Acacia Research Corp (ACTG) 2012 Q2 法說會逐字稿

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

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

At the request of the Company, we will open up the conference 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 statements 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, developments, 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 you an overview of the progress we are making in building the business, and Clayton Haynes will provide you with an analysis of our financial results.

We will then open the call for your questions.

Acacia continues to build its leadership position in patent licensing.

Acacia generated second-quarter revenues of $50.5 million, an increase of 27% over last year's second-quarter revenues of $39.7 million.

Acacia grew its key performance metric of trailing 12-month revenues to a new record $233 million and completed the quarter with $431 million in cash and investments.

We generated the $50.5 million in second-quarter revenues from 38 new revenue agreements, including new licensing agreements with American Express, Cisco, Freescale, Fujitsu, FujiFilm, IBM, Hewlett-Packard, Panasonic, and Regions Bank.

The 38 new revenue agreements covered 27 different licensing programs, including seven new licensing programs generating initial revenue.

Acacia has now generated revenues from 125 different licensing programs.

Acacia invested $48.3 million in new patent portfolios during the quarter, bringing our total investments and patents over the first six months of this year to $200.4 million.

During the second quarter, Acacia acquired control of a record 27 new patent portfolios.

These new portfolios included patents originally issued to Polaroid, six prominent patent portfolios of 68 patents covering a wide range of software technologies; five patent portfolios with 156 patents from a major semiconductor company; four patent portfolios with 48 patents from a major technology company; and seven med-tech patent portfolios with over 150 patents and pending applications relating to medical devices, biologics, and diagnostic techniques.

We continue to increase future shareholder value by acquiring control of significant patent portfolios and now control 238 different patent portfolios.

We continue to see an acceleration in opportunities for both partnering and acquisition of new patent portfolios.

Acacia has built its business by 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 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.

The first trend is the growing number of 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.

The recent sale of AOL's patent portfolio to Microsoft for $1 billion, and last year's sale of the Nortel patent portfolio for $4.5 billion, and Google's subsequent $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 payments and realize they need to generate financial returns from their own R&D investments to offset their growing IP payment obligations to other companies.

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

Acacia's partnering business model is very attractive to companies that want to generate financial returns from their patent without having to create a distraction to their core business, become involved in litigation, or have 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.

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 often unsuccessful, has repeatedly demonstrated our value to these partners.

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

We are very fortunate to have build a market leadership position in patent licensing at a time when more and more companies are seeking to monetize their patent assets.

Our extensive history of patent due diligence in all the major technology sectors has become a great asset in evaluating new opportunities.

And our experience in negotiating over 1,100 licensing transactions with major companies gives us great insight into the likelihood of being successful in completing transactions at projected price points within realistic time frames.

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

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

Our quarterly revenues will continue to be uneven, 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 licensing transactions, and that the more meaningful measurements are 12-month trailing revenues and projected annual revenue growth.

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

Thank you, Paul.

And thank you to everyone joining us for today's second-quarter 2012 earnings conference call.

As indicated in today's earnings press release, on a consolidated basis, revenues in the second quarter of 2012 increased $10.7 million, or 27%, to $50.5 million, as compared to $39.7 million in the comparable prior-year quarter.

Second-quarter 2012 revenues included license fees from 38 new licensing agreements covering 27 of our technology licensing programs, as compared to 29 new licensing agreements covering 24 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 growth, with consolidated trailing 12-month revenues increasing 31% to $233.6 million as of June 30, 2012, as compared to $177.9 million as of the end of the comparable prior-year quarter.

Currently to date, on a consolidated basis, our operating subsidiaries have generated revenues from 125 of our technology licensing programs, as compared to 104 technology licensing programs as of the end of the comparable prior-year quarter.

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

For the second quarter of 2012, Acacia Research reported GAAP net income of $6.3 million, or $0.13 per fully diluted share, versus GAAP net income of $2.1 million, or $0.05 per fully diluted share for the comparable prior-year quarter.

Second-quarter 2012 non-GAAP net income, which excludes the impact of non-cash patent amortization charges, non-cash stock compensation charges, and excess benefit-related non-cash tax expense was $21 million, or $0.43 per fully diluted share, as compared to $8.2 million, or $0.19 per fully 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 press 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 68% for the second quarter of 2012, as compared to 46% for the comparable prior-year quarter.

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

Inventor royalties expense for the second quarter of 2012 versus the prior-year quarter increased 11% to $9.6 million.

Contingent legal fees for the second quarter of 2012 versus the prior-year quarter decreased 49% to $6.6 million.

So fluctuation in inventor royalties and contingent legal fees in relation to the 27% increase in revenues for the second quarter of 2012 versus the second quarter of 2011 is due primarily to a portion of the second-quarter 2012 revenues recognized having no inventor royalty or contingent legal fee obligations, and hence, no corresponding inventor royalty or contingent legal fee expenses in the period.

Net results for the second quarter of 2012, as compared to the second quarter of 2011 also included the impact of a 44%, or $3.7 million, increase in other marketing, general and administrative expenses, due primarily to a $2.6 million increase in non-cash stock-based compensation charges resulting from an increase in the average grant date fair value of restricted shares expensed in the second quarter of 2012 versus the prior-year quarter; a net increase in licensing, business development, engineering and other personnel since the end of the comparable prior-year quarter; and an increase in variable performance-based compensation costs.

Tax expense for the second quarter of 2012, totaling $3.5 million, as compared to $306,000 for the comparable prior-year quarter included the impact of calculating tax expense for financial reporting purposes without the excess tax benefit related to the exercise and vesting of equity-based incentive awards, as discussed on previous conference calls.

The non-cash tax expense calculated without the excess benefit, totaling approximately $3.2 million in the second quarter of 2012, was credited to additional paid-in capital, not taxes payable.

As of June 30, 2012, taxes paid or payable totaled approximately $12.4 million, primarily comprised of foreign withholding taxes withheld in the first quarter of 2012 as described on last quarter's conference call and other state-related taxes payable.

Looking forward for fiscal 2012, we expect MG&A, excluding non-cash stock compensation charges, to be in the range of $25 million to $26.5 million.

We expect non-cash stock compensation charges to average approximately $5.9 million per quarter and non-cash patent amortization charges to average approximately $7 million per quarter.

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

From a balance sheet perspective, cash and cash equivalents and investments totaled $430.9 million as of June 30, 2012, as compared to $323.3 million as of December 31, 2011.

Working capital increased to $404.2 million as of June 30, 2012, compared to $295 million as of December 31, 2011.

Net cash inflows from operations for the second quarter of 2012 totaled $14.5 million versus net cash outflows of $11.3 million for the second quarter of 2011.

Year-to-date, net cash inflows from operations as of June 30, 2012 totaled $63.4 million, versus year-to-date net cash inflows from operations of $25.1 million as of the end of the prior-year quarter.

In the second quarter of 2012, we acquired 27 additional patent portfolios as compared to nine new patent portfolios in the comparable prior-year quarter.

Second-quarter 2012 patent-related acquisition costs totaled $48.3 million, as compared to $1.1 million in the prior-year quarter.

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

Thank you, Clayton.

Operator, can you please open the call for questions?

(Operator Instructions)

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

Please go ahead.

I just wanted to clarify with regards to the patent acquisition costs, it just looked like in the cash flow statement it was $38.3 million, and I think you said $48.3 million a couple times on the conference call?

Correct.

We've got an additional amount of accrued patent acquisition costs payable on the balance sheet as of June 30, 2012.

Accrued patent acquisition costs payable.

Which are scheduled to be paid in the third quarter.

Okay.

And of that $48 million capital outlay, how is that applied across the 27 patent portfolios that you acquired?

Is it related to one specific patent or group of patents that you bought from a company, or is it divided amongst several?

It's primarily two of the larger portfolios we bought with multiple licensing programs.

Accounted for substantially 99% of all of that acquisition costs.

And one was an outright acquisition and one was a buy in to a portfolio where we get first dollars back until we recover all of our investment.

Okay.

And can you talk about how you think about capital outlays or how you'd think about portfolios that you partner on versus acquire or get skin in the game?

Like you in the second example you gave, how the sellers think about it or the partners think about it and how you think about it?

And then how you think about the return metrics on the back end when you do put capital in the game?

Absolutely.

One of the great things that we have right now going for us is with our solid treasury, we can work with patent owners across the entire spectrum.

Many patent owners want as big a possible share at the back end, and will do that with 50/50s.

There are some times where the patent owner wants a liquidity event, as in the first quarter with Baker Capital and Adaptics.

And We have got the treasury to buy it out 100%.

I think we're also going to probably see a lot of transactions where we do something in between where there's some earn-in in the front end that gives companies confidence in our attitude that we're going to generate money for that.

So one of them was an outright acquisition this quarter, again, where the seller simply wanted the liquidity of that.

And one of the other large ones was one where they want to stay in on a partnering event, but that portfolio already has a lot of early licensing activities which we've already been in on, that we're very confident of.

And so we advanced the money and we get first dollars back.

So we have great deal of flexibility in working with patent owners, which we're finding probably is going to work very well for us in terms of capturing deals, and we're very flexible.

It all comes down to the numbers.

We can put it on a grid, and we're basically just an objective decision.

And so where it falls on the matrix really doesn't make a difference to us, as long as we think we can earn the returns, which leads to your first question.

And obviously, we're going to stay extremely disciplined.

There's a lot of IP coming to the market for sale.

A lot of it has very unrealistic asking prices based on some of the publicity around the well-known sales.

We're seeing already if we stay disciplined, as you know, we've had a couple of transactions we've been looking at.

No one else has closed on those transactions.

We're going to be very disciplined.

And if deals come in at the price points where we can earn great returns, we're a buyer, and if not, we're not going to chase anything.

We're staying very disciplined.

We see increasing deal flow, which is to our advantage.

And we think, look the default decision for most companies is going to be to try to sell the asset first, and hope they get a premium price.

And a lot of people who want the business will try to promote them and tell them they're going to get a huge premium price, and then the reality sets in.

And so a lot of assets are getting put into motion, and we think very few of them actually will capture buyers.

And that will open up even more partnering opportunities, so we're in a really good spot here with a strong treasury and a great due diligence team, to be able to pick and choose for our shareholders the right investment and structure them in the right way for patent owners.

Right.

I know you don't like to commit to any specific time lines, because it might hinder your ability to negotiate.

But when you, with Adaptics, where you put up-front capital or the patent acquisition in the second quarter, should investors have some expectation of at least an initial return of the up-front capital within, let's say, a year or?

Or is there any time frame where we should expect the licensing revenue to come in in such a way that you get back that initial upfront outlay?

Thanks.

I'll let Matt Vella answer the substance of that, because Matt is in charge of the licensing program to generate those revenues.

As you saw in Adaptics, certainly one of our focuses as a corporate culture here is return of capital.

And that's a key focus for us, and it will be in all of the transactions we do.

But to the larger question, why don't I have Matt address that?

When we did the analysis and when he acquired the Adaptics portfolio, we had a lot of pathways to return of capital.

And then beyond that, a lot of pathways to a return on capital.

And those pathways, a number of them, are basically being implemented as we speak.

We're in negotiations with over half of the prospective licensees right now.

And we're confident that we're going to be able to get a return of capital in, along the time lines that we originally had in mind.

We can't get in the position of putting an exact time line, because we don't control that.

But the concept is we're very mindful of that.

As you know, our culture, we've built our Company on a very frugal partnering model.

And now that we're deploying serious amounts of shareholder capital, believe me, we're extremely disciplined.

We want to be quite sure of the returns we can generate, and we're always going to opt for doing early licenses to get return of capital so we get our shareholders in the money on these portfolios and then can enjoy the returns after that.

So that's the mindset.

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

Please go ahead.

When in the quarter, I know you had a couple high profile deals.

I believe you signed Cisco along with some other guys.

And I know you have various structures across the deal spectrum, but one had been more of a comprehensive or structure deal.

Clearly with the margins being a lot higher in the quarter, I'm guessing one of the deals in this quarter was probably a structure deal.

You haven't done one of those in well over a year.

I'm just trying to understand the mindset around that.

Is it purely a pricing discipline?

Are you getting something alongside that, alongside the dollars that compelled you to want to do those deals?

And, and just lastly a thought around, given that you guys are bringing in so much IP, are you getting better at pricing those types of deals?

Because it seems like given the IP intake valve is open big, the value of the future IP that you have coming in, and an option on that seems to be increasing very rapidly.

We're always interested in doing structured term deals.

We're probably certainly not going to do them with a large number, but as we've indicated in the past, probably there's opportunities for 10 or 12 of those transactions, and we basically have done four to date.

The primary thing is price.

We're getting companies used to the fact that we're growing very rapidly in assets.

And historical pricing that might have made sense for them has shifted dramatically.

And as companies come to confirm that, then we'll get more of these transactions done.

The second key component is we like to do these transactions with companies where we think there's going to be an opportunity to work with them in the future in terms of additional acquisitions, in terms of existing portfolios they have.

So we're choosing it from both sides.

We're trying to choose companies that we think over the long term are going to add a lot of value to Acacia and to its shareholders, both by having a structured term deal and an ongoing relationship.

As you probably have seen, a couple of the companies we've done transactions with have been early licensees and new programs, even though under a structured term they'd already acquired certain rights.

So it doesn't necessarily limit revenue opportunities once we enter a structured deal.

What it does is open up new opportunities as well.

So, yes, we're very actively in discussions with people regarding those types of deals.

And if we can get the right pricing and we think there's a good expectation of being able to work with them in the future in a mutually beneficial way, then we want to do more of those deals.

Great.

And then thinking a little bit more about the base partner model and the singles and doubles licensing business that you originally built the business on and then juxtaposing that against some of the larger transactions and even bought IP, do you see the two can live in the partner model and you being a principle in the IP, those can live together nicely and grow?

Or do you think that one suffers because of the other as you're starting to own more IP?

If anything, I think the so-called singles and doubles business benefits from us being in the major category, because it generally moves the companies on the other side that want to move into licensing agreements with us, even if they don't do a structured deal.

If we're doing a transaction on quote a higher revenue potential portfolio, generally, that will lead immediately to discussions in terms of getting other ones done.

So, if anything, I think it's benefiting the small entities.

Our scale and presence in the market is enabling them to get paid much faster than they would otherwise.

So that's a definite benefit for them, and I think a lot of small entities now realize that.

And particularly as we have structured deals, and eventually we get into renewals, it increases the odds of them getting paid and reduces the odds of putting their assets at risk in litigation.

Great.

The bid/ask spread clearly, even according to your comments is out of whack in some of these IP portfolios, of course, more on the ask side.

How quickly do you think that gets more in line here?

And does it take six months, a year?

How long do they sit with a for sale sign up on some of this with unrealistic expectations before they come back to the table and want to get something done?

I'll ask Matt to weigh in on that a little bit as well.

Generally, yes, once it's out there three months, the flower starts to fade a little bit.

People realize there's not a huge number of strategic battling for the asset.

And I'd say four or five months, people start getting a little more realistic.

You're going to have to look at strategic value versus licensing value, but Matt why don't you?

I think the answer to that question is highly dependent on the sector in which that portfolio falls.

And it's highly dependent on facts occurring within those sectors that tend to fluctuate quite a bit month to month.

So for example on smartphones.

A lot of the spread and the sustainability and a lot of the appetite of a prospective seller is to stay on the market with a very high asking price is going to be a function of a perception of how badly companies will need to buy portfolios to, for example, fight with a strategic competitor.

There's other sectors where you have to look at what obligations they have, what debt, what cash.

So there's no, in my view one general answer.

It really is a sector-by-sector specific analysis.

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

Please go ahead.

The average size of the singles and doubles, is there any trend there?

Can you comment on the size of those deals?

Not really, Paul.

Depending on a given quarter, we take in a lot of portfolios.

And each transaction, of course, depends on the degree of infringement and the size and amount of sales of units of the company involved.

I don't think anybody can draw any meaningful conclusions from that data to begin with.

I know we haven't.

We've looked at it.

It just depends.

Some portfolios will have several large companies as licensees with big revenues events, but we're also responsible for enforcing throughout the entire market.

It would be unfair to enforce only against the larger companies and not against others.

It's a variety of deals but I don't think you can draw any meaningful conclusion from average deal size.

Okay.

Roundabout way of trying to size the Cisco deal.

I think you ended the quarter with accounts receivable about $11 million, and as far as I can tell, that Cisco deal occurred maybe near the end of the quarter.

Are accounts receivables all attributable or mainly attributable to Cisco?

I wouldn't draw that conclusion.

Generally when we do transactions, we get paid for them.

And that's a very modest amount of payables to have at the end of a quarter.

We do a lot of transactions in the last 30 days.

So I wouldn't draw that conclusion.

Is there anything you can say about the size of -- the last three days were getting consecutively larger, the term deals that is.

This one sounds like it was smaller.

But then again, it also sounds like it was a subset of your portfolios.

Is that correct thinking?

Relative to the price for company, we have to look at what their likely exposure would be, what the history has been and it depends on the company.

So it's going to be priced on a basis that makes sense for that particular company.

But obviously, we wouldn't be doing the transaction unless we thought we got the new plateau pricing on a company-specific basis.

All right.

Got it.

What were the NOLs at the end the quarter, please?

The NOLs, from a federal standpoint, approximately $40 million.

Okay.

Obviously, this is a very hot space, and can you comment upon your ability to attract and retain your talent all the way up to the top?

We've been very fortunate.

We haven't lost anybody that we've wanted to retain.

I think our incentive programs here in terms of compensation that align the executives, well, all members of the team.

Everybody's in the bonus programs, engineers, patent attorneys, licensing executives share on a portfolio-by-portfolio basis based on the P&Ls of those portfolios.

So one way to look at it is our compensation here is uncapped.

It's a great place to work.

We're a market-leading Company, and as a result, we've been able to retain great people because we want to create an environment where there's no place they could go that would be better than this.

And Chip and I both want a lot of people here to make a lot more money than we do.

And it that happens, our shareholders are going to get very wealthy.

I think our corporate culture is such that people's compensation is literately uncapped based on their performance and that tends to retain really top-flight people that want to work really hard.

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

Please go ahead.

In terms of the acceleration you saw on the number of acquisitions in the quarter.

Are these new companies that you're partnering with?

Are they some existing partners that are turning over more portfolios?

The vast majority of them are new transactions with new companies.

Okay.

Great.

The portfolios do seem to have more depth.

You're announcing four or five different patent portfolios and certain transactions.

What should our read be into that?

Are companies simply looking to turn over more to you?

Is this a trend that you're starting to see relative to maybe some partnerships you did 12, 18 months ago.

Yes, I think so.

I think part of it is our licensing credibility and history now.

In the beginning, a lot of companies wanted to give us one portfolio to see how we did.

Now that we've established a track record, companies are more confident in turning over groups of portfolios, or in some cases, all of their portfolios to us.

Hopefully, that will be an increasing trend, because certainly we think there's efficiencies in licensing, given the depth of portfolios.

Our experience has been companies tend to come to the table on the other side more quickly when you've got very deep portfolios that cover multiple technologies that read on them.

And then on the structured term licenses, to the extent you can talk about, how should we think about renewals on those in 2013?

I think the first two are up.

Should we think about those as being entirely new negotiations?

Are future terms similar to terms we've seen in the past?

Can you comment at all on expectations there?

All I can say is we've got great relationships with everybody we've done transactions with.

We think we're probably likely to do a lot of business with those companies.

And I wouldn't look too specifically to a quote, renewal.

Obviously, we've done a number of transactions already before any anticipated renewal with some of those companies, and we think that likely is to occur.

What we want to do is align ourselves with forward-looking companies who are very talented in the IP space, who see the benefit of working together with us, both from us being an intake source for them from a very efficient stand point, and a great outsource licensing Company strategically for them.

So I wouldn't look for a specific renewal events as much as just continuing relationships with those companies on a variety of transactions, which could occur at any time.

Okay.

On Adaptics, you now own the portfolio for the last few months.

What benefit, if any, has it had on maybe negotiations in the rest of your business?

And then secondly, what have you learned about the portfolio since you've acquired it?

Is it the fact that it's not subject to [FRAN] has that been meaningful in negotiations?

And I think there's an international component to the portfolio.

Do you plan to take advantage of that?

I might miss one of the sub questions here, Jonathan, so feel free to draw my attention to that if it happens.

I think when brought on Adaptics, as you know and as the rest of the investment community knows, we were always very excited by the lack of a FRAN commitment.

We're always re-excited by the depth and the quality of the IP.

If we did learn anything over the last couple of quarters, the extent of the international coverage has been a good -- I wouldn't say surprise, but we've really dug into it and understand it better, and we've got a very good international strategy with these patents.

And we're starting to get a good understanding of how that can positively impact our bottom line.

The idea that with a global portfolio that you have a global strategy for, you can get multiples above and beyond what we as a Company has been traditionally conditioned to expect being so US-centric before.

And then I think the other, again not pleasant surprise but learning, has been the extent of our ability to shape the claims and prosecution.

We're very happy with our progress on that front as well.

So did I miss any of the questions, Jonathan?

No, that's it.

Our next question comes from line of Tim Quillin of Stephens Inc.

Please go ahead.

Yes, I just had a couple of quick follow-ups.

One is, you've had some nice initial licensing revenue on the Renaissance portfolios.

I'm just wondering how they are opening up to you in terms of letting you look at additional patent assets and carve out additional patent portfolios?

How open is that relationship right now?

And you had a recent press release with regards to access/smartphone technologies expanding the licensing arrangement with HP, and HP had made some noise about licensing the Palm LS.

And they didn't fully own that.

And I'm just wondering what that expanded licensing relationship with HP might mean?

I'll answer the Renaissance one and Matt can answer HP.

Renaissance, the relationship is very open.

We continued to work with their teams, and I think we have a total of 11 portfolios we now have identified.

And we've started generating revenues from a handful of those, and they're very pleased with what we're doing, and we expect that relationship to continue to yield more portfolios for us.

There's been no resistance or change since the attitude when we first became strategic partners.

On HP, Palm Source, obviously it's a confidential agreement, so I can't get into details, but I think the term you used there was a lot of noise.

I'd expect the noise to die down.

Did that answer your question?

I'm not sure it does, but thank you.

Our next question comes from the line of Doug Thomas of JET Investment Research.

Please go ahead.

I'm telling people I still believe the best is yet to come, which leads me to my question of the day, which is clearly the technology industry has been the primary driver of the growth of the business and the creating the awareness of the opportunity, in a broader sense.

I'm just wondering if you could paint a picture in terms of automotive, industrial, and medical.

Where are those industries in terms of adapting, adopting, understanding their level of awareness and in terms of opportunity?

One of the interesting things is, that I've been pointing out to people I think is that it's going to be very difficult for a lot of these industries to really put up any significant organic growth over the next, over the foreseeable future.

And that this is clearly an area where they have to -- at least developers of technology have to be aware that this is a terrific revenue growth opportunity for them.

But I'm just wondering what your view is of what inning we are in, in each of those particular areas?

I think we're very early.

Historically, inventors had very much success in the automotive, and we think we're hopefully going to change that.

We think we have partnered on probably the premiere automotive patent portfolio that exists, and we've got a great team behind that, and we think that will open that market for us.

Medical, we're getting very aggressive in the portfolio we brought in this quarter.

With the seven med-tech portfolios we think, well, we're already seeing is acting as a catalyst to open the eyes of a number of companies, both small and large that Acacia Research is moving into this arena.

And we think it could be a very significant market for us.

So there's no area that we don't want to apply.

It's the same basic process that we use, and the teams we have internally, and so we want to be obviously first to these markets and develop the same reputation we have in technology.

So we see all of them as a major growth opportunity for us.

Would it be correct to say that we're seeing a significant amount of cross -- I don't want to say breeding, but marketing of different technologies as we start to see the automobile, for example, become an extension of people's wireless network.

A lot of the core technology that's been developed just for technologies users is going to be applicable to the automobile for example.

And you've got, clearly Acacia's got a beat on some of those infotainment opportunities.

Absolutely.

No question in automotive, and actually a lot of medical as well.

There's inner use of patented technologies between the technology sector and the medical technology sector.

So, yes, you're absolutely right, there's a great deal of crossover there.

Just to be clear, because people ask about this all of the time, but I don't think a lot people read proxies.

You mentioned in response to an earlier question that you and Chip would be happy if a lot of guys at the firm wind up making a lot more money than you do.

But could you talk about your, you and Chip's philosophy with respect to the link between performance and compensation over time?

And your growth as shareholders in the Company and so forth?

Because I think sometimes people miss the alignment issue that is so critical, in my opinion anyway, in trying to analyze what make this Company different?

In the early days, obviously, the compensation until we reached profitability on certain portfolios, there was a little bit of qualitative comp.

But now, we're at the point of maturity now where teams can see what they know what their comp's going to be based on the P&L of their portfolios, so it makes them very cognizant when they're bringing in a portfolio.

The licensing group works very closely with the business development group, and is highly incentivized to do so.

And to control costs, because it's all based on the bottom line.

It's all based on the P&L that shareholders are going to enjoy.

And the leverage factor is not only -- or the cash bonus is based on the profitability of their individual portfolios of the teams that have them, but their future stock grants are highly correlated with that as well.

So there's a multiplier effect.

The people who are really producing great returns for the shareholders not only get good bonuses, but they get the most restricted stock going forward and the biggest ownership in the Company.

So as a program, we think it's working very well, and it also obviously, as earlier caller mentioned, one of our biggest risks is people trying to poach our talent.

That is, I think, our biggest risk, and so far I think our compensation system has served us well.

And it also makes it a great place to work where people know what kind of bonuses they're going to get.

It's not who knows who; it's who produces the results.

This will conclude the question-and-answer session.

I will now turn the call back to Mr. Ryan.

I want to thank you all for being on our second-quarter call.

If people have specific follow-up questions they can call myself or Rob Stewart.

Or if it's financial-related from an analyst, can call Clayton and look forward to speaking with you next quarter.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 800-585-8367 or 855-859-2056 with confirmation code 9077-1402.

This concludes our conference for today.

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

All parties may now disconnect.