Acacia Research Corp (ACTG) 2012 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Acacia Research first quarter earnings release conference call.

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

At the request of the Company, we will open up the conference for question 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 acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority owned operating subsidiaries.

With me today are Chief Financial Officer Clayton Haynes, General Counsel Ed Treska, and Executive Vice Presidents Dooyong Lee and Matt Vella.

Today I will give an overview of the progress we are making in building the business, and Clayton Haynes will provide you with an analysis of the financial results.

We will then open the call for questions.

Acacia continues to build its leadership position and patent licensing, and during the first quarter generated record revenues of $99 million, an increase of 62% over last year's first quarter.

Acacia also grew its key performance metric of trailing 12 month revenues to a record $223 million.

Acacia invested $152 million in new patent portfolios during the quarter and finished the quarter with $452 million in cash and investments.

We generated the $99 million in first quarter revenues from 40 new revenue agreements covering 32 different licensing programs, including five new licensing programs generating initial revenue.

We have now generated revenues from 117 different licensing programs.

During the quarter we licensed technology patents to Amazon.com, Hitachi, IBM, Microsoft, Nokia Seimens, SK Hynix and Samsung.

We also licensed automotive patents to BMW, industrial patents to Stanley Black & Decker, and medical technology patents to Abbott Labs and Philips Electronics.

During the quarter, Acacia acquired control of five new patent portfolios, including the 100% acquisition of Adaptix, a pioneering company in the development of 4G technology for wireless systems, which owns 230 4G patents.

We acquired new patent portfolios covering online user registration technology, optical networking technology, catheter ablation technology, and a portfolio of over 300 patents for automotive safety, navigation and diagnostics technology from Automotive Technologies International.

We continue to increase future shareholder value by acquiring control of significant patent portfolios and now control 212 different patent portfolios.

Acacia has built its busy partnering with patent owners, taking control of licensing activities, and splitting the net licensing revenues 50/50.

Our successful track record in generating revenues for patent owners is accelerating for new business opportunities.

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

There are two major market trends which are accelerating our business opportunities.

The first trend is the growing number of companies worldwide who are deciding to generate revenues from their patent portfolios.

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

The recent sale of AOL's patent portfolio to Microsoft for $1 billion and last year's sales of Nortel patent portfolio for $4.5 billion and Google's $12.5 billion acquisition of Motorola Mobility have served as wake-up calls to all companies and is accelerating this new trend.

We are also observing that large companies are becoming focused on their IP balance of payment and realize they need to generate financial returns from their ownR&Dinvestment to offset their growing IP payment obligations to other companies.

As a result of this trend, we are seeing significant increase in partnering opportunities with large companies.

Acacia's partnering model very attractive to 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 realized we built a highly specialized company for patent licensing and have built a proven track record in generating revenues.

The second major trend which is accelerating our business is the growing complexity and cost that is required for small entities such as individual inventors, research centers, universities and small companies to be able to license and assert patents on their own.

As a result of a number of recent court rulings and the recently passed patent legislation, we are seeing increased partnering opportunities with these small entities who need an expert partner to generate licensing revenues from their patents.

We have delivered great results for many of these small entities over the past few years, and our reputation for generating revenues even after their own efforts were unsuccessful has repeatedly demonstrated our value to these partners.

As a result of these two trends, Acacia's pipeline of potential portfolio acquisitions is continuing to accelerate.

We are also seeing a major new growth opportunity for Acacia's business in becoming a 100% owner of important patent portfolios like the Adaptix 4G patent portfolio.

When the patent portfolios come into the market that impact competing companies in major markets, Acacia can acquire all the patent assets and selectively sell certain patent assets or license each of the companies only the rights it needs.

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

Acacia has an opportunity to bring efficiency to the market by providing a market clearing function and selectively licensing the rights that each company needs.

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

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

Has an accretive impact on our margins, given that legal fees have historically been around 20% of our gross revenue.

Last year we grew revenues from nonlitigated licensing agreements to 25% of total revenues.

In the first quarter of this year we generated over 50% of our revenue from nonlitigated licensing agreements, further enhancing our margins.

We are also expanding our business platform into additional markets and have begun to build a significant base of patents in the medical technology and automotive markets.

Our quarterly revenues will continue to be uneven, given the nature of our revenues, and we are very appreciative of the work the investment analysts covering Acacia have done in 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 transactions, and that more meaningful measurements are the 12 month trailing revenues and projected annual revenue growth.

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

Thank you, Paul, andthank you to everyone joining us for today's first quarter 2012 earnings conference call.

As indicated in today's earnings press release, on a consolidated basis revenues in the first quarter of 2012 increased $37.9 million, or 62%, to $99 million as compared to $61.1 million in the prior year quarter.

First quarter 2012 revenues included license fees from 40 new licensing agreements covering 32 of our technology licensing programs, as compared to 35 new licensing agreements covering 32 of our technology licensing programs in the 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 growth, with consolidated trailing 12 month revenues increasing 21% to $222.6 million as of March 31, 2012, as compared to $184.7 million as of the end of 2011.

Currently, to date on a consolidated basis our operating subsidiaries generated revenues from 118 of our technology licensing programs, up from 99 technology licensing programs as of March 31, 2011.

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 first quarter of 2012 Acacia reported GAAP net income of $50.1 million, or $1.09 per fully diluted share, versus GAAP net income of $12.4 million or $0.34 per fully diluted share for the prior year quarter.

First quarter 2012 non-GAAP net income, which excludes the impact of noncash patent amortization charges, noncash stock compensation charges, and the excess benefit related to noncash tax expense, of $67.9 million or $1.48 per diluted share, as compared to $19 million or $0.52 per diluted share for the prior quarter.

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

Our average margin, defined as gross license fees less inventor royalties and contingent legal fees for the portfolios generating revenues during the period, was approximately 89% for the first quarter of 2012, as compared to 63% for the 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 for the first quarter of 2012 decreased to 42% to $7.6 million versus $13.1 million for the prior year quarter.

Contingent legal fees for the first quarter of 2012 decreased 60% to $3.7 million versus $9.4 million for the prior year quarter.

A significant portion of first quarter 2012 revenues were generated from patent portfolios that our operating subsidiaries own outright without inventor royalty obligations, anda significant portion of first quarter 2012 revenues were generated without litigation, contributing do the 49% decrease in inventor royalties and contingent legal fee expense on a combined basis, as compared to the 62% increase in revenues when compared to the prior year quarter.

Net results for the first quarter of 2012 as compared to the first quarter of 2011 also included the impact of a 37% increase in marketing, general and administrative expenses; due primarily to a $2.2 million increase in noncash stock-based compensation charges resulting from an increase in the average grant date fair value of restricted shares expense in the first quarter of 2012 as compared to the prior year quarter;a net increase in licensing, business development, engineering and other personnel since the end of the prior year quarter; and an increase in variable performance based compensation costs.

Tax expense for the first quarter of 2012 as compared to the prior year quarter included the impact of the following.

An increase in foreign withholding taxes of $4.4 million, which are withheld by the applicable foreign tax authority on revenue agreements executed with third-party licensees domiciled in certain foreign jurisdictions.

The first quarter of 2012 tax provision contemplates utilization of the $11.8 million in foreign taxes withheld in the first quarter of 2012 as a credit against income tax expense calculated for financial statement purposes.

In addition, as discussed on previous conference calls, for financial reporting purposes tax expense is calculated without the excess tax benefit related to the exercise investing of the equity based incentive awards.

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

Accordingly, the noncash tax expense, calculated without the excess benefit, totaling approximately $7.6 million in the first quarter of 2012, was credited to additional paid in capital, not taxes payable.

In addition, as of December 31, 2011, we maintained a full valuation allowance against our net deferred tax assets.

The net deferred tax liability resulting from the acquisition of Adaptix, Inc.

created an additional source of income to utilize against our existing consolidated net deferred tax assets.

Accordingly, the valuation allowance on the majority of the net deferred tax assets as of December 31, 2011, was released, resulting in a first quarter 2012 financial statement income tax benefit of approximately $10.2 million, which decreased the net deferred tax liability established in connection with the acquisition method of accounting for the Adaptix acquisition.

As of March 31, 2012, taxes paid or payable totaled approximately $12.1 million, primarily comprised of foreign withholding taxes withheld totaling $11.8 million and other state-related taxes payable.

Looking forward to fiscal 2012 we expect MG&A, excluding noncash stock compensation charges, to be in the range of $25 million to $26 million, including an estimate of the impact of variable performance-based compensation costs.

We expect noncash stock compensation charges to average approximately $5.4 million per quarter and noncash patent amortization charges to average approximately $5.1 million per quarter, excluding the impact of any future 2012 patent acquisitions.

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

From a balance sheet perspective, cash and cash equivalents and investments totaled $451.6 million as of March 31, 2012, as compared to $323.3 million as of December 31, 2011.

Working capital increased to $431.1 million as of March 31, 2012, compared to $295 million as of December 31, 2011.

Cash and working capital balances reflect the impact of the February 2012 common stock offering in which we raised net proceeds of approximately $219 million through the sale of 6.1 millionof shares of our common stock.

Net cash inflows from operation for the first quarter of 2012 totaled $49 million, versus net cash inflows of $36.5 million for the first quarter of 2011.

In the first quarter 2012 we acquired five additional patent portfolios, as come compared to the eight new patent portfolios in the prior year quarter.

First quarter 2012 patent related acquisition costs totaled $152.1 million, including the $150 million acquisition of Adaptix as compared to $680,000 in the prior year quarter.

Again, thank you for joining us for today's conference call, and I will now turn it back over to Paul Ryan.

Thank you, Clayton.

Operator, can you please open the call for questions?

Thank you, sir.

(Operator Instructions).

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

Good afternoon.

Hi, Mark.

First question, was is wondering if you could provide any update on -- I know you were working towards a potential second acquisition here with the capital you just raised.

Any update there?

And then second question, have you felt any impacts or seen any impacts now with the JOBS Act implemented, and how is that affecting your business?

On the first -- on the acquisition front, we are in active negotiations on a number of patent portfolio acquisitions, including the one that we have discussed previously.

We expect there is a pretty high probability we are going to close on one or more of those transactions that we have going on right now, and we are at a fairly advanced stage.

But other than that, I can't comment further other than to say we are seeing a lot of opportunities.

We are obviously going to maintain the discipline we have in the past, and if the pricing is right and if the deals are right, we think there is enough deals that we can select the ones that make sense for your our shareholders.

So very active negotiations on multiple portfolios right now.

And then the JOBS Act, I know one of the issues was around the --or excuse me, the changes made in terms of multiple jurisdiction lawsuits, which is probably I guess not actually in the JOBS Act I don't think.

Well, that's in the patent act.

Right, in the patent act.

So the -- is that --

It really hasn't had much impact.

We, as you know, he have long-term relationships with a number of law firms who do not have a problem with filing individual litigations.

The issue I think you are talking about is the joiner issue.

There has been a change where you used to be able to in a lawsuit on a patent matter include up to -- include 10, 15 companies, and now you have to meet very strict standards or sue you them separately.

That is really not an issue for our law firms in terms of doing that.

Actually we are finding it is driving business from kind of small MPEs to maybe more capital constrained, and doing that is kind of driving more business our direction I think is the net effect of it.

Last question --

And also one of the positive aspects is one of the delay tactics that people historically used on the other side is a common defense attorney.

If you can't have them all in one litigation, it forces them to get individual counsel and often times focuses them earlier on negotiated settlements.

If they can all pay only one are law firm, they can drag it out longer, so actually we think it will be beneficial for us.

Great.

And then last question, in regards to Adaptix, clearly you guys did license deals, right shortly after signing that deal, with a couple of large tech companies.

Have you been approached or are you getting any more incoming from large tech companies that are looking to participate in more of this clearing function that you guys are starting to offer?

Why don't I let Matt Vella, our Executive Vice President who is most involved in that, answer that.

The -- I mean, in short, the answer to your question is yes, we have been getting approached on Adaptix, and we are in active negotiations with several companies about the Adaptix portfolio.

Are you starting to see these companies -- are they starting to steer IP towards you or show you IP that they think is interesting as well, or do you have to -- are you typically approaching them with the IP?

I don't want to comment about any one particular matter or one particular portfolio, butI will say that a common recurring theme we are seeing on our license negotiations for larger portfolios involves the prospective licensee bringing their own IP to our attention.

Great.

Thanks, guys.

And congrats on a good quarter.

Thanks, Mark.

The next question from Tim Quillin of Stephens, Inc.

Please go ahead.

Good afternoon.

Nice quarter.

You -- the patent intake -- the new patent portfolios was low, I guess especially versus the strong fourth quarter intake you had with 15 portfolios coming in the door.

What should we expect for the full year in terms of patent intake?

Should that be -- should we continue to focus on that as a key metric?

Or since you are elephant hunting maybe a little bit more, is it more the size and not the number of patent portfolios that you are bringing in that maybe we should think about?

Fortunately we are getting a look at more and more high revenue opportunities.

But I would expect we'll still probably, over the course of the year, bring in 30 or 40, which has been around our norm.

Again, any given 13 week period we have got a lot of portfolios actually under contract right now, which we could close on, but we are finishing all of our due diligence.

We like to do all the due diligence so we are really prepared to start licensing and enforcing as soon as we announce it publicly.

So we have got a lot in the pipeline actually that are ours to close.

We have the options to control them and close them, some good portfolios.

But yes, you are right, portfolios like Adaptix, when you think about it, are really three separate licensing programs into three different industries with 14 patent families, so even though that only counts as one you could count it as several.

And the automotive portfolio is a world-class portfolio, developed by the same family who basically invented the safety air bag in the car.

Very high quality portfolio.

Very deep.

One of the biggest portfolios in the automotive industry.

That one was on a 50/50 partnering arrangement.

So we see no shortage of opportunities, so I wouldn't make anything of a 13 week count on intake.

Got it.

And then I was a little bit unclear with regards to where you stand on the specific acquisition that you referenced on the last conference call where you had signed the letter of intent.

I know you had started due diligence.

Have you found anything in the due diligence process that has given you pause there?

Actually we found things we like.

All I can say is we have got active negotiations on that portfolio as well as a number of other portfolios right now.

There is no shortage of opportunities.

We are very fortunate, and if we can get certain things completed from a process standpoint and in some cases we still have got to -- we still are arm wrestling over the final price, and we are going to maintain discipline, and given the number of opportunities we have we can continue to exert that discipline.

We want to make sure we can earn really good returns for our shareholders when we deploy capital.

So, yes, we're still -- that one is still ongoing as well as, actually since we last spoke, a couple of very significant new ones as well.

And what is your appetite or what is the pipeline like for more recurring revenue royalty models?

Actually some of the stuff we are looking at in the pipeline, some of those actually have some existing licenses with them, which would automatically create ongoing unit royalties, which we like about some of those potential acquisitions.

Although there is much more licensing to be done.

So certainly we have a view toward that, and some of the acquisitions we are looking at would come with built-in revenue streams, which I'm sure some of our shareholders would like.

Right.

And on the Adaptix licensing, I know you filed suit against I want to say 16 different companies.

Is -- are there certain steps in the litigation process that you think will be leverage points or triggers for additional licensing there, or what would you think in terms of timing?

I know you talked about return -- rapid return of capital before you even talk about return on capital on that acquisition.

So how you quickly can you get back your initial capital outlay for the Adaptix patents?

I'll let Matt Vella, our Executive VP of Licensing, answer that.

I ask him the same question every day.

Well, let me preface everything I'm about to say by stating the obvious.

If I'm too explicit in telling you what we expect the trigger points to be, that will be a self-defeating prophecy, because I'm sure a lot of people other than investors are listening in on this call or a transcript of the call.

Having said that, there are natural points in a litigation that act as forcing functions for folks to look at their position and to assess whether or not they want to take a license.

And what we are going to do with Adaptix is expand the number and quality of those points.

And it won't just be through US litigation.

I think that's all I'm comfortable saying at this point.

Okay.

And then just, Clayton, could you give us any help with how to model tax rate for the rest of the year?

Thank you.

Sure.

I think, as we have spoken on previous calls with respect to the US GAAP reporting, there -- from the standpoint of the availability of NOLs for purposes of recording tax expense for book purposes, we no longer have NOLs with respect to book taxes.

We, of course, still maintain a fair amount of NOLs for purposes of our tax return.

And so for the most part tax expense that's rolling through our financial statements does not represent cash taxes payable.

It is really just tax expense for GAAP reporting purposes, and so given that a tax rate for financial statement purposes, we expect to be some where in the 35% to 40% range for the rest of the year.

Perfect.

Thank you.

Your next question comes from the line of Paul Coster of JPMorgan.

Please go ahead.

Thank you.

Clayton, just on the share count for a second, I think you ended up with about 45.8 million shares on a fully diluted basis.

Would it be correct to assume that is -- the share issue means that on a -- by next quarter we will be around about 48 million to 49 million shares?

Yes, that is a good estimate, yes.

Good, thanks.

The other thing is that you talked about significant revenues from wholly owned patents and revenues that did not require litigation, and so I guess I'm inferring from this that more than 50% of revenues originated from the large one-time settlements associated with Adaptix this quarter?

We can't talk about specific programs, but over the course certainly over 50% of the revenue was represented by he nonlitigated licensing settlements.

Okay.

Thank you.

And then just strategically -- I think there is so many variables here, it may be difficult to answer, butyou seem to be -- you have moved away from term deals and comprehensive deals to -- and moved away from partnering to a wholly owned deals and then back again, and what if anything should we infer from this strategy?

Is there a -- do you have a vision of how this is all going to end up, or is it really just sort of make it up as we go along and exploiting the best economic opportunities that arise?

Well, as you can see we can have pretty good quarters without doing any structured term licenses.

In this case we didn't limit any potential future opportunities.

I think we expect over the course of this year we will do some additional structured term deals.

Again, it's all about price and it's about a point in time that a company makes a decision that they think that's how they want to do business with us.

We think we are probably moving strongly in that direction with some major companies, and that'll be --If we could combine both, we would love to be doing both.

We would love to have the kind of margins we did this quarter, which were about as high end as you can get, given the fact that there was a big contribution from 100% owned portfolios and a lot of ones that there was no participation in payment to law firms.

So if we can combine both that is the ideal world.

We would love to be doing more transactions like this and do some structured transactions as well, and that would drive further earnings power for the Company.

So it isn't as if we've strategy.

It's when the opportunities are right at the right price, that is when we will execute on them, and we certainly plan on doing more structured term deals.

Thank you very much.

Sure.

Your next question comes from Jonathon Skeels of Davenport.

Please go ahead.

Hi, guys.

Congrats on the quarter.

I have two questions.

The first one just on partnerships with large companies, you have signed a lot of these deals over the last 18 months, and I would expect them to be meaningful revenue drivers over the next six to 12 months.

Can you talk about where you stand in terms of generating revenue from these?

And then I guess to the extent you can be specific, maybe talk about Renaissance, how many licensing programs you have there, and when should we start to see revenues from this portfolio?

With Renaissance, I believe we commented, I think we have gotten 10 distinct patent portfolios that we have selected and they have actually transferred control, and probably about six of them I guess are in active licensing and litigation.

The other ones are being queued up.

And in this last quarter I think you saw some transactions there that obviously in the semiconductor -- with some obvious semiconductor companies that were highly likely that would include Renaissance patents, so you can assume they are starting to make money in the relationship and that they are very happy with the relationship.

So we are still pretty early stage, but -- and we have got other portfolios actually we are working with them.

This is certainly not the end.

But10 of them we have identified, put together portfolios and have begun programs with, and we have started generating revenues for them, and I think the first quarter was probably the most revenues we have generated for them so far.

And same with some of the other companies.

Again, other than Renaissance, most of the large companies have chosen to not be public with their relationship with us, but we are certainly beginning to generate revenues for them in some of the licenses, particularly the ones we did in the first quarter.

Second question, just on Adaptix.

It's clearly a positive contributor to the results in the quarter, but what kind of impact has closing this acquisition had on the business overall?

Has it helped the partnership business in terms of discussions with potential licensees?Are you just seeing a lot more deals because of your involvement in that transaction?

Can you talk a little more on that?

On the licensing side I would have Matt comment, because he works with all the licensing people here.

I don't know if you've seen a --

Well, I think, overall it has had an effect.

I think it shows that we can source patents in a different way than we have done in the past, and I think there is certain [deal flow] that we are really getting a serious look at that we wouldn't have gotten a serious look at but for the demonstration of our ability to pull down a portfolio like that.

So I mean in a nut shell, yes, it has impacted the deal flow we see on the patent sourcing area.

I think the second thing it does, this is a halo effect that results when you essentially license a very, very high powered portfolio.

And we have seen this with some of our other previous high powered portfolios, where the fact that we can license a portfolio and that it is significant encourages the prospective licensee under that portfolio to take care of all matters outstanding with our family of companies at the same time, or at least several matters at once.

So I think those are the two big impacts that Adaptix has had on our business day to day.

Yes, the [wet] impact definitely on the intake side, now that we have done a transaction of that size where I think we are seeing every deal there is in the market.

Thank you.

(Operator Instructions).

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

Please go ahead.

Hi, guys.

Great quarter.

Just wanted to get clarification.

You mentioned that 50%, or was above 50% that came from nonlitigated deals?

Above.

Just above.

Okay.

And you mentioned there was a comp.

I didn't catch what the comp was.

It was 25% at what point?

Oh, for 2011.

We have been running about -- well, actually, we have been running at 10% and about 20% in 2010, and we jumped that up to 25% of our revenues in 2011 were from portfolios we licensed without any litigation.

So certainly it is trending in the right direction in the first quarter.

We went substantially higher than that, and hopefully it will be a continuing trend because it creates great margins and it is a great bottom line.

Okay.

And with regard -- getting back to Renaissance, obviously there were a few semiconductor-related deals in the first quarter.

Are these identifiable in terms of which LLCs they are, or is this -- we're just going to have to stay in the dark on this?

We [have them] identified by LLC name, but you can see from the licensee, if we look you look at the website, the companies we license [you'll see] from -- license [from] semiconductor companies, and those obviously would probably include Renaissance patents.

So for example Integrated Silicon or SK Hynix [would be] --

Those are the types of companies, sure, yes.

Okay.

Excellent.

I think that is basically it.

Thank you very much.

Okay.

Thank you, Daniel.

Your next question comes from Walter Ramsley of Walrus Partners.

Please go ahead.

Thank you.

Congratulations Paul.

Another great quarter.

I got a question for Clayton, actually, about foreign taxes and how that might be handled in the future.

Is there some strategy there to try to locate those payments and lower tax domiciles, or do you kind of take them where you get them?

No, certainly not, no.

We certainly are aware of the issue and over the years have taken a look at a number of potential strategies that we can employ with respect to the burden that foreign withholding taxes presents.

Certainly in the current quarter we have incurred some foreign withholding taxes, but expect to be able to utilize the ensuing foreign tax credit to offset to tax obligations in the future.

Yes, I mean, going forward there are certain countries that just automatically have a withholding.

If you do a license and they pay you money, thatcountry withholds some money and you don't get to see it.

The good news is, if you are a tax paying company, you can withhold it at the end of the year and in effect retrieve the capital that has been withheld, and so hopefully that will be the case going forward.

A year ago or so when we weren't profitable yet, then it actually hit our bottom line.

But now if we stay profitable those get credited against taxes due and so it shouldn't be an issue you for us.

Okay.

And as far as the United States end of it goes, has the shift to the headquarters in Texas saved the Company any money?

Well, certainly not on paying taxes.

But, yes, we have got significant groups in both places, but we -- it depends on the geographic location strategically for certain employees.

And for certain employees that we have recruited they preferred to go there, so enabled us from a recruitment standpoint to offer people alternatives to the California personal tax situation, which Paul has taken advantage of.

Okay.

All right, just one last thing.

I don't know if you can comment on this, but [indications viewed] does Apple Computer infringe on any of the Company's patents, and if it is, what are you doing about it?

If they were they would be in a current litigation, or we couldn't comment about it if we hadn't filed the litigation yet.

But obviously we have a number of currently recorded litigations with Apple currently.

Okay.

Thank you very much and congratulations.

Thank you.

This will conclude the question and answer session.

I will now turn the call back to Mr.

Ryan.

Thank you very much.

I want to thank you for being on the call you with us today.

If you have any specific questions please give us a call, and if not we look forward to speaking to you next quarter.

Thanks.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 855-859-2056 or 404-537-3406 with the confirmation code 66125760.

This concludes our conference for today.

Thank you all for participating.

And have a nice day.

All parties may now disconnect.