify portfolios, go to them and say this grouping of patents would be a very logical licensing program, let's put those under contract, let's move those into our possession, so that we can have standing to enforce those.

We are kind of doing program by program, and we are going as quickly as we can, and doing similar things with some other companies actually in anticipation of doing those types of deals.

We are very proactive.

We will come in and look at the portfolio, identifying the licensing opportunities, and then encourage them to take that grouping of portfolios, and transfer control of it to us so that we can start the programs.

So we are very proactive in the process.

I know in previous calls you thought that the opportunity to do three of these more comprehensive structured deals, that was kind of the target for 2011.

Do you still feel comfortable you will be able to hit that?

Just for clarity for everyone on the call, kind of the other side of the business, the one side, the intake where we are partnering is where we are talking about with the Renesas type deals, where we come in with a large corporation, identify that and take over the licensing, and split the revenues with them.

What Mark is referring to now are these structured licensing agreements, where we are granting the licensing rights, and again up until last year, we had done all of those licenses kind of on a one-off basis, but now that we have scaled the business to this degree, it makes sense from an economic efficiency standpoint, for companies to enter into some type of structured arrangement with us, to enable us to license a number of in license portfolios to them, in license them, and we have said that we have a goal of doing three of those structured licenses this year with large companies, and that is good, because it generally results in a lot of the existing portfolios being negotiated licenses at one time, and so far our IP partners, it is a great opportunity for us that normally they probably wouldn't have if the portfolio is in litigation, where by virtue of doing this one-time negotiation simultaneously of all of our programs in house, we can generate revenues for our partners and for our shareholders.

It works for both sides.

It is a win/win for the companies we are doing it with.

It is much more efficient and obviously reduces a lot of legal costs for both sides, and we think as we scale the business, it will become a major portion of our revenue growth.

In terms of the competitive environment, I know recently RPX filed to go public, are you seeing any from a competitive environment out there, any kind of new entrants or anything that kind of catches your attention, and also with RPX assuming that they successfully go public and raise some capital, how do you look at them in the marketplace?

We think they are definitely the newest entry into this new market.

We think they are doing a great job.

Obviously we have done a number of deals with them.

They are in the business of buying patent licensing rights.

We are in the business of selling patent licensing rights.

We anticipate doing a great deal of business with them in the future.

We are well aware that they are raising some more capital and going public.

I think it is going to be great for the visibility of this industry and sector to have another public company.

I think the more visibility we have in the investment community, the more people will appreciate the strength of the Acacia business model.

I think they are complementary business models in a very fast and emerging market.

Last, more of a housekeeping question.

Clayton, I think you mentioned in your remarks that MG&A for the year, $18 million to $18.5 million, and I am assuming that that is excluding any stock comp expense, is that right?

That range does exclude of impact of nonstock cash compensation charges.

The NOL as of the end of the year, where do you stand with the NOL?

The NOL is approximately in the $95 million to $100 million range.

Great.

Appreciate it, guys.

Thanks.

Thank you, Mark.

Our next question comes from the line of Jonathan Skeels of Davenport.

Please state your question.

First just on the quarter, you entered into a number of settlements in January.

Were some of these settlements ones that you thought may have happened in fourth quarter?

Did anything get pushed out in the quarter that impacted revenues at all in the fourth quarter?

Well, we don't view it that way, but obviously again, we have always told our shareholders and everyone interested, we do not try to manage for 13-week quarter revenues, we try to manage for 12-month trailing revenues.

So it happens every quarter, there are some deals that happen to make it in some quarters, and some that don't.

We will never succumb to any pressure, the other side is oftentimes trying to negotiate that at the end of the quarter.

I think you can see by virtue of some of the deals we did in January, that we certainly didn't succumb to that kind of pressure.

And that is always part of the negotiating process.

It always happens every quarter, and we could go back and move a couple of deals one way one quarter or another, and probably have quite different quarterly results, but at the end of the year it is all the same number, so that happens every quarter.

Great.

And then on the global structured license deals, how extensive I guess are some of these?

Are companies also looking to turn over patents to you for licensing, and can you talk a little bit about that opportunity?

Well, that can certainly be a complementary function of entering into it.

We are doing it on both sides.

Some are just pure business development relationships with companies where they want to monetize their patents, certainly it makes sense that in cases where we enter into structured term licenses with a company, that that could lead to enforcing or licensing some of their patents as well, and we certainly expect that is going happen with some of our structured licensing partners it is a logical outcome.

And there may be even times we are in discussions with some potential structured licensing partners, where if we complete that, there may even be some third-party portfolios that we jointly acquire, and therefore they would get licensing rights for those, and then we could complete the rest of the licensing program and share revenues with them.

So certainly as the industry emerges, and as this asset class grows, I think we are extremely well-positioned to do all of those things with large companies.

We can certainly bring efficiency to the intake of the patent they need to license through our intake, and we can also obviously go out and monetize their nonperforming assets, which in effect could help pay the in licensing cost of ours, and then we can also jointly strategically work with them and identify third-party portfolios that we could jointly acquire, so I think we will be doing all of those.

Okay.

And then on the structured deals, are there, or is part of the negotiation around renewals, are there renewals included in some of the deals that would extend them beyond kind of the three year term that I think most of, or the ones signed are, it just seems that given the amount of patents you are bringing in, the dollar amount could increase substantially when these things come up for renewal.

Is that something companies want to negotiate before entering into a deal, some sort of cap on what they would pay for renewal in the outyears?

Well, I can't really comment, because obviously the ones we done are confidential and given the fact that we are in discussions now with third parties, I wouldn't want them to be taking their cues from our conference call from a negotiating standpoint.

Certainly it is something that we are aware of, that does enter into the situation, but I can't really comment specifically on it.

Okay.

And have you seen evidence this far I guess of some of the global or structured deals helping to drive patents to Acacia, and is that part of the strategy when companies enter into these deals with you?

Can you talk a little bit about that?

There is no question that that is beginning to occur even though it is a very early stage.

People know we have some renewals coming up on a confidential basis, and again, I think you have to look at the comparable time frame.

A lot of people don't appreciate for a patent owner not to be partnered with us and go out and try to get paid.

It could be a five, seven, nine year cycle, so even at the beginnings of a three year renewal period, that is usually closer time to money than the alternative they have.

Certainly companies are aware of that.

We have actually had a number of patent holders come to us wondering if we are in negotiations with certain companies, because they have portfolios that would apply to those companies.

From that standpoint it has definitely driven more interest in patent holders coming to Acacia, because they see the benefit to them without risk of litigation if we have got structured licensing agreements, and we do plan to do more this year obviously, it could lead to some much earlier less risky payments for them for their portion of the revenue split.

So certainly it is attracting more portfolios to us.

Okay.

Then on the corporate partnership side, are these primarily technology companies that are interested, or are you seeing kind of broad interest in companies in other industries as well, and to that point, do you expect to sign more of these partnerships with large companies this year, 2011?

Yes, we do plan on signing more partnerships on the business development side, and some of the companies we will partner with can be niche companies, or have related technologies that might not necessarily be the most well known tech companies, whereas on o the licensing side on the structured term deals, obviously we have focused on companies where it makes sense for us, particularly companies that have a lot of nonperforming assets themselves, because we think that can broaden the relationship.

So we will be partnering with, on the structured licensing deals probably more with the very well known companies, and on the business development side both of those well known companies, as well as some fringe players who have valuable patents.

On the Renesas portfolio, you have done a handful of licenses to certain portfolios there to date.

Will these all be kind of one-time individual settlements, or will there be broader kind of multiyear licenses signed by companies that may have more exposure to those patent portfolios?

I think it going to be a mix of both.

Already we are seeing indications because companies are now well aware that we do have the strategic alliance with Renesas.

When we come to them with one or two portfolios, obviously there are discussions around what other portfolios there may be, and that may enable us to structure some licensing agreements that are both paid up and some that have running royalties.

So people are obviously aware of our strength in the marketplace, and it is logical that then they would want to understand what other portfolios we may be bringing to them in the future.

Actually it makes the process much more efficient, and hopefully shortens the time to money for both us and Renesas.

And then last one and I will get off, but on the cash balance I guess what are you seeing in terms of patent acquisition opportunities, and are you looking to make purchases just on your own or with partners, and can you remind us of the return parameters you typically look for?

Well, during the last couple of years we have been a little under $10 million that we have advanced in cash each year.

Generally that takes the form of a partner who either A, really needs some money and we can provide that to them, or they want to see us have some skin in the game, which we are more than happy to do.

As you know our typical deal is 50/50.

If we are putting up cash then we will generally get a better than 50/50 split.

We will get additional points for that, so we will continue doing that in the future, probably I would guess at roughly the same pace.

In addition to that, we are aware of some significant portfolios, and we have had some discussions with some major companies about jointly acquiring some portfolios.

So I think if anything you may see us strategically deploy some capital during 2011 beyond our normal pace.

Great.

Thanks.

Thank you, Jonathan.

Our next question comes from the line of Stephen Koffler of Con Brio.

Please state your question.

I know these in licensing deals are somewhat sensitive.

You referred to two large well-known companies.

I have a question about an announcement you made on January 19th.

Acacia subsidiary enters into a licensing agreement with Microsoft.

When that came out, I was curious should we be thinking about this as another large in licensing deal like the ones you announced in 2010, because it kind of sounded like that.

But please give us some idea about what this is, and am I thinking correctly in terms of the scope?

I would be happy to talk in generalities.

I can't talk specifically about confidential specific licensing agreements.

I think in the future you may see us enter into some agreements that the analysts pick up on, that say Acacia Research as well as a subsidiary entered into a relationship, probably indicating there is a broader term license.

There may be as part of that transaction a number of carve-outs.

In other words, given the amount of money that we are paid over the period of time they may get term licenses to the majority of the portfolios we bring in, but given the pricing we may reserve the ability to have one or two slots available for additional licensing.

In other words, that aren't part of the deal.

As we continue to grow the business, and as our intake continues to accelerate, and obviously as we start getting portfolios like access to smartphone patents that have extreme value, in terms of our term deals, we may not be granting the term licensee full rights to everything we bring in over that three year period.

In other words, they may be paying us a fee for the majority of things we bring in, but we may have the ability to carve out certain portfolios if economically that makes sense.

So you may see from time to time that we enter into these relationships with these companies, and yet still subsequently do licensing deals with them.

Okay, so I guess without getting deeper into specifics, should we understand large, you have a large deal with company A that is announced, and we kind of get the idea that it is very large from whatever verbiage is put into the release, et cetera, but then see something down the road with company A we should understand it as okay, this was something in the portfolio that was withheld for the kind of reasons you just described, and now company A will pay additional to get access to those patents.

Is that a correct understanding?

Well, there could be a carve-out.

Yes, the three year license that we grant, the term license of new portfolios we intake during that three year period, may have some carve-outs where there may be additional portfolios that we would negotiate separately.

We may have some agreements and understanding of how we do that under an NDA.

But given the uncertainty on the pricing right now as we are growing rapidly, obviously companies would like to pay us a fixed amount for that three years, and if there is a differential between the dollar amount they want to pay, what we can do is adjust for that by carving out a potential portfolio or two going forward.

There could also be additional payments due based on acquisitions of companies.

Hypothetically you could have an agreement where if certain companies were very inquisitive and acquired more companies, there could be additional payments due.

Okay.

Thanks very much.

Surely.

Our next question comes from the line of Dan Bretthauer of MDC Financial.

Please state your question.

Hi.

Of your legal cases that are likely to go to trial this year, do you think there are any that have potential to be a sizeable upside catalyst to your stock?

We do have litigations obviously all of the time.

I think there is currently, pardon.

Yes, I think we have three currently scheduled litigations that are expected to go to trial in the second quarter.

But oftentimes those are settled, so we really don't encourage people to invest in the stock based on one-time outcomes of litigation which oftentimes have appeals.

It is really our core business is licensing, occasionally when there are large dollar amounts, we will have so many trials.

We did have one with Yahoo.

We have been awarded $12 million.

We still don't have the money, it is on appeal.

So we will have them from time to time, but we really discourage people from owning the stock based on trying to guess the outcomes of specific litigations, particularly given the scale of our business right now we just don't think, and we can't really give guidance because historically what has happened is most of those trial dates have never come about, because there have been settlements prior to that.

As of right now the only thing I know is I think we have three currently scheduled for the second quarter.

And we traditionally don't speculate on catalyst of new stock.

We can speculate on catalysts that will increase our revenues, but not that will move stock.

Thank you.

And on the three cases that you mentioned can you give me the case titles?

I don't have them right here.

You can call in separately, and we can get that information for you offline.

Alright, thank you.

That is okay.

Our next question comes from the line of Walter Ramsley of Walrus Partners.

Please state your question.

Hi, good afternoon.

Thank you.

A couple of questions.

The relocation to Texas, can you just go over why you did that, and how it is going?

Yes, we did it because it is a great place to do business.

We already have people down there.

We have moved our headquarters of Acacia Research Group, which is the primary operating subsidiary of the Company.

Great for recruiting new people.

We have a number of our employees here who have relocated there, based on a better cost of living ratio than in California.

We have also new employees, many of them I think are probably going to go to those offices.

And it is our headquarters.

Over time we expect to have a number of senior executives who have already relocated there permanently, and we expect at the end of the school year, we will have a number of additional ones.

Over time we think probably Texas will be the largest office.

It is our, headquarters and we are in that transition period now.

Okay.

You indicated that you didn't really add any employees to speak of last year.

Are you planning to increase this year, and if not how are you going to keep growing?

That is the great value of our business and the talent of our people.

The more we get into structured agreements with large companies, and get into structured licensing agreements, the more efficient the process becomes, and actually the less manpower you need.

In other words, if you are having to go out and find a law firm to litigate each and every portfolio that is much more intensive than doing structured negotiated licenses.

We will add a handful of people mostly on probably the business development side.

We added so far this year a senior executive that will help build our medical technology business, which we think will have great potential, and really has the potential to be as big as our entire tech business.

We will probably if anything add people on the medical technology side, but again at most it would be a handful of people.

Okay.

And the two structured agreements that the Company completed last year, those two companies do they appear to be satisfied with the way things are turning out?

Well, I think they are because we haven't received any complaints.

But they have been granted the license that they wanted to at the price points that we negotiated with them, and obviously they have the intake of the current portfolios with the exception of some potential carve-outs.

But yes, we have not had any complaints.

Okay.

So by the looks of it, I mean do you think there is a good chance of renewing it when the original term expires?

Yes.

I mean that is the plan.

Certainly we don't want to enter into these not with the intention of doing renewals, so we think if we have a robust pipeline of new portfolios, they are going to be very happy with renewing, because if you look at it we are taking a lot of the disaggregated R&D in the economy, we are the intake and we are delivering it to them in a very efficient licensing process at realistic licensing rates, which is preferable to them over litigation, or people that don't understand values trying to negotiate with them.

I think they appreciate the value we are playing in the food chain here, of helping them bring in portfolios and license to them at realistic prices on an efficient basis without a lot of friction.

So do they provide anything like a reference account to some of these other companies you are pursuing?

They all talk to each other and they all have very top law firms, so they are all quite well aware of the situation, and they are very sophisticated companies who realize the economics of these transactions.

And then just one last thing.

The companies started up its own investment fund last year.

Can you give us on how that is performing?

It is really a sidecar investment fund.

We want it in place.

It is a private partnership.

We have a leading pension fund who has contributed capital.

We have done some initial investments with them.

We wanted it as an alternative financing vehicle.

At one time in our limited history we had a great opportunity, and we didn't have a stock valuation that enabled us to execute on that opportunity, and we don't want that to ever happen again.

This way by having an in place fund that is formed and ready to go, we can if we wanted to have an alternative way to raise capital, and so we are going to build a track record in that fund.

We may or may not expand it, depending on future opportunities.

Okay.

Congratulations, Paul.

Terrific year.

Thanks a lot.

Thank you.

Thanks, Walter.

Our next question comes from the line of Jonathan Skeels of Davenport.

Please state your question.

Quick follow-up questions.

On the access portfolio can you just talk about maybe the interest level there, and where you stand on litigation?

I believe you filed against a number of companies, and when do you expect additional settlements there?

You will know the true interest level when you see announcements that are access our subsidiary has licensed their technology.

There is obviously an interest as you are well aware.

There was an article in the Wall Street Journal describing our first license to Microsoft, which we were able to do without litigation.

We do have litigation against some users of the technology, and we don't against others.

As you can well imagine, we are probably in discussions with a number of companies.

And then on the Yahoo resolution, when do we expect that whole appeal to be completed?

We expect the Federal Circuit to rule on the appeal any time now.

It has been a few months.

You can expect that any time in the next few weeks I would guess.

Okay.

And then at that time I guess there would be some revenue recognition, potentially assuming all goes well for you from that ordeal?

It depends on which way it goes.

If they order Yahoo to pay us, and they pay us it is revenue.

If for some reason the appeal doesn't work, as you know we have insured the verdict and we would get paid, but it would be below the top line.

It wouldn't be considered as revenue.

It would be Other income right, Clayton?

That is right.

Thank you.

Alright.

Okay.

This will conclude the question and answer session.

I will now turn the call back to Mr.

Ryan.

I want to thank you all for being with us.

We look forward to our first quarter call in April, and if you have any questions in the meantime, please feel free to give me or Rob Stewart a call.

Thank you so much.

Ladies and gentlemen, if you wish to access the replay for that call dial 800-642-1687 or 706-645-9291 with confirmation code 35295584.

This concludes our conference for today.

Thank you all for participating, and have a nice day.

All parties may now disconnect.