Acacia Research Corp (ACTG) 2011 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research fourth quarter and year-end 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, Clayton Haynes, our Chief Financial Officer, and Ed Treska, our General Counsel.

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.

And we will then open the call for questions.

Acacia continues to build its leadership position in patent licensing and generated another year of record growth in 2011.

During 2011, Acacia grew its revenue and other operating income to a record $185 million, up 40% over the prior year, and acquired control of a record 40 new patent portfolios for future revenue growth.

During 2011, Acacia generated 125 new revenue agreements, covering 56 different licensing programs, and generated initial revenues from 21 new licensing programs.

During the fourth quarter of 2011, we acquired control of a record 15 new patent portfolios in the quarter as our growth in patent assets continues to accelerate.

Acacia now controls over 200 patent portfolios.

And we entered 2012 with the largest number of licensing opportunities in our history.

Acacia increased its cash and investments by $219 million during 2011 and ended the year with $323 million.

In January of 2012, we announced that we acquired ADAPTIX, a pioneer in the development of 4G technologies for wireless systems, for $160 million in cash.

ADAPTIX, which owns 230 4G-related patents is now a wholly owned subsidiary of Acacia.

This morning, we announced that we raised $225 million in a private offering.

Following the closing of that transaction next week, we will have cash and investment position of approximately $440 million.

Because of the disclosures made in the private offering, we also disclosed in our press release this morning that, quote, for the first quarter of 2012, Acacia expects to record it's highest level of quarterly revenues to date and that Acacia has executed licensing agreements through February 1st, 2012, totaling in excess of $75 million and that the foregoing results for the first quarter of 2012 are preliminary, unaudited, and subject to adjustments resulting from Acacia's quarterly review process.

The disclosure of this interim revenue information was made solely because of the disclosure in the private placement and does not represent a change in the Company's continuing policy of not giving revenue guidance or providing preliminary amounts.

The proceeds of the financing are for pending and future acquisitions of patents and companies with patent assets, including an acquisition we are currently negotiating, as well as for working capital and general corporate purposes.

We anticipate that our current cash position upon the close of this financing will be more than sufficient to meet all of our capital requirements, including any future acquisitions in the near term.

And we would likely fund any additional future acquisitions out of retained earnings.

Acacia has a long history of being very disciplined with the deployment of shareholder capital.

And we will continue to exhibit that discipline as we make future patent acquisitions.

We will only transact when the acquisition price provides the opportunity to achieve our targeted returns.

Acacia also has a history and corporate culture of focusing on early returns of capital when we have invested shareholder capital, whether we are investing $1 million or $160 million.

Acacia's primary focus is to recover our risk capital with early introductory pricing to initial licensees and then be more patient in licensing the balance of the market.

Fortunately, we are seeing an increase in the number of potential licensees that are interested in doing these early transactions with us.

Historically, we have grown our business by partnering with patent owners and sharing the net revenues 50/50.

We anticipate our partnering business will continue to accelerate, given our success in completing over 1,080 licensing agreements covering 112 different technologies.

We continue to generate growing interest from patent owners wanting to partner with us and have us take over the licensing of their patented technologies.

We are also seeing accelerating interest from major companies as an increasing percentage of our recent partnering agreements are with major companies as more and more large companies decide to monetize their patent assets.

We have also started expanding our business platform by purchasing 100% ownership of certain patent portfolios when the patent owner would rather sell than partner.

This provides an opportunity for us to expand our profit margins on portfolios where we do not need to share 50% of the net licensing revenues.

Acacia's acquisition of ADAPTIX serves as a good prototype for the criteria we look for when investing shareholder capital in a patent portfolio.

First, the patents cover a major technology, 4G wireless, already being deployed, and expected to become the dominant technology platform.

Two, it is a very diversified portfolio of 230 patents with 15 distinct patent families.

Three, their existing open continuation patent applications within most of the 15 patent families, allowing for additional patent claims.

Four, it has a long remaining patent life of 10 years on average.

Five, there is worldwide geographic coverage.

Six, the patents are unencumbered, allowing full revenue potential for Acacia.

And seven, there are three different industries to license, wireless clients, including handsets, base stations, and wireless carriers.

The diversification of the patent portfolio is important in mitigating fundamental asset risks.

And the broad spectrum of companies and multiple industries to license diversifies revenue risk.

Acacia's ability to invest in the new asset class of patents is enhanced by the years of experience we have gained in identifying the 200-plus patent portfolios we have acquired control of from the tens of thousands of patents we have analyzed and reviewed over the past several years.

Our extensive history of patent due diligence in all of the major technology sectors has become a great asset to our Company.

Additionally, our experience in negotiating over 1,000 licensing transactions with major companies gives us great insight into the likelihood of being successful in completing transactions at projected price points within realistic timeframes.

These skill sets give our management teams a unique perspective in valuing intellectual property.

We are very fortunate to have built a market leadership position in patent licensing at a time when patents are rapidly becoming a new asset class.

We are continuing to see a major trend in growing numbers of large companies worldwide who are deciding to generate revenues from their patent portfolios.

There is rapidly increasing awareness in boardrooms across the world that their managements need to generate returns on investment from shareholder capital that has been invested in research and development.

We are also absorbing that large companies are becoming very focused on their IP balance of payments and realize they need to generate financial returns from their own research and development investments to offset their growing payment obligations to other companies.

The sales of the Nortel patent portfolio for $4.5 billion and Google's $12.5 billion bid for Motorola Mobility has served as a wake-up to large companies and is accelerating this new trend.

As a result of the trend, we're seeing a significant increase in partnering opportunities with large companies.

Acacia's partnering business model is very attractive to large companies who want to generate financial returns from their patents without having to create a distraction to their core business, be involved in litigation, or having to make additional investments of capital and human resources to earn those returns.

Our corporate partners recognize that we have built a highly specialized company for patent licensing and have built a proven track record in generating revenues.

We are also seeing major new growth opportunity for Acacia in becoming an owner of important patent portfolios, like the ADAPTIX 4G patent portfolio, when these patent portfolios impact competing companies in major markets.

Acacia can acquire the patent assets and selectively sell certain patents or license each of the companies only the rights it needs.

Major companies are seeing that this is a much more efficient than them having to pay for all of the market rights when they only have limited market share and then have to give away a substantial portion of the value to their existing cross-licensees and face regulatory and legal issues when attempting to get the balance of the value from their competitors.

Acacia has an opportunity to bring efficiency to the market in playing a market-clearing function and licensing only the rights that each company needs.

We are also seeing a significant trend in our ability to generate a growing percentage of our revenues from nonlitigated licensing agreements.

In 2011, we grew our percentage of revenues generated from nonlitigating licensing agreements to 25% of total revenues from 20% in the prior year and expect this trend to continue to grow in 2012.

This has an accretive impact on our margins, given that legal fees have been 19% to 20% of our gross revenues on average.

We also continue to expand our business platform into additional markets and have begun to build a significant base of patent portfolios in the medical technology sector over the past year.

We think our business in the medical technology sector patent market could eventually equal the business -- our business in the technology sector itself.

We are also seeing emerging opportunities in the industrial markets and earlier this week announced a paid partnership on a premier portfolio of 300 patents relating to automotive safety and diagnostics.

As a result of these initiatives, Acacia currently has the largest pipeline of both potential new partnerships and outright patent acquisitions in our Company's history.

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

Our quarterly revenues will continue to be uneven, given the nature of our revenues.

And we are very appreciative for the investment analysts covering Acacia and giving the investment community the appropriate perspective for measuring our Company's performance.

The analysts have focused investors on the fact that our quarterly revenues can be very uneven, given the timing of certain licensing transaction.

And a more meaningful measurement is 12-month trailing revenues and growth in patent assets for future growth.

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

Thank you, Paul.

And thank you to everyone joining us for today's fourth quarter and fiscal year and 2011 earnings conference call.

As indicated in today's earnings press release, on a consolidated basis, revenues in the fourth quarter of 2011 increased $7.7 million, or 59%, to $20.8 million as compared to $13.1 million in the comparable prior-year quarter.

Fourth quarter 2011 revenues included license fees from 37 new licensing agreements covering 26 of our technology licensing programs as compared to 41 new licensing agreements covering 25 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 strong trailing 12-month revenue and operating income growth with consolidated trailing 12-month revenues increasing 40% to a record $184.7 million as of the end of 2011 as compared to $131.8 million as of the end of 2010.

Currently, to date, on a consolidated basis, our operating subsidiaries have generated revenues from 112 of our technology licensing programs, up from 91 technology licensing programs as of the end of 2010.

License fee revenues continued 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.

Please note that the income tax provision for the 2011 periods discussed is preliminary and subject to completion and adjustment.

As such, related net income and loss -- or loss and earnings or loss per share for the 2011 periods discussed are subject to adjustment resulting from completion of the income tax provision in connection with the completion of our year-end close procedures and the filing of our 2011 Annual Report on Form 10-K with the SEC.

For the fourth quarter of 2011, Acacia Research reported a preliminary GAAP net loss of approximately $7 million, or $0.17 per fully diluted share, versus a GAAP net loss of $5.3 million, or $0.16 per fully diluted share, for the comparable prior-year quarter.

The fourth quarter 2011 non-GAAP net loss, which includes -- I'm sorry, which excludes the impact of noncash patent amortization and noncash stock compensation, was approximately $1.9 million, or $0.05 per diluted share, as compared to $2.3 million, or $0.07 per diluted share, 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 8-K filed with the SEC.

Our average margin, defined as gross revenues less inventor royalties, noncontrolling interests, and contingent legal fees for the portfolios generating revenues during the period, was approximately 42% for the fourth quarter of 2011 as compared to 53% 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 and vendor agreements and contingent legal fee arrangements, if any.

Net results for the fourth quarter of 2011 as compared to the fourth quarter of 2010 also included the impact of a 38% increase in marketing, general, and administrative expenses, due primarily to a $2.1 million increase in noncash stock compensation charges resulting from an increase in the average grant date fair value of restricted shares expensed in the fourth quarter of 2011 as compared to the prior-year quarter.

In addition, inventor royalties expense and noncontrolling interests for the fourth quarter of 2011 increased 70% to $6.5 million versus $3.8 million for the comparable prior-year quarter.

Contingent legal fees for the fourth quarter of 2011 increased 142% to $5.5 million versus $2.3 million for the comparable prior-year quarter.

The increase in inventor royalties and contingent legal fees primarily reflects the increase in related revenues quarter-over-quarter and also reflects certain patent portfolios with lower contingent fee rates generating revenues during the fourth quarter of 2010 as compared to the patent portfolios generating revenues in the comparable 2011 period.

The fourth quarter and fiscal 2011 increase in our preliminary effective tax rate primarily reflects the impact of foreign withholding taxes paid during fiscal 2011, creating a foreign tax credit carry forward for which we placed a valuation allowance related to credits not utilized.

As discussed on previous earnings calls, foreign withholding taxes totaling $7.5 million were withheld by the applicable foreign tax authority on payments in connection with certain licensing arrangements executed in 2011.

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.

In addition, the effective tax rate also reflects the preliminary impact of the suspension of the use of net operating losses in California for the 2011 tax year.

Keep in mind for financial reporting purposes tax expense if calculated without the excess tax benefit related to the exercise investing of equity-based incentive awards.

The deduction related to the exercise investing of equity-based incentive awards is available to offset taxable income on our 2011 consolidated tax returns.

Accordingly, the tax expense calculated without the benefit related to the exercise investing of equity-based incentive awards in fiscal year 2011 totaling approximately $2.1 million was credited to additional paid in capital, not to taxes payable.

Next, I'd like to provide a brief summary of the results for the fiscal year ended December 31, 2011.

Fiscal year 2011 revenues and other operating income increased $52.9 million, or 40%, to a record $184.7 million as compared to $131.8 million in fiscal 2010.

2011 revenues included license fees from 125 new licensing agreements covering 56 of our technology licensing programs, including initial license fee revenues from 21 technology licensing programs.

Fiscal year 2011 average margins were approximately 51% as compared to 63% for fiscal year 2010.

We reported fiscal year 2011 GAAP net income from operations of $20 million, or $0.48 per fully diluted share, versus net income of $34.1 million, or $0.97 per fully diluted share, in 2010.

Fiscal 2011 non-GAAP net income was $43.3 million, or $1.05 per fully diluted share, as compared to $48.1 million, or $1.37 per fully diluted share, for fiscal 2010.

Inventor royalties expense and noncontrolling interest for fiscal 2011 increased to 54% to $43.7 million versus $28.5 million for fiscal 2010.

Contingent legal fees for fiscal 2011 increased 102% to $40.3 million versus $19.9 million for fiscal 2010.

The increase in inventor royalties and contingent legal fees primarily reflects the increase in related revenues for fiscal 2011 as compared to fiscal 2010 and also reflects certain patent portfolios with lower contingent fee rates generating revenues during fiscal 2010 as compared to the patent portfolios generating revenues in 2011.

Marketing, general, and administrative expenses increased 42% to $35.7 million in fiscal 2011 from $25.1 million in fiscal 2010 due primarily to a $6.5 million increase in noncash stock-compensation charges, and increase in variable performance-based compensation costs, and a net increase in engineering and licensing personnel in fiscal year 2011.

Litigation and licensing expenses related to patents was relatively flat year over year.

Looking forward, for fiscal 2012, we expect MG&A, excluding noncash stock-compensation charges, to be in the range $22.5 million to $24 million, including an estimate of the impact of variable performance-based compensation costs.

For fiscal 2012, we estimate patent-related litigation and licensing expenses to be between approximately $14 million to $15 million.

From a balance sheet perspective, cash and cash equivalents and investments totaled $323.3 million as of December 31, 2011, as compared to $104.5 million as of the end of the prior year.

Working capital increased to $295 million as of December 31, 2011, compared to $92.3 million as of December 31, 2010.

Net cash inflows from operations for the fourth quarter of 2011 totaled $13.3 million versus net cash inflows of $14.6 million for the fourth quarter of 2010.

Net cash inflows from operations totaled $59.1 million for the year ended December 31, 2011, as compared to $4.9 million for the year ended December 31, 2011 (sic).

In the fourth quarter of 2011, we acquired a record 15 additional patent portfolios as compared to nine new patent portfolios in the prior-year quarter.

Patent portfolio acquisitions for fiscal year 2011 totaled 40 new patent portfolios, which is also a record for annual patent portfolio acquisitions, which compares to 36 new portfolios acquired in 2010.

Fourth quarter 2011 patent-related acquisition costs totaled $11.9 million as compared to $5.2 million in the prior-year quarter.

Fiscal year 2011 patent acquisition costs totaled $14.7 million as compared to $8.2 million in fiscal 2010.

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

And I will turn the call back over to Mr.

Paul Ryan.

Thank you, Clayton.

And, operator, you can open the call for questions.

Thank you, sir.

The question-and-answer session will begin.

(Operator Instructions).

Your first question comes from the line of Tim Quillin of Stephens Inc.

Please go ahead.

Hey, good afternoon.

Hi, Tim.

Could you talk just a little bit about the different options you had in terms of raising capital and why you settled on a private placement, maybe how that relates to timing as opposed to waiting until an acquisition is a little more teed up and going through a traditional equity offering?

Well, the transaction is fairly advanced with a private company and that met a standard that precluded us from being able to do a registered offering.

Without disclosing.

Without disclosing the company we're acquiring, and they did not want disclosure of the company.

Okay.

So, the only route we really had was to do a private equity offering, which will be registered subsequent to those events occurring.

And so, you can't tell us a lot about the target I guess at this point.

But, maybe if you could talk about the timeframe for completing the acquisition and maybe if it -- the range of potential types of targets.

Is it operating company?

Is it just patent assets?

What exactly are investors getting here?

The timeframe would be likely the end of this quarter, early second quarter in terms of a closing, if it goes through.

We have an LOI, and we're in the early stages of due diligence.

So -- but, that would be the expected timeframe if we did continue with the deal and close on it, would be end of quarter, beginning next quarter.

But, we can't give any more color on that.

Any color we would give might lend to the identity of the company, which we've agreed not to do.

Okay.

And one last question, I'll hop back in the queue.

But, so, you had -- you announced a couple nice licensees of the ADAPTIX patents shortly after closing the acquisition.

And you filed suits against kind of a range of potential other infringers.

What should be the timeframe that we should be thinking about in terms of seeing additional licensing revenue on those patents?

Thanks.

Well, you know our pattern.

We're always in discussions with people.

We're in the settlement business.

So, litigation is really a backdrop.

So, we would certainly look to continue to try to get early licenses done on the portfolio.

We think it's a kind of a compelling portfolio, given its depth and breadth and pedigree.

But, all of these are negotiated settlements.

So, it's difficult for us to predict the timing of a settlement or a negotiation.

We have other companies obviously we haven't litigated with that we could reach a licensing agreement without litigations.

But, we can't predict the timeframes of those being completed.

Thank you.

Sure.

Thanks, Tim.

Your next question comes from the line of Paul Coster of J.P.

Morgan.

Please go ahead.

Yes, thanks very much.

I've got a few questions.

First one, is there a lock up on the shares that have been placed in sort of this private placement?

Yes, it's well probably 90 days.

It's a private equity placement.

And we have to wait for certain events to occur or not occur prior to registration.

So, we would assume -- it'd be either concurrent with the announcement of the intended acquisition if it occurs or -- .

-- Or, if we abandon that -- .

-- Or, if we abandon that, then we could go ahead with the registration at that point in time, so some time within that 90-day timeframe.

But, they are currently restricted.

Okay.

The ADAPTIX acquisition and subsequent monetization, can you just give us some sense of what timeframe we should expect for a full return on the investment there or whatever -- any other kind of parameters on your philosophy around that deal and what, if anything, that signals regarding this prospective deal as well?

Well, look, it depends on the nature of the assets acquired, Paul.

In certain cases, as in the case of ADAPTIX, where there's never been any licensing at all, that affords us a lot of opportunity.

There wasn't any current litigation going on.

So, we had an open opportunity to have some discussions with companies about wanting licenses.

As a philosophy, as we stated in the prepared remarks, our corporate culture is very much about getting a return of capital.

And then you can worry about return on capital.

So, we're very much driven to do early introductory deals.

We think more and more companies are realizing that and moving in that direction, which would be good for them and good for us.

But, we can't -- we can never predict the timeframe of when we would recover X percent of the revenue.

But, certainly, it's our intent to do very reasonable early deals to get our capital back and be able to reuse our capital in subsequent transactions.

As you could imagine, Paul, the identification of us as to when we think we might be able to do it puts us and our shareholders at a tremendous disadvantage in the negotiation with the expectations of when and where.

No -- .

-- But, the plus -- clear, I think we've continued to exhibit that in portfolios we've brought in and the timeframes of us beginning to generate licenses has been shortening consistently and particularly at new portfolios that we've brought in.

Got it.

In your prepared remarks, Paul, you said you had the largest number of licensing opportunities in your history.

Is that merely a reflection of the number of portfolios you've acquired now, or is it referring to the actual number of negotiations that you have underway at this moment in time?

Well, I think it would cover absolutely both.

I mean, we've got not only more companies to settle with in current litigation, but we have more portfolios that we're negotiating nonlitigated transactions with as well.

Yes, as Paul said in his remarks, we've seen -- 2009, we virtually had zero settlements that were without litigation.

And you saw about 20% of the revenues in '10 and about approximately 25% of the revenues in '11.

We continue to think that that opportunity will grow and with it margin expansion.

The average revenue per revenue-generating portfolio per quarter kind of bumps around all over the place.

But, should we expect it to grow through time, or is that an unrealistic expectation?

We don't place any metrics.

The uniqueness of a patent being a unique asset as to itself, we've never even looked at that and would caution anybody from using that kind of metric for some kind of forward guidance.

Yes, we oftentimes have portfolios where there's less companies at much larger revenue points.

We have other portfolios that have very broad coverage of 30, 40, 50 companies at much lower revenue points per company.

Both types of portfolios are very profitable for our shareholders.

And we like both kinds of portfolios.

So, again, yes, I don't think there's any metric that defines our business that's very helpful based around that because it varies quarter to quarter.

Okay.

Last question.

It's reasonable I think to anticipate without being able to quantify the improvement in gross margins owing to this ADAPTIX acquisition and the pending acquisition.

In both cases, it sets you up for improved gross margins over next couple of years.

Is that correct?

Can you quantify -- ?

-- Well, I think the trend is probably as important if not more important as the trend away from everything as a litigation.

If you'll look back, I think our litigation expenses averaged around 10% or 20% over the last couple years.

And if we're able to do more of that without litigation, then the margins will increase.

As we state each quarter, margins vary quarter to quarter based on the ownership and the backend participation.

It goes without saying that, if we own more of the backend, our margins will expand.

And you amortize over several years.

So, obviously, the margins from these deals upfront should be much superior to what we've seen previously.

Well, yes, if we own 100%, certainly.

If there's no litigation, we have 95% plus margins.

With litigation, the margins would still probably be in the 70%, 80% range.

So, absolutely, and most of the portfolios that we've acquired, the ones we're looking at have 7- to 10-year life.

I think in the fourth quarter we did 15 new licensing opportunities.

I think four or five of those, we had 100% backends, but still the vast majority of our business and where we really made our mark.

And the vast majority of the people who come to us are in the partnering model.

Yes.

Okay.

Thanks very much.

Thanks, Paul.

Sure.

Thank you, Paul.

Your next question comes from the line of Mark Argento of Craig-Hallum Capital.

Please go ahead.

Yes.

Hi, good afternoon.

Hi, Mark.

Just a couple questions, one more of a kind of a housekeeping accounting question in regards to the ADAPTIX portfolio or other types of transactions, where you're buying the IP outright.

Should we assume that you guys will have to amortize a purchase price over kind of the useful life of those patents, or what -- could you give us a little bit of help in terms of the models and what kind of expense, amortization expense we should be running through for that transaction or others like it?

Sure.

Sure.

Certainly, pursuant to the requirements under US GAAP, we are required to allocate the purchase price amongst the assets acquired.

And certainly in the ADAPTIX scenario, the primary asset is the patent portfolios.

And so, we would be required to amortize that purchase price over what we deem to be the estimated economic useful life of the patents.

Currently, we're estimating anywhere from a 7- to 10-year amortization period on the purchase price.

All right.

Have you fine tuned exactly kind of what the dollar amount you're going to run through the P&L will be, or is that something you could help us with at some point?

Yes, I guess we're still sort of finalizing our thoughts on that.

But, as soon as we come up with sort of our final estimates on that, we certainly can -- I could provide you some information.

Yes, certainly, in the first quarter report, what's -- the time period within the transaction occurred, we would have that information at that time.

Certainly.

Great.

All right.

And then shifting gears, Chip, you talked a little bit about the trend towards nonlitigation settlements.

And at least the two you did with the ADAPTIX and the bulk of the ones you've done over the last year I think have been guys -- done with guys that you've had more formal kind of look-forward relationships with.

Some people call them comprehensive deals.

There's a litany of different names I guess sort of been given those transactions.

But, are you able to have formal discussions with potential licensees if you're not in that type of relationship with them?

I knew one of the issue had historically been, if you approach somebody about license and portfolio, you not only have like kind of a standstill agreement that you lose venue, control of venue, on a lot of those things.

Are you seeing willingness or a change in the marketplace, or is there some mechanism in place where you're actually able to have these discussions with guys without having to worry about them coming at you before you can have a decent discussion?

Yes, I think we have both formal agreements and informal agreements.

And we're finding that [Jones] agreements are just as structured and followed as formal agreements.

So, we have more of those.

People are more willing to rationalize the process of monetizing IP.

I'd say that the more sophisticated the player, the more realistic and the more understanding they are of the process and the more willing they are to talk about a -- discuss something rationally before the friction cost on both sides gets involved.

And then my last question is, in terms of the organization, I mean, the rate of growth and the explosion in the IP market, how comfortable are you in terms of the scalability of the model, the number of people?

Do you have to add people at this point?

Are you -- how do you -- how are you looking at your G&A here going forward?

Yes, the headcount has stayed about the same.

We've grown the business from about $20 million run rate to $180 million run rate with approximately the same headcount.

And we don't see a need for significant on-balance-sheet headcount increases.

In the first quarter, we'll probably pare back four or five people and add four or five people.

The leverage in the model also is in the fact that we have a significant amount of very valuable resources working off balance sheet for us, not only our partner law firms, who are probably 12 to 15 law firms with 60 to 70 full-time equivalent lawyers are working on business for Acacia shareholders and are paid, obviously, on a performance basis.

Similarly, on the due diligence area, our managing engineer, each manage probably 15 to 25 leading outside consultants and technical experts, which we repeatedly use.

And my guess is probably there's 30-plus full-time equivalents leading technical experts, again, not on payroll.

And those expenses get reimbursed to the Company out of gross revenues.

So, it's not a net cost to shareholders.

So, you probably at any given time, there's 150 to 200 people actually working for shareholders on these matters.

But, between 50 and 55 are actually on payroll.

Okay.

Thanks, guys.

And we don't expect that to significantly increase.

Thanks.

Sure.

Thank you.

Your next question comes from the line of Daniel Gelbtuch of Cantor Fitzgerald.

Please go ahead.

Hey, just wanted to revisit the comprehensive deals.

Obviously, you guys have backed away from that for the time being as you I guess assess the value of your portfolios or potentially acquire portfolios.

But, my question is, is the pipeline still as robust as it was a year ago?

And what do you see in that market right now?

Well, yes, we have people interested.

We have turned down offers of doing structured term deals when it didn't make sense either financially for us.

We're more interested in only doing those transactions and probably less than we originally thought we would do with companies where we think there's additional business we can transact to the benefit of our shareholders.

But, again, with exceptional growth in our patent portfolios and the quality of the patent portfolios, obviously, our pricing has gone up.

And the companies who did those early deals probably got in hindsight very good bargains.

Yes, and with the growth of our revenues and with the growth of our margins, we're able to drive significantly greater returns for shareholders without the opportunity cost if we're moving potentially large companies from potential licenses down the road.

So, this is a much more accretive, much more valuable way for us to grow the business, both from a top line and from a bottom line.

But, as you can see also, some of the companies we did those transactions with have come back and bought additional rights from us in addition to whatever term rights they had in the original agreement.

So, we're trying to select partners that are -- or companies that are very sophisticated in this area, want to eliminate the friction cost, and can engage in a variety of transactions that benefit them and that benefit our shareholders simultaneously.

So, we will continue to do.

We've got interest in doing additional structure term deals.

If the price is right and the terms are right, we will do them.

And I expect we will do some this year.

Okay.

And just I guess switching gears to more of a high level in the industry, obviously, InterDigital had an announcement this quarter where they backed away from their sale.

And you saw RPX maybe switch gears a little in terms of what they're going to be doing going forward.

What do you see in terms of on a -- from a high level the direction of the market and how things are shaping this in the current situation in the market?

Well, we think that the whole idea of the auction or the model was an exception rather than the rule.

If you look at the auctions that were done three, four years ago, it turned out in the autopsy that one party was responsible for 90% of the purchases.

If you look at the auction that was Nortel in the early spring, that is clearly the only successful one that happened.

There was a number of public auctions that you mentioned, IDCC.

There was one around Kodak.

There's been a number of other ones on -- there's only two degrees of separation.

We'd be surprised if there's a transaction that we didn't know about and just didn't feel -- we've never bought anything in an auction and a handful of times we've ever even transacted on the broker side of it.

It's just not our business.

Our business is kind of doing the deep dive, finding the opportunities.

Most of the stuff that we see that goes to auction has limitations because it's been licensed so many different ways, or it just -- it gets kind of -- we're past that.

That's not an area that we're actively canvassing in.

And we would not expect to see a lot of -- a lot more auctions, especially from the strategic standpoint.

They seem to all have what they need.

Also, if you think about it from a strategic standpoint, I know a lot of patent owners, once they saw the Nortel price got very encouraged and overly encouraged.

Strategics from a structural standpoint, obviously, the vast majority of them only have 5%, 10%, 12%, 15% market share.

So, to expect them to pay 100% market value for the portfolio is a stretch.

And then the instant they would put it on balance sheet, they give away a substantial portion of what they just paid to all their existing cross-licensees.

And then if they go to assert against their competition, they run into regulatory and legal issues.

So, we think we can provide a much better and much more efficient process by us stepping in, buying the asset, slicing and dicing the rights that people need, giving people only the rights they need, and being able to get premiums in doing that.

And we -- hopefully, the ADAPTIX portfolio will serve as a good prototype for that structure.

But, you can imagine not a lot of companies with 10% market share want to pay 10X for what they need to simply take the asset off the market.

However, they are fearful of a competitor getting it.

So, again, we think we can play that role.

And we don't think that that many auctions will be successful with strategic buyers.

Okay.

Thank you very much.

Sure.

Your next question comes from the line of Jonathon Skeels of Davenport.

Please go ahead.

Guys, you mentioned in the prepared remarks that you're seeing an increase in the number of companies interested in taking early licenses when you're acquiring patent portfolios.

Can you just talk about maybe specifically what's driving that?

Is that competitive based, meaning they want to incentivize you to go assert against competitors, or are they simply being proactive and want you to clear the market of their risk from those patents?

Well, one thing I -- yes, they see that we're -- this is a business for us.

We're not trying to clear shelf space.

We're not in the market.

We're simply licensing rights.

And I think more companies realize that we're pretty rational in our ability and very good in our pricing.

And so, to engage in litigation, it oftentimes exceeds the cost of a license as a very inefficient process.

So, I think it's driven simply by cost.

Companies are seeing that we are able to underwrite and price IP realistically.

And if they're willing to engage, they can probably get the deals done without all of the friction cost.

So, I think that's the primary driver.

Think about this, Jonathon.

Think about an asset class that, in order to determine the value, 90% of the times it requires a federal lawsuit.

So, just that's pretty inefficient.

Imagine going into a car dealer and trying to buy a car, and you've got to file a lawsuit first.

So, it's basically driven by cost.

Some companies, obviously, are trying to be opportunistic and strategic around competitive environments.

So, I would expect that they think, if they do an early license, that might give an advantage because they know we will enforce against all infringers and abate them.

So, that kind of comes with the territory.

Okay.

And then can you comment on what the pipeline of acquisition candidates looks like now versus, say, six or 12 months ago?

Specifically, what sectors is it based in?

Is it just wireless, or you looking in other areas as well?

Interestingly enough, everything that we're looking at seriously are things that we have known about for two or three years.

We just have price discipline.

And some of them are moving toward the price level where we think they make sense.

So, it isn't as if we've discovered a whole new group of patents.

They're patents that we've done a lot of due diligence on, have a great deal of awareness, and think we have a better feel for the licensing value because of the hundreds of transactions we've done in the last couple of years realistically as to what the full monetization value could be.

And then obviously, you've got to buy to the price that makes sense.

So, we're probably seriously looking at three or four transactions with another half a dozen in the background.

But, they're all things that we're pretty knowledgeable about and have been looking at for a long time.

Well, we kind of chuckle, Jonathon, when we see news releases about companies, private and public saying we've had a valuation of our patent, and it's worth X.

Think about it.

You really can't put a valuation on anything unless you've actually gone out and tried to monetize it.

As Paul said earlier, we've done over 1,000 deals.

There aren't too many companies that we haven't had a number of licenses with over the years.

So, we think that's our intellectual capital.

We think that's our IP.

We know how to price something appropriately because we've done it before.

We've done it with those parties before many times and with the same business units of those parties in their space.

So, we know how they will react to certain overtures.

That's a huge advantage for us.

It helps us on the business development standpoint.

We can go in and talk to any company and say we've done this.

We've licensed the people that need to be licensed.

Here's what our -- here's what your expectations should be.

We know that when we're talking about buying -- using shareholder capital to buy 100% of an asset.

We've licensed everybody out there who needs to be licensed under a certain asset and have a pretty good -- much better idea than anybody else out there what it's worth, what the risks are, and what we should pay for it.

So, we think that makes us uniquely qualified and has a huge competitive advantage.

As long as, like Paul said, we have pricing discipline, some of the portfolio -- we did a big partnership portfolio just recently on 300 patents in the automotive.

And the first conversations go back I think four or five years on that.

So, you just have to be patient and do it at the right price, not the right time.

And then just one on ADAPTIX.

So, that was not a profitable company in the past.

Did you acquire NOLs along -- in that deal as well?

Yes, there are some NOLs that come along with the acquisition of the Company.

The pretax number is roughly $50 million in NOLs.

And on a tax effective present value basis would represent approximately between $10 million and $15 million of tax benefit over a three- to four-year period, which includes sort of an estimate of the impact of the limitations under Section 382 associated with the change in control.

Didn't affect our attitude as to the price we should pay, though.

Gotcha.

Thank you.

Thanks, Jonathon.

Your next question comes from the line of Darrin Peller of Barclays Capital.

Please go ahead.

Hey, thanks, guys.

Just one first question on the access patents again.

I mean, I know it's been a major driver of revenues in the past quarters.

Just can you give us a little color on why it seemed a little bit of a lower contribution in the fourth quarter?

And then can you comment on how conversations might be progressing with Apple or HTC?

Well, of course not.

And the reason it was lower in the quarter is we didn't do as many deals.

I mean, that's -- .

-- From an opportunity standpoint, though, I mean, it's not -- there's still more to come?

Well, obviously, the last thing we want to do to our shareholders is disadvantage them by answering those kind of questions on the call.

I mean, no, seriously, you guys -- we're really good at three things, finding IP, buying IP, and licensing it.

And we just need to -- if you agree that we're good at that, the reason we didn't have as much in the fourth quarter is we didn't do as many deals.

We still have some -- we had -- still have some defendants out there.

And that's all we'll say.

All right.

Maybe we could just then shift gears over to the RPX announcement with Alcatel-Lucent.

Can you just give me your -- I'd love to hear your color on what you think -- how that sort of is from an impactful-to-the-industry standpoint.

I mean, what does it mean for companies like yourself from a competitive standpoint, given -- if that is successful, it seems like it's -- it seems somewhat similar to what you guys have done, although in a different manner.

Obviously, they're not generally accepting fees from Alcatel-Lucent for it.

Well, we don't -- we can't really speak to that.

I don't know the terms of the agreement or the nuances of it.

I think it's an indication certainly that more and more large companies are interested in getting paid for their patents.

And that's one approach that they're using.

And to the degree that RPX has a fabulous group of members that may be encouraged given the overture to voluntarily license for a limited window period of time, it could be a good thing.

I think strategically, what it does -- Alcatel-Lucent is probably one of the more sophisticated major corporations in IP.

And they have decided that there is a role for a third party to help them monetize their IP.

And I think that's the trend that everybody ought to be focused on that a very sophisticated group that has generated hundreds of millions if not billions of dollars over their life is looking to independent third parties to help them with the monetization.

And that kind of chatter is happening in 20X the companies in the last year.

Right.

And there's a lot of beauty contexts.

And depending on the opportunity that's out there, we'll win more than our fair share, given what we've done.

Got it.

Okay.

All right.

Thanks, guys.

That's helpful.

Sure.

Thanks, Dan.

Your next question comes from the line of John Evans of Edmunds White Partners.

Please go ahead.

Could I just ask a follow up to Tim's question?

And I guess I'm really curious just about the timing of the deal and why you wanted to do a deal where you gave an 8% discount in the market because it sounds like your business is on fire.

And it sounds like you -- .

-- Because we were -- the reason is because we were prohibited from doing a registered offering, given the status of our negotiations with that company.

It was deemed that we could not do a registered deal.

And we're interested in doing the deal.

We think it could be very accretive for shareholders if we complete it.

And therefore, we were willing to live with a discount on a private placement to accomplish that.

But, may I ask you a question?

Why would you put the cart before the horse I guess if -- because it sounded like the deal may not even happen until the second quarter.

Why wouldn't you announce the deal and then go do an equity offering?

You can't announce the deal unless you're ready to close it because the other side wouldn't allow us to do that.

In other words, we have to have the funds to transact and do the rest of our business and be prepared for other acquisitions that we're looking at -- .

-- And this wasn't a deal specific.

The fact that we had this nonbinding LOI triggered the ability to do or the inability to do a registered deal.

We felt this was the right time, the right place to take advantage of the opportunities.

I mean, we're not macro players.

We don't know what's happening in Greece and Germany.

We don't know if an issue's going to break out in the Middle East.

I mean, there's a lot of things beyond our control.

We can control our business.

The difference between the registered and the nonregistered we did eight months ago is about 2%.

We felt that the opportunities that afforded themselves out there were worth that risk.

But, so, then just to finish that thought, the reason is, if you do do this deal, it will be substantially bigger than the cash that you have on your balance sheet.

And that's why you needed this extra cash.

No, not necessarily, no, no, no.

We'd never put ourselves in a position that way.

Look, we want to be financially strong and opportunistic.

We see a lot of potential transactions in the market.

And if they come in at the right price, we want to be ready, willing, and able with capital to transact.

And our ability in the ADAPTIX case was very critical.

You want to have cash on the balance sheet so you're able to transact.

You're not out scrambling trying to find money when -- .

-- When we did our deal last March or April, we didn't have the ADAPTIX deal even in our radar.

We had looked at it prior.

The expectation after the Nortel deal was for a much higher price than we thought we would transact it at.

It came back to us.

We made the deal.

I mean, it's about being opportunistic.

The last question then, you said that you -- so, you believe now that you've raised this capital, you won't need to raise anymore capital?

Certainly not in the foreseeable future.

We think we would buy additional things out of retained earnings.

If we're able to do early licenses on acquisitions and generate cash, we'd like to -- .

-- Yes, what it looks like to -- .

-- Use the same capital.

What it looks like to us is there's been -- this is kind of the exception and not the rule.

There's been a huge amount of opportunities that have all started to coalesce that we've been tracking for two, three years.

And we think it's probably -- what's happened is it's probably the afterglow of Nortel.

For years, we would call on IP departments.

And they were very -- weren't very receptive to our overtures.

Maybe it was they didn't want us doing their job.

They didn't want to look bad to management.

But, I think, as you analysts have done such a good job of creating the awareness of this new asset class, CEOs, CFOs, COOs all over the world are now demanding plans of actions from IP departments, who up until then have been pretty much left alone.

Because of that, we've been getting calls left and right and see a multitude of opportunities.

And we had to right-size the treasury to take advantage of whatever combination we saw coming down the road.

Okay.

Thank you.

Thanks.

Your next question comes from the line of Michael McCormick of Gilder Gagnon & Howe.

Please go ahead.

Hi, guys.

Hi, Michael.

Maybe I'm doing this wrong.

But, if you look at the year-end numbers and you strip out the amortization of patents and the verdicts on the insurance proceeds and you look at the -- kind of what would be the operating profit under that situation, it looks like your margins are down under that strategy.

But, you've spent a lot of time talking about you've been moving away from kind of contingent legal fees because this movement to settlement -- but, the contingent to legal fees are up 100% year over year when the revenue isn't.

So, maybe you can help me reconcile those two comments.

It just depends on the portfolios, Michael.

There's certain portfolios that are deeper into litigation.

And some of those are ones where our law firms get 30%, 35% contingency fees.

And so, just depends on the mix of those.

And so, sometimes, that definitely impacts margins.

And some of the portfolios that we've had earlier that have gone deeper in litigation have had that kind of a cut.

And most of the revenues that we've generated even through last year were partnering deals.

We think going forward, obviously, more and more of these are going to be 100% owned.

In the fourth quarter, of the 15 portfolios we brought in, 11 of them were for major companies, and I think eight of them we acquired either outright ownership of 100% or significantly more than 50%.

So, that's why we think margins will drive -- and then we're also -- we're just at the beginning I think of seeing a behavior shift of companies.

And we've now demonstrated some of those transactions with the purchase of ADAPTIX, where we're able to get companies to license without litigation.

And so, we just think that'll be an increasing trend.

But, you're right (inaudible).

Between 2011 and 2010, there wasn't a lot of impact from that trend.

Okay.

Okay.

Right.

So, you're saying that this trend will be more relevant next year than this year.

We think so, yes.

Okay.

And then the other is with the acquisition of ADAPTIX and this potential other acquisition capital.

The business is becoming much more capital intensive for you.

You've never been one to want to use kind of retained earnings or capital to acquire patents now.

And -- but, now, it seems like that trend might be changing.

And maybe that's due to the acceleration of the business model.

But, maybe you can talk to us about how you think about your deployment of capital.

And those returns are required for you to put capital out versus your older model of just kind of licensing.

Yes, obviously, we were -- Mike, we were -- when we were doing our partner model, those are really the only deals we ever did.

We didn't feel comfortable enough in deploying large amounts of capital.

As we've talked about earlier, we've done over 1,000 deals now.

I think, as you see us start to deploy capital to own 100% to think we can get some early deals done without the high cost of litigation, they're going to be in areas that we're pretty familiar with, where we have multiple relationships, multiple deals, multiple licenses with people because that will drive margins and will drive return.

But, like, ADAPTIX was a liquidation of that company.

Under a partner model, that was a non-starter.

So, it's usually the IP owner who determines for us.

We don't really make that determination going in.

Should we buy this, or should we partner it?

The ATI model, the one we just closed on, was not available for sale.

It was still a partner model.

It's hard to tell you what we're going to -- is it going to be two-thirds partnering and one-third purchases going forward?

It's really hard to tell because we don't set that policy.

That is set for us by the IP owner usually before they even call us.

They either have a determination they want to partner with us, or they have some sort of liquidation, or it's -- they need some money.

So, we haven't changed our policy.

Okay.

So, this is almost like an expansion of the plan is the way I think about it.

Clearly.

But, is it right for me to think that the bigger opportunities are going to require capital investment on your part now?

No, no, I mean, I think you'll -- .

-- Well, listen (inaudible) the automotive portfolio we just brought in of 300 patents, that was a partnering deal this week.

Yes, Access was not available for sale.

The Renaissance portfolio was not available for sale.

So, I don't -- I think it's hard -- it's hard for us to determine because those decisions are made before we get them.

My gut tells me that people want to see -- they don't want to let their patents go unless they absolutely have to because the difference in pricing, what they can get versus what they think it's worth in the long haul is pretty significant still.

Obviously, it drives our returns.

So, we think that most people with good patents are going to still want to do the partnering deal rather than the acquisition deal.

But, not everybody can afford to wait or be in that position.

My guess is we'll still do the vast majority of our deals two-thirds/one-third, three-quarters/one-quarter, 80/20, don't know, in partnering deals.

Thank you very much.

Sure.

Thank you, Michael.

Your next question comes from the line of Tim Quillin of Stephens Inc.

Please go ahead.

Hey, thanks for taking my follow up.

And then I don't want to parse your words to closely, Paul, but would you have had enough capital to fund the current acquisition you had teed up?

And was the additional capital raise more a function of wanting to make sure that you had a little dry powder for other opportunities after that?

Yes, we've got other things we're looking at.

We want to be in a position for shareholders.

If we can buy an asset right and earn multiples on that, we want to be ready to go.

Got it

And we have found in the past -- and also, yes, also the general philosophy.

This deal was not driven by the letter of intent that we have signed, period.

The only part of this deal that was driven by the nonbinding letter of intent we have signed is it hit the requirements to not allow it to be a registered offering.

And that -- if we apparently haven't made that clear, I think that's important.

This deal was not driven because of our letter of intent.

Got it.

It was -- .

-- And then in terms of patent intakes, you've set a pretty high bar with 15 patent portfolios in the door in the fourth quarter.

And it's quality, not quantity.

But, what should our expectations be in terms of new patent portfolios in 2012?

Probably about the same run rate.

Our quality and revenue requirements have continued to go up.

Fortunately, our due diligence teams have researched and done due diligence in these markets so many times we can actually now process many more opportunities much more quickly.

But, I'd say probably around pace for about the same amount of total portfolios that we did last year, albeit we always are looking for ones with greater revenue opportunities for our shareholders.

Got it.

And fourth quarter -- excuse me, then fourth quarter, you spent $12 million on patent acquisition cost.

Is -- was that one patent portfolio, or what was -- or, was it multiple patent portfolios?

Actually, we had invest -- we invested capital in seven of the different transactions, some of which we bought wholly, some of which we made upfront payments to get better percentage splits with the owner.

Yes, the $12 million, seven different.

So, eight -- actually, eight of the 15 we did apply some capital to.

Okay.

And then it's just a couple modeling questions.

But, the MG&A expectations, I know it kind of spiked up with incentive compensation in the first quarter of last year.

Do you expect kind of a similar first quarter relatively high quarter in terms of MG&A expenses?

It depends how successful our quarter is.

If we knock it out of the park, there will be incentive compensation paid to people.

It'll be a larger number, probably less as a percentage.

But, we want to have those quarters.

It means we had great quarters.

Right.

Well, we already I guess per based on what you put in the press release it's going to be a pretty darn good quarter.

Well, the first month was off to a good start.

Right.

And then, Clayton, on the tax rate -- and I guess there's going to b ea lot of different puts and takes.

But, how many -- what's the total NOL you have now, including ADAPTIX?

Well, as I mentioned during my prepared remarks, we're still in the process of finalizing the year-end tax provisions.

So, I don't want to give out an estimate yet of what the NOL remaining is going to be as of the end of the year because it is still subject to completion.

I think, as of the end of the third quarter, we estimated around $70 million remaining of the NOL for tax return purposes.

But, again, that is subject to adjustment based upon finalization of the year-end tax provision.

Okay.

So, 2012 taxes will probably still be state -- depending on how successful year you have, but state taxes and foreign taxes, but probably not federal taxes in 2012.

Is that fair?

We hope not.

Well, or maybe hope you do because you burn through those NOLs, but -- .

-- Well, that's what we meant.

Yes, we like to burn through them as fast as we can.

We hope that your assumption of only foreign tax and state was incorrect.

Got it.

Okay.

Thank you.

This will conclude the question-and-answer session.

I will now turn the call back to Mr.

Ryan.

I want to thank you all for participating in the year-end call.

If you have any questions following the call, you can give myself or Rob Stewart a call and look forward to speaking with you again in April.

Thanks.

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This concludes our conference for today.

Thank you all for participating.

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