Acacia Research Corp (ACTG) 2012 Q4 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Acacia Research Fourth Quarter and Year-End Earnings Release Conference Call.

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

At the request of the Company, we will open 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 it's wholly and majority owned operating subsidiaries.

All intellectual property acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia

Research Corporation's wholly and majority owned operating subsidiaries.

With us today are Matt Vella, President of Acacia and Clayton Haynes, our Chief Financial Officer.

Today, I will give you a quick overview of the exceptional growth in our patent licensing business during 2012; then Matt Vella that I will respond to questions we were getting asked most frequently by analysts and shareholders; then Clayton Haynes, will provide you with an analysis of our financial results; and we will then open the call for questions.

Acacia had a record fourth quarter with $66.2 million in revenues compared to $20.8 million in the prior year.

The fourth quarter was the second highest revenue quarter in Company history.

Acacia also had record revenues for the year in 2012 as we generated $250.7 million in annual revenues compared to $184.7 million in the prior year, representing a 36% growth rate in revenues over the prior year.

This is the fourth consecutive year that Acacia has grown annual revenues by over 35%.

During 2012, Acacia generated licensing revenues from 68 different licensing programs, including 31 programs generating initial revenues.

We have now generated licensing revenues from 143 different licensing programs.

In 2012, Acacia earned a record $59.5 million in GAAP net income compared to $21.1 million in the prior year and a record $137.3 million in non-GAAP net income compared to $45 million in the prior year.

More importantly, looking forward, Acacia added a record 55 new patent portfolios in 2012, as we took control over a number of major new patent portfolios to drive future revenue growth.

Our current pipeline of new partnering opportunities in the technology sector is also at an all-time high.

As the market leader, Acacia continues to see an acceleration of partnering opportunities for adding new patent portfolios, which should lead to continued growth in licensing revenues.

In addition to the exceptional recent growth in our assets under management in the technology sector, we see the potential for a major expansion of our business as we move into the medical technology, automotive and energy sectors.

During 2012, Acacia invested $328.3 million in new patent portfolios, including the $150 million net purchase of ADAPTIX.

44 of our new portfolios in 2002 are the result of partnering with patent owners in sharing and licensing revenues and a 11 were outright acquisitions resulting from the patent owner wanting to sell their assets.

During the fourth quarter, we also utilized $26.7 million of our cash to repurchase 1,129,000 million shares of our common stock at an average price of $23.67.

Acacia finished 2012 with $311.3 million in cash, cash equivalents and short-term investments.

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

In 2012, we've set new records in all four metrics.

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

Unlike most companies, revenue not generated in the current quarter are not lost, but are generally pushed into subsequent quarters, building a revenue backlog.

Our focus is always on getting paid the right price.

I will now take a couple of minutes to address a few of the questions we're most frequently asked.

The first question is, what are Acacia's expectations for its expansion into the new sectors like medical technology, automotive and energy?

The answer is that we are already seeing a significant revenue contribution from our expansion into the medical technology sector as we generated over $41 million from that new sector in 2012.

Medical technology licensing grew from a little under 5% of revenues in 2011 to 16.5% of revenues in 2012.

And with the major new medical portfolios we acquired during the last year, we expect the percentage of our revenues generated from medical technology sector will continue to increase.

Acacia is at a much earlier stage in its expansion into the automotive and energy sectors, but early indications are that both of these sectors have the potential to become very meaningful contributors to our revenue growth.

We partnered on our first automotive portfolio last year and have already begun generating revenues and we just brought in our first couple of energy sector patent portfolios in the past few weeks.

We have an accelerating pipeline of new opportunities in the energy sector, which we think could lead to rapid growth for us in that sector in 2013.

The second question is, are you moving away from your original revenue-sharing partnering with patent owners to a strategy of buying patents?

The answer is no.

We continue to grow the business by partnering with patent owners and only buy patents if that is the only transaction available from the patent owner.

Of the 55 new patent portfolios we added in 2012, 44 where revenue partnering transactions and 11 were purchases.

Of the 44 revenue partnering transactions, 25 included upfront cash advances that are usually recouped by us from the initial licensing revenues and 19 did not have any upfront cash advances, which enables the patent owner to immediately start sharing in net revenues from our licensing activities.

We expect the vast majority of new portfolios we add in the future will continue to be revenue-partnering transactions with patent owners.

The third question is, what does the pipeline of potential new patent partnerships and acquisitions look like?

The answer is that we are seeing an unprecedented level of new opportunities.

The greatest increase in opportunities is from large, well-known companies, who are looking to generate money from their patent portfolios and who want to participate in the revenues we generate.

We are seeing these opportunities, because these large companies most often would prefer to work with a company like Acacia that has built a great track record in generating revenues as well capitalized, has the talent in place to monetize their assets and is willing to commit upfront capital.

The accelerating level of activity we are seeing indicates that we are still at a very early stage in the cycle of large companies deciding to generate money from their patents by partnering with companies like Acacia.

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

Thanks, Paul.

I'm going to continue with essentially answering questions that were frequently asked.

And one question that we see quite often involves the status of our structured licensing business.

As mentioned in previous calls, and I'll refer you to those transcripts for those calls for the details, but essentially structured deals are highly tailored deals that can vary according to which of our portfolios are impacted, when assertions can be brought and how assertions can be brought for example.

These are essentially an amalgam of many individual portfolio licensing agreements and also each establishes a mechanism that may govern future licensing transactions.

The status of this business is that we expect more such deals to occur this year.

Generally speaking, these deals occur at points in time when the critical pre-condition has been met.

That is at point in time when our subsidiaries have collectively asserted a large number of quality portfolios against a single prospective licensee.

When such a pre-condition is met with respect to a given prospective licensee, Acacia actively and consistently strives for structured settlements, but only on terms that benefit our shareholders.

Another related question that we often receive involves a number of structured agreements we can expect for this upcoming quarter.

And just like we cannot publicize revenue forecast on a quarter-to-quarter basis, we cannot forecast a number of structured agreements that are ready for execution for a given quarter.

As mentioned before, where we to publicize a number, prospective licensees, all of whom can and typically in fact access our quarterly calls such as this one, would easily figure out their role in estimates and use that information against us to force us into a less favorable agreement.

Still on the theme of structured agreements, we're also asked whether or not investors can expect renewals of structured agreements that we've struck in the past.

The same theme continues in terms of our response to this question, just as a structured deal is a function of the patent portfolios, we have available for assertion, renewals are also a function of the very same variable.

So, the answer to this question for a given prospective renewing licensee is that it all depends on what portfolios we have to assert against that licensee.

The portfolios available for assertion in turn is a function of several other variables, including the degree to which a prospective renewing licensee is using third-party patented technologies, the health of that licensing and other such related factors.

We also are being asked a lot of questions about our efforts to monetize the ADAPTIX portfolio covering 4G and LTE technologies.

As many of you know from our previous calls and public filings, we've already partially monetized the ADAPTIX portfolio early in 2012 and then again at the end of 2012 and to earn significant income in so doing by licensing Samsung, Microsoft and Nokia Siemens networks.

We're delighted with the status given several years are typically required before any significant returns are earned on portfolios of this size.

We have started earning our returns during the first year.

Turning to future monetization events for this portfolio, again, as mentioned in previous calls, we are encouraged by our current negotiations around the portfolio.

We cannot comment about negotiations with individual prospective licensees because of confidentiality obligations that we are under, but again in the aggregate, we are encouraged by our current negotiations with several parties.

Sticking with the theme of individual portfolio questions, we are also being asked a lot of questions around the status of our smartphone technologies portfolio, which involves the patents that come ultimately from PalmSource and Geoworks.

As many of you also know from our previous calls and public filings, we have already monetized the smartphone technologies' portfolio over the past few years and have done so well in advance of any impactful litigation events.

We're delighted with the status and particularly our ability to license many of the prospective licensees for this portfolio ahead of major litigation events.

The time for major litigation events, however, is not arriving, including the first trial, which is scheduled for April 8 of this year.

We cannot comment about negotiations with individual prospective licensees, but, again, as is the case with the ADAPTIX portfolio, we are generally happy with the status of negotiations and with the status of the litigation in general.

The final question I'll field today, which is a question we're also being asked quite often, regard the impact on our business of the current regulatory environment regarding non-practicing entities.

The environment, as we all understand it, includes the Americans Invent Act, which was passed some 18 months ago, and the recent announcement by the Department of Justice and the recent holding by the Department of Justice of informal hearings regarding whether or not specialized patent holding firms, we'll call them non-practicing entities for the purposes of this call, whether or not such entities are disrupting competition in high-tech markets.

Our view, put simply, is that we do not think that either aspect of the regulatory environment, the Americans Invent Act or the DOJ hearings will have or should have any net impact on our business.

The Americans Invent Act, first of all, certainly has increased the cost of enforcing patents, but we think that increase has especially impacted our less capitalized competitors and has thus resulted in less competition for our Company when it comes to acquiring rights and patents.

This decreased competition has more than offset the increased cost of enforcement.

We note that since the Americans Invent Act has been passed, we have had the greatest growth and patented intake, both qualitatively and quantitatively.

As with the Department of Justice hearings, they were focused on a number of issues that we think at worst only tangentially relate to our particular business.

For example, the hearings focused on possible abuses of fair, reasonable and non-discriminatory commitments by patent holders when they are engaged and stand as essential activities and are concurrently engaged in the process of obtaining patents.

We only just recently acquired our first major portfolio that has any significant FRAND commitments and we plan on treating our recently-acquired FRAND encumbered portfolio precisely the way we treat all our other portfolios, which is to say that we will license it on fair, reasonable and non-discriminatory terms and conditions.

There also is a focus in the hearings on strategic companies and non-practicing entities working in tandem to shift market share to those same strategic companies within particular industries, while they are seeking injunctions from third parties that are infringing the patents or prohibitive royalties from those third parties.

We also do not think that this concern applies to the licensing activities of our Company and its subsidiaries.

Acacia almost always enters into patent partnering agreements with patent within franchise companies or persons.

That is companies or persons that no longer have any significant market share in markets covered by the corresponding patents.

Acacia almost never sources patents from companies with material market shares and when it does, it seeks to license those patents at reasonable market rates that protect the consumers of these strategic companies.

With that, I'm going to turn the call over to Clayton Haynes, our CFO.

Thank you, Matt, and thank you to everyone joining us for today's fourth quarter and fiscal year-end 2012 earnings conference call.

I will provide a brief summary of our earnings release, focusing on key components of our results for the applicable periods beginning with the fourth quarter of 2012.

On a consolidated basis, revenues in the fourth quarter of 2012 increased to $66.3 million as compared to $20.8 million in the comparable prior-year quarter.

Fourth-quarter 2012 revenues included license fees from 27 new licensing agreements covering 27 of our technology licensing programs as compared to 37 new licensing agreements covering 26 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 a record $250.7 million as of December 31, 2012, as compared to $184.7 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 143 of our technology licensing programs as compared to 112 technology licensing programs as of the end of the comparable prior-year quarter.

License fee revenues continued 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 fourth quarter of 2012, we reported GAAP net income of $9.8 million or $0.20 per share versus a GAAP net loss of $4.2 million or $0.10 per diluted share for the comparable prior-year quarter.

Fourth-quarter 2012 non-GAAP net income, which excludes the impact of non-cash patent amortization, stock compensation and excess benefit related non-cash tax expense, was $41.8 million or $0.86 per diluted share as compared to breakeven 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 86% for the fourth quarter of 2012 as compared to 42% 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.

The increase in average margins in the fourth quarter of 2012 was due to a higher percentage of revenues generated in the fourth quarter of 2012, having no inventor royalty obligations and lower overall average inventor royalty and contingent legal fee rates for the portfolios generating revenues in the fourth quarter of 2012 as compared to the fourth quarter of 2011.

As a result inventor royalties expense decreased 41% and contingent legal fees expense decreased 2% in the fourth quarter of 2012 despite the 219% increase in related revenues quarter-over-quarter.

Net results for the fourth quarter of 2012 as compared to the comparable prior-year quarter also included the impact of a 91% or $7.9 million increase in other marketing, general and administrative expenses due primarily to a $4.6 million increase in non-cash stock-based compensation charges, resulting from an increase in the average grant date fair value of the restricted shares expensed and an increase in the number of shares expensed in the fourth quarter of 2012; a net increase in licensing, business development and engineering personnel cost since the end of the prior-year period; and an increase in variable performance based compensation costs.

Litigation and licensing expenses in the fourth quarter of 2012 increased $4.8 million over the prior-year quarter to $7 million, 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 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.

Fourth-quarter 2012 non-cash patent amortization charges increased $16.7 million, due primarily to $6.6 million of increased amortization expense related to new patent portfolios acquired since the end of the comparable prior-year period comprised primarily of non-cash patent amortization expense related to the patents acquired in connection with our acquisition of ADAPTIX, Inc.

in the first quarter of 2012 and other patent portfolios acquired in fiscal 2012.

The change also reflects a fourth-quarter 2012 increase in accelerated amortization related to recoupable upfront patent portfolio acquisition costs recovered totaling $10.1 million in the fourth quarter of 2012.

The effective tax rate for the fourth quarter of 2012 was approximately 37%.

This effective rate primarily reflects the calculation of tax expense for financial statement purposes without the excess tax benefits related to the vesting of equity-based incentive awards as required under U.S. GAAP and as discussed on previous conference calls.

However, the excess tax benefits associated with the vesting of equity-based incentive awards are available to offset taxable income on Acacia's consolidated tax returns, resulting in no federal cash taxes payable related to the tax expense reflected in the fourth quarter financial statements.

As such, the tax expense reflected in the fourth quarter of 2012 is primarily non-cash in nature.

From a cash flow perspective for the quarter, net cash inflows from operations for the fourth quarter of 2012 totaled $34.7 million versus net cash inflows of $16.5 million for the fourth quarter of 2011.

Fourth-quarter 2012 patent-related acquisition costs totaled $113.3 million as compared to $11.9 million in the prior-year quarter.

Next, I would like to provide a brief summary of the results for the full fiscal year ended December 31, 2012.

Fiscal-year 2012 revenues increased $66 million or 36% to a record $250.7 million as compared to $184.7 million, including other operating income in 2011.

2012 revenues included license fees from 138 new licensing agreements covering 68 of our technology licensing programs as compared to 125 new licensing agreements covering 56 of our technology licensing programs in 2011.

For fiscal 2012, we reported GAAP net income of $59.5 million or $1.24 per share versus GAAP net income of $21.1 million or $0.51 per diluted share for fiscal 2011.

Fiscal 2012 non-GAAP net income, which excludes certain non-cash items as described earlier, was $137.3 million or $2.86 per diluted share as compared to $45 million or $1.09 per diluted share for fiscal 2011.

Our average margin for 2012 was approximately 80% as compared to 50% for fiscal 2011.

Net results for fiscal 2012 as compared to fiscal 2011 also included the impact of a 52% or $18.4 million increase in other marketing, general and administrative expenses, due primarily to a $12.1 million increase in non-cash stock-based compensation charges, resulting from an increase in the average grant date fair value of restricted shares expensed and an increase in the number of restricted shares expense in 2012; an increase in variable performance-based compensation costs; and an increase in licensing, business development and engineering related personnel costs.

Litigation and licensing expenses in 2012 increased $8.6 million or 66% to $21.6 million due primarily to higher net levels of patent prosecution, litigation support and other litigation-related costs in 2012 related to programs that commenced as of the end of the prior-year period.

Fiscal-year 2012 non-cash patent amortization charges increased $29.3 million, due primarily to $19.9 million of increased amortization expense related to new patent portfolios acquired since the end of the prior year, comprised primarily again of non-cash patent amortization expense related to the patents acquired in connection with our acquisition of ADAPTIX.

The change also reflects a fiscal-year 2012 increase in accelerated amortization related to recoupable upfront patent portfolio costs recovered totaling $7.5 million.

Our annual effective tax rate for fiscal 2012 was 27%, remaining relatively flat year-over-year.

Fiscal 2012 tax expense primarily reflects $11.9 million of foreign taxes withheld on certain revenue arrangements with licensees in foreign jurisdictions and $13.2 million of non-cash tax expense related to the calculation of tax expense for financial statement purposes without the excess tax benefits related to equity-based awards as described earlier.

As of December 31, 2012, we have approximately $38 million of net operating losses available for use in future periods for tax return purposes.

From a cash flow perspective, fiscal 2012 net cash inflows from operations totaled $105 million versus net cash inflows from operations of $60.6 million for fiscal 2011.

Fiscal-year 2012 patent-related acquisition cost totaled $328.3 million, including the acquisition of ADAPTIX as compared to $14.7 million for fiscal 2011.

Looking forward for fiscal 2013, we expect MG&A, excluding non-cash stock-compensation charges, to be in the range of $28 million to $29 million.

For fiscal 2013, we expect patent-related litigation and licensing expenses to be between $18 million to $20 million.

Excluding the impact of any future 2013 grants of restricted stock, we expect non-cash stock-compensation charges to be approximately $25 million or $6 million per quarter.

As of the end of 2012, scheduled fiscal-year 2013 patent amortization expense is expected to be approximately $45.1 million or $11.2 million per quarter.

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

Thank you, Clayton.

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

(Operator Instructions) Tim Quillin, Stephens.

Yeah, could you give us a sense of how much revenue was generated from either patents that you own or partnerships where you put upfront capital and get first licensing dollars back?

We generally don't break out revenues by type of structured transaction that we do.

I mean the vast majority of our transaction are partnering.

Certainly, ADAPTIX, you know we own outright and we did a licensing transaction to Nokia Siemens in the quarter.

Other than that I would think virtually the vast majority of all the other revenues were ones in which we have partnering arrangements.

So, that will be the only portfolio that comes to mind with a significant transaction that we own outright.

Okay.

And on the other side of it, can you give us a sense of where and how you deploy capital in the quarter, so it was, I guess, over $100 million in patent acquisition costs, how much of that was outright acquisition?

I think you had at least one large one there and how much was upfront capital and partnerships?

The vast majority of all that capital is again upfront payments on partnering.

Our preferred model, going forward, we're finding it works very well we think for our shareholders is to utilize our capital, make some upfront payments that represent a fairly small amount of potential revenues that are expected and then we recoup those immediately from the first licensing activities and in fact get our money back and can re-use that capital again.

So, the vast majority of capital that we intend to apply will be in these advances, which we expect to recoup.

And our goal is to try to get that money back within 12 months and be able to reuse that capital again in other advances for new portfolios.

And it's a little hard to keep score just because we don't know precisely where you're putting capital to work, maybe from a broader perspective when do you foresee that cash from operations begins to exceed your patent acquisition cost?

Well, it could happen any given quarter, just depending on the timing.

Certainly, year-over-year, we're seeing a lot of new opportunities.

We expect our revenues to grow and obviously we expect to generate a lot of cash, particularly in the early licensing activities, where we are recouping our dollars.

Obviously, that provides a tremendous amount of cash flow coming back that we can re-utilize.

But certainly with $300 million-plus, we think we've got plenty of capital for the opportunities that we're looking at this year in the pipeline.

If we can -- it all comes down to how attractive the deals we can find.

If we can find opportunities, where we can advance 5% of the revenues and capture 60% at the backend and we think the risks are extremely low, we want to deploy as much capital as we can.

And then just finally, how do you -- so the Company has a lot of momentum, especially on the patent intake side, you're becoming the go-to partner on patent monetization efforts, this might be a decent time to take a swing at a major trial.

So how do you think about positioning as you approach the April 8th trial date?

We always have a financial number in mind.

We are a licensing company.

Litigation comes as part of the process, but, yeah, we always have a dollar value attached to what we think, we think we're the best in the business.

We know what the assets are worth and if the part is willing to pay it, we transact.

And if they are not close to transacting, then we will go to a trial.

I mean that's our answer across the board with any of these portfolios.

Again, as you're aware, many of these, we've had early licensees and we have to protect the integrity of those early licensees, particularly when it comes to a portfolio like the Palm, Geoworks.

There are many companies that stepped forward early, took licenses and we want to reward them and obviously we ratchet our rates as we go appropriately and so, yeah, that's where we are.

So, we leave that decision to the other side.

Generally, we always have an open dialog with everybody.

As Matt said, a fair and reasonable non-discriminatory pricing.

We're not shy about giving people our prices, letting them know where we stand and they can make the decision.

So how big is the bid/ask spread right now?

That we couldn't comment on.

Thank you.

Okay.

Mark Argento, Lake Street Capital.

Good afternoon, guys, congrats on a strong quarter.

Well, thank you and welcome back to being an analyst covering it.

I appreciate that.

Couple things, looking at the quarter, it looks like you did a couple what looked to be maybe a sizable transaction first on the orthopedic portfolio with Stryker, I believe.

What was unique there?

It looks like you didn't actually end up having to litigate to come to a licensing agreement.

Is that a trend -- is that kind of a one-off or is that something you think that's going to be more likely when you get a little deeper into the medical vertical?

I'll let Matt follow up a little bit.

My initial comment is we are seeing that across the board.

We believe in the aggregation model, the more high-quality patents we have and the more persistent we are and the larger we grow, it seems like the behavior is modifying on the other side, where smart companies are wanting to eliminate lots of friction cost and transact.

And so we think a growing amount of our business will be of that nature.

Sometimes we have to file the initial litigation to start the dialog, but more revenue is now coming from with no litigation or very early litigation.

Matt, do you want to comment on it?

Yes, I think this there is a two-part answer to the question from my perspective.

One is you are seeing the emergence of a more transaction-orientated and less litigation-orientated market between folks that need patent rights and folks that have patent rights.

And the hallmark of that market is where there is scale, diversity and quality, because then at that point, people can model out the pricing and the spread between the bid and the ask becomes more manageable.

And therefore you will have to litigate as much.

And the second part is and Paul mentioned this when he was talking about our attitude towards settling out matters that are close to trial, it's incumbent on us to be responsible about maintaining price discipline to protect early licensees.

And we think the more we do that, the more early license deals we'll have in subsequent rounds with everybody, not just the folks whose pricing we protected by essentially being respectful of the pricing process as we approach a litigation.

Good, that's helpful.

And then, shifting gears a little bit and you guys have brought in, like you said 55 portfolios and I don't have the totals against the different vertical, but clearly energy now, healthcare of course, then the traditional areas as well, how are you guys managing all these assets?

And have you had to staff up, do you need to bring more people in, are you figuring out ways to do it, outsource, maybe you could talk a little bit about organizationally how you are managing the business?

Yeah, we have brought in some leaders in these new sectors.

In the energy sector, we brought in John Schneider, who is out of Exxon IP department and out of Fulbright & Jaworski, the legal group in energy.

And then we took some of our tech people that added and surround those teams.

Bob Rauker, who came to us with major medical tech experience, has built his internal team and is continuing to do that.

We do expect, given the growth we see in these new sectors, we will add some top people there.

We think it's tremendous leverage for our shareholders.

Each of these new sectors can become very large standalone businesses.

And, yeah, we've started with small core groups of people, three or four people, which we'll probably double over the course of this year to take advantage of that, because we can see -- not only are we growing the business in the tech sector, but if you start growing at these three additional sectors, we could -- we can grow this -- can take this Company to the next level.

Matt, do you have more comments?

No, I think the only other thing I'd add is that on tech, we'll learn to do things more efficiently as well.

So I wouldn't expect net-net, a ton of people being added, but you certainly will see not only a net increase in the people we're adding, but a shift in terms of what the focus areas are going to be, because we're not going to be a company that is almost exclusively focused on tech.

Yeah, we also have the core teams of engineers and contracts people, all that is in place.

So the only people we will add really are the business development side, on the partnering deals.

So, you're talking about really a handful of people in each of these new sectors to drive potentially some very large revenue growth.

Great.

Last question on the structured deals, I think you're coming up on the three-year anniversary of your first kind of a more structured transaction.

Is there a mechanism typically within these structured contracts that you have to sit down in a certain period of time or is it basically just contracts up, if you would renegotiate, what's kind of typical there?

There is nothing typical, just different folks want different things and the market presents itself differently and by the market, I mean the market on patent supply.

So, companies that essentially are -- the companies' profiles can change over time and the patent market around those companies can change over time.

So, the reality, again, and I refer you back to my answer when we talked about structured deals, is that it's primarily a function of what we've picked up.

That's what's going to drive regardless of whether or not there is a mechanism that's what's really at play here.

Well, also what you're seeing, Mark, is we have done some significant transactions with parties during the structured period before even getting to a renewal.

So, it really comes down to the quality of the assets we have and their need for the licenses.

Yes, and actually going -- picking up off that point, essentially that's another -- it's another variable, right.

It's what the dialog looking like during these so-called structured periods because even that's not uniform.

These are all very highly customized and very different.

Thank you.

Thanks, Mark.

Paul Coster, JPMorgan.

Thank you.

My question, Matt, I know you won't tell us very much about the structured deals, but did they increase in numbers in the pipeline, are they expanding in size, what is the average size of these term deals, is there anything you can give us by way of this directional sort of content of your pipeline?

I think the best I can do is to tie it to our business in general, meaning you follow the intake, right, and from the intake, we have a -- we think, just based on the intake, we can at least have a semblance of an answer to the question you've asked.

Now, what does that mean when you break it down?

Well, we've diversified.

So, now, we are in medical devices.

We're moving into energy.

So, you're going to start seeing structures I think potentially around those areas going forward.

You also know that the quality of our intakes increased and the number of patents we're bringing in has increased.

So we have a quality, quantity increase and I've mentioned before in my stock answers to the structured licensing business, when you get to a certain threshold number of patents and portfolio in front of someone, a structured transaction is often the smartest way to go forward and obviously the third thing, which is the structures, if anything, I'm going to get even more non-uniform, even more diversified.

As you start to put more assets in front of someone and as you start to become a more meaningful issue for a company to deal with, you start finding more customized responses.

So, overall then just to recap, our business is growing and so I expect ultimately the volume of structures to grow over a period of time, because it is more diversified, so we expect more diversity and those things.

And our business is getting more complex.

So you're going to can get even more non-uniformity, even more diversity, in terms of the way these things come up.

Yes, that all makes good sense.

Is it fair to say that there are a dozen term deals in excess of -- with multiples of $20 million or are there $50 million?

I mean which is the closer to -- the right answer in terms of that pipeline?

It all depends on your timeline, right.

I mean essentially depends on the timeline and depends on, again, the number of sectors you're talking about, but look overall --

But we've also -- what's happening now is that we've got certain situations where companies, where there maybe seven or eight or ten portfolios we have and maybe they want to sell all three or four of the higher profiled ones, a couple of them we don't agree on terms yet and we let them -- we mutually agree to let those going forward, but it doesn't block our ability to transact on everything else.

So, I think what we're seeing is a greater degree of receptivity of licensees in terms of having that flexibility and look they're doing it out of their own self-interest.

If we have certain cases against them that they think they have a lot of liability, they want to get those settled.

If there are other smaller dollar cases, where the transaction and legal costs as a percentage of the overall payment is high, they want to transact on those and maybe there is a couple of ones we don't agree yet.

We'll wait for subsequent litigation events before we agree.

So, as Matt said, what we're seeing is highly customized, we're willing to highly customize for our customers the licensees how they want to transact and ultimately they are the ones that are writing the checks.

So we're open and what we're doing is being responsive to their internal needs of how they want to do structures and we're flexible in doing that with them.

And overall, the degree of non-uniformity, getting to the point, where I'm not sure the term structured deals have much meaning.

If you take a typical hypothetical profile, where one company wants -- it's got 11 matters in front of you, wants to settle three litigate on eight, another company might have six matters, want to sell them all out, another one might want to go with different ratios.

I mean at some point, I mean unless, the more rigid the definition, the smaller the number, but at some point, these things are getting so highly customized that the term itself is starting to lose meaning at least in our eyes.

yeah, okay, that's fine.

And my last question is kind of abstract question as well, is there a risk this business peaks in the next two to three years?

Well, we never know that, two to three years from now, it's hard to see, but certainly, right now, we see a significant acceleration in our tech business and of course we're just at the infancy on both the medical tech, the energy and the automotive, where we virtually see no competition.

When we go out to talk to people with assets, doesn't like to talking to anybody else.

And with our track record across the board, we certainly -- what we see now is tremendous growth in all four of these new sectors, where it is two or three years from now, I don't know, maybe Matt can --

I mean, you can just look at the macro factors, right.

Technology continues to be more and more disaggregated in terms of its creation and we're starting to see a lot of tech markets continue to coagulate among small numbers of players that are relative to the number of folks actually creating technology.

We're starting to see and we're still seeing not as much competition as perhaps we've seen historically, especially given the mirage of talent in capital and information that we have.

So all the macro factors are sort of confirming what we're seeing in the trenches, which is an unprecedented level of deal flow and that's really all we can see right now.

Very good, thank you.

Thank you, Paul.

Matthew Hoffman, Cowen & Company.

Thanks and nice job down the stretch in 2012, gentlemen.

So, Matt, first question for you, there is the central patent from the ADAPTIX portfolio.

So, it appears as though you signed three deals now on that portfolio.

Do you view those three as setting FRAND precedent for the rest majors in the wireless industry?

And then, at high level, how do you expect to handle smaller players who obviously having the same type of exposure as the majors?

Thanks.

Well, in the case of ADAPTIX, the answer to your first question is simply really no.

I mean, again, remember ADAPTIX as we mentioned on previous calls, the folks that owned the ADAPTIX patent, the folks that invented the ADAPTIX technology, the folks that ran that company, they never where offered to see at the table at these standard setting organizations.

FRAND commitments arise by contract, because the quid pro quo usually is, if I'm going to get to see the standard setting body like let's say LTE and I'm going to therefore get to either explicitly or implicitly impact the direction, the technical direction that the standard takes, I should have to put my patents up in terms of licensing, in terms of FRAND basis.

Well, ADAPTIX was never given that opportunity and so technically FRAND commitments don't apply to that portfolio.

Having said that, at Acacia, right, we are in the business of licensing and enforcing to achieve licensing outcomes.

So we don't plan on doing anything ridiculously crazy about it, but technically, no we are not under a FRAND obligation.

In terms of how you handle companies with small exposure, well, you just simply set you're pricing according to a rate and you multiply it by the royalty base.

So a small company -- cutting a deal with a small company is not going to be problematic for us in terms of the hypothetical what we do actually have a FRAND obligation or in terms of our ongoing policy of being fair to early licensee and gradually ratcheting up rates, because it's a function of the number of -- the amount of exposure, small company pays less, but its per unit is going to be a function of other variables.

Right, that's a good color.

So, MG&A, shifting gears to Clayton, MG&A up year-on-year and quarter-on-quarter in the fourth quarter, how much of that is a function of the increased activity level versus some of the other factors that you discussed in your discussion of the outlook for OpEx and then what's the outlook there?

Thanks.

Sure, sure, with respect to the increase in MG&A as mentioned that is primarily comprised of increases in non-cash stock compensation, the other components being increases in licensing, engineering and biz dev related personnel costs and that sort of goes to what Matt and Paul were talking about earlier as far as the increase in resources associated with the growth of the business.

The other component of the increases for both the full year and the quarterly results relates to an increase in the variable performance costs and of course that's related to the increase in performance for those periods as well.

And so to the extent that we continue to build the business in areas that Paul and Matt have discussed, we would expect to see continued costs in those areas, but the biggest one being variable associated with the overall performance of the Company.

Paul, do you have anything you want to --?

No, I think the majority of it is a non-cash --

Yeah, the majority of it is non-cash stock compensation.

Right.

So, basically, if we look at previous quarters, we should look at previous quarters' levels of MG&A for the outlook for 1Q, I'm not trying to back into sort of revenue forecast here and activity forecast for the upcoming quarters, but in time, just trying to structure out if that's correct?

Yeah, I mean I'd say as far as Q1 is concerned, we would expect MG&A levels to be relatively consistent with what we've seen in Q4 2012.

If I could, last question for you, Paul, good to see you put some of the balance sheet cash to work in the quarter, can you add some color on the -- I think its the $113 million quick calculation on cash acquisitions or acquisitions, are those -- was the entirety of that $113 million was it entirely spent on now fully owned patent portfolios or owned patent portfolios?

Thanks.

No, actually, virtually all of it was upfront dollars, largely recoupable from first dollars of licensing revenues that will flow back to us, in other words advances.

There wasn't any significant outlay for any outright purchases in the fourth quarter.

It was all advances, whereas where we think the majority of our capital was used, because again with the goal of getting that back in 12 months, you can reuse the same capital and attract a tremendous level of deal flow and growth for the Company.

Great, thank you.

Thank you.

Matt Bendixen, Craig-Hallum Capital.

Hi, guys.

Hi, Matt.

Hi, given the strong cash balance, do you consider at all moving away from contingency model and absorbing some of the upfront legal cost kind of increased IRR on the backend?

Well, the short answer is yes and the slightly longer answer is, there is a couple of things that are going to pull us away from that gradually.

One is we're doing a lot of early deals and so we're essentially entering into agreements that have to accommodate that reality.

I mean, if the firm takes on a case and suddenly dollars start materializing, right, I think both sides understand that you are not going to be paying out typical contingency rates and that has been our history and we expect that to continue.

I think the other aspect is we're starting to enforce overseas and in different jurisdictions, you just don't have the regulatory regime in terms of how lawyers are regulating.

You don't have the customs, the customary practices to go with the same kind of contingency arrangements we've done before.

Now, having said all of that, we're going to essentially vary the mix very gradually.

Our roots are, in terms of spreading the risk, very real, we are respectful of those roots and the changes are going to have them gradually as those two factors I mentioned, one, early dollars coming in more readily and two a little bit more foreign enforcement, as those kick in, you will start seeing a shift away, but it's not going to be dramatic or sudden.

Yes, we can tell.

They still are the preferred thing.

We have a lot of law firms and partners that we have partnered with in the past and we want to continue using them.

It's a great model for us and I'll say what happens is with the earlier and earlier licensing, as Acacia grows and as the settlements come earlier, we're able to negotiate terms that are generally better than we did when we first started.

And the key thing to understand is that the firms have been benefiting as well.

In some sense, one way to think about it is the size of the pie is increasing and when the size of the pie increases, then the delivery time of the pie decreases, you start adjusting shares a little bit and in the end both side, the law firms and Acacia win.

Yeah, that's helpful.

And then just lastly, I know last year there was a big trend and purchasing IP for defensive purposes, have you seen that motivation kind of decline for the most part?

And I guess some of the market neutralized itself a bit and if so, are those defensive buyers kind of [certain toys] the idea of maybe monetizing those portfolios?

I mean, if I have to answer the question and really restricted to just what was happening in Q4 last year in certain sectors, I could just give you a straight yes, but really it's much more complex than that, meaning these markets, especially when they are being driven by defensive needs, truly fluctuate and they fluctuate according to what's going on with the strategics out there, right, the operating companies.

So I just think that trends one, there is no one trend that attaches to the sector as a whole.

You see different trends attaching to different technologies, different patent areas, right.

What's going on in wireless might be very different than what is going on in energy, for example.

And two, as a function of time, those markets are changing all the time, just depending on who is settling with whom.

I mean, in smartphones alone, there has been a number of settlements that I think have decreased some of that fraud, but there could be other fights flaring up at any moment and suddenly you will see an increase in that fraud.

So, I think the answer is it's very complex and we don't read too much into those trends other than knowing when to stay clear of markets where the asset acquisitions have gone a little bit high, the pricing I should say.

Great.

Thanks, guys.

Thank you.

Tim Quillin, Stephens Corp.

Hey, thank you for taking my follow-up question.

I appreciated the breakdown in your press release of the patent portfolios that came in the door between partnering with upfront cash, partnering with no upfront cash and outright purchases.

Do you have a similar breakdown for the fourth quarter?

We do not.

We just -- we would probably do it on an annualized basis.

It depends on what we don't want to do is kind of violate confidentiality agreements and so we don't want to create a precedent in a particular quarter, where there may not be enough where you can kind of get blended out.

So we are doing it on an annual basis.

If we have enough transactions in the quarter that we can protect the confidentiality, we have no resistance to doing that, but we have to be mindful of those agreements.

So, where we can we will.

Okay.

I'm just trying to think about, so the $100 million in patent acquisition cost in the quarter, should we think -- so there's nine new patent portfolio, should we divide the $113 million by nine and it's kind of an average at $12.5 million of capital outlay per portfolio?

No.

No, I wouldn't do that.

I would assume it was fairly concentrated in a smaller number of transactions.

Okay, okay.

And can you help us think about patent acquisitions in 2013 or kind of what a normal level of patent acquisitions might be?

Well, given our pipeline right now, we are obviously looking at a number of additional very significant transactions where -- when we say that, we mean very high revenue potential for the patent portfolios.

Certainly, our pipeline is at the highest level, unprecedented level right now.

So, we plan to continue to deploy significant levels of capital, where we think for our shareholders, we can advance capital that represents a very small percentage of total revenues that we think is very low risk and get that capital back from first dollars and reuse them.

And that's the way to really grow this business to the next level.

So, we plan on being very aggressive with the right opportunities.

And I think that maybe is that the ultimate point is I think in 2012 at least the cash from operations just from the cash flow statement was a little over $100 million, you spent $330 million in capital, so you burn cash in 2012, so I think what you are, I hope what you are saying is that there's going to be an accelerated pace that --

Sure, if you look at, that's the first year we put out that kind of capital.

So, obviously, (inaudible) our job right, we are going to adjusting some cash flow off of that capital and get it back.

Right, right, right.

And a lot of it was in the fourth quarter, so a lot of it's only been deployed for a few weeks.

Yeah, that's fair.

And Clayton, do you have a guess for me on GAAP tax rate for 2013?

Sure, I would expect the GAAP tax rate to continue to be in the 38% to 40% range just as based upon the discussion earlier regarding the requirements for calculating of GAAP taxes.

Okay, great.

Well, thank you and nice quarter.

Okay, thanks, again, Tim.

This will conclude the question-and-answer session.

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

Thank you, operator.

Well, in summary, we'd just like to say as you can probably read, we're very enthusiastic about the prospects for the growth of our business right now.

Not only is our tech business growing at the highest level we've ever had, but obviously we're seeing great potential in these new sectors, particularly, medical technology and particularly in the energy sector and we are very fortunate that we've got an established track record.

We've got plenty of capital.

We've got some really good people and our role in transacting in this market, we think is going to increase.

We're going to be doing more transactions and probably less going to trials in general, which improves margins and improves the velocity of our use of capital, which does great things for our shareholders.

So we're very enthused.

I'm looking forward to a great 2013 and I appreciate all the new people, who bought stock, I know we have a lot of new owners this quarter and we appreciate those people and the ones that added to their positions and hopefully, we can reward them during 2013.

Look forward to talking to you on our next call.

If you have any questions, give me, Matt or Rob Stewart a call.

Thank you.

Thank you.

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