Acacia Research Corp (ACTG) 2011 Q2 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/or 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, and Clayton Haynes will provide you with an analysis of our financial results.

We will then open the call for questions.

Acacia had another great quarter, as we continue to build our leadership position in patent licensing.

Acacia had second quarter revenues of $39.7 million, which gives us a new record high in trailing 12-month revenues of $178 million.

To put Acacia's revenue growth in perspective, last year was the first year we exceeded the $100 million milestone in revenues.

This year we have exceeded the $100 million milestone in the first six months.

Acacia continued to build its leadership position by completing 29 new licensing agreements in the second quarter including agreements with Nokia, Motorola, Dell, FAP, Broadcom, Nanya, Red Hat, Cortis, and CR Bard.

During the quarter, we also sold patents to RPX Corporation and received a jury trial award of $3 million in a patent infringement case against Universal Lighting.

Acacia generated revenues from 24 different licensing programs in the quarter including five new programs generating initial revenues.

We have now generated revenues from 104 different licensing programs.

Acacia also acquired control of nine new patent portfolios in the second quarter including 86 microprocessor and digital signal processing patents from a major semiconductor company, over 30 circuit patents for advanced memory and processor technology from a major technology company, as well as patents relating to voice over IP technology, data compression technology, HDTV technology, targeted Internet advertising and power over Ethernet technology.

We continue to build increased future shareholder value by acquiring control of significant patent portfolios and now control over 180 different patent portfolios.

Over the past quarter, we have seen a significant acceleration of interest in patents as a new asset class from both corporations and the investment community.

Acacia is uniquely positioned to expand its leadership role in patent licensing as a growing number of large companies worldwide decide to generate revenues from their patent portfolios.

There is an increasing awareness in boardrooms across the world that their managements need to generate returns on investment from shareholder capital that has been invested in R&D.

As the Director of the US Patent Office recently commented, "Patents are the currency of invention."

We are observing that CEOs and CFOs are becoming very focused on their IP balance of payments and realize they need to generate financial returns from their own R&D investments to offset their payment obligations to other companies.

The recent auction of the Nortel patent portfolio for $4.5 billion has served as a wakeup call to large companies across the world, much like the RIM payment of $600 million to MTP a few years ago, served as a wakeup call for individual inventors.

The Nortel patent auction and recent interest in InterDigital's patent portfolio also indicate that major technology companies are increasingly realizing the strategic value of patents and protecting their product franchises and profit margins.

The increasing number of companies who are recognizing they need to start generating revenues from their patents basically have three choices.

They can build an internal patent enforcement business, or they can outsource the enforcement of licensing to a specialized company like Acacia, or they can sell patent assets.

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

Our current business development initiatives indicate that many companies will choose to outsource the enforcement in licensing or sell patents rather than try to build a new internal business.

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

Acacia's corporate partners recognize that we have built a highly specialized company for patent licensing and appreciate the value of our multi-disciplinary 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 and generating revenues.

In summary, Acacia currently has the largest number of licensing opportunities and the largest pipeline of potential new partnerships in our Company's history.

As the leader in outsource patent licensing, we have the potential for significant growth as we are in a very early stage of the development of this new asset class.

Our quarterly revenues will continue to be uneven, our key internal performance metrics, our growth in patent assets, growth in new revenue-generating licensing programs, growth in 12-month trailing revenues, and growth in annual profits.

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

Thank you, Paul and thank you to everyone joining us for today's second quarter 2011 earnings conference call.

As indicated in today's earnings press release, on a consolidated basis, Acacia reported second quarter 2011 revenues of $39.7 million as compared to $15 million in the second quarter of 2010.

Second quarter of 2011 revenues included license fees from 29 new licensing agreements covering 24 of our technology licensing programs as compared to 89 new licensing agreements covering 22 of our technology licensing programs in 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 $177.9 million as of June 30, 2011, as compared to $90.8 million as of the end of the prior-year quarter.

Currently, to date, on a consolidated basis, our operating subsidiaries have generated revenues from 104 of our technology licensing programs, up from 75 technology licensing programs as 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 second quarter of 2011, Acacia Research reported GAAP net income of $2.1 million, or $0.05 per fully diluted share versus a GAAP net loss of $3.9 million, or $0.12 per fully diluted share for the comparable prior-year quarter.

Excluding noncash stock compensation and noncash patent amortization charges, we reported non-GAAP net income of $8.2 million, or $0.19 per diluted share versus approximately breakeven on a non-GAAP basis for the comparable prior-year quarter.

Please refer to our disclosures regarding the presentation of non-GAAP financial measures in today's earnings release and 8K filed with the SEC.

Net results for the second quarter of 2011 as compared to the second quarter of 2010 included the impact of the following -- one, a 39% increase in patent amortization charges due primarily to the acceleration of $1.1 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 second quarter of 2011 pursuant to the provisions of the underlying inventor agreements.

Second, a 66% increase in noncash stock compensation charges resulting from an increase in the average grant date fair value of restricted shares expensed in the second quarter of 2011 as compared to the prior-year quarter.

Third, a 22% increase in other marketing, general and administrative expenses due primarily to an increase in variable performance-based compensation charges, a net increase in business development engineering and other personnel since the end of the prior-year quarter, and a net increase in corporate, general and administrative costs.

And, lastly, a 195% increase in business development-related research consulting and other expenses due primarily to a net increase in third party research, consulting, and other due diligence-related costs incurred in connection with the identification, review, and assessment of patent portfolio acquisition opportunities during the second quarter of 2011.

In addition, 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 approximately 46% for the second quarter of 2011 as compared to 59% 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 interest for the second quarter of 2011 increased to $8.3 million versus $2.6 million for the comparable prior-year quarter.

Contingent legal fees for the second quarter of 2011 increased to $13 million versus $3.5 million for the comparable prior-year quarter.

The increase in inventor royalties and contingent legal fees was primarily due to the related increase in revenues in the second quarter of 2011 as compared to the prior-year quarter.

In addition, on a combined basis, inventor royalties and contingent legal fees as a percentage of total revenues increased to 54% as compared to 41% in the comparable prior-year quarter primarily due to higher inventor royalties and contingent legal fee expenses associated with the patent portfolio programs generating revenues in the second quarter of 2011 versus the comparable prior-year quarter.

Second quarter 2011 litigation and licensing expenses decreased to $3.8 million as compared to $4.4 million in the comparable prior-year quarter due to lowering net levels of litigation support, third party technical consulting and professional expert expenses associated with our continued investment in ongoing licensing and enforcement programs.

This 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.

Looking forward for fiscal 2011, we expect MG&A, excluding noncash stock compensation charges, to be in the range of $21 million to $21.5 million including the impact of variable performance-based compensation costs described earlier and on previous earnings conference calls.

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

From a balance sheet perspective, cash and cash equivalents and investments totaled $301.4 million as of June 30, 2011, compared to $104.5 million as of December 31, 2010.

Working capital increased to $291.4 million as of June 30, 2011, up from $286.1 million as of March 31, 2011, and $92.3 million as of December 31, 2010.

Net cash outflows from operations for the second quarter of 2011 totaled $11.3 million versus net cash outflows of $2.9 million for the second quarter of 2010.

Net cash outflows from operations in the second quarter of 2011 reflect the payment of inventor royalties and contingent legal fees related to first quarter 2011 revenues during the second quarter and does not reflect the cash impact of the $20 million in receivables reflected on the balance sheet as of June 30, 2011, the majority of which is scheduled to be collected in Q3 2011.

Net cash inflows from operations totaled $25.1 million for the six months ended June 30, 2011, as compared to $16.2 million for the six months ended June 30, 2010.

During the second quarter of 2011, we acquired nine additional patent portfolios as compared to 12 new patent portfolios in the comparable prior-year quarter.

The second quarter of 2011, patent-related acquisition costs totaled $1.1 million as compared to $1 million in the second 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.

And, Operator, can you open up the call for questions?

Thank you, sir.

The question-and-answer session will begin.

(Operator Instructions) Tim Quillen, Stephens, Inc.

Good afternoon, nice results.

A couple of questions, but one is, if you can talk about a trend or if there is a trend of doing fewer but larger revenue agreements.

And maybe not necessarily bringing in a larger number of patent portfolios but better portfolios and kind of what that means for your business model.

And then also how you think about doing additional term deals versus other monetization methods like auctions?

Okay.

This is Paul Ryan.

On the licensing side, I think, over time, certainly, we have increased the revenue per license.

But I don't know as a long term trend.

There are certain portfolios that have a large number of companies to license and therefore they make sense for us and the shareholders to take those portfolios.

But there may be 20 or 30 companies to license, which may yield the same amount of revenue as other portfolios with two or three.

So, yes, we're agnostic.

As long as the revenue opportunity is there, and we think we can execute on it.

So we don't shy away from programs that have broad licensing efforts involved because we've done that many times before.

On the business development side, you know, we continue to see an expansion on the corporate side.

When we started, there was a lot of individual inventors and universities and certainly our business is moving much more toward very large corporations, and those corporations do tend to have much deeper patent portfolios.

And from a licensing and enforcement standpoint, it usually is a little easier to do that because companies are less likely to want to engage in long-term litigation when you've got a portfolio of 100-plus patents versus one patent.

And the structured term deals, we are going to use opportunistically.

We are seeing interest in that.

As you know, we have completed some of those, and we have some goals, going forward, which we think are realistic.

But we're flexible around that.

If certain strategic partnerships in the marketplace emerge, we may limit the amount of those that we do as long as the same financial results accrue.

So if we can do less of them but they're much larger dollar amounts, we would certainly be willing to do that.

And just a couple more, and I'll let you move on to other questions.

But, one, is, given the kind of the fervor around patent sales right now, do you see any opportunities to just to outright sales of patent assets into a relatively receptive market versus licensing?

And then a second question -- if there's anything you could say about the smart phone patent portfolio that you just took on or just announced earlier this week, and I think you characterized as valuable, and if you could maybe help us understand exactly what that consists of, thanks.

Sure.

The licensing opportunities, once we get something -- you know, we have several portfolios that we have, we think, added significant value through our enforcement and licensing efforts.

A portfolio becomes much more valuable strategically if it's one in which we have gone through litigation and gone through all of the hurdles that that implies as well as does major licensing efforts.

So it increases the value, we think, in our hands, our licensing and enforcement programs, increased the value.

And, certainly, there are going to be moments in time in particular product categories where you've got competitors where the strategic value of the patents may greatly exceed the licensing value of the patents.

And I think we saw that recently in the Nortel patent auction, where you've got probably the most important product in the world right now, the mobile smart phone, and you've got major competitors fighting for that marketplace.

The strategic value of those patents exceeds what you would normally expect as licensing value.

So we worked -- yes, we make the decision on the part of our partners and our shareholders.

If there are opportunities to sell an asset into a higher level, if you can generate more money as a strategic asset sale, certainly, we're very flexible in doing that.

And to answer your other question, we have been approached with certain of our patent assets that relate to this category with that in mind.

And we're certainly -- you know, we'd consider those.

And if we can get the best returns for us and our partners, that is something that we would do.

Chip, do you have any more comments on that?

Yes, I think you need to be careful just the distinction.

Every time we sell -- every time we license, we just sell a right of the patent.

And whether we're selling that unique right to one person or selling all the rights to one person -- I think you saw in the second quarter we saw a sale of a patent portfolio that we owned to a patent aggregator who had some needs for it.

So, I mean, it's part of our everyday business, you know, whether we're selling an individual right to an individual company, or selling all the rights to a company.

It's part of what we do day in, day out.

So the distinction, which Paul made -- sometimes the strategic value exceeds the economic value.

And as some shareholders who are probably on here, I've asked management in the past what happens if they see certain sectors of patents become more expensive, we always said that we might sell all those rights instead of just license those rights.

It's part of our day-to-day business.

We have a unique ability to understand -- I've always said we do three things really well.

We identify patents, we underwrite the value of them, and we monetize them.

And this is what we do day in, day out.

And if somebody wants to buy some of our rights in a bundle, we'll sell it to them.

And if somebody just wants to license the rights for their use, we'll sell it to them.

Great, thank you.

Mark Argento, Craig-Hallum Capital.

When we're looking at the margin profile of the business, I know it bounces around a lot, depending upon what kind of business you do in each quarter, in particular.

This quarter was a very strong quarter on the top line.

With that, we saw legal expense contingently go leased up and royalties up.

Any kind of trend there, I mean, in terms of on a go-forward basis that we should think about in terms of margin profile mix on the comprehensive side versus on the more perpetual license side?

If you can (multiple speakers) there in the quarter, that might help us.

Yes, no real trend.

You know, it's just -- we've always said it varies with the specific ownership interest and back-end interest and the contingent legal fee interest.

So there is no trend.

You shouldn't take anything from that.

We've always said in the past we think that the normalized margins will be that 50% to 60% range.

I think during the first half we were at 54%.

So we're right in line with what we thought.

But it will vary quarter to quarter depending on the transactions and given our splits with the IP holders and given their splits with our legal partners.

Sure.

And alluding back to the question about, you know, with the market right now and, you know, clearly, a big strategic play on smart phone IP.

If you guys were approached and offered to buy one of your smart phone portfolios, you'd have to get the consent of your partner or of the original IP owner to basically sell the IP and dissolve the partnership or the JV?

Or is that decision because you control the partnership, do you guys have that authority?

Yes, generally, that's a provision that's agreed up front when the patents are assigned to us.

And in a significant number of those agreements, we do have the right to sell the assets.

It depends on the agreement.

I don't think we own any patents in partnerships.

No, no.

It's strictly partnership.

We form an LLC.

We have total control of the decision-making as once the patent gets transferred into the LLC.

But our original agreements with companies sometimes are clarifying on that issue.

But, generally speaking, if we can achieve above the original goal of the revenue monetization through a strategic sale rather than a license, then certainly no one is going to object to that.

That's helpful.

And then what we saw with the Nortel situation, where you had almost like a consortium buying group with five or six different operating companies, tech companies, do you see more of that type of activity that could potentially occur in the marketplace?

Or do you really look at what happened with Nortel is going to be a unique situation?

Well, in this product category, it may not be unique.

You could see the same thing around the InterDigital.

It's just intelligent groupings of companies aligning their interests temporarily when it meets their mutual best interest, vis--vis the competing bidder.

So, yes, transactions make for strange bedfellows sometimes, but you saw how the Nortel transaction came out and certain companies, in effect, basically got pre-licensed.

Others got other rights, and there were bundle rights that got divided up for the highest winning bid.

So, no, I think that pattern will probably continue in these strategic acquisition issues that are high profile.

Do you think in that situation -- do you think there will be any of those -- any of that IP that will be productively (inaudible) on?

Or is that just basically purely strategic to block other people from going into markets?

Well, to block them, it will be used as strategically and (inaudible) upon them to accomplish the goal, I would think.

The right of a patent is to preclude somebody else from using it.

That's the fundamental right of a patent.

Permission (inaudible).

I guess a better word in my question would be do you think that's something that they would look to a third party to help them with, or is that something that they could create their own entity to go about and do that type of business?

We have companies who use us for that right.

I mean, that's part of our business model.

Yes, when it makes sense, we certainly could be used as part of a consortium because we would bring certain advantages to being included in that structure.

So I would expect that would happen in the future.

Last question -- any -- do you have, close at hand, do you know the number of license deals in the quarter that were 10% plus of revenue?

We will disclose that in our second quarter 10Q, which should be filed in the next week and half or so.

Paul Coster, JP Morgan.

Yes, hi.

Mike Strauss on behalf of Paul here.

Regarding your comprehensive licensing deals that you've had in the pipeline for a while -- is this recent flurry of activity causing any delays in those deals being closed or perhaps making negotiations a bit more complex?

We've never detailed anything out as -- what's a comprehensive license?

I'm sorry, your term deals.

Do you mean a structured term license?

Right, yes.

I don't think we understand your question.

What is it again?

I mean, just -- I guess some of the larger licensing deals that you've been working on for, say, 18 months, two years, whatever it might be -- that you know might have been -- that you might have started back in 2010, 2009.

Now that we're seeing all this activity in the industry, is it changing anything with those negotiations that are making them -- ?

I don't think we've ever disclosed -- ever we're in negotiations at any one time.

Probably what we have said is, look, we have a long-term goal of entering into a limited number of structured licenses, basically, where would comprehensively, at one point in time, simultaneously negotiate settlements on a variety of issues with a company, and then potentially grant them some forward usage rights for a payment and then do renewal payments.

You're probably referring to those types of agreements.

And we, from time to time, have discussions with a number of companies, and it always comes down to price and terms.

And we think we will continue doing that.

I think, if anything, the strategic portfolios will probably increase the potential of those types of deals getting done at some point in time.

But it's important to know we've never talked and disclose that we have comprehensive discussions with a certain company out there for any period of time.

It's just not -- if we have one, we'll announce it.

Darrin Peller, Barclay's Capital.

This is Adam Carron for Darrin here.

I just was kind of looking.

It seems like you guys obviously generated a larger amount of revenue per licensing agreement this quarter, and I know that this will kind of vary on a quarterly basis, but is this kind of a trend now given the depth and the quality of your guys' patent portfolio that we could kind of look to expect, going forward?

Yes, I don't think you can draw any definitive trend here and nor do I think it's a particularly good metric.

Because, look, again -- we -- there are going to be some portfolios that we bring in where all of the revenues, licensing revenues, will be generated potentially from one company or two or three.

And some will be 20 companies, and they could be the same dollars.

So -- we don't think it's an important metric to follow, really, of average size of individual licensing deal.

What, to us, is important, obviously, with our partners is to generate the optimum amount of the total licensing program for that particular technology.

But to answer your question, no, there's no trend.

Overall, I think we're getting much deeper portfolios with total higher-dollar revenue value.

So if you assume the same amount of licensees per revenue, yes, over time, it would go up.

But, again, I don't think a really useful metric.

Part of what we've said, Darrin -- or, I'm sorry, Adam?

Yes.

-- is that it's management's responsibility.

You know, four years ago when we did $25 million of revenue for the year, you know, if we found an opportunity that was a $3 million to $5 million opportunity, we were pretty excited about it.

Now that we've done, what, $177 million in the last 12 months, obviously, it's management's responsibility to make sure that the real assets of the company, the people that work here, are working on opportunities that are going to accrue to the benefit of the shareholders.

Our real goal is to obviously acquire controlling interest in more valuable portfolios that have larger revenue opportunities.

The actual revenue per licensee within that portfolio is not really a key metric to us.

That's a dangerous trap for the analyst to fall into, and I think you guys being the most recent group, it would be helpful to not take anything from that.

Yes, I know.

I guess I was just kind of thinking that, like, given the quality of the patent portfolio and the fact that you guys are acquiring more valuable patents, is this something that could be sustainable, over time?

Let me give you a hypothetical.

We could have one portfolio that's worth $100 million, but there's a 100 potential licensees.

So each time you do a million-dollar deal.

We could have another portfolio that's worth $15 million, and there's one licensee.

It would be very easy for the analyst community to construe that the $15 million deal is a big deal, and there's other opportunities when, in fact, there's not.

So it's hard for us to give any kind of indication as to what the trend will be.

And, like we said, we hope that, as management, we are encouraging our employees to work on things that are more accretive to shareholders and, so far, we've been right And that's why the metrics we do give -- the number of portfolios we bring in, the number of portfolios that we monetize -- those metrics that we talk about lead to higher revenues, and we have stated certain margin areas that we think it gives the community out there an ability to handicap the relative strengths or weaknesses of the company.

Thanks, that's very helpful.

And then I was hoping I could just ask one housekeeping item here.

In terms of what you guys are expecting for a full-year tax rate and where you're at with the NOL?

Sure, sure, this is Clayton here.

As far as the NOL, that's somewhere around approximately $90 million as of the end of June.

And from the standpoint of the overall tax rate, I would say that I would expect, you know, outside of perhaps some foreign tax situations, you know, for the rest of the year, that the remaining quarters' tax rate will look something similar to the way it did this quarter.

As management, we're trying to burn through that as quick as possible.

The NOL?

Yes, we're going to try to prove our CFO wrong.

Jonathan Skeels, Davenport & Company.

Hey, guys, congrats on the quarter.

A couple of questions.

First, just on partnership opportunities with large companies -- obviously, that seems to be increasing in terms of the announcement that you have out there.

First, are those all 50-50 revenue share partnerships?

And then are you seeing, just, increased interest in partnerships following this Nortel patent sale and all of the activity in recent weeks?

To answer your second question -- yes.

I've been on some phone calls lately with managements of large companies saying, "We have crossed the Rubicon." And I go, "Why?" They go, "Any board who sees the Nortel patent auction who is not talking about patents is negligent." So, yes, we have definitely seen an increased interest and think that will continue.

Yes, good news is -- I mean, this is every -- you know, virtually, you know, most companies around the world, the IP department is getting called by the C suite and not by our business development opportunity people.

And they're -- we're in the conversation.

The bad news is, you know, we have to be careful.

You know, some of these asset classes are getting pretty pricey, and we need to use the same level of sophistication and background that we have and making sure that we're acquiring valuable patents.

But to answer your first question, yes, we're still doing 50-50 deals on our -- that's still the bulk of our business, and I don't think we've done any deals in new business development that have been less than that.

What drives the sell versus partnership decision --

Money.

-- by a large company?

Expected return.

Yes, a lot of might be strategic.

Some companies are still hesitant to be a plaintiff in litigation given maybe the vulnerabilities they have of other products within their product line.

Most companies who have the assets are telling us to realize we're going to have to take a discount to sell them.

I mean, not every category is in vogue as the smart phone category is right now.

And semiconductors, it's kind of a unique area.

So the other areas, it comes really down to the partner.

If they want quick money, and if they just want cash with no risk in the time value, that's usually -- but most of the companies that we are in discussions with would rather maximize the opportunity and have us go out and generate long-term licensing revenues and fully get value for the patents.

Because in most categories, unless they're strategic buyers, they're going to have to sell at a discount for cash.

Okay.

And then on maybe the deployment of capital you guys have a large cash balance, and where do you see opportunities to deploy that?

Is it just opportunities where you'd acquire 100% of a patent portfolio?

Are you still putting up some up-front capital in some deals, and do you see any opportunities to jointly purchase with larger partners?

Well, I think, yes, there's opportunities, certainly, to do outright purchases.

There are going to be -- we think a number of companies just because they are -- you know, you look at Kodak.

You've got companies in financial distress, they need to sell assets.

They don't have the time -- or luxury of time.

So there's going to be opportunities in distressed situations where, if we can opportunist with a buy, we will buy the whole portfolio.

We also expect that we will be doing some partnering deals where we jointly acquire them.

And the other use is, oftentimes, we can use cash up front and use an advance and get better terms.

In other words, we can take a 50-50, we can advance cash, and it's truly an advance that we recoup out of first licensing.

But we improve the margins for our shareholders, maybe we take the deal to 65-35.

So, in the past, the last couple of years, we've done that, and it's -- you know, our partners like it because a lot of partners need the cash.

We're willing to advance it to them and get it back from our own efforts.

So they're guaranteed the base amount of money quickly at the front end of the deal.

But, as a tradeoff, then, longer term, through the full licensing, we get a bigger revenue split on the percentage basis.

So all three of those are places we can effectively use capital and generate accretive returns.

And then the last one, just on cost structure -- you have more opportunities, there's a lot of interest in partnership and selling assets.

How large can the operation get before needing to hire additional personnel?

Well, we've effectively used a lot of outside resources, and we will continue to do that.

There are a lot of really smart, well-informed groups out there, and we'd rather incentivize them from a business development standpoint.

We've got satellite third party groups that are working with us that we would give them some back-end participation.

So, again, we really want to try to do as much as we can off balance sheet without building a huge cost structure here.

I do think, on the BD front, with the large corporate opportunities, you know, probably over the next year we'll hire a handful of people, senior people, who can relate to those markets because there probably will be a significant amount of corporate [pardoning] opportunity.

But, again, not a significant increase in headcount.

Walter Piecyk, BTIG.

Thanks.

Could you give just give me an update on two things -- any type of new competitors in any form that you see cropping up?

Obviously, the media flow in this space has increased pretty dramatically in the last couple of months, and that typically attracts new competitors.

I know you guys have talked about the time it took you to get to the point where you're at today.

But have you seen anything in the companies that you're talking to that would show as new potential competitors?

And then also an update on the second question on the regulatory front.

Any changes that you're anticipating over the next six or nine months that could change your business model?

Thanks.

Sure.

On the competition front, no.

We see no one new on the horizon.

The marketplace, because this is a new asset class, a few people think that RPX, which went public, is somehow a direct competitor.

And while there could be possible aspects of competition for buying portfolios, they're one of our best customers because, at the end of the day, they're really in the business of buying patent rights for their members, and we're in the business of selling those rights.

So we see them more as a complementary company establishing a new marketplace, really, for this new asset class.

If you think about it, we have developed very sophisticated groups that know how to identify and underwrite this asset and know appropriate transaction values.

And RPX is doing the same thing as that on the other side.

And so I think the two companies are helping to develop a more sophisticated transactions market in IP, and I think that will be very beneficial because it will cut down a lot of unnecessary litigation and friction costs, which really isn't doing anyone any good.

So we think RPX is a valuable component in the ecosystem, and between the two companies we can become the de facto market in many cases.

On the regulatory side, as you know, there's been pending patent legislation for the past seven years.

It's gotten watered down to the point where it's -- actually, the good thing -- it's focused Congress on the fact that they now realize that they have been expropriating the user fees out of the patent office to the tune of about $900 million, and what an incredibly stupid thing to do when you're trying to create jobs in a country is to divert the user piece from the patent office where new startup technology companies are the ones that are the biggest job creators.

So the good thing that's come out of that, even if the other legislation doesn't pass, I think Congress will discipline themselves from expropriating that money in the future.

So that's a huge plus.

The other issues that are really incumbent in the legislation are to vet more of the legal issues earlier in the process in a post-grant review.

And if you think about it, longer term, that would make our job as a licensing and enforcement company, much easier.

Because issues of priori and post-grant oppositions and certainly this first to invent versus first to file, basically eliminates ownership issues.

So it would eliminate two of the three big risks in legal enforcement, which currently are, you know, the validity of the patents, vis--vis the priori, which would have been resolved in the post-grant opposition and ownership issues.

So then it would really come down to just proving infringement.

But on the front end, certainly, there are a lot of smaller companies, just the complexity of the potential aspects of the legislation, I think, are driving more and more small entities to us.

It's kind of like, as taxes get more complicated, and Congress passes more rules, the tax advisory business goes up.

So I think we've seen a noticeable increase in smaller companies knowing that we understand these issues.

And so I think that, in the broadest sense, it would probably be a plus for us.

Although the impact on the enforcement licensing side probably wouldn't be for several years.

So it doesn't sound like much difference there, but to go back on the competitive side of things, if a new firm was funded with some limited expertise but just a lot of money, I guess you could argue that they'd make dumb purchases or dumb types of deals, but would that potentially, the risk that that would create, is potentially restrict some of the new licensing acquisitions that you could make with your new, fresh cash that you've recently acquired?

It's possible, sure.

And we would expect in any new asset class, capital is going to flow there.

This is so different, though, than any other asset class.

This is an asset class where 97% to 98% of the assets are worthless.

So unless you've got very experienced, sophisticated teams, you can make a lot of mistakes in a hurry.

And even though the 2% or 3% of the assets that are valuable, the nuances of how to roll out a risk-adjusted, time-adjusted licensing effort knowing all the counterparties on the other side and what their likely action is, we think our last 10 years of experience of doing over 1,000 transactions with major companies gives us a huge advantage in understanding the smart way to roll out licensing programs.

And so, certainly, we think new capital will come in given the degree of difficulty and sophistication of the industry, certainly, we think people will make the same mistakes we did.

But we see such a large opportunity right here in front of us with large corporations, that it's not something that concerns us.

So it's not one of these things -- I'm just trying to understand, like, in the situation where this happened.

Let's say a bunch of capital goes in.

How do you, as a company, react?

You wouldn't anticipate that your revenue would drop as you kind of sit and wait for these companies to blow up?

You're saying that there's still enough opportunity that you can still access licensing -- or patent portfolios that you can license even if at the same time as others perhaps overpaying and buying those patents, those 98% or whatever -- the patents that you guys would think are worthless?

You have to understand the vast majority of our business is partnering.

So any new competitor in the field would have no track record compared to ours.

On outright purchases, certainly, if there are people who don't understand the nuances are willing to overpay, it could potentially exclude some opportunities from an outright purchase.

But the vast majority, probably 99% of all of our revenues, historically, have been from partnering.

So, certainly, the competitive threat would take some time to build for them to build a credible track record to become competitive with our track record.

Can I just ask one other question.

Today there was an 8K filed about how, I guess, Icon is pressuring Motorola to figure out how to monetize their patents.

Can you give us a sense of what you would envision goes on at a company like that?

Because you talked about this earlier on the call about how when boards see what happened at Nortel, they're going to start putting pressure on their own company.

And maybe in this case, it's an investor.

What becomes the next step in the -- maybe Motorola is not the perfect example, but in smaller companies, how does that usually play out from a timeline when companies, do you think, get over the hump of saying, "Okay, let's get this asset out and monetized?"

Well, if you're asking us to envision it, I would envision it that somebody on the board level probably says, "What are we going to do with our patents?" And the smart person says, "Call Acacia."

It's hard to speculate what goes on inside.

We see it from a business development.

It's more on timeline, I mean, and understand because you've dealt with, obviously, a lot of these companies, small and large.

Most companies move very, very quickly.

Other companies, we could be in discussions with for a year, and, all of a sudden, tomorrow they call and say we want to do a deal.

Or they call and say we don't want to do a deal.

Yes, we've developed a dialog with a number of large companies who have valuable patent assets, and, obviously, these milestone events are increasing the percentages of them being interested to doing it now rather than later.

We had a large technology company with well over 15,000 patents who literally wouldn't take our call for a couple of years.

And we had lunch with them last week, and they said, "We have 15,000 assets, and we only 8,000 of them.

Help us." So you just don't know.

I mean, when the corner suite calls ahead of IP and says, "What's our plan?" You know, more times than not, we're going to be part of a discussion internally.

Do we outsource it?

Do we -- that's just a natural progression.

To speculate on what goes on and how long it takes --

It depends on the company.

Yes, it depends on --

We think it's moving more quickly now because of some of the things we've seen in the marketplace.

Tim Quillen, Stephens, Inc.

I just want to follow up on the press release yesterday regarding the smart phone patents and the fact that they're valuable.

And, you know, the access patents that you brought on have proved to be very valuable from a discounted cash flow perspective, just on their own.

Is this portfolio valuable in that type of way?

Or is it more valuable just because it adds to your overall smart phone IP and maybe pushes potential licensees toward structuring deals a little bit better?

Well, the answer to the question is both.

These patents are, we think, very valuable and, certainly, yes, the more you aggregate as is seen in these auctions with Nortel and InterDigital, the deeper and broader the total portfolio is, the more valuable it can be to a strategic player in the field.

So we clearly can't say any more than we did in the comments.

It was multiple patents.

It was several patents, and we do think it's valuable, and it is in the smart phone category, and probably in combination with existing patents we control, you know, it puts us in an even stronger position.

Right.

And on the intake side, on the patent intake side, you've talked about the notion of carving out some, maybe underutilized patents that your structured licensees own.

Have you seen any progress there?

Was this at all related to that?

This particular one, no.

But --

We made progress on the --

Yes, we've seen progress on that concept.

This particular portfolio, though, was not related to one of those.

Okay.

And, you know, because I'm sure inquiring minds want to know, but do you still think you can three structured licensing deals this year?

The two more, certainly.

Well, we know we could do them, it's just a matter of price, we could do them right away.

But, yes, we still believe we will, yes.

Okay.

And just, lastly, for Clayton on the amortization of patents.

If I understand your comments correctly, we should maybe assume that amortization is about $1 million lower in 3Q and going forward is that right?

Correct.

For the remainder of 2011, a scheduled amortization is coming out at around $2.5 million or so.

But that doesn't, obviously, take into account any additional accelerations of amortization related to recoupments in future --

Or any new purchases.

Right, right.

So it's $2.5 million split over the two remaining quarters?

But that's probably a low estimate?

Well, we know it will be wrong.

Not as wrong as our revenue estimates.

This will conclude the question-and-answer session.

I will now turn the call back to Mr.

Ryan.

Okay, I want to thank you all for being with us.

If you have any follow-up questions, you know where to find us and look forward to speaking with you next quarter.

Thanks.

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This concludes our conference for today.

Thank you all for participating and have a nice day.

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