Acacia Research Corp (ACTG) 2011 Q1 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acadia Research First 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 8K, 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/or its wholly and majority owned operating subsidiaries.

All intellectual property acquisitions, development, licensing, and enforcement activities are conducted solely by 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 in building the business, and Clayton Haynes will provide you with an analysis of our financial results.

We will then open the call for questions.

First of all, we welcome and thank our new shareholders who participated in our recent stock offering.

We also want to thank our long-term shareholders who increased their investment in Acacia through the offering.

This significant increase in capital will enable Acacia to accelerate its market leadership in this new asset class.

Acacia had a great first quarter, as we continue to build our leadership position and patent licensing.

Acacia had record first quarter revenues of $61.1 million, record trailing 12-month revenues of $153.2 million, and with the completion of our stock offering, we increased our cash position to a record $314 million.

Our first quarter GAAP net income of $12.4 million was significantly impacted by a foreign tax withholding expense of $7.4 million, and $2.4 million of accelerated patent amortization related to our recoupment of up-front advances for patent portfolios.

Clayton Haynes will provide you with specific details regarding these expenses in his financial presentation.

Acacia continued to build its leadership position in the first quarter by completing 35 new licensing agreements including agreements with AT&T Mobility, Cisco, General Electric, Hewlett Packard, IBM, Microsoft, and Samsung.

With the recent licenses completed in early April, Acacia has now reached the milestone of completing over 1,000 patent licensing agreements.

Acacia generated revenues from 32 different licensing programs in the quarter including eight new programs generating initial revenues.

And we have now generated revenues from 99 different licensing programs.

Acacia also acquired control of eight new patent portfolios in the first quarter including over 200 3G and 4G patents from a major telecommunications company, DDR SDRAM patent from a major technology company, flash memory patents from a major technology company, and DRAM patents from a major semiconductor company.

We continue to build shareholder value by acquiring significant economic interest and valuable patent portfolios and now control over 170 different patent portfolios.

We continue to see 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 expand its leadership role given the breadth of our business model.

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

The first trend is the rapidly growing interest of large companies worldwide in generating revenues from their patent portfolios.

Even companies who historically have not generated any revenues from their patents are, for the first time, considering how they can monetize their patent assets if only to offset their payment obligations to other companies.

Many large companies are beginning to focus on their IP balance of payments and realize they need to generate returns from their own R&D investments to offset their payment obligations to other companies.

Companies essentially have four choices.

One, they can do nothing and face increasing deficits in their IP balance of payments; two, they can start building an internal patent enforcement business; three, they can outsource the enforcement and licensing to a specialized company like Acacia; or, four, they can sell patent assets.

Both of the last two options present great opportunities for Acacia to expand its business.

We think a number of companies will choose to outsource the enforcement and licensing or sell patents rather than try to build an internal enforcement and licensing business, which usually presents significant risk and complications to their core operating business and requires them to build a new business.

As the number-one outsource patent licensing company, Acacia's partnering business model is very attractive to companies who want to generate financial returns from their patents without having to create a distraction from their core business, be involved in litigation, or have to make additional investments of capital and human resources to earn those returns.

Acacia's corporate IP partners are recognizing that we have built a highly specialized company for patent licensing.

They increasingly recognize the value of our multidisciplinary teams of engineers, patent attorneys and licensing executives who can 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 strategic patent licensing alliance with Renaissance Electronics, the world's third-largest semiconductor company, which has a portfolio of over 40,000 patents.

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

Companies are deciding that it makes economic sense for them to enter into these structured agreements with Acacia that will facilitate periodic licensing negotiations and license renewals and eliminate 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 benefits 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.

Companies are beginning to realize that Acacia can provide three strong value propositions to significantly improve their IP balance of payments.

First, Acacia can be a very cost-efficient aggregator of needed in-licenses.

Second, Acacia can monetize their nonperforming patent assets without any costs or distractions.

And, third, Acacia can acquire valuable third-party patent assets and turn potential problems into profits.

Our goal is to enter into a limited number of these strategic relationships.

In summation, Acacia currently has the largest number of licensing opportunities in our history.

We expect continued growth in new licensing programs and new patent portfolios for future licensing.

Our quarterly revenues will continue to be uneven.

Our key internal performance metrics, our growth in patent assets, growth in new licensing programs, growth in 12-month trailing revenue, and growth in annual profits.

Again, we welcome our new shareholders and thank them along with many of our longtime shareholders for providing us with the additional capital to grow the business.

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 first quarter 2011 earnings conference call.

As indicated in today's earnings press release, on a consolidated basis, Acacia reported record first quarter 2011 revenues of $61.1 million as compared to $39.8 million in the first quarter of 2010.

First quarter 2011 revenues included license fees from 35 new licensing agreements covering 32 of our technology licensing programs as compared to 40 new licensing agreements covering 29 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 $153.2 million as of March 31, 2011, as compared to $90.2 million as of the end of the prior-year quarter.

Currently, on a consolidated basis, our operating subsidiaries have generated revenues from 99 of our technology licensing programs, up from 73 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 as disclosed in our periodic filings with the SEC.

For the first quarter of 2011, Acacia Research reported net income of $12.4 million, or $0.34 per fully diluted share versus net income of $18.5 million, or $0.55 per fully diluted share for the comparable prior-year quarter.

Net results for the first quarter of the 2011 as compared to the first quarter of 2010 included the impact of the following items -- first, an increase in our effective tax rate resulting from Korean foreign withholding taxes totaling $7.4 million withheld by the Korean Tax Authority pursuant to the requirements of the US and Republic of Korea Income Tax Convention on a payment in connection with a licensing arrangement executed with a Korean company in the first quarter of 2011.

Foreign withholding taxes are included in tax expense in the consolidated income statement.

In general, foreign taxes withheld may be claimed as a deduction on future US corporate income tax returns or as a credit against future US income tax liabilities.

Results also included a 121% increase in patent amortization expense due primarily to the acceleration of $2.4 million of scheduled patent amortization expense related to recoupable up-front patent portfolio acquisition costs that were recovered from related net licensing proceeds in the first quarter of 2011 pursuant to the provisions of the underlying inventor agreements.

And, lastly, results also included a 58% increase in marketing, general, and administrative expenses due primarily to an increase in noncash stock compensation charges resulting from an increase in average grant date fair value of restricted shares expensed during the first quarter of 2011, an increase in the annual one-time variable performance-based compensation charges recorded in the first quarter of 2011, and increases in other variable performance-based compensation charges.

First quarter 2011 noncash patent amortization charges and noncash stock compensation charges combined totaled $6.7 million as compared to $3.6 million in the comparable prior-year quarter.

Our average margin defined as gross license fees less inventor royalties, non-controlling interests, and contingent legal fees for the portfolios generating revenues during the period was 61% for the first quarter of 2011 as compared to 78% 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 non-controlling interests for the first quarter of 2011 increased to $14.3 million versus $4.4 million for the comparable prior-year quarter due primarily to the related increase in revenues though partially offset by a decrease in the inventor royalty component of average margins for the same periods.

Contingent legal fees for the first quarter of 2011 increased to $9.4 million versus $4.4 million for the comparable prior-year quarter, again, relatively consistent with the related increase in revenues though partially offset by a decrease in the contingent legal fee component of average margins for the same period.

On a combined basis, inventor royalties, non-controlling interests, and contingent legal fees as a percentage of total revenues increased to 39% as compared to 22% in the comparable prior-year quarter primarily due to higher inventor royalties and contingent legal fees expenses associated with the revenues generated in the first quarter of 2011 versus the comparable prior-year quarter.

First quarter 2011 litigation and licensing expenses totaled $3.5 million and were relatively flat versus the comparable prior-year quarter 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 quarter.

Looking forward for fiscal 2011, we expect MG&A, excluding noncash stock compensation charges, to be in the range of $20 million to $20.5 million including the impact of variable performance-based compensation costs described earlier.

For fiscal 2011, we estimate patent-related litigation and licensing expenses to be between approximately $13.5 million and $14 million.

From a balance sheet perspective, cash and cash equivalents and investments totaled $315.6 million as of March 31, 2011, compared to $104.5 million as of December 31, 2010.

Working capital increased to $286.1 million as of March 31, 2011, from $92.3 million as of December 31, 2010.

Net cash inflows from operations for the first quarter of 2011 totaled $36.5 million versus net cash inflows of $19.1 million for the first quarter of 2010.

Including cash flows from investing and financing activities, total cash inflows for the first quarter of 2011 totaled $211.1 million as compared to $15.8 million for the first quarter of 2010.

Cash inflows from financing activities for the first quarter of 2011 included the impact of the net proceeds from the stock offering completed in March 2011 mentioned earlier on the call.

First quarter 2011 patent-related acquisition costs totaled $680,000 as compared to $1.3 million in the first quarter of 2010.

Again, thank you for joining us for today's earnings conference call, and I will now turn the call back over to Mr.

Paul Ryan.

Thank you, Clayton.

Operator, can you open the call for questions, please?

Thank you, sir.

(Operator Instructions) Mark Argento, Craig-Hallum Capital.

When you're thinking about the new capital you just raised, and the opportunities to deploy that capital, could you give us a little bit of color on what you see out there, different possibilities of ways you could put that capital to work, and earn some good returns?

Sure.

As I said in the prepared remarks, a number of companies who are facing IP balance of payments deficits are considering selling assets.

We think that's going to be an increasing trend of corporations -- unlocking patents.

And we would like to be participants in purchasing those, in some cases directly and, in other cases, in combination with a strategic partner.

We think that a lot of companies that haven't previously considered selling patents are going to be doing that, and we're already seeing evidence of it.

If you just looked at the last couple of weeks, you saw where HTC paid $75 million for some patents from ADC Telecommunications; where Omnivision paid $65 million for some patents from Kodak.

So, I mean, it's in the news all over the place.

Obviously, you've got situations where Google has made an opening offer of $900 million on the Nortel patents and RIM has already made a statement that they are going to exceed that number.

So all you've got to do is open up the Wall Street Journal and look and see every day patent assets are beginning to come on the market.

And so this capital will enable us to accretably acquire, we think, valuable assets either as a standalone or in combination with other partners.

And in terms of the process in going about doing that, I mean, are you actively out there -- I mean, of course, you're out there looking, but what expectations, in terms of your ability to get something done and deploy this capital -- is it sometimes a 2011 event?

What kind of expectation should we have to see you guys be active with that capital?

Yes, Mark, this is Chip.

I think 2011, yes, we'll start to deploy some of the capital or maybe a large chunk of the capital in 2011.

We've always said this business is kind of two degrees of separation.

I think you can, rest assured, that if people are starting to pedal very valuable IP, Acacia, where we're positioned, is seeing those packages.

We don't know that there is anything that's being trafficked in the industry that we're not getting very early if not first look.

We positioned ourselves as kind of the partner of choice for major corporations as well as the -- hopefully, the acquirer of choice.

Great.

That's helpful.

And then in terms of in the quarter, it looks like you signed at least one or two pretty good-sized deals.

You had the tax withholding.

Could you walk me through a little bit about how that works with the Korean Tax Authorities, and do you expect to be able to recoup some of that withholding over time now?

Or should we really think of you guys as kind of a full 35% taxpayer here, going forward?

No, definitely, we're not a full 35% taxpayer.

The irony is the fact that we have $100 million of NOLs that caused us to have to expense this withholding.

So, eventually, we will get use of it but, ironically, it's our existing -- as we've told the market, we have about $100 million NOL.

But given the accounting regulations, a withholding from a foreign tax authority, given the large NOL, forces us to expense that.

So you should only see us as a large taxpayer if we continue to do deals with Koreans.

Until we have recouped our entire NOL.

That's an aberration.

Like I said, outside of doing other deals with other Korean national firms, we would not have this mistreatment.

Got you.

And then --

Actually, together, it actually was a pretty good one to have.

The $2.4 million of accelerated patent amortization was taking the risk out for our shareholders.

As we've told people, we are beginning to make advances on certain portfolios and then, obviously, as soon as we recoup those events, as we've eliminated the financial risk.

And, in this particular quarter, we did that very successfully.

But, again, you can't book a profit from recouping advances.

Yes, and in a large number of our deals where we've advanced some hard dollars we, in effect, take a preferred position that we take that capital back first, and we think that's very accretive.

We don't think we're going to change the way we operate now that we have over $300 million to back when we didn't have any money.

We want to instill that same discipline in looking at patent portfolios.

[IEB], it's always been kind of our policy and our behavior that to get our shareholders' money back early in the process.

And so we've always been return-on-investment-focused in the early stages because we didn't really have much capital B investment.

We think if we take that discipline that we've learned over the last five or six years, that we can continue to make very, very accretive acquisitions for our shareholders.

When you think about the returns profile of deploying capital versus the partnership model, do you expect to be able to achieve similar types of returns?

Or what kind of -- how do you guys think about that type of return profile?

Well, I think, you know, we've been asked this question on the road a number of times, and when you don't have any capital, it's all infinite from a return standpoint.

But in the times that we have started to -- we've always looked at kind of four to as much as 10 times, depending on -- you know, each one of these portfolios has different potential licensees.

One of the assets we have is our own intangible asset, which is we've done over 1,000 deals.

We, with great certainty, think we can anticipate a certain portfolio and how it gets rolled out to a certain industry because of our experience in doing that.

And as you see us start to deploy capital, rest assured, that we are doing it with benefit of knowing how and who and what and when and where those things get done.

We don't want to change the discipline.

You know, for us, we used to put forward maybe $200,000.

It was very important for us to get back that $200,000 right away to start some momentum and get a return.

The same thing with the hundreds of millions of dollars we have.

We're not going to change our philosophy.

It's tried and true, and we think the opportunities -- there's more opportunities now for the reasons that Paul said in his opening remarks.

Boardrooms all over the world are waking up to the fact that these are monetizable assets.

And, by and large, they're going to decide to do one of the four things, the alternatives, that Paul laid out.

We think we are very attractive.

We'll put ourselves in two of those respects up against anybody in that kind of beauty contest.

Great.

That's helpful.

And then when you think about the intake side of the business on new IPs brought in, I think you said -- I think there was eight new portfolios brought in.

I mean, the size and scope of these portfolios continue to increase.

In terms of time to money and your ability to monetize these, are you seeing acceleration in the kind of the time to money on even some of these bigger portfolios as you get them and bringing them in and start working with them?

Well, we've certainly exhibited that on the PalmSource Access portfolio is one that we brought in.

We've done two very significant licenses -- one without litigation with Microsoft and one with litigation with Samsung that we've announced.

So we think we've got the skill set and the ability on larger portfolios to get deals done in fairly short timeframes.

Paul Coster, JP Morgan.

Let me start by just focusing on your comments around future growth.

Paul, I think you mentioned in your prepared remarks that you expect to see growth in profits.

When you talk about growth in profits, what metric should we use?

Should we use EPS or EBITDA or operating income?

Well, whatever -- you know, different analysts are going to use different approaches.

It's our stated goal.

Obviously, we're not promising any growth, but it's one of our key four metrics.

We've reached the point -- in the earlier years, it was about gathering assets, number one, and then starting licensing programs.

And then up until about a year ago, it was growing 12-month trailing revenues.

Obviously, we have now scaled the Company where it's becoming profitable, and so the goal is to continue to increase those profits.

But both on EPS and EBITDA.

Right.

So, for instance, I'm just nitpicking here but, obviously, because of the tax, [the May] EPS was a little bit lower than perhaps we even might have anticipated, and yet EBITDA was really quite strong.

So when you say you're going to grow profits on a trailing 12-month basis, do you think that's going to include EPS when you have such kind of random -- ?

Surely, yes.

This quarter, I think, was -- you had a couple of aberrant events in there that accounted for about $10 million compared to $12 million in earnings.

So certainly without those, your earnings would have been 180% of what they were.

Okay.

The other thing is, on the comprehensive deal that you did this quarter, can you confirm that it was of a similar size or even bigger than the prior two deals that you'd done there?

And also that you're still on track for achieving something in the region of 12 of these deals over a two-year period, I guess, starting in 2010?

Yes, I think you'll see the progression in each of our 10Qs.

Obviously, we have to report concentration of revenues from customers.

And so that's available in all of those periods where we did structured deals, and I think you'll see continued increase in the size of this deal compared to the earlier ones.

How many deals do you think you'll be doing this year?

And do you think they'll be of similar magnitude or even bigger?

Our goal is to do two more.

We wanted to do three this year.

And we would hope that they would be -- it's going to depend on the size of the company, the relationship.

There are some strategic advantages to us with certain companies.

Some will be larger, some will be smaller.

But I think, on average, you're going to see, given the fact that we have more and more assets under our control, the deals, on average, are going to become larger.

One of the things we would like to do, Paul -- this is Chip Harris -- and one of the things we'd like to do is we see that the combination of quality and the quantity of the licensing opportunities we present to anyone -- potential customer.

With these new cash totals, we think that we can go out and buy numerous other significant portfolios.

And if you think about that, we would hope that the purchase of those portfolios would lead to larger structured deals because some of the -- when we talk about these structured deals, inclusive are those -- or, for instance, are the license of -- standing side by side is the license with the PalmSource, which is driving a lot of interest into structured deals.

So if we have two or three of those PalmSource type of portfolios, one can only assume that the amount of the structured deal will be significantly larger.

Okay.

Is there any way of helping us project forward amortization -- patent amortization and FAS 123 expenses?

Sure, sure.

This is Clayton here.

With respect to patent amortization and the current assets that we have carrying values for on our balance sheet for the remainder of 2011 currently we have scheduled about $4.1 million of additional patent amortizations for 2011.

That should fall pretty significantly in the subsequent quarters then?

Correct, correct, correct.

And --

And --

I'm sorry, I'm sorry, go ahead.

No, I'm sorry.

Can you continue on FAS 123?

Sure, sure.

And then with the spec 2, a FAS 123 projected stock compensation expense for the rest of 2011 should be roughly around $10 million.

Yes, we're sorry that keeps going up, but the stock price keeps affecting that.

Okay, and my last question really is -- do you think you're going to see a mix shift towards medical technology type licensing moving forward?

Or is there any kind of color you can provide us on the kind of the nature of the pipeline that's coming up?

Well, we've said that we think we can grow the medical technology business to the size our tech business is currently in about three years.

It took us about five years to grow the tech business.

And we think, given our experience and brand name in the market, that we should be able to accomplish the same thing there in three years.

We've got about, what, a dozen portfolios, active portfolios, right now in the medical tech?

I mean, by a certain estimate, that business is the same size as the tech business depending on how you define it.

And there's no reason it should take us five or six years to do the same thing given the platform that we have.

We want to move very heavily into that area.

There's a [sophistic] group of potential licensees who really understand the IP business; that think that what we come to offer will be very valuable.

We want to do some strategic partnerships like we've done with the Renaissance.

There's a lot of disaggregated R&D out there both at the -- let's say, the doctor level as well as the corporate level as well as the university level.

Areas that we've been very successful in tapping into.

We've hired -- as you know, we've hired an executive out of the industry, and it's an area that we think we can build, probably in half the time, what we've done on the tech side.

We're really excited about it.

What percentage of revenues does med tech represent at the moment?

Right now, I would say it's probably less than 5%.

Yes.

It's certainly less than 10%.

It's kind of hard, Paul, when -- it's all definitional.

I mean, med tech, you think about some of the imaging technologies.

Those imaging technologies really probably came out of the photocopier business that made their way into medical technologies into the CAT scans and the MRIs.

It's some of the software-related technologies were just not exclusive to med tech, but with the health care initiatives going on are making big inroads on that side of the (inaudible).

So -- we need to be careful when we define something that's tech or med tech because those two worlds are converging.

Jonathan Skeels, Davenport & Company.

I just wanted to focus in on the structured term deals.

You said you'd planned to do a limited number of these agreements in specific vertical markets.

And this should generate demand, I guess, from multiple companies to sign the deal on that specific vertical.

Have you started to see this happen, where you have multiple companies interested in signing a deal?

Almost a -- ?

We actually, vis--vis a recent structured term deal are no longer offering a structured term deal to another company, to answer your question.

Yes, we understand the attractiveness of the scarcity.

Okay.

And then on the term deals, you said the plan is for two more this year, which would bring you to three total, and I believe you said four in 2012.

What is the total number that you see signing out over the next couple of years?

Well, it's really hard to say.

There's companies that -- if we really push into the medical tech area, we could see doing a couple in that area that weren't anticipated originally.

There are some companies that we could describe, and 9 out of 10 people would say they're technology companies when, in fact, more than 50% of their business is coming out of the med tech.

So -- I wouldn't get -- like I said, we've always said we think we can do somewhere between 8 and 12 over kind of the -- starting in '09 last year.

And we're still comfortable with that.

We think that right-sizes the market.

As I said, if we're successful in deploying this capital and buying a number of new, kind of, what we call tent pole patent portfolios, we will be asking for significantly larger amounts in these structured deals.

So you might do one or two fewer than 12, but it might be at 30% or 40% more in aggregate.

So it's a little hard to do but, rest assured, we understand the power in our model and the ability to generate good returns, and we're going to continue to focus on that.

Got you.

And then when looking out, I guess, past 2012 into 2013, that should be when you start to see the first renewals from the agreements you signed in 2010, right?

Eventually, yes.

Okay.

And then kind of the second aspect of the structured deal is the idea to partner with some of your companies to monetize their noncore assets.

Have you started to see that happen?

Have you started to receive portfolios from your structured term licensees?

We can't comment on that.

Obviously, that's -- we've stated that it makes sense for us to do these strategic term licenses with companies that are IP-rich because they afford the additional opportunity and value add to them, quite frankly, of us monetizing their nonperforming assets.

I think you'll see us do both that as well as jointly acquire third-party patents.

Okay.

And does the discussion center around making the relationship profitable with you?

So if the company is paying you "x" amount for the term deal, you're in discussions with them to potentially generate at least that much and monetizing -- ?

No, that's not a quid pro quo, but certainly companies are very -- are increasingly getting very sophisticated around IP, and certainly the companies we've done deals with are very sophisticated in the IP sector.

And they were one of the first companies to realize there is this IP balance of payments as a corporation, and how are they going to deal with this long term?

And they've put together strategic plans to make sure that's a profit center for them not a loss center.

So certainly that comes into their thinking, but there's no --

Contractual obligation.

There's no contractual obligation to do this.

It's just that there are -- and also in certain markets there's competitors and there's common sense.

If you line up with certain companies, you're probably not going to line up with our arch rivals.

And then on the acquisition front, will the acquisitions only be made with the select structured deal partners that you signed up?

Is that who you are looking to jointly buy patent portfolios with?

Oh, no.

We will buy some 100% directly on the balance sheet.

But where it makes sense, and we want to bring a partner in, either for economics, or they have a strong interest that it makes sense, and it's accretive for us then we'll do it together.

And last one I'll ask -- on the Renaissance portfolio, you signed a number of licenses this quarter to, I believe, some patent portfolios that belong to Renaissance.

Are you seeing momentum tick up there?

And can you comment at all on maybe the number of licensing programs you currently have with Renaissance or how many you're generating revenue from now?

I think we have six portfolios, distinct portfolios, that we now have gone through the assignment process.

I think three of them have started generating revenue, if I recollect (inaudible).

Yes, and I think there's a couple more actions getting ready to start.

Right.

Yes, we've been active.

If you think about the relationship only started the end of last August.

So, literally, in six or seven months we've gotten a half a dozen programs up, and half of those are already producing revenue.

And looking out, longer term, I mean, how many licensing programs do you think could come out of a patent portfolio that size?

It's hard to predict.

Obviously, they have a very deep portfolio, and we're continually mining it and in discussions with them.

But it's hard to predict ultimately how many there would be.

But certainly, to date, it's been a very mutually beneficial relationship.

Yes, okay.

And one more, and I'll get off.

On other partnerships with large companies, Renaissance-style relationships, you're acquiring patents from large companies according to press releases that you've put out there.

Do these relationships usually start small and grow larger?

And should we expect other partnerships of -- much larger -- (multiple speakers).

Yes, I mean, that's our goal.

I mean, the large relationships we have today started small.

You kind of earn your stripes, and they see it.

Hopefully, we're able to accelerate that.

But before any company is going to turn over the remnants of billions and billions of dollars of R&D, common sense says that maybe there's a dating period before you start having a family.

(Operator Instructions) Walter Ramsley, Walrus Partners.

Congratulations, that was another terrific quarter.

I've got a question for Clayton, actually.

The non-controlling interests -- who owns those or what are they exactly?

In the first quarter of 2011, that particular amount relates to one of our partners in the Acacia Intellectual Property Fund.

Oh, the fund, oh, okay, all right.

And looking forward, I mean, was that kind of a one-shot deal, or is that sort of a recurring number to look forward to?

I'm sure our partner hopes it's a recurring number.

We've made a limited number of investments in the fund with our institutional partner, and we're beginning to generate returns very early for them, and they are very pleased with that.

Okay.

So that's the full extent of it?

Yes.

That's the fund, okay.

All right, and that money just gets reinvested in the fund?

I mean, they don't take it out during -- ?

It's not.

No, it's a one-time investment, and they earn their returns, and it's not automatically reinvested.

Oh, I see.

Oh, okay.

All right, well, in any case -- and also on the Korean transaction -- could you tell us what the tax rate was -- the withholding tax rate?

Sure, sure.

Pursuant to the treaty between the United States and the Republic of Korea, the withholding percentage on royalty-based payments is approximately 16.5%.

Okay.

And that's after -- how much cost did the Company deduct before they whacked you with the tax?

There's no cost for that?

Yes, that withholding is on the actual payment from the Korean entity to -- (multiple speakers).

Oh, okay.

So that's just the gross amount, okay.

And just kind of ballpark, do you have an estimate for what the share count might look like in Q2?

The total house (inaudible) shares?

Well, the diluted number you plan to -- hope to report.

It will be slightly higher -- I'm sorry -- so is your question for the second quarter standalone or -- ?

Right.

Just all by itself.

You know, like, with all the new shares.

It will be slightly higher than the 36,400 that we're showing now.

I mean just -- yes.

(inaudible question-microphone inaccessible)

It would be, like, 41, right?

Yes, roughly, yes.

Say that again?

41?

Roughly, yes.

Yes, okay, all right.

And, I mean, this is kind of off the wall.

It might be the last question.

The Chinese are considered to be the worst patent infringers in the universe.

Is there any chance of ever getting any money out of them?

They are actively building a patent office, and they anticipate having four times the patent applications in the Chinese office that we do in the United States within five years.

So apparently, they are realizing that IP has value, and they'll probably start paying once they have a lot of it.

And I think in the past we've licensed a couple of Chinese companies.

Yes.

So that could actually turn into a business for you guys down the road?

They're beginning to respect IP because they understand the importance of it.

Internally, in China, they are making -- there's a major initiative to develop intellectual property for Chinese companies.

And as Chinese products get more accepted by -- tech products get more accepted into the US marketplaces, they'll pay us licensing revenue just -- or royalty revenue just like anybody else is.

Tim Quillin, Stephens, Inc.

First, Clayton, I just want to make sure I understand the MG&A expense in the quarter.

You explicitly break out the noncash stock compensation expense, which was up about $1 million year-over-year.

But even the part that's not explicitly -- the increase in MG&A that's not explicitly listed as stock comp that was also a large degree of noncash compensation in that as well?

Is that the right way to think about that?

No.

The noncash stock compensation relates specifically to the noncash charges that we do reflect on (multiple speakers).

That $1 million increase?

Yes, yes.

Well, it appears, then, that MG&A was up $2.6 million or $2.7 million excluding that?

Yes, there was a lot of significant -- including one-time payments in the first quarter that related to performance bonuses.

But it's not necessarily -- you shouldn't account that as a recurring number, because it was a one-time -- many of them are one-time payments.

Okay, so there's cash compensation as well?

Correct, correct.

And the guidance -- the $20 million to $20.5 million -- so that includes -- tell me what exactly that includes or kind of how I should think about that for the rest of the year?

Sure, sure.

Just from a standpoint of attempting to estimate -- that number includes the impact of the performance-based charges in the first quarter.

I'm going to estimate that -- the remaining of the year as far as performance-based compensation will be similar to what it was in the second, third, and fourth quarter of last year.

So that's what the estimate currently reflects.

But if we have great quarters with really large revenues, it could be higher, which will be a good problem to have.

Right, right, understood.

And the taxes, the Korean taxes, again, I just want to make sure I'm understanding this correctly.

Is that because of the NOLs, you don't really have anything to deduct it against?

And so you -- was there a cash tax expense in Korea that maybe sometime down the road, you'll be able to get a credit for but for now there's going to be a cash outflow?

Yes.

Currently, the taxes were withheld by the Korean Tax Authority, and so that is an actual cash outflow.

What we would then do is, for tax return purposes, is we would have either a future deduction or a future credit that we potentially could utilize in the future.

Okay.

But timing-wise, because of the NOLs you don't think you'll be able to use that anytime soon?

Timing-wise --

(inaudible) quarters away.

It really depends upon the actual results, but --

As soon as we use up our NOL, we will get a credit for it.

Certainly.

Or have the ability to utilize that credit.

Right.

Right.

And on the net income attributable to non-controlling interests, I kind of understand how that arises, but is there any way to help us think about that?

I mean, what is the ownership in the IP portfolio?

What ownership does your partner have?

Right now, presently, it's roughly about 40% after our fees and after our joint investment in the fund.

Yes.

Of a specific --

It's about a 60-40 split.

We generate about 60% of the returns, and the institutional partner about 40%.

Right.

And that's on how many patents -- ?

$25 million of capital.

Excuse me?

Approximately $25 million of dedicated capital for the fund.

Okay.

Okay.

Okay, and then in terms of -- and this is splitting hairs, I understand, but I understood you had talked about potentially getting to 12 structured term licensees.

And then my understanding that maybe med tech would be on top of that?

And I understand -- it seemed to be a hedging a little bit in terms of the numbers but maybe because they might be increasing in size?

And so now are you saying kind of 8 to 12 structured licensees altogether but maybe in the larger size?

Well, I think we've always said two last year, three this year, four the following year.

That's kind of been the --

And a total of -- but we have said 12 in total, and so the next -- eventually, there will probably be an addition to that.

It depends on who they are, quite frankly.

There are certain companies that if we do these deals with them, it would eliminate other companies from an exclusivity standpoint.

There are certain companies that have big investments in the tech side as well as the med tech side.

I wouldn't get too focused on the absolute number.

I think we're going to keep driving the revenues the way we have, but your model is going to be wrong.

Because we don't know.

I wouldn't start splitting hairs between 11, 12, 10.

We're going to try to maximize revenue potential.

If we can do as much money as we thought we could do in 12 deals in six deals, we'd do six.

It's just driving more of the capital without putting those companies on the bench, so to speak.

But we think that we can drive the revenue somewhere between that 9 and 12 number.

We're not trying to hedge on any of them.

We see these things getting more and more valuable, and assets come into our hands, and we'd like to drive the -- it's like we've done every licensing program.

We try to offer attractive terms early on to help us get our shareholders' capital back, and then drive the pricing as we get farther along into the process.

Same thing with these.

Bill Block, WAB Capital.

I have a couple of questions.

One, can you give us the percentage breakdown of the concentration of your customer mix?

Like any customers that account for more than 10% of revenue in the quarter?

Yes, Bill, we traditionally do that, and we'll continue to do that in our Q, which will get filed, what, in 10 days?

Correct, correct.

Yes, you'll see that.

Yes, you'll have that in the next 10 days, but we don't do it on the conference call.

We put it in the Q.

Okay.

Now, another comment that I had is -- I had mentioned this to Rob before -- but when you make an announcement that one of your subsidiaries and Company X have agreed to a settlement, why don't you announce the number of patents that were involved in that settlement?

Well, generally, it depends -- we have not done that historically and don't plan on doing it in the future.

It's not relative.

Because it's really not relative in the sum of it.

Sometimes they're settling on certain patents that are only in litigation.

So it really wouldn't, I think, be very informative to anyone to detail exactly how many patents there were.

Well, there's no linear relationship between patents and revenue for people who are trying to figure out revenue per patent.

It's just there's no relationship.

So we don't want to confuse people.

Okay.

Then my last question is -- and this is based on a comment that was made by Clayton.

On the stock-based compensation like, for example, in the first quarter is significantly higher than it had been a year ago.

And it was mentioned that it had to do with the -- what -- the price of the stock.

Correct.

Yes.

So at what point do you determine the price of the stock?

Is it at the end of the quarter or at the particular time that you decide to issue the shares to that particular individual?

Bill, we have a policy -- the comp committee does annual grants consistently in January.

And so it just depends on the price of the stock on the day that they do that grant in January.

Oh, so it's -- well, wait -- if it's --

Obviously, this January it was much higher than it was in the previous January.

Yes, but, now look what happens, let's say, in quarters two, three, and four.

You'll be granting -- there will be additional --

We don't do -- we do only to new employees basically.

Our grants for the year are done in January, one time.

So there won't be additional grants every quarter to the whole company.

It's only done once a year.

And the noncash stock compensation charge is based upon the grant date fair value and doesn't get modified in future quarters.

You actually gave that number, right?

We have a number we can give you for the year, basically (inaudible).

I think you said $10 million.

Right, exactly.

For the remainder of the year.

$10 million -- so that means for the full year it will be approximately (multiple speakers).

Correct, correct.

Mark Argento, Craig-Hallum Capital.

Just more of a housekeeping question for Clayton.

Could you just -- you got it to the patent amortization expense, I believe, for the remainder of the year.

I think you said you have roughly $4 million left, or $4.1 million.

So when we're looking at the income statement here in the quarter that you guys just reported, you guys realized roughly -- it was about $3.8 million in amortization of patent expense in the quarter.

So is it safe to assume we're just taking the $4 million that you have left, and we can burn that off through the rest of this year?

Or is there something else that goes into that line item in the income statement?

Well, the number of $4.1 million is the scheduled amortization for the remainder of fiscal 2011.

Of course, the number may be impacted by future recoveries of --

Advance?

-- of all fronts.

Yes, of advances paid.

But as far as what is scheduled for the remainder of 2011, that's the $4.1 million.

Okay.

So assuming you guys, if you have any other large license deals above and beyond kind of whatever schedule you've used, that could drive that number higher.

So it's probably not the right thing to do to run $4 million through there but probably adjust that up assuming higher revenue levels?

Well, we've recouped a lot of our advances this quarter.

So I don't think those advances will be a big impact on the rest of the year.

We don't have a model, so we don't really worry about it.

But you have to, right?

We understand.

Well, I just want to -- you know, if I hear a number like that, I just want to make sure I know how to -- you know, the context of it a little bit.

So I'll --

I think you're going to be pretty close to the scheduled amortization number.

Jonathan Skeels, Davenport & Company.

Again?

Earlier you said that -- or you made the comment that you guys have over $300 million in cash on the balance sheet.

I think you said that you'd like to keep about $100 million, which leaves north of $200 million left on the balance sheet.

And you said earlier that you could see yourselves spending a large chunk of that in 2011.

So I guess that would imply that you're looking at large acquisitions.

I mean, how much money --

Or a lot of small ones.

Or a lot of small -- how much money would you see committing or what's the maximum amount of capital that you would commit to -- ?

Probably not more than $316 million.

Who knows?

I mean, when we do it, we'll tell you, and we'll give you a new schedule.

I understand you guys want to build the model and want to build it correctly, but we can't help you in this quarter-to-quarter stuff.

But when we do it, we'll tell you exactly what it is, and your models will be accurate at that point.

I don't mean to be flippant about it, but it's hard.

There's huge amounts of opportunities.

We could get a call tomorrow, which will change anything we give you today.

I mean, it's moving that fast.

Paul read off a couple of examples.

You know, we actually looked at one of them.

And they're popping up everywhere.

Yes, we could have been a buyer of one of the ones I just mentioned.

And we understand that, all of a sudden, the models go out the -- and then we could do one deal, and we could accelerate a lot of that (inaudible).

Okay, well, I wasn't so much asking with respect to the model but more or less trying to find out if some of the portfolios you're looking at are large in size.

They are, yes.

Yes, if they weren't, we wouldn't [dilute] to the shareholders.

This will conclude the question-and-answer session.

I will now turn the call back over to Mr.

Ryan.

Thank you, Operator.

And I want to thank everyone for being on the call today.

If you've got follow-up questions, you can either give myself or Rob Stewart a call.

Look forward to talking to you again on the next quarter.

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This concludes our conference for today.

Thank you all for participating and have a nice day.

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