Acacia Research Corp (ACTG) 2012 Q3 法說會逐字稿

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

At this time, I would like to inform 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 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 or majority-owned operating subsidiaries.

All intellectual property acquisitions and 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 Matt Vella, who earned a well-deserved promotion to President of Acacia during the third quarter; Clayton Haynes, our Chief Financial Officer; Ed Treska, our General Counsel; and Dooyong Lee, Executive Vice President.

Today, I will give you a quick overview of the progress we are making in growing the business, then Matt Vella and I will respond to questions we are getting asked most frequently by analysts, shareholders and potential new investors.

I will respond to questions regarding the recent dramatic decline in our share price, Acacia's capital deployment strategy and Acacia's expansion into the medical technology sector.

And then Matt will respond to questions regarding Acacia's strategy around multi-portfolio structured licenses and the licensing strategies for our ADAPTIX 4G/LTE portfolio and for our Smartphone Technologies portfolio, our Palm and Geoworks patents.

Then 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 market leadership position in patent licensing.

We generated revenues of $34.9 million in the third quarter from 33 new revenue agreements, including new licensing agreements with AOL, Bank of New York, Boston Scientific, Citigroup, Dell, Freescale, Fujitsu, Google, Hewlett Packard, IBM, Panasonic, RPX Corp., Sony Mobile, UBS, and Varian Medical Systems.

The 33 new revenue agreements covered 31 different licensing programs, including 9 new licensing programs, generating initial revenue.

Acacia has generated record revenues of $184.5 million for the first nine months of 2012 and we have already surpassed our previous full-year record revenues of $172 million generated last year.

During the third quarter, Acacia acquired control of 13 new patent portfolios and invested $24.5 million in acquiring new patent portfolios, bringing our total investments in new portfolios over the first nine months of this year to $214 million.

Acacia has acquired a record 45 new patent portfolios in the first nine months of this year, representing an 80% increase over the 25 new portfolios acquired in the same period last year.

Acacia now controls 250 different patent portfolios and has $410 million in cash and investments to continue acquiring new patent assets.

As the market leader, Acacia continues to see an acceleration in opportunities for both partnering and acquisitions of new portfolios and this should lead to continued growth in licensing revenues.

We see significant opportunities to partner with large technology and medical companies and are expanding our partnering activity in international markets.

Management evaluates our Company's performance on four metrics -- annual growth of the patent portfolios under management, annual growth of new licensing programs, annual growth in revenues, and annual growth in profits.

Acacia appears to be on target for a record year in all four of its key metrics.

We always remind investors that management does not attempt to manage for smooth sequential quarterly growth in revenue and therefore, quarterly results can be very uneven.

Unlike most companies, revenues not generated on a portfolio in the current quarter are not lost but simply pushed into a subsequent quarter.

Our focus is on getting paid the right price.

I would now like to respond to questions we are asked most often starting with the recent dramatic decline in our share price.

We normally do not respond to questions regarding fluctuations in share price; however, given the dramatic decline, while our share price following the second-quarter earnings report, we are going to make an exception.

First, the decline is actually worse than it looks.

Given Acacia's cash position of over $400 million, ex-cash, the Company's enterprise value has dropped a full 50% following last quarter's strong performance.

We are not aware of any fundamental change in our business or its future outlook that would account for such a dramatic change in valuation and there appears to be a major disconnect between the continued exceptional growth of Acacia's overall business in contrast to the 50% decline in the enterprise value of our Company.

This loss of enterprise value has come during a period of exceptional growth and new assets which historically have driven future revenue growth.

With 45 new patent portfolios acquired this year, including $214 million in investments, we have significantly expanded Acacia's future revenue platform in the technology sector as well as beginning to expand Acacia's future revenue platform to include the medical technology, automotive and industrial technology sectors.

Historically, there has been a high correlation between growth in new patent assets and the subsequent growth in future revenues.

We do not see any reason why that should not continue to be the case in the future.

We recognize that it is often difficult to track our progress given the confidentiality requirements of the licensing business so we are actively considering new ways to enhance and expand our communications to better enable the investment community to track and evaluate our business.

Our management team has driven exceptional revenue growth from $67 million in $2009 to $132 million in 2010 to $172 million in 2011, an increase of 157% in 3 years and as stated earlier, we have already exceeded last year's record in the first nine months of this year.

Even with this exceptional growth, some investors think our recent revenue growth could have been stronger, and we don't disagree.

What we will point out is as the dollar value of transactions on some of our newer portfolios increases the time to negotiate some of these transactions has also increased.

Also, some potential licensees want to negotiate broader ongoing process for future licensing matters as part of these licensing transactions and some companies are interested in having us take over their licensing as certain of their patent assets.

While these are very positive developments for the long-term success of our Company, they do take time to negotiate and this can push out the timing and revenues.

The good news is that these revenue opportunities stay in place and will be generated in a future quarter.

In summary, growth in assets under management drive growth in revenue and profits which should drive growth in Acacia's enterprise value and we are delivering another record year in asset growth.

We are also very well-positioned to continue growing assets under management with $410 million in capital.

We plan to reinvest early cash returns from licensing our recent portfolio acquisitions to make further investments and see no need to raise any additional capital to grow the business.

That leads to the next question which is, what is Acacia's capital deployment strategy and what are our investment return metrics?

Acacia has a history of being very disciplined when investing shareholder capital.

We built the business with very little capital by employing a strategy of acquiring patents with no cash upfront and sharing net revenues 50/50.

This core 50/50 business continues to account for a large percentage of our patent portfolio acquisitions.

Over the past year, Acacia has significantly expanded its ability to accelerate new patent portfolio acquisitions that uses upfront cash advances.

This has given us a significant advantage in acquiring new portfolios.

We have also completed a few 100% acquisitions when the IP owner wanted to cash out.

Acacia is now in the ideal position of being able to offer a patent owner the full spectrum of available options to generate money from their patents.

From a 50/50 split to an outright purchase to a cash advance against the future revenue split.

Our flexibility and deal structure for patent owners is increasing deal flow dramatically and is giving us a much wider range of portfolio assets to choose from.

We are agnostic as to the form of the structure with the patent owner if we can generate great returns for our shareholders.

Acacia's investment return criteria for patent asset acquisitions is conditioned by several factors including the expected time to recapture our initial investment; the diversification of the revenue opportunity; our history of licensing experience with potential licensees; the depth of the patent portfolio to moderate enforcement risk; and the likely total returns adjusted for risk impact.

Our total return requirements to make a specific investment are highly dependent on these factors and vary significantly depending on these factors.

Acacia's extensive experience in completing due diligence on thousands of patent portfolios gives us great insight into the risk factors associated with the enforcement of prospective portfolios.

Similarly, Acacia's experience in completing over 1,100 licensing transactions gives us significant insight into the likelihood of being able to enter into negotiated licenses with prospective licensees at price points required to generate the expected returns.

When we undertake a 100% acquisition requiring significant capital, all of these criteria are amplified.

An example of this would be our purchase of the ADAPTIX 4G/LTE patents earlier this year.

That portfolio was very diversified with 230 patents with [15] distinct families, with open continuations allowing additional claims for most of the patent families, worldwide geographic coverage, unencumbered with any licences, a long remaining patent life average of over 10 years, and three different industries to license.

We also generated $75 million in early licensing revenue within the first quarter to further minimize the investment risk.

Acacia plans to aggressively deploy capital over the next few quarters with most of those transactions being cash advances where we recoup all or majority of the initial revenues until we have recouped our original cash investment.

Many of these transactions enable Acacia to generate more than 50% of the net revenue split after we recover our initial investment.

Finally, we have received a lot of questions regarding Acacia's expansion into the medical technology sector.

Acacia began this initiative 18 months ago and we are on plan in meeting our expectations having acquired control of over 15 patent portfolios including 2 very extensive portfolios relating to orthopedics and cardiovascular technologies.

We have already begun generating licensing revenue from some of these portfolios and expect that revenues from these new medical technology portfolios could become a significant percentage of our future growth starting as early as this quarter.

Our most recent acquisition announced at the end of the quarter included over 1,900 patents and applications regarding it to -- relating to cardiology and vascular devices from a leading global medical device company.

This acquisition demonstrates the significant traction we are gaining in this sector and partnering with large medical technology companies.

The successful track record that Acacia has built in licensing in the technology sector is helping us convince patent owners in the medical technology sector that we are the partner of choice.

With that, I would now like to turn the call over to Matt Vella.

Thanks Paul.

To everybody on the call, good afternoon.

As Paul mentioned, we have been receiving questions regarding one, our multi-portfolio structured license business; two, questions regarding the status of our ADAPTIX 4G/LTE license program; and three, questions regarding the status of our PalmSource-Geoworks license program.

I will be providing responses to these questions.

Turn to the first one.

Investors want to know the status of our multi-portfolio structured licensing business.

In answering this question, it is first important to define what is meant by our structured licensing business and by structured licensing deals.

As [core] can distinguish from our core licensing business and our so-called core licensing deals which each involve a single patent portfolio being licensed to a single prospective licensee.

A structured deal is simply what can happen when we are on track to concurrently close a large number -- typically four, five, six, or more of core licensing agreements with a single prospective licensee.

Two things can happen when this precondition has been met which leads to a structured deal.

First, the prospective licensee wants to simplify the negotiation across all assorted portfolios by amalgamating what would be several individual license negotiations into one composite negotiation that is informed by smaller individual parts.

Second, when four, five, six, or more of these portfolios are before a prospective licensee, that licensee, given the large amounts of money it typically needs to pay for licenses to all of these portfolios, will want to set a structure to deal with future licensing transactions for a limited period of time.

The result is a so-called structured deal which is typically quite complex and vary significantly from party to party.

They are highly tailored deals that can vary according to, for example, which of our portfolios are impacted, when assertions can be brought in the future and how assertions can be brought.

The bottom line is that a structured deal is simply, one, an amalgamation of many individual portfolio licensing agreements; and two, it had a mechanism that make govern future licensing transactions.

Having to find structured licensing deals, we can tell you that the status of our structured licensing business is that we expect more such deals to occur in the future at points in time when the critical precondition has been met.

That is, at points in time where our subsidiaries have collectively asserted the large number of portfolios against a single prospective licensee.

When such a precondition exists, with respect to a given licensee, Acacia actively explores a structured settlement outcome but only on terms that benefit our shareholders and our patent partners.

Given the requisite preconditions that must exist before a structured deal is even possible, the keys to future structured deals are the breadth, scale and diversity of our portfolio acquisition activities.

Acacia continues to aggressively pursue new business development opportunities on a global basis because each new patent acquisition or partnership has the potential to add to our scale, invest in and improve our negotiations with a prospective licensee.

It's worth adding, by the way, that structured license deals also represent the compelling opportunity for our patent partners to receive licensing income in a relatively less risky and timely manner.

The aggregation of portfolios that underlie structured deals enhances our overall bargaining position with a prospective licensee which in turn accelerates time to money and helps to de-risk a patent assertion as compared to what a patent partner might expect when their portfolio is being asserted in isolation.

As Paul mentioned, another question we often receive concerns the status of our efforts to monetize the ADAPTIX portfolio covering 4G/LTE technologies.

As many of you know from our previous calls and public filings, we have already partially monetized the ADAPTIX portfolio earlier this year and have earned tens of millions of dollars in income in so doing.

We are delighted with this status given several years typically required before any significant returns are earned on most major portfolios.

For this ADAPTIX portfolio, we have started earning our returns during the first year.

Turning to future monetization of events for this portfolio, we are encouraged by our current negotiations.

We cannot comment about negotiations with individual prospective licensees because of confidentiality obligations that we are under.

Generally speaking, however, the negotiations have taken longer to close than we anticipated because the complexity has been greater than anticipated.

For example, in some of the negotiations, prospective licensees are asking for additional licenses under portfolios controlled by other Acacia subsidiaries.

Additionally, the prospect of working with prospective licensees to enforce some of their own patents have also arisen.

While such complexity has been frustrating at times because of its impact on the timing of our monetization agreements for ADAPTIX, we find that same complexity encouraging in that we think it speaks to the value of the ADAPTIX portfolio.

Paul and I are also asked about the status of our efforts to license the Smartphone Technologies portfolio that includes PalmSource and Geoworks patents.

As many of you know from our previous calls and public filings, we have already partially monetized the Smartphone Technologies portfolio over the past few years and done so well in advance of any damaging or risky litigation events.

We are delighted with the status and particularly, our ability to license many of the prospective licensees for this portfolio, [ahead] of risky litigation events.

The time for more (inaudible) litigation events is now arriving, including the first trial which is scheduled for April of next year.

We cannot comment about negotiations with the individual prospective licensees because of confidentiality obligations that we are under.

We already know from our negotiations; however, that as is the case with our ADAPTIX negotiations, these Smartphone Technologies negotiations will be complex.

For example, as with ADAPTIX, prospective licensees are typically requesting additional licenses under portfolios controlled by other Acacia subsidiaries in addition to licenses under the PalmSource-Geoworks patents controlled by our Smartphone Technologies subsidiary.

As the litigations proceed to that first trial in April, we may see opportunities arise to resolve this dispute through a settlement.

We shall be ready to go to trial, however, if such resolutions do not materialize.

With those three questions answered, I will hand over the microphone to Clayton.

Thank you Matt.

Consistent with previous earnings conference calls, I will provide a brief summary of our earnings release focusing on key components of our results for the third quarter of 2012.

On a consolidated basis, revenues in the third quarter of 2012 decreased to $34.9 million as compared to $63 million including other operating income in the comparable prior-year quarter.

Third quarter 2012 revenues included license fees from 33 new licensing agreements covering 31 of our technology licensing programs as compared to 24 new licensing agreements covering 22 of our technology licensing programs in the comparable prior-year quarter.

For more details, please refer to today's earnings press release for a summary of technology licensing programs contributing to revenues during the quarter.

Consolidated trailing 12-month revenues totaled $205.3 million as of September 30, 2012, as compared to $177 million as of the end of the comparable prior-year quarter.

As Paul mentioned, currently to date on a consolidated basis, our operating subsidiaries have generated revenues from 134 of our technology licensing programs as compared to 108 technology licensing programs as of the end of the comparable prior-year quarter.

License fee revenues continue to be uneven 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 third quarter of 2012, we reported a GAAP net loss of $6.4 million, or $0.13 per share, versus GAAP net income of $10.8 million, or $0.25 per fully diluted share, for the comparable prior-year quarter.

Third quarter 2012 non-GAAP net income which excludes the impact of non-cash patent amortization, stock compensation and excess benefit related non-cash tax amounts was $8.5 million, or $0.17 per diluted share, as compared to $18 million, or $0.42 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 total revenues less inventor royalties and contingent legal fees for the portfolios generating revenues during the period, was approximately 60% for the third quarter of 2012 as compared to 44% including other operating income and related expenses 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 and the related economics associated with the underlying patent acquisition agreements and contingent legal fee arrangements, if any.

Contingent legal fees for the third quarter of 2012 versus the prior-year quarter decreased 29% to $8.8 million, consistent with the percentage fluctuation in revenues in the current quarter versus the prior-year quarter excluding verdict insurance related amounts from the prior-year quarter.

Inventor royalties expense for the third quarter of 2012 versus the prior-year quarter excluding verdict insurance related amounts decreased 68% to $5 million versus $15.6 million for the prior-year quarter.

The decrease was due primarily to the decrease in related revenues in the current quarter as well as lower inventor royalty rates for the portfolios generating revenues during the third quarter of 2012 as compared to the portfolios generating revenues in the comparable prior-year quarter.

In addition, inventor royalties expense for the third quarter 2012 included a credit of $2.6 million related to inventor royalties originally expensed to the second-quarter of 2012 which based on certain events occurring in the third quarter of 2012 were no longer payable pursuant to the terms of the underlying agreement negotiated.

Net results for the third quarter of 2012 as compared to the prior-year quarter also included the impact of a 36%, or $3.1 million increase in MG&A expenses due primarily to a $2.7 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 third quarter of 2012 as compared to the prior-year quarter.

Litigation and licensing expenses in the third quarter of 2012 increased 62% due primarily to higher net levels of patent prosecution, litigation support, third-party technical consulting and professional expert expenses associated with our continued investment in ongoing and new licensing and enforcement programs commenced since the end of the comparable prior-year quarter.

We continue to expect patent-related legal expenses to continue to fluctuate period to period in connection with our current and future patent acquisition, development, licensing and enforcement activities.

As of September 30, 2012, our annual effective tax rate for fiscal year 2012 is estimated to be approximately 40% excluding the impact of any discrete items.

Including discrete items, comprised primarily of a $10.2 million tax benefit resulting from the release of valuation allowance on the majority of our net deferred tax assets in the first quarter of 2012, our year-to-date effective tax rate is approximately 22%.

As discussed on previous conference calls, we calculate tax expense for financial statement purposes without the excess tax benefit related to the exercise and vesting of equity-based incentive awards.

As such, approximately $7.7 million of the year-to-date financial statement tax expense of $16.4 million represents non-cash tax expense which was credited to additional paid-in capital, not to 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 million and for fiscal 2012 patent-related litigation and licensing expenses to be between approximately $17 million to $18.5 million.

From a cash flow perspective, net cash inflows from operations for the third quarter 2012 totaled $6.3 million versus net cash inflows of $19 million for the third quarter of 2011.

Year-to-date net cash inflows from operations as of September 30,2012 totaled $69.7 million versus year-to-date net cash inflows from operations of $44.1 million as of the end of the prior-year quarter.

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

Hi operator, can you please open the call for questions?

Thank you.

Thank you sir.

The question-and-answer session will begin.

(Operator Instructions)

Tim Quillin, Stephens.

Good afternoon, I appreciate you going through all the frequently asked questions.

Hopefully, we can come up with some more.

Matt, on the structured licensing deals, I am wondering as you get to the expiration of these periods of tranquility with companies that you have already signed structured licensing deals with, do either patent owners come to you until you aggregate patents that way?

Or you go out and try and find patent assets that read on those specific companies to drive another structured licensing deal around the time of the expiration, or does -- should we not think of that as a renewal or getting a new deal at the time of the expiration of those current agreements?

The structured deal and therefore, the renewal, when you think about it, it really is a function of the patent portfolios we have available for assertion.

The activity you described are naturally going to be in our minds as the anniversary periods, so to speak, the expirations of those periods of tranquility are coming to an end.

Now what we have to do as well is figure out the, from a given perspective, renewing licensee, what portfolios we're going to have that will be available for assertion and we have to organize our acquisition activities in accordance with those expectations.

So the answer to your question in a nutshell is yes.

But, of course we have to look for a number of variables besides availability of patents when we think about renewals.

One of those factors, for example, is going to be the health of the Company that we are trying to renew with, for example, the industry they are operating in, the sorts of innovations that they are adding to their products, whether their patents are covering them or not.

So, the two activities you mentioned are certainly occurring as renewals approach but other analysis has to occur as well, primarily focused on the industry in which the prospective, by in this case, the structured licensee is operating and the health of the structured licensee's business itself.

Tim, I think it's also important to note that we have done a number of transactions with companies that we have done these structured licenses with, and some very significant transactions as well.

There develops a relationship once we generally do a structured transaction with a large company where we then are able to bring them some of our newer portfolios in advance of the renewal period.

And many times they choose to move forward with licenses prior to when they would be required to do so based on thinking that they can probably get a fairly good deal by doing it early rather than waiting for the renewal.

So, in many cases, as we expand the number of companies we have these relationships with, it helps really facilitate early licensing of new portfolios, and particularly ones that could have a significant impact on those particular companies.

Right.

I may be wrong, but your first structured licensing deal which if it was a three-year covenant, not to sue would be coming up for expiration in the first quarter of next year but it's a company that you, traditionally, I don't think have had a lot of patents that read on that company.

And so it's that one we shouldn't think of you renewing and maybe none of them renewing exactly on the time frame, but especially not that one?

We can't comment about any specific arrangement, obviously, because of confidentiality provisions, but I think it's also important to note, increasingly, these transactions are highly customized.

It is not uncommon for us to potentially have a, quote, carve-out.

In other words, companies are looking to try to get the predominant relationship on track to minimize the legal cost for themselves primarily.

That also helps with us.

But it doesn't necessarily mean that we can't do subsequent licensing activity depending on certain categories of products depending on certain dollar amounts of purchases that we may make of a portfolio.

So, there can be ongoing transactions with a structured deal in place and I think as we move forward, that's going to be more of the norm than it was for our first few deals.

So, it's going to be dependent when we come up to those renewal periods, besides as what Matt said, what assets we have in place that they are interested in that makes sense and we may go on individual licenses for those or put those under a general format with a broader agreement that can resolve future matters.

So I wouldn't look for a lot of necessary binary events, but the companies we have established relationships with where it's appropriate to license, it's much more likely we will be getting deals done with them.

Okay, fair.

And then throughout the quarter, you announced patent acquisitions or the headlines says patent acquisitions, and I know a lot of those do not involve upfront capital.

I think most of them do not involve upfront capital.

But can you say and maybe in the future in press releases, but which ones do have a capital component to them but maybe if you can talk about third quarter where did you put the $24.5 million to work?

When looking at that situation, as I commented earlier, we're looking for better ways, we realized that given the confidential nature of the licensing deals themselves and some of the constraints of being in litigation provides and telegraphing in advance of litigation to certain companies you may be litigating against the facts and circumstances that aren't in the best interest of shareholders or our IP partner.

Yes, we do have those constraints.

So we are looking right now at ways that will enable us to better communicate, particularly to the analysts metrics such as that, that are meaningful but doing it in a way without compromising our business.

And we're actively exploring that because we realize, yes, we make an acquisition announcement and you don't know whether that's a 50/50 partner or 100% ownership or a cash advance, and similarly, when we do a license, you have no idea as to the size and scope dollar-wise of the license.

So we appreciate the difficulty of analysts and investors tracking our progress given those confidentiality requirements and believe me, we are working actively and working soon with an outside group to see if we can't better communicate the metrics that we can to give you a better visibility.

But one thing that's worth noting is the primary obstacle to giving you that information is the counterparty.

The seller or the patent partner often does not want that information coming out, and that is one big obstacle we have to deal with.

So, where we can, we're going to try to be clear in terms of the nature of the transaction and certainly whether it's a 100% ownership or whether it's a 50/50 or a transaction so you have some metrics as to our economic interest and the revenues that will be generated.

Can you say how many of the patent acquisitions involved upfront capital?

I would try to guess the -- roughly (multiple speakers) six or seven of the 13 we used some upfront capital and about half of them were the traditional 50/50s and about half we used capital.

Okay.

So it's obviously a relatively low capital outlay, then, per portfolio that you are acquiring; is that the right way to think about capital outlays going forward, a small upfront commitment that you recoup on the front end?

Yes, it's going to depend on the economics.

We are agnostic as to structure and format as long as we think we can earn great returns on the investment.

But as a general rule of thumb, I would expect certainly, if we're doing a partnering deal and we're putting cash upfront, we probably wouldn't be advancing more than 5% or 10% of the total potential revenues we think can be generated.

And we do that because we think there is an extreme high likelihood knowing who we have to license that we can recoup that in early licenses and therefore, derisk the transaction.

So it's unlikely that we're going to be putting out more than 10% of the revenue potential upfront, particularly if there is a back-end revenue shared with a partner.

And again, that is to modify risk for shareholders and increase returns.

As you know, we want to aggressively deploy the capital we have got in the bank.

It's earning us nothing and we can accretively use it by getting better backend.

So many of these transactions we get all first dollars back.

The patent holder gets the certainty of the cash advance from us.

We get first dollars back until we recoup and in most of these, we're getting a preferential treatment over the 50/50, so we're getting margins of 60/40 which, long term, are very accretive for our shareholders by temporarily using some capital, we think, on a very low risk basis.

Right.

And just one last question before and then I'll step back into the queue.

Are the inventor royalties, I think was around 15% of revenue, relatively low given your traditional 50/50 split and I'm just wondering how you got to that number?

And how we should, and I know it's all going to depend on the mix, but how we should think about a general mix on that?

There was a component of inventor royalties in the third quarter of 2012 where, I guess whereby we credited $2.6 million of inventor royalties in the third quarter, related to amounts that were originally expensed in the third quarter of 2012, but we ended up not actually having to make that payment to the inventor.

So, there were some adjustments that probably made that artificially low.

It probably would've been, without those adjustments, closer to 25%.

(multiple speakers)

Correct, correct.

So, that's a good catch.

We had an adjustment in there; we had a special situation and that skewed the numbers for the quarter.

But if you took that out, we're probably closer to around 25%.

Clayton, could I ask you to explain that again?

I did hear that in the prepared comments and I meant to ask about what exactly that meant.

A $2.6 million credit for royalties from 2Q that you would --

Why don't we do that off-line?

It is a fairly complex transaction and in the interest of other shareholders being on the call, why don't we do that right after the call.

Would you -- can you do that?

Thank you.

Paul Coster, JPMorgan.

A question.

You have depicted the frustration as a originating in this pipeline of deals which are of growing complexity, which to me, really, just simply means they are getting bigger and bigger, and the timelines for settling them is therefore longer.

Are they all, by definition, structured deals?

Well, I think the rule of thumb, you can probably think, if there's over $50 million involved, the company on the other side is probably going to want some form of transaction that gives some elements of a structured transaction.

In other words, if the guy is going to borrow $50 million, he probably doesn't want you to be able to sue him on a new matter within the next week.

So in varies then.

I'm not trying to be cute, but the time frame that we give people and what we offer them, yes, there is a whole variety of things and the interest becomes in getting deals done and obviously, the party on the other side leading the transaction for them doesn't want to put their company in an embarrassing position.

So on average, certainly it leads to a much more meaningful dialogue about a much broader ongoing relationship.

And generally, we know that we are seeing it as we increase the scope of our assets, and particularly, the depth and value of some of these portfolios, companies on the other side are now engaging in negotiations that are of co-equals.

Before it was us in a litigation against them and making us wait to get paid until the latest moment to see what they could do in litigation.

The tenor of all of that and the tone of that is changing, which is, obviously, very positive for the long-term development of Acacia's business model.

And we think, yes, it will be less reliant on lengthy litigation and much more reliant on transaction structures where we sit down periodically and negotiate that.

Now in the beginning, as we have moved up the food chain in terms of values of the portfolios and dollar values of transactions, it has moved the dialogue in that direction and that adds to the time element of getting them completed.

How many customers are in this pipeline of complex deals so it's taking longer to come to market and to get results then one would have expected?

Is it a handful or are we talking about more than10, 20?

Just like we cannot publicize revenue forecast on a quarter-to-quarter basis, we cannot issue forecast on the number of structured agreements that may be executed.

We don't want to prejudice our discussions by making those forecasts but again, the key is a precondition, right?

It is any time you've got three, four, five, six portfolios and one prospective licensee and we are happy to report that, that is happening often.

Yes, I mean you can see our assertions that if you look at them against most of the larger technology companies, certainly, we are at the stage now where we have got multiple matters before them.

So you can assume a significant portion of those are at the point where that dialogue is appropriate.

(multiple speakers) We don't want to get into specifics of is it more than 10 or less than 10 right now.

But yes, with most of those companies, the discussions are moving in that direction and the more portfolios we continue to add, the more they go in that direction.

All right.

I've had a number of e-mails from clients here and I think if it all boils down to the following question, which is in the next year, do you expect to post double-digit growth on the top line or if you can't answer with a one-year timeline, can you answer with a three-year timeline what kind of growth rate you believe this Company can generate on the top line?

Let me answer it based on assets under management.

Certainly, we would realistically think we can put up those numbers.

Performance-wise, as you know, these are all negotiated transactions, so you don't, as a public company, want to go out there and put yourself on the line with the guy on the other side knowing he can use that against you.

But certainly, if you look at the growth in assets, we brought in 80% higher level of assets so far this year.

Historically, there has always been a very high correlation between subsequent revenue growth and assets under management.

It's like a money management Company.

If you have got the assets under management, generally revenues are going to grow.

So certainly we think those are very achievable numbers based on the growth in our assets.

At least 10% growth in the next year, for instance?

Yes, that should be very achievable based on the asset growth, sure.

All right.

Got it.

I think that is it for me.

It seems pretty straightforward what is happening here and it all sounds quite good to me.

Thank you.

Mark Argento, Lake Street Partners.

A question around any takeaways from the Apple-Samsung litigation?

How does that potentially impact any of your portfolios, good or bad?

Well, certainly, we were very pleased with the valuations that Apple and their experts put on the valuation of their software patents, non-industry standard patents.

And then we were further pleased with the jury's recognition of the valuation of those patents.

As you know, we have a pending trial date with the first trial on our Smartphone patent portfolio, and we think the Palm and Geoworks patents are very comparable to the patents that were involved in the Apple-Samsung litigation.

Obviously, there were some very large numbers there.

So we are certainly pleased that they have an opinion.

It's no longer our opinion.

They valued patents in this category and a jury has opined on that, and so that's certainly going to be strong evidence for us in our trial.

Great.

When you guys look at going after new portfolios, I know the whole issue of standards-based versus functional-based patents that continues to be more and more of a hot topic.

When you guys think about potential damages and valuation on various portfolios, have you guys -- is it your opinion that standards based?

That patents are -- it is an area in which it's going to be more and more difficult to command big dollar awards?

Or how have you taken that shift into consideration when you are doing your analysis?

Well, I'll let Matt answer that but you will notice that our biggest acquisition to date of ADAPTIX were non-standard patents.

I mean, yes, primarily -- in fact, Paul kind of stole my thunder on that one.

We try avoid the note.

It's not that simple though.

If you take a patent individually, you certainly have to take into account the fact that the European Union and other political bodies throughout the world that have control over these things are seeking to arguably regulate the price points of standards of essential patents.

And so that, to ignore that, you would be operating in a foolish manner.

Having said all that though, there is so much terrific IP locked up in the standard essential category that we don't think the asset class, or I should say, sub-class, is disappearing.

So if we can find the right price, the right metric, the right numbers, the right concentrations, we'll certainly dip in, but it's certainly a factor that impacts our evaluation.

That's helpful.

Lastly, this big Medtech portfolio, I'm guessing that took awhile to work on and get to the finish line; it looks like a fairly comprehensive portfolio.

When you're negotiating, you're sitting down with these larger companies, what's the -- is it a return on their capital or a return on their R&D dollars, what is their main goal when they're working with you in terms of the monetization?

Is it risk mitigation, is it absolute hard dollars?

What is the focus for these types of deals for the IP owner?

I think it's primarily a return on an otherwise dormant asset and then secondly, making that return more predictable and less risky.

We can really help with that in a number of ways.

One, we can basically put these portfolios on time tables that are functions of other portfolios that are further advanced in discussions.

Two, there is strength in numbers.

So although we bring aggregations of portfolio assertions against companies and we keep the aggregations separate and distinct, the reality is that a single prospective licensee faced with a number of portfolios is going to have to analyze its risk equation looking at several portfolios, not just one.

And that is the rising tide that helps all proverbial patent partnerships, if you will, right?

So because we -- and then number three, in addition, we become the focal point and we have control of the asset and a lot of companies like operating, and essentially handing the asset over to us so that we take on that risk for them.

We have systems that are better handled to absorb litigation, better handled to absorb litigation risk.

We do it all the time; better handled to absorb all the risk that's associated with patent monetization.

So if you take those factors into account, not only can we get our partners a return on their otherwise dormant assets, we can do it, again, with a lot of risk mitigation.

Then the final thing I would say is something Paul alluded to at least once earlier today, which is with the capital we have, we can give our partners a range of options for how they see a return.

There can be some upfront money; there can be a larger back-end participation; there could be hybrids of those two, and I think that is also something that we are finding is very positive.

Doug Thomas, JET Equity Partners.

I also appreciate the color, Paul, today.

I wanted to ask you, I know you're going to say that you can find very attractive uses for all of the cash that you've probably got but I'm just wondering, recognizing the manic depressive state of the markets and what I expect are much brighter prospects for the stock ahead, might not you consider putting a portion of the cash on the balance sheet to use in retiring some shares here and buying back some stock?

We've certainly considered that, obviously given the dramatic decline in the value of our Company.

At the moment, our Board and management has decided, because we see the pipeline of deals that we have right now that we are working on, and by using capital as an advance to capture deals where we think there is very low risk of not getting that capital back in early licensing and then improving our margins substantially over our traditional 50/50s that at the present time that is a better use of cash to grow this Business then to buy our stock back.

We see an opportunity with our experience and our capital right now to dominate this sector and to become a much larger Company.

That $400 million in capital right now is every bit as valuable as the teams we have that can do the due diligence, handicapping, and the licensing handicapping.

We're very fortunate.

We have all three elements that are required to make money.

We've got teams that know how to assess the risk of these portfolios.

We've got teams that have very high probabilities of predicting revenues for portfolios and therefore determining the true value of portfolios and we've got the money to execute.

You very rarely have a Company get all those at the same time and we're not seeing as much competition in certain of these sectors as we have in the past.

There's been a lot of noise around the smartphone sector, and we're certainly pleased we have what we think is one of the premier portfolios in that sector, but that's not what patent licensing is all about these days.

It's obviously medical technology, and semiconductors, and other fields.

So right now though we just see a tremendous ability to use capital very accretively to grow this Company to a whole another level and we are not saying if the circumstances don't change or if there's unfortunately would the further price decline, we wouldn't consider it.

We never rule anything out because, as you know, we look at all of this from an investment standpoint.

So you're right but right, but right now, given the deal flow that we're seeing and how we can use capital, we're going to continue on this path of making acquisitions.

Okay, I appreciate that.

And you, the management team in the past, you all own a lot of stock, obviously.

You have personally taken advantage of weakness in share price as opportunities to buy back stock.

Could we anticipate that there would be some insider buying at these levels or are you guys restricted in terms of, like you said, the news flow that you are expecting in the near term?

It's not news flow that would restrict us.

There are indeed are employees that buy who aren't subject to the insider rules.

The situation is that our Board and compensation committee about three years ago saw the biggest risk to building our Company was people poaching our talent and as a result, we moved our restricted stock grants from annual vesting where oftentimes is not uncommon for guys to raid your people right after they've gotten their annual restricted stock.

And we did it in six-month increments.

One of the things we didn't consider was by doing that, you basically preclude the top-level executive people who are subject to insider trading rules from buying stock unless they were willing to come out-of-pocket every time they get a restricted stock grant and write a separate check to the IRS, and that hasn't happened very frequently.

So we'll really consider that going forward in stock grants but the way we have structured it, it precludes us on a six-month swing rule from being able to effectively do that.

I appreciate that, too.

You mentioned in the text today something I have been wondering about for awhile and we've talked about it before but for the first time now, you're talking about being engaged more actively in foreign markets.

I would imagine that your capabilities, Acacia's capabilities are probably among the leading companies out there in terms of all the patent litigation knowledge base you have acquired over the years.

What are you doing overseas and what are the opportunities?

I imagine there, outside of China, I imagine they are fairly large but you're focused, obviously, on countries where there's formal patent law and where people appreciate the value of an intellectual property and so forth.

What is the opportunity for Acacia outside the US?

Great question.

I think the opportunity is twofold.

First off, the foreign enforcement opens up our royalty base.

If you look at a number of markets, and by markets, I mean technology markets and you overlay those technology markets over geography, you'll often find that the people that sell technology product type A in Japan are very different than the people that sell that same technology product type in the US versus Germany versus England, for example.

By going overseas, if you have the assets and increasingly, we're getting those assets, you are adding to your royalty base that you wouldn't cover if you are just US focused so that's the primary benefit but there's another benefit, as well.

The lawsuits overseas will give you certain risk mixes, if you will, certain cost risk mixes that are not available in the United States.

The timing of lawsuits and enforcement actions can be different overseas.

The cost can be different overseas.

Certain procedural rules around evidence that gives you insights into what other companies are thinking, in terms of how they're going to attack patents, those opportunities might be available overseas.

Just like an offensive coordinator in a NFL football team wants a variety of offensive weapons to go to receivers, tight ends, running backs, power backs, to us the second benefit of growing overseas is that we get these different tools that we can use when we are dealing with what effectively is a global licensing effort.

Those are the two primary benefits.

And yes, you are right, we are expanding our oversea enforcements effort.

We also are expanding dramatically in the business development side; that's a big focus of our effort right now.

Matt, would you announce whether or not, for example, the medical device portfolio that you've recently announced, how -- in terms of the transparency that you're talking about trying to provide investors, are we going to know whether or not these portfolios have international opportunities?

Will you know how we are going to be able to model that?

That's a great example what we're discussing with some outside groups from a communication standpoint.

Indeed, in that portfolio we recently acquired of 1,900 patents, there is significant international coverage, and that is one area that we could probably, as we are putting deals together, not constrain ourselves unduly with restrictions on disclosure that would enable us to better communicate with the analysts.

In other words, in my portfolio, if we could have said and in the future, we're going to have that in mind which companies these patents read on major companies, they're there for revenue opportunities, I think, obviously, that would be helpful.

The interesting fact is litigation is typically public, right?

There isn't a secret litigation docket sitting around somewhere.

So we are definitely taking a long hard look at how to exploit that information to you guys, including overseas.

(multiple speakers) maybe you'll wait and see that it's closures, though at least telegraph in some general way, so that you have a better perspective.

Jeff Van Rhee, Craig-Hallum.

A couple of questions.

First just on the sales cycles, can you comment on the pace at which the sales cycles have been lengthening and give us a little context in terms of history when you started to see that lengthening and how it has progressed and the last part there, just the pace at which it is lengthening?

Well, all we have to go on is history and if you study both our stock and our revenues very carefully and you think back to what was happening in the 2007, 2008, 2009 time period, there were increased lags temporarily as we transitioned from a certain smaller size of average transaction to a certain larger size of average transaction.

Learning from that experience and looking back, as we could tell that the deal cycles were lengthening but what we didn't understand at the time was that lengthening was temporary.

And we also didn't understand the duration of time during which we would see that lengthening put in place.

Learning from that experience and transplanting that experience to what we're seeing right now, we expect some of this to be temporary.

In other words, once the perspective licensees get used to dealing with us under a new modality, it will be easier to repeat the modality, right, in terms of the larger, more complex deals.

And then the second thing, in terms of when we started to notice the lengthening, honestly, we started to notice it the moment we had the portfolio in hand and began speaking with people.

The things we were seeing were immediately different.

So, I think that's the two components of your question.

Great.

In terms of portfolios out there and your pipeline, can you comment on a couple of things?

First, just who you're seeing, in terms of the competitive battle for those portfolios and the give-and- takes in terms of how that has changed?

Right now, we're seeing competition mostly from a strategic buyer, a major corporation, who has either exposure in that area or has an interest in increasing their asset base in a particular area.

And obviously, if it is a large company, they're probably going to spend more money on it if it's strategic than we are going to.

But we are also seeing opportunities as we broaden our relationships in discussions with these large companies.

There's been a dramatic shift in behavior where a couple of years ago, it was purely adversarial.

Now, oftentimes, we are getting calls from companies and some of which we haven't really set it up on other matters with, but where a particular patent issue might be resolved by us stepping in and buying something and licensing them certain rights that they may not want to put directly on the balance sheet.

Overall, I would say it is more strategic corporate than it is any other patent licensing company.

How is that different from, say, three months, six months ago?

Well, I think the American Events Act, certainly, at one price point has really impacted the behavior of companies trying to assert patents.

The Act has made it more complex, more sophisticated, more expensive.

I think that is going to drive more business to us because we are equipped to deal with all of those issues and some of the smaller entities aren't so we're actually seeing, I think, less competition on that level of certain 50/50 deals.

I think there are some aggregators out there who have also acquired what they need to, to get paid and it doesn't make sense for them to incrementally continue to make investments because they're probably not going to get the equivalent bang for the buck on additional assets and so in our view, certainly recently, seeing less activity there.

Okay.

And then could you put a little finer point maybe on in terms of the pipeline, the shift to the owned IP from 50/50?

It sounded like a pretty considerable mix shift maybe in the works here in terms of what is to come, to the owned IP.

Can you try to quantify that or give a sense of maybe the opportunities that are in the portfolio?

How many are -- what percent are owned IP versus maybe 6 months or 12 months ago to give us a sense of the shift?

In terms of 100% owned, that is still a small percentage.

ADAPTIX, while it could be a big revenue, contributed on the revenue side, increased our margins.

On the transactions we have done, I would say over the last year, probably less than 10% have been 100% acquisitions; probably 40% of them 50/50s; and 40% or 50% of them where we are doing some cash advances.

Mostly they are cash advance deals and 50/50s still.

But if an IP owner, as in the case of ADAPTIX, wants to liquidate, then again, it just comes down to the numbers.

We're agnostic.

We would rather have a partner involved to develop the technology but if the structure is such that they want to sell, we will certainly do that.

But it's going to be as in terms of a numbers of transactions, the 100% acquisitions are still going to be a fairly small percentage.

And we don't see, internally at least, that dichotomy.

It's owned or it's partnered.

It's really a spectrum.

The only thing we can tell you about the spectrum is that by portfolio count, we still tend to do a lot of transactions that are heavy on the partnership aspect, and as Paul was saying, less than 10% of forecast revenue on the upfront payment aspect.

The other thing we'll tell you is that when we do trade dollars for back-end points, when we do trade dollars for risk, we use the power of that capital very effectively and all involved are aware of that.

It's something that it's a big reason why we are so delighted to have not only the team, as Paul mentioned, but the capital.

Right now, capital is absolutely king in this field now that some of the flurry of transactions around smartphones have faded, there's a lot of assets out there for sale and we're very fortunate to have the capital.

It's our most important component because with the teams, without the capital, you can't execute.

So it's incredibly important for us right now.

Just so I'm clear, I think you had said 50% historically had some component of cash advances?

Just -- did I hear that right?

And then --

I would say over the last few quarters, I would say close to almost half of the deals have some cash.

Sometimes it is a modest cash upfront but there is some cash component, yes, upfront.

So if you just look at the coming the pipe for the next 6 months to 12 months, how much higher could that 50% go?

Meaning the amount that have cash components in them?

It's just deal specific.

We're agnostic.

We don't have any goal or structure around that but probably it's going to stay the same.

I think the last quarter, about half of them required cash, and half of them were 50/50s.

I don't see any -- we can't forecast how that would be significantly different.

[Amrun Haulamar], Citi.

Karim from Citi Capital Advisors.

Paul, I heard what you said about the cash being incredibly important to your business, but just following on Doug Thomas' earlier question about a stock buyback.

When I look at a stock that has a low multiple and a huge cash balance like this and also, the length of time that it takes you to put that capital to work and when you yourself say that on a go forward basis, you expected 100% cash deals would be very small and you expect them to be 50/50, or some small component of cash.

Has the Board discussed at all any dividend?

Not like instituting a regular dividend but a success-based dividend?

We have not gotten to that point yet.

If we have recurring revenues that were throwing off significant amounts of cash, I think dividends would be potentially relevant.

I think now if we were going to use capital in that way, we would do a stock buyback.

That would make more sense.

I don't think people own our stock to get paid a dividend.

I think people own our stock because they think we can become a dominant player in the intellectual property field and we think we can use the capital to achieve that.

If there come moments in time where it makes sense economically to buy back stock, we don't rule it out, although we don't want to hold that promise out to investors and it's certainly not a key thing on our plate right now.

(multiple speakers) Just to be clear, I'm not talking about a regular quarterly dividend.

I'm talking about if you win a large settlement that you agree to return a certain percentage back to shareholders in the form of a special dividend?

Well, the pre-agree to an event that we can't be certain, I don't know that we can -- that, that would make sense at this stage.

Look, if we are fortunate and we don't necessarily have to win a large award.

There are some transactions that we may do that generate a significant amount of capital and if we don't have a current use reasonably to think we can reinvest that capital, we would return it either through a one-time dividend or stock buyback, depending on the price of the stock.

So we don't rule that out but right now, let's wait until we get that event where we have that situation in front of us.

The other point worth raising is, I heard you say just now 50% of our transactions will involve capital and 50% won't.

Again, we see a spectrum of capital deployment patterns available to us and under some of the points in that spectrum, there could be large capital outlays being made.

You shouldn't come away from this call with the impression that half of our deals will involve a low capital outlay and half will involve no capital outlay.

We have seriously been in very advanced stage discussions and transactions that are well over $100 million, and in some cases, $200 million.

We haven't completed any of those transactions yet, but certainly we are actively pursuing them and some of those types of transactions if they make sense to us, we will do.

So again, that is, Karim, don't think that we're only going to put this out in bite sizes of $5 million, $10 million.

If we find the right transaction, we will invest significantly more.

This will conclude the question-and-answer session.

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

Thank you operator and thank you everyone for being on the call today.

Thank you for the questions and for your patience with some of our other comments.

If you have any questions as usual, either give me, or Matt or Rob Stewart a call and we look forward to speaking with you next quarter.

Thank you.

Thanks everyone.

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