Acacia Research Corp (ACTG) 2013 Q1 法說會逐字稿

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

At this time, I would like to 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 its wholly and majority owned operating subsidiaries.

All intellectual property acquisitions, developments, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority owned operating subsidiaries.

With me today are Matt Vella, President of Acacia; Clayton Haynes, our Chief Financial Officer; and Ed Treska, our General Counsel.

Today I will give you 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 by 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 continues to build its market leadership position in patent licensing.

Acacia generated the second-highest quarterly revenues in Company history in the first quarter.

Acacia generated revenues of $76.9 million in the first quarter from 29 new revenue agreements which covered 31 different licensing programs, including 11 new licensing programs generating initial revenue.

Acacia increased its cash and investments position to $327 million at the end of the quarter, and has collected $30 million in cash from outstanding receivables from first quarter licensees, and expects to receive an additional $11 million of outstanding receivables for first quarter licensees by the end of April.

During the first quarter, Acacia acquired control of nine new patent portfolios, and invested a total of $4 million in upfront advances and payments.

In the first quarter, Acacia expanded its patent licensing business into the energy sector by acquiring control of our first patent portfolios in that sector.

One of the portfolios relates to polymer-based drilling fluids used in oil and gas well drilling, and the other relates to solid separation technology used in oil and gas wells.

We have a very rich pipeline of additional portfolios we are evaluating in the energy sector, and early indications are that the energy sector could be an area of substantial growth for our Company.

Acacia also continued to expand its business into the medical technology sector by adding a patent portfolio relating to vascular device technology.

Acacia also added six new portfolios in the tech sector, including patents related to broadband technology such as DSL modems and voice-over-internet protocol phones, fiber optic network architectures, and display technologies used in smartphones, tablets, computers, HDD feeds, and other devices, which was transferred to us by Rambus.

We are very pleased to have been selected by Rambus for the licensing of this important portfolio.

As the market leader, Acacia continues to see an acceleration in opportunities for partnering with companies in the tech, energy, and medical tech sectors for the licensing of their patented technologies.

This should lead to continued growth in licensing revenues.

We are expanding our partnering activity in international markets as well, and expect that that initiative will also contribute significantly to revenue growth.

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

Last year, Acacia once again set new records in all four of its key metrics as we grow our revenues by over 35% for the fourth consecutive year, and we are obviously off to a great start again this year.

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 in the current quarter are not lost, but most likely are just pushed into a subsequent quarter.

Our focus is on getting paid the right price for the licensing of our patents.

I would now like to respond to questions we are asked most recently by analysts and shareholders.

The first question we are usually asked is, what is your visibility for future revenue growth?

Our answer is that historically there has been a very high correlation between our growth in new assets under management and our subsequent revenue growth, with a 12- to 18-month like to begin generating revenues.

While our quarterly numbers are uneven, we have always seen very significant and consistent growth in annual revenues based on the previous 18 months of growth in new assets under management.

Because we have added a record number of new assets during the past 18 months, we expect to generate continued revenue growth.

In addition, a number of the new portfolios we now have under management in the technology, medical technology, and automotive sectors have very significant revenue opportunities, based on the depth and breadth of the patent coverage and the size of the markets these technologies address.

Our focus over the past 18 months is increasingly on gaining assets under management, which have the potential for producing very significant revenues.

The revenue opportunities these assets represent is now beginning to be realized in the higher dollar amounts of revenues we generate from certain licensees.

As we continue to add these high revenue potential assets which have diverse licensing opportunities, our business should continue to mature, and our revenue visibility should continue to improve.

The second question we get asked is, are you changing your business model from partnering with patent owners to buying patents?

The answer is no.

We continue to partner on approximately 90% of new assets under management, which is our historical average, and purchase about 10% when the patent owner does not want to wait for the revenue share.

We are, however, deploying more capital in the form of upfront advances, which we recapture from the initial licensing revenues we generate.

Our strong balance sheet is giving us the ability to utilize these upfront advances to continue to shift our Company's focus from lower revenue high risk assets to higher revenue low risk assets.

We think this is the right strategy for growing the Company, and increasing shareholder value.

The last question I will address is regarding the changes in Acacia's free cash flow over the past three years.

Some investors have expressed concern that we have gone from positive free cash flow generation to a negative free cash flow in 2012.

In responding, I think it's important to distinguish the free cash flows provided by Acacia's business operating activities to the cash flows after acquisition cost of new assets.

Acacia has continued to generate consistent and growing net cash flows from its operating activities, including 2012, as we generated $45 million in net cash in 2010, $61 million in 2011, and $105 million in 2012.

The change in free cash flows after new investments over the past three years is simply a function of the amount of new asset investments we made each year, which are $8 million in 2010, $15 million in 2011, and $328 million in 2012.

We anticipate that our cash -- net cash provided by operating activities should be favorably impacted in the future by the significant investments we made in new assets during 2012, and this should be viewed as a positive, not a negative.

In the first quarter of 2013, we generated $17 million in net cash from operating activities and invested $4 million in new assets.

Acacia has a history of being very disciplined when investing shareholder capital, and has a record of generating exceptional annualized returns from the investments we have made in patent assets that have been under management long enough to generate a majority of the expected return.

Acacia's extensive experience in completing due diligence on thousands of patent portfolios, now across multiple industry sectors, gives us great insight into the risk factors associated with the enforcement of prospective patent portfolios, and similarly, Acacia's experience in completing over 1200 licensing transactions gives us a 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.

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

Thanks, Paul.

We also get a lot of questions regarding potential changes in patent law and how it may impact our Business.

As we've mentioned before, the answer to these questions is that we carefully monitor changes in both the legislation and the judicial front, and we have been doing so over the past six years.

We have modified our business execution in light of those changes, and through all of those changes we have grown annual revenues from $35 million to over $250 million.

While many of investors have been concerned that these changes would have a negative impact on our Company's business, some of these changes have most likely driven more patent owners to want to partner with us, and have had a positive impact on our business.

The more complex and difficult it is to monetize patent assets, the more valuable our expertise becomes for patent owners.

Of course, we will continue to monitor potential changes, and we will adapt if any changes are made that require adaptation.

The bottom line, however, as of right now, is that we are not seeing anything coming out of Washington that is a material threat to Acacia's business.

Okay.

Thank you, Matt.

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

Thank you, Paul.

And thank you to everyone joining us for today's first quarter 2013 earnings conference call.

On a consolidated basis, revenues in the first quarter of 2013 totaled $76.9 million, as compared to $99 million in the comparable prior-year quarter.

First quarter 2013 revenues included license fees from 29 new licensing agreements covering 31 of our technology licensing programs, as compared to 40 new licensing agreements covering 32 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 $228.5 million as of March 31, 2013, as compared to $222.6 million as of the end of the comparable prior-year quarter.

On a consolidated basis, our operating subsidiaries have generated revenues from 154 of our technology licensing programs, as compared to 118 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 first quarter of 2013, we reported GAAP net income of $5.1 million, or $0.11 per share, versus GAAP net income of $49.9 million, or $1.09 per share, for the comparable prior-year quarter.

First quarter 2013 non-GAAP net income, which excludes the impact of non-cash patent amortization, stock compensation, and excess benefit related non-cash tax expense, was $22.7 million, or $0.47 per share, as compared to $67.8 million, or $1.48 per 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 56% for the first quarter of 2013, as compared to 89% for the comparable prior-year quarter.

Average margins continue to fluctuate period-to-period, based on the mix of patent portfolios, with varying economic terms and characteristics that generate revenues each period, and specifically based on the related economics associated with the underlying patent acquisition agreements and contingent legal fee arrangements, if any.

The decrease in average margins in the first quarter 2013 as compared to the first quarter of 2012, was due to a significantly higher percentage of revenues generated in the first quarter 2012 having no inventor royalty obligations or contingent legal fee obligations, as compared to the revenues generated in the first quarter of 2013.

As a result, inventor royalties expense increased to $18.5 million from $7.6 million in the prior-year quarter, and contingent legal fee expenses increased to $15 million from $3.7 million in the prior-year quarter, despite the 22% decrease in related revenues for the same periods.

Marketing, general, and administrative expenses remained relatively flat quarter-over-quarter.

Litigation and licensing expenses in the first quarter of 2013 increased $6.3 million over the prior-year quarter to $9.6 million, due primarily to higher net levels of patent portfolio litigation and enforcement expenses incurred in the first quarter of 2013, including litigation support, patent prosecution, 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 litigation and licensing expenses to continue to fluctuate period to period in connection with our current and future patent acquisition, development, licensing, and enforcement activities.

First quarter 2013 non-cash patent amortization charges increased $6.6 million, due primarily to $5.9 million of scheduled amortization expense related to new patent portfolios acquired since the end of the comparable prior-year quarter.

Our estimated annual effective tax rate was approximately 39% for the first quarter of 2013, as compared to an effective tax rate of 23% for the comparable prior-year quarter.

During the prior-year comparable quarter, the effective tax rate was impacted by $10.2 million of tax benefits recognized, resulting from the release of valuation allowance on the majority of our net deferred tax assets in the period, resulting in the lower effective tax rate for the first quarter of 2012.

Non-cash tax expense calculated without the excess tax benefits related to the vesting of equity-based incentive awards, which are credited to equity, not taxes payable, totalled approximately $709,000 for the first quarter of 2013, as compared to $7.6 million for the comparable prior-year quarter.

As of March 31, 2013, taxes paid or payable totaled approximately $3.4 million, primarily comprised of $2.2 million of foreign withholding taxes withheld by the applicable foreign tax authority on revenue agreements executed with third-party licensees domiciled in certain foreign jurisdictions, and federal and other state-related taxes payable.

The 2013 tax provision contemplates utilization of the $2.2 million in foreign taxes withheld in the first quarter of 2013 as a credit against income tax expense, calculated for financial statement purposes.

As of the end of the first quarter of 2013, we estimate that we have approximately $25 million of net operating loss carry forward, and $20 million of foreign tax credits available for use in future periods.

From a cash flow perspective, net cash inflows from operations for the first quarter of 2013 totaled $16.8 million, versus net cash inflows of $49 million for the first quarter of 2012.

First-quarter 2013 patent-related acquisition costs totaled $4 million, as compared to $152.1 million in the prior-year quarter.

We ended the first quarter of 2013 with $327.4 million of cash and investments, up from $311.3 million as of December 31, 2012.

As Paul mentioned, the majority of accounts receivable from licensees at March 31, 2013, totaling $45 million, has been collected or is scheduled to be received from licensees by the end of April.

Looking forward, for fiscal 2013 we expect MG&A, excluding non-cash stock compensation charges to be in the range of $29 million to $30 million, relatively consistent with fiscal 2012.

For fiscal 2013, we expect patent-related litigation and licensing expenses to be in the range of $18 million to $20 million, depending on net patent portfolio litigation and prosecution activity occurring throughout the remainder of the fiscal year.

Based on current outstanding grants of restricted stock, we expect non-cash stock competition charges for 2013 to be approximately $23.5 million, or $6 million per quarter.

Excluding future patent portfolio acquisitions, scheduled fiscal year 2013 patent amortization expense is expected to be approximately $46.2 million, or $11.5 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.

Thank you, Clayton.

Operator, you can now open the call for questions.

Thank you.

Thank you, sir.

The question-and-answer session will begin.

(Operator Instructions)

Our first question comes from the line of Matthew Hoffman of Cowen.

Thanks, and congrats on a good quarter, especially the revenue.

Clayton, it sounds like the $18 million to $20 million for litigation and licensing is still in play for the year, despite having a big number here for the first quarter.

Can you step us through what was going on in a little bit more detail in terms of what the puts and takes were for that number in the first quarter?

And is there any correlation between having a lot of the litigation going so close to trial?

Thanks.

Sure.

One of the elements were, there was litigation costs prior to the settlements that we did on the smartphone.

We had three companies scheduled to go to trial.

So obviously there was a lot of activity; and probably was helpful in getting those companies to make a decision to settle.

So yes, that was a one-time event that was in the first quarter.

Great.

All right.

So as you think about the ACCESS portfolio, things like Listen and non-Chinese OEMs -- the big ones, anyway -- are now licensed.

As we look forward to some of the med tech and auto portfolios, can they replace ACCESS in terms of the size of the contribution to the top line?

Well, we have far more than that.

I mean, we have, if you just look in the 4G LTE smartphone market, the Nokia-Siemens handset portfolio, the Adeptix portfolio.

We have several in that category -- not to say that the expansion into med tech and automotive and energy sectors won't contribute to growth, but we feel we have exceptionally strong revenue opportunities in that same sector on the telecommunications right now.

And ACCESS is one that there's -- continually we are now looking at foreign markets.

There is coverage there, and we will expand our licensing efforts into foreign markets as well.

And you correctly point out that both Huawei and ZTE are currently in litigation on that portfolio.

Great; and last question for me, and then I'll pass it on to the next guy.

So it seems like there's a pretty good correlation there between the closer you get to trial of late and revenue.

Can you update us on trial activity from the 2Q, and trials you may be seeking meaningful damages on?

What's going on?

What other trials we should be looking at here in 2Q?

Thanks

Well, I don't want to misguide you; because if you put it in context, if you think about the licensing of the smartphone patents, the vast majority of the licensing occurred over the last two years, far prior to litigation.

There are only really three companies towards the end, but obviously as you're aware, larger companies like Microsoft and Samsung settled quite some time ago.

So I would not draw that comparison or use that analysis.

We consistently seem to be able to get licenses done at price points.

There's always seem to be companies that want to wait longer than other companies, but we don't think that's really going to impact the timing of our revenues.

Great.

It still comes down to the portfolios growth for you?

Well, we think it comes down to the strength of the portfolios.

Many of these new portfolios that have such depth of patent families and breadth of coverage, and obviously come from companies that are very well recognized as leaders in those fields, generally enable us to get into licensing discussions much earlier.

If you've got a portfolio with one or two patents and two or three claims, those tend to go through extended litigation before you can get to settlement.

One of the great benefits of us being able to move into what we think are much higher-revenue low-risk assets is also, it improves times to money, because more companies are going to respond and want to license on a portfolio that they certainly don't want to take on in the litigation challenge.

Thank you.

Mark Argento, Lake Street Capital.

Good afternoon, guys.

Question about how quickly you are turning the capital that you deployed.

I know early on last year, a big investment at Adaptix, and clearly you've done some license deals there.

You talk a little bit about some of the deals in which you put upfront capital -- kind of was a prepaid royalty.

How quickly are you recouping your capital?

Are you able to get -- six months, three months -- is there any kind of metric, can we think about our understanding return on your invested capital in some of these portfolios?

Any thoughts around that?

Sure.

I mean, we've got data, obviously.

At Adaptix, we invested $150 million, and we've earned back roughly two-thirds of that in the first three licensees over a period of about 14 months, which is pretty much on target, and hopefully we will be in the money on that portfolio this year, and it's one that has revenue opportunities going out for the next decade.

So that's how you earn exceptional ROIs that we've done historically with invested capital.

The orthopedic portfolio, we got back the vast majority of our money on the first license with one company.

Other portfolios that we've acquired that were smaller significant ones -- one we just did recently.

We bought six portfolios in one transaction last summer, and we earned 0.5 of our money back on one license for one of the portfolios.

It's an area that we get a lot of questions on, obviously -- our ability to deploy capital.

It's probably -- makes more sense to go back and look at revenues that we've generated from portfolios that have had time to be fully licensed.

We've done that analysis.

And just to give you an idea, we went back and looked at our investments from 2005 to 2010.

Those are in portfolios that have had the opportunity to get a majority of the licensing done.

And over a broad number of portfolios, we have averaged annualized 44% annualized returns.

So we think we're pretty good at deploying capital, and we think we're getting actually better at deploying capital than we were in the early days.

One of the great things now is, is we can look at opportunities in multiple sectors.

We are not confined to making our decisions of where to deploy capital in one sector.

In some of these other sectors, we're kind of the only player.

We think we're getting a lot of great looks to deploy investor capital, and we will continue to earn very high returns.

And certainly the early indications on the substantial investments we made in 2012 are very much on track, and we are very pleased at where we are.

That's very helpful.

And in terms of the seasonality around capital deployment, I know you currently deployed a lot of capital in '12.

In particular, in Q4, I think you put up over $110 million, or put out over $100 million; $113 million, I believe was the number.

This quarter, it looks like $4 million went out.

Is it an end-of-year flush, where guys are looking to get things off their balance sheet and move forward deals?

Or how should we think about -- any seasonality around capital deployment?

Yes, there's no seasonality; and the vast majority -- and another misconception -- and the reason we understand, but a lot of people think we've moved from partnering to buying -- is we did that one very large transaction with Adaptix.

That was unique, and probably we would not be doing more deals like that.

That was 15 patent families in a very major category where we had a very good indication we could do early licensees and de- risk the investment.

The balance of all the other investments we have made substantially are all partnering deals.

They're advances, and basically we are advancing what we think is a very small amount of the revenue potential, and we are in control of recapturing our advances by doing early licenses, and then getting rights to own -- half the portfolio.

If you think about it, what we've really done is translate a very good business model into an even better business model.

Early on, we were partnering with mostly disenfranchised patent owners who were willing to give us 50% of the net revenue split because they really did not have an alternative.

But those types of assets frequently were higher-risk because they were more narrow portfolios with a handful of patents that could be challenged, and generally did not have as much coverage.

Portfolios like Adaptix, like Nokia-Siemens, like some of our big medicals, are very deep, are very broad, and are less likely to be challenged.

And so if you think about it, what we did is, we sold some stock; we took a fairly modest dilution; built a huge balance sheet, which now enables us to basically use advances to have the same economics on portfolios with orders of magnitude higher revenue potential -- and with much lower risk.

And with shorter time to money.

So while some people perceive we've moved into a higher-risk business model, we think we moved into a substantially lower-risk business model that has much more growth attached to it, and that we can continue to grow this Company at exceptional levels and dominate this area.

We think we're on the right strategy.

We think the deployment of capital should not be viewed as a negative.

But it's when we get an opportunity to deploy capital, not based on seasonality, or what anybody else wants or thinks to do.

It's when we see a great opportunity for our shareholders, we will deploy capital, and we think we will earn the returns from that.

Well, that's helpful; and I think as the model continues to change or morph or grow, as you guys are deploy more capital, I do think it would make sense, as the data is available, to provide some metrics around that.

It's a question I get a lot from investors.

Some of those things you just answered as well.

I think increased visibility there is a plus.

I think it will go a long way.

I appreciate the answers.

Thank you.

Sure.

Thanks, Mark.

Paul Coster, JPMorgan.

Thanks very much.

Just focusing on Apple for a moment.

There is a flurry of announcements around quarter-end; and I guess I'd like to understand what was in the first quarter and what was not in the first quarter.

Was everything in the first quarter relating to Apple?

Or was it just the smartphone technologies settlement?

And the others that were announced, which seem to exclude Adaptix -- did they flow into 2Q?

I will address that.

The Apple transactions that we announced were all first quarter events, those licenses.

We obviously did a number of licenses through them.

There's a number of continuing litigations we have with them and other licensing programs.

Yes, we settled a portion of the matters outstanding, but the ones that we announced were first quarter revenue events, yes.

There was no Adaptix announcement.

I thought you just said that, yes.

None of the Apple announcements spilled into 2Q?

No

Okay.

Your visibility in 2Q, though, is actually quite good, because you have had a number of settlements since -- I think, LG, HTC, Toshiba, maybe even Micron.

Can you talk a little bit about the visibility you already have into 2Q?

Well, you're right on all but one of the transactions.

The HTC transaction was also a first quarter event.

The other ones you correctly said are second quarter revenue events, but they represent -- the ones we've done to date represent a small portion of what we hope we will get done by the end of this quarter.

But we are off to, certainly, a stronger and faster start than we were in the previous quarter.

Okay.

[You can] explain international growth up next.

Can you explain how you're going to market there, and what the probability of it being material is this year?

Yes.

Our business development efforts we're expanding internationally.

We think there's some very good opportunities in certain international markets.

We don't want to telegraph exactly to other people where we're going.

We've got people on the ground there on business relationships with our Company, and we are probably going to add a little bit of headcount internationally to access potential partnering deals in those markets where people are local to those markets.

Matt, do you have a --

Yes.

In addition, for certain markets -- like if you look at the smartphone market, you will find there are certain countries, like Japan, where the market shares look quite different than they do in the US and in Western Europe.

So, if you basically can create a licensing presence in jurisdictions like that, you can collect more revenue than we've previously collected on the same scope of IP.

And so you'll be seeing, and you are in fact seeing, increased presence in those sorts of markets.

Yes, that's correct on both the licensing and enforcement side, and the business development side.

Yes, we are dramatically expanding our enforcement activities into multiple markets, particularly with larger portfolios that oftentimes generates a earlier dialogue with potential licensees.

All right.

My last question is, when you do an upfront deal, how do you account for the expense?

Is it then amortized over a period?

Or is it a one-time expense?

Well, if it's an asset investment, it is on the calendar amortization schedule.

On a straight-line basis.

On a straight-line, right.

Over what period?

Over an estimated period that we refer to as the economic useful life -- basically our estimate of the period over which we expect to realize cash flows, which currently is the weighted average useful life is roughly six to seven years.

Great.

Thank you very much.

(Operator instructions )

Tim Quillin, Stephens Inc.

Good afternoon.

I just want to talk to you a little bit about the logic of settling with Apple, especially before the trial instead of taking what obviously would be a riskier strategy but potentially higher payoff of going to trial and seeing how you can do there, and potentially having a nice jury award.

Especially in light of how we have seen Apple do relative to Samsung on some future patents, even on a scaled-back award of $500 million, or whatever it's going to be.

Maybe it's worth taking a swing at a big opportunity like that.

And so, what was the thought process in settling there?

Well, we're going to have a lot of swings in the future.

Our thought process is, when someone is willing to pass the price that we think is fair, we transact.

We are not in the business of trying to win flashy court awards, which oftentimes, as you know, don't get paid at all; and oftentimes don't get paid for years and years.

So if we are a licensing company, we're going to be doing lots of transactions with all of these same companies multiple times.

And if they are not willing to pay what we think is a fair and reasonable price, then of course we have to take into account what we've licensed to other companies for.

And as you know, we ratchet our rates up based on the strength of the patent; as they go through the challenge in the court system, they're more valuable, and therefore we raise our pricing.

But if a counterparty is willing to pass what we think is the reasonable price, we transact; we don't litigate to see if we can win a larger award.

And the converse holds true.

I mean, if these parties are not willing to pass the reasonable price, factoring in the ratcheted-up amounts, then we will try it.

There's two audiences we are very sensitive about, beside obviously shareholders, when we cut these deals, if you want some insight into the thinking.

One is the folks that have taken early licenses.

We want to make sure they've got better deals.

And the second is the folks to whom we're going to go back over and over and over again for subsequent licenses.

And so what we want to do is create really a rational market in this space; and in the long run that's going to serve us better.

It's going to mean less risky litigation, less litigation costs.

Where we have to litigate, we will; to enforce that [discipline].

But the endgame is not litigation, right?

The endgame is to create a marketplace in this space, in the patent space; and we are acting, basically, to promote that creation and promote a creation of a marketplace that's profitable for us and our shareholders.

And to date we've been doing that.

And you did end up licensing several different patent portfolios to Apple.

And as you mentioned, there some that you didn't.

And some are not even at the stage of litigation.

So it makes sense that those would be pushed forward.

I think that the litigation -- you've initiated litigation on the Adaptix patents.

I'm assuming there's some kind of meaningful pushback from Apple to licensing those patents.

Do you think it's still -- is that still a longer-term issue?

Are you going to have to be getting closer to trial before you are able to get to a settlement there?

Well, I'm not going to comment about any individual negotiation.

Generally speaking, as Paul mentioned about five minutes ago, the trial is not the only forcing function, right?

Sometimes you show up with a portfolio, and then you show up with another portfolio, and then you show up with another portfolio.

And all of a sudden there's enough critical mass where the averages start to even out and people want to transact.

Sometimes it's foreign litigation that might do the trick.

There really is not, I think, much to be read in terms of the timing of the trial date for a lot of our transactions.

In terms of, again, generally speaking, the response to the Adaptix portfolio -- I can tell you it has not been negative; and I can also tell you that it really is -- it's just a matter of the size and the scope.

And I think at some point -- and we are expecting, again, to be in the money this year on this portfolio -- we are going to start seeing transactions, and they are not going to be necessarily be tied to US litigation dates.

Right.

How should we think about the pipeline of structured licensing deals this year and next year?

And we've talked about maybe that there isn't a true renewal of these multiple portfolio structured licensing deals; and maybe it matters more what kind of critical mass you have in terms of assertions against an operating company?

Should we expect renewals, or however you might want to phrase it, or other structured deals this year?

Well, as we've mentioned in previous calls, the line between structured deals and other deals is increasingly blurring.

And we have seen that trend continue, even this quarter.

There are one-off license deals, and then there are licenses that have more -- there are more than a one-off license deal, right?

Where there's some kind of structure, maybe there's multiple portfolios.

Now, we certainly expect these structured deals -- I put this in quotes -- to grow.

And we've seen it continue to grow, related to, for example, the number of one-off agreements we have.

That's part of the evolution, the natural evolution, of the licensing business as it gets bigger and more complex.

When we cut deals with someone like Apple, you're going to expect a number of things to be resolved at once.

You're going to expect a number of things to get done with that transaction, as opposed to the days when we had much smaller portfolios.

Coming back directly to your question -- again these structured deals are highly tailored; they're highly individual.

We're going to see more of them.

I'm not sure how much that information helps you, but essentially that's just the reality.

As our business gets more complex, we're going to have more complex arrangements with these companies, going to be resolving more things at once.

You won't necessarily resolve everything at once, though; which is, I think, the definition people have of a structure, but is not necessarily correct.

In terms of renewals -- just like the definition I think people have had in mind that our structured somehow involve everything we control -- that definition is false.

The idea of a renewal being necessarily something that's part of a structured is also not true.

The deals, again, are highly customized; they vary; and what you really want to be looking at, I think, that is relevant is the number of times when we transact with these big companies that we're dealing with more than one matter at a time.

I think that's a good thing when we're dealing with more than one matter a time, because there's certain economies of scale we realize; there certain risk profiles we can adopt when we're cutting those kinds of deals.

Again, there is no cookie-cutters here.

And so to think along the lines of how many deals are you doing, we're licensing everything to a company, or how many renewals we have, that's really vocabulary that does not really mesh with what we are actually doing.

Okay.

And I've got a last question that's three different questions, I think.

So I apologize upfront.

Your customer concentration is always high, but if you exclude out your top three licensees in the quarter, I think there was $6 million in other licensing revenue.

And like I said, customer concentration is always high, but that's a relatively low number.

I think it's the lowest number, excluding your top 10% customers in 3.5 years.

Are you more focused on your marquee patent portfolios, the bigger ticket items?

That's question one.

Number two is, what your pipeline like of those marquee portfolios?

And question three is, would you expect capital allocation to look more like this quarter, or more like the first quarter, or more like the fourth quarter at 2012, in terms of the amount of capital you put up to bring these marquee portfolios in the door?

Thanks.

Sure.

Well, to answer your first question on other revenues -- one of the concentration of revenues transaction involved multiple licenses of multiple portfolios.

So you really ought to move that into the other category.

That's the one that was roughly $10 million.

It was really about $16 million.

It was a license with an intermediary third party that covered multiple portfolios.

So if you split it out that way, it would really about 84% and 16%.

The answer is, increasingly our business is going to be marquee portfolios.

Again, we think there are much higher revenue opportunities with much less risk, and we are obviously shifting the focus of our Company more and more to those types of portfolios.

They can take us to the next level from a shareholder valuation standpoint.

The capital deployment is strictly opportunity-related.

It's not seasonal.

We have no targeted dollar amount that we want to particularly have to invest.

We are just constantly looking at all of the opportunities in the market, and where we can advance money and get control of and significant economics, and very valuable portfolios -- that's where we will deploy capital.

It's a little hard to predict.

We are looking at a lot of them right now.

We think we are very good at doing the due diligence and handicapping these, and pricing these.

And being able to do in advance that, on a risk-adjusted basis, we think is very prudent for our shareholders.

It's hard to give guidance on that, Tim, because it's opportunity-related.

But we think over the course of the year, we're certainly going to deploy a very substantial amount of money.

And can I (multiple speakers )

Sorry, Tim.

What we are aiming to do, really, is create an environment where we are doing multiple, I think you called them high-value or --

Marquee.

Dollar deals.

We're trying to scale the business on that axis.

And if I could just follow-up -- I'm sorry -- Paul, you had mentioned that one of those deals was through an intermediary.

I just wanted to qualify.

So there was a press release on April 3 that you had entered into a patent rights agreement with RPX.

Did that fall in the first quarter as well?

Yes, it did.

Yes.

All right.

Thank you.

Our next question comes from the line of [Ses Nu] of Amici] Capital

Hello everyone, and thanks.

I'm just curious, the $327 million cash balance at the end of the quarter.

You've been asked a lot about future outlays for -- in order to take control of portfolios, and you've been consistent in your answer that it's opportunistic.

I'm just curious if you could see what would be a scenario where you think this business could support some type of ongoing dividend or intermittent cash return to shareholders?

Do you feel you need all of that cash on the balance sheet to affect your strategy?

Or could you share, again in somewhat an opportunistic way with shareholders, some of your monetization success?

Both those are possibilities.

Most likely would be a regular dividend.

We think we are a little early for that.

We would like to see positive free cash flows after investing activity be strong before we start returning capital to shareholders, particularly when we're in an environment here where we think we've got a great opportunity, given our skill set and given our balance sheet.

We don't see a whole lot of competition for assets right now, and we think it's a great time to be acquiring assets for shareholders.

So it's a little early on the dividend side, but certainly we understand.

If we are correct in our analysis of the kind of cash that can be generated from the investments we are making, we are going to have significant excess free cash flow after investing activities, hopefully in the not-too-distant future.

And at that time it would be appropriate and most likely probably do a regular dividend.

Okay.

And just related to the comment of scaling the business with marquee portfolios.

Obviously that has the promise of the Company being much bigger in terms of revenues and cash flows.

Matt, I was wondering if you could talk about the different risks in terms of, on the monetization side -- not on the patent-acquiring side, but on the turning those patents into settlements and cash -- how do the risks, or the processes, differ with marquee portfolios?

Well, what's interesting is, as Paul mentioned, the risk actually comes down if you are buying the right kind of marquee portfolios.

And here's what I mean.

If you're buying a single patent that is marquee, and you are going to expect to make nine figures out of that single patent, that's a very high risk profile.

Because ultimately a court, a jury, a tribunal is going to always have a opportunity to impact its valuation.

When we bring in marquee portfolios, we're not bringing in one-patent portfolios.

We are bringing in multiple-patent portfolios.

And by multiple-patent portfolios, we mean multiple patent families with orthogonal risk profiles; that is, a prior [ride] reference magically pops up in one, it should not impact the other four, five, six, seven in that portfolio.

So at the most elemental level, these portfolios get broken when they get damaged in court.

Until they get damaged in court, as we say in our calls and in some of our releases, when we -- our revenues are basically just shifted forwards or backwards in time.

It's just a matter of when we're going to collect -- again unless they're damaged in court.

If we're buying portfolios that have multiple points of failure, that all have to be traversed before the portfolio is taken down a notch in terms of its valuation, we should get it less risky.

The timing is also interesting.

We used to think -- right?

-- that we would start seeing some kind of relationship between how long it takes to license complex portfolios with lots of assets versus a single patent that's strong in a single portfolio.

And again, there what we are finding is there's a bigger range of outcomes with the larger portfolios.

We're not seeing the same sort of cookie-cutter approaches defendants take.

Some defendants want to take out the big portfolios early and pay us license fees early.

Some others want to wait and see how the portfolio is doing and look at the valuation on the edges before they commit to paying.

Even in terms of timing, we see less risk dealing with the marquee portfolios.

Here's the catch with the marquee portfolios.

You need upfront capital to play.

Now, again, the way we are deploying upfront capital, however -- even there, we think we're de-risking it substantially because, except for Adaptix, which is an outlier that was driven by some very unique properties in that portfolio, what we are doing is we're advancing money.

And as we're advancing a certain amount of money, in our minds, because of the extensive experience we have and relationships we have with prospective licensees vis-a-vis that portfolio, we know we can recover that upfront capital.

In some sense, this is why we are in such a sweet spot.

We've got the upfront capital to deploy; we're able to deploy the upfront capital in amounts where we think recovery is relatively safe prospect; and so that's a barrier to entry for a lot of companies that we don't have.

As a result, we are able to pull down these portfolios that have multiple patents, multiple families, and once you have those portfolios in, the collection risk is actually lower.

Thank you.

Does that answer your question?

Yes.

Larry Waldman, a private investor.

Congratulations on a good quarter there.

What my focus -- I know the prior person I think asked some of these points, but emphasize -- It looks like in the first quarter, again most of the volume was the Apple deal, one of your marquee deals.

And I'm curious how many more in that in the category of marquee deals do you still have in your portfolio?

And what are the trial dates expectation on those -- at least scheduled trial dates?

We've got a lot of partners and a lot of assets.

So we don't want to -- there's certainly, I think, analysts' view that portfolios like Adaptix, like Nokia-Siemens, like the medical portfolios we have with 1,900 vascular patents, and the orthopedic portfolios, and the automotive breed portfolios we have, are all ones that are nine figure-type licensing opportunities.

We have others in-house, but we don't want to separate out individual assets and identify them in any kind of pecking order.

We think we have a very substantial amount of marquee assets at this stage.

ACCESS is one of them.

We've been successful in generating probably the majority of the revenues to date on that one.

We've got more revenues to go, and we expect over the course of this year we will be adding a number of other marquee portfolios.

But put simply, we have a number of marquee portfolios.

Again, we don't want to isolate them and pick them out.

I think the Street has a consensus on what they are, but there's more than five.

Each of these have a number of licensees, that when you combine the marquee portfolio with the licensee, you get a marquee deal, I guess you could call them.

We think it's 10s, at least.

Are there trial dates scheduled, or are these just -- have you filed suit already on these marquee deals?

It depends on the portfolios.

Again, we have dozens of litigations.

So it would be too laborious to go through it, and oftentimes they shift in dates.

Some courts set trial dates very early; some don't set them until after other processes.

I don't think you can really glean anything or learn anything by knowing that information.

And indeed, what we are seeing now is, on these deeper, broader portfolios, there is much less of a correlation on settlements to litigation events.

Companies are looking at their exposure, they're assessing it.

It's all about the appropriate pricing and transactions, and watching what other companies have done in transacting with us that leads more to their behavior than specific litigation outcomes.

And part of it is, again, the density.

Let's say you're selling a smartphone, and you're dealing with us on one, two, three, four portfolios.

And probably three, four marquee ones right now, even after -- even if you set aside ACCESS, right?

Well, there's foreign litigation in a lot of these things, and in one or two cases there will be ITC proceedings, right?

And then there's district court cases.

And again, it's scattered across two or three, four portfolios.

If you take all of that in totality, there's bound to be a date that's coming up, if you're a major smartphone vendor that we need to be talking about, right?

In addition, there's other -- as we mentioned earlier on this call -- forcing functions; and again, with lots of portfolios and lots of perspective licensees, you're just going to have more forcing functions, more dates.

That's why, as Paul mentioned, to an increasing extent we don't focus that much on trial dates as much as we used to.

We've got -- there's loads of litigations proceeding, in many geographies across many portfolios, and these negotiations are ongoing as a result of that.

Yes, I'm bringing that up because the Apple trial is supposed to be April 7, or whatever; and that settling a week before that appears to be one of the motivating facts, I assume, from both sides.

So my question is, using that as an example, I know Apple you probably have -- what?

-- four or five different claims against them.

And what I understand that this settlement just involved one of them.

Are the ones that are continuing of equal size to what you just settled in your fair valuation, or are these --?

Well, we -- yes, I don't want to answer that question directly.

It's deposition and litigation fodder, right?

Look, we have other marquee portfolios, that are very meaningful, and those are play.

And again, just coming back to the observation you made about the trial being April 7 -- I mean, boy, if I have to go back the last 4, 5, 6, 7, 8, 9, 10 quarters, we were able to deliver numbers without trial dates anywhere nearby.

Yes, the vast majority of the revenues that we have generated to date from the ACCESS portfolio came far in advance of any calendar trial dates.

In fact, I have a hard time remembering the last time we had trial dates driving a quarter.

Right.

All right.

So it's an aberration.

I wouldn't read it as something that you could use constructively.

I understand, but going back to the question, that there are multiple issues that you have with Apple, and the one that was just settled -- was that of equal size to the ones that continue?

Or -- from my understanding, you settled on one or two issues, and there's five or six remaining.

Are those much bigger than the one was settled?

I'm trying to get a size (multiple speakers) from a valuation standpoint?

Here's the dilemma you're putting us in, okay?

There's a number for Apple, and if I say it's higher or lower than that number which is going to be evidence is in play, and I'm pinning myself, right?

We can't publicly comment on that, because it would impact litigation strategy?

Okay, I understand.

Right.

Now, again, we have another marquee portfolios.

Marquee portfolio's not chump change, right?

They are portfolios that make quarters when licensed, and we have a lot of those.

Yes.

We just can't comment, and then make a comment on relative value.

Okay.

It's not in our shareholders' best interest to comment on that.

All right.

All right, thank you.

Okay, surely.

This will conclude the question-and-answer session.

I'll now turn the call back to Mr. Ryan.

Okay.

Thank you, operator.

Thank you all for being on the call.

If you have any follow-up questions, we are available and look forward to speaking to you at the end of the second quarter.

Thanks again.

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This concludes our conference for today.

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

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