Acacia Research Corp (ACTG) 2013 Q2 法說會逐字稿

Good afternoon, and welcome ladies and gentlemen to the Acacia Research Second Quarter Earnings Release Conference Call.

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

At the request of the Company, we will open up the conference for questions and answers after the presentation.

I will 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 acquisition, 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, Clayton Haynes, our Chief Financial Officer, and Ed Treska, our General Counsel.

Today, I will give you a quick overview of the business in the second quarter.

Then, Matt Vella will provide his thoughts on the business going forward.

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 $23.1 million in revenues in the second quarter from 43 new revenue agreements, which covered 28 different licensing programs, including 3 new licensing programs generating initial revenue.

Trailing 12 month revenues at the end of the second quarter were $201 million, as compared to $233 million as of the end of the prior year quarter.

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

Unlike most companies, revenues not generated in the current quarter are now lost, but in many cases are pushed into subsequent quarters.

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

Revenues for the first six months were $100 million, compared to $150 million in the prior year.

While the Company has acquired control of a number of the highest revenue potential licensing programs in our history over the past 12 months to 18 months, whether we can meet our expectation of annual revenue growth will depend upon the number of licenses we can complete on some of these portfolios during the second half of the year.

During the quarter, we acquired control of seven new patent portfolios in the energy, automotive, and technology sectors.

We invested a total of $10.8 million in up front advances and future guaranteed payments.

We acquired patents relating to energy efficiency in the commercial residential building markets, patents relating to automatic illumination in the automotive market, patents in the technology sector relating to inkjet printing, high-speed circuit interconnect and display control panels, patents relating to content security and consumer electronics PCs and mobile devices, patents relating to printer technologies, and we also partnered with a major technology company for patents relating to microprocessor and memory technology.

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

And we are at a very early stage in entering into the energy sector.

We continue to partner with patent owners 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 a revenue share.

On some portfolios, we are using our working capital to provide an upfront advance to the patent owner, which we recapture from initial licensing revenues we generate.

Our strong balance sheet is giving us the ability to utilize these upfront advances to acquire control of higher value, lower risk assets.

Acacia's cash and investment position was $320 million at the end of the quarter.

During the second quarter, we added two leading IP executives to the Acacia team, Charlotte Rutherford joined Acacia as the Senior Vice President.

Charlotte most was recently Deputy General Counsel Intellectual Property for Schlumberger, was previously Vice President and associate General Counsel for Colgate-Palmolive, and Chief Intellectual Property Counsel for Conoco.

Charlotte will be leading our new initiatives in the energy sector.

Jamie Siegel also joined as Acacia Senior Vice President.

Jamie was most recently Vice President and Senior Intellectual Property Counsel for Sony Corporation of America, where he worked for the past 15 years.

Jamie has extensive experience in international IP monetization, enforcement, and strategic acquisitions.

Acacia continues to attract the best in class IP executives from industry.

As we previously reported, I will be retiring at the end of July, and Matt Vella, our President will also become our Chief Executive Officer on August 1st.

Our Executive Chairman, Chip Harris, myself, and all of the members of our Board of Directors have every confidence that Matt has the leadership skills and expertise to assume this new role.

We started working on the succession plan over 18 months ago, and following my 68th birthday I decided to culminate the process.

Matt has risen up through the management ranks over the past seven years, and has earned the respect of everyone at Acacia.

Matt has the good fortune, as have I, to be surrounded by a very deep and talented executive team that is well seasoned.

I congratulate Matt on his very well-deserved promotion, and know he will do a great job.

Before turning the call over to Matt, I would like to take this opportunity to thank our shareholders, our Board of Directors, and all of the companies and investors who have entrusted us with the licensing of their patents.

Most of all, I want to thank the very talented and dedicated employees of Acacia who have been responsible for generating the exceptional growth in assets and revenues for our Company over the past few years.

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

Thanks Paul.

I want to start by acknowledging your role as a pioneer in the patent licensing industry, and as a CEO who has made an immeasurable contribution to Acacia shareholders, employees, and patent partners.

On behalf of everyone at Acacia, I also wanted to thank you for all you have brought us by word and deed over the past decade.

You made all of us better professionals, and better people.

While we would have liked to have concluded more revenue agreements this quarter, Management is confident in the strength of the Company's portfolios.

Litigations for all our major portfolios are progressing well, and we see no adverse impact in their valuations.

We want everyone to know that we shall continue to run this Company using the same key Acacia principles developed by Paul and Chip.

Specifically, one, we are in the licensing business not the trial business.

Where possible, we will continue to reasonably price licenses under our portfolios with first assigned licensees with a minimal amount of litigation.

Two, we seek to partner with patent owners and law firms to help de-risk our investments.

Shareholders should know that we are still in the patent partnering business.

For example, in most cases where we deploy capital to acquire portfolios, we are simply advancing to our patent partner what we estimate to be a small percentage of the revenue to be generated under the partnership.

As of the revenue starts to come in, we generally get our advance dollars back before paying the partner additional proceeds.

And then after recovering most or all of our advance, then do we share revenue with the partner.

Under this model, we look at advanced dollars as working capital because we can keep using the same dollars over and over to bring in more and more high quality portfolios.

Another key Acacia principle that we'll adhere to, we are technology agnostic.

We shall remain involved in any technology sector where there is a lack of patent equilibrium.

That is, any sector where the company is making the money selling products and services are not the same as the companies or people that own many, many, many of the patents underlying those products and services.

We are not just about wireless, or orthodics, or display, or drilling.

We can scale and vector our model into any sector that has such a lack of patent equilibrium.

We think our model is able to scale into new sectors by adding relatively small numbers of highly competent, highly motivated, and highly experienced professionals.

We have been scaling in this matter into new sectors, such as energy and medical technology, and we expect to keep scaling out into other sectors in the coming years.

Another key Acacia principle, we want Acacia to be the destination of choice for all top class patent licensing executives.

And to that end, we have brought in terrific new talent in the past couple of years, including the two professionals, Charlotte and Jamie that Paul mentioned a few minutes ago.

We shall also be making similarly significant additions that we expect in the coming days and weeks.

All of these very accomplished patent executives have left big prestigious companies to join Acacia, because they see the same trends and the same opportunities that we see.

In addition, we expect that they will be driving big new growth areas for us, such as energy and internationally sourced patents.

Besides the Acacia principals I just annunciated, there are additional Acacia principles that I want to particularly emphasize because we are going to particularly focus on those principles in the coming months.

My goal as CEO, will be to continue to add in fact accelerate the addition of high quality, high revenue, potential portfolios.

We seek to achieve scale and diversity in our portfolios, and the revenues they generate.

Such scale and diversity results in more quality assets under Management, which better diversifies our patent portfolios and our licensing addressable markets.

Also, we reaffirm our commitment to getting the right price for each of our portfolios, time and risk adjusted.

As a result, do not expect us to manage for smooth sequential quarterly revenue growth.

We will also more actively participate in the patent reform debate presently taking place.

To be sure, as we have said before, our view of patent reform can be characterized by the following two observations.

Firstly, we have gone on record, as a matter fact, I was quoted in the Wall Street Journal a few weeks ago, as either supporting or feeling mutually about most of the pending reform initiatives that have any chance of passing into law.

If these bills, once turned into law, help get rid of bad behavior being exhibited in our industry, behavior which only gives all players in our industry a bad name, then we are all for it.

The second observation that characterizes our view on patent reform, we continue to see evidence that the harder, the more expensive, the more complicated patent licensing becomes, whether real or whether perceived, the more companies we see going to use an independent and professional outsourced partner like Acacia.

Recall that over the past four years, we have generated record revenue, profit, and portfolio growth, even as patent reform initiatives and debates have progressed.

Notwithstanding these two observations however, when it comes to patent reform, we shall now play a more active role, because we have become important enough to the patent ecosystem to make a positive contribution to the debate.

And most of all, because we believe thoughtful, reasonably packaged and well voiced pro patent and pro invention opinions are good for technology and invention driven economy such as ours.

They're good for patent owners, such as our customers, and therefore they are ultimately good for our shareholders.

That concludes my remarks, and our remarks collectively.

Before turning the call over to Clayton, we want to remind all of our shareholders that we will be presenting an in depth review of our business, it's opportunities, and our Acacia team at an Analyst and Investor Day to be held next week.

12 of our Senior Executives shall be presenting that day, including our Executive Chairman, Chip Harris, and myself.

The logistics of our Analyst and Investor Day are as follows.

It will be held on Wednesday, July 24, 2013, that's next week, at the New York Palace Hotel located at 455 Madison Avenue, New York between 8.00 am and 9.00 am there will be breakfast and registration.

Between 9.00 am and 12.15 pm, we'll be making our presentations, and we'll have a Q&A and lunch session between 12.15 pm and 1.30 pm.

For invitations, please RSVP Rob Stewart at 949-480-8311, or you can use e-mail at rs@acaciares.com.

With that, I'll turn the call over to Clayton.

Thank you Matt, and thank you to everyone joining us for today's quarterly earnings conference call.

On a consolidated basis, revenues in the second quarter of 2013 totaled $23.1 million as compared to $50.5 million in the comparable prior year quarter.

Second quarter 2013 revenues included license fees from 43 new licensing agreements covering 28 of our technology licensing programs, as compared to 38 new licensing agreements covering 27 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 $201.2 million as of June 30, 2013 as compared to $233.4 million as of the end of the comparable prior year quarter.

Currently to date on a consolidated basis, our operating subsidiaries have generated revenues from 157 of our technology and licensing programs as compared to 125 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 second quarter of 2013, we reported a GAAP net loss of $12.5 million or $0.26 per share versus tend to net income of $6.3 million or $0.13 per share for the comparable prior year quarter.

Second quarter 2013 non-GAAP net income, which excludes the impact of non-cash patent amortizations, stock compensations, and excess benefit related non-cash tax expense was $6.5 million or $0.13 per share as compared to $21 million or $0.43 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 the 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 58% for the second quarter of 2013 as compared to 68% 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 fluctuation in average margins in the second quarter of 2013 as compared to the second quarter of 2012, was primarily due to a higher percentage of revenues generated in the second quarter of 2012 having lower or no contingent legal fee obligations as compared to the revenues generated in the second quarter of 2013.

Inventor royalties expense decreased 41%, relatively consistent with the decrease in revenues quarter-to-quarter.

Contingent legal fees decreased 39%, reflecting the overall decrease in revenues quarter-to-quarter.

And the higher percentage of revenues generated in the second quarter of 2012 having lower or no contingent legal fee obligations as compared to the revenues generated in the second quarter of 2013.

Second quarter 2013 non-cash patent amortization charges increased, due primarily to an increase in amortization expense related to new patent portfolios acquired since the end of the prior year period totaling $3.9 million.

And an increase in scheduled patent amortization related to patent portfolios acquired in the latter portion of the prior year comparable quarter totaling $2.1 million.

Marketing, general, and administrative expenses increased to $1.3 million or 11%, due primarily to a net increase in licensing, business development, and engineering personnel costs, including recruiting and severance costs associated with a net increase in personnel.

Since the end of the prior year quarter and minor increases in non cash stock compensation expense, facility costs related to the expansion of our Newport Beach and Texas facilities, and corporate and general, and administrative costs.

Litigation and licensing expenses in the second quarter of 2013 increased $4.7 million over the prior year quarter to $9.9 million due primarily to higher net levels of strategic patent portfolio prosecution, international enforcement costs, and higher net levels of litigation support in third party technical consulting 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 fluctuate period to period in connection with our current and future patent acquisition, development, licensing, and enforcement activities.

Our estimated annual effective tax rate was approximately 40% for the second quarter of 2013 as compared to an effective tax rate of 35% for the comparable prior year quarter.

As of the end of the second quarter of 2013, we estimate that we have approximately $20 million of net operating loss carry forward, and approximately $23 million of foreign tax credits available for use in future periods.

From a cash flow perspective, net cash inflows from operations for the second quarter of 2013 totaled $1.3 million versus net cash inflows of $14.5 million for the second quarter of 2012.

The second quarter of 2013 patent related acquisition costs paid and accrued for future payments totaled $10.8 million as compared to $48.5 million in the prior year quarter.

We ended the second quarter of 2013 with $320.1 million of cash and investments, up from $311.3 million as of December 31, 2012.

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.

For fiscal 2013, we expect patent related litigation and licensing expenses to be in the range of $26 million to $27 million depending on net patent portfolio litigation and strategic patent prosecution activity occurring throughout the remainder of the fiscal year.

Based on current outstanding grants of restricted stock, we expect scheduled non-cash stock compensation charges for fiscal 2013 to be approximately $26.9 million or approximately $6.7 million per quarter.

Excluding future patent portfolio acquisitions, scheduled amortization for fiscal 2013 is expected to be approximately $47.9 million or $11.9 million per quarter.

Lastly, I would like to echo Matt's sentiments with respect to Paul Ryan's years of top-notch leadership, and wish him all the best going forward.

At this time, it is my sincere pleasure to turn the call back over to Mr. Paul Ryan.

Thank you Clayton.

And operator, we can open the call for questions please.

(Operator Instructions)

Tim Quillin of Stephens Inc.

Hello, good afternoon.

One specific question on the quarter is that in your press release, I didn't see any mention of licensing smartphone patents to LG.

And I thought on the most recent conference, earnings conference call, you had mentioned that that was a deal that you completed early in the second quarter and should have impacted Q2.

Yes.

The LG transaction -- we had an LG transaction in the second quarter.

What you're saying is in the detailed press release it wasn't mentioned as one of the portfolios that was --

I didn't see it.

That's an inadvertent error.

Okay so it was -- and would have that been one of the 10% licensees in the quarter?

No, we can't comment on that, but there was a transaction done with LG in the second quarter.

Okay, okay.

And then excluding 10% customers, I always like to look at the remainder in terms of revenue, and in the quarter it was about $6.25 million and only about $156,000 per agreement.

And I know there was a lot of fairly broad campaigns that you licensed during the quarter, but it just seems to be going the wrong way in terms of the goal to get to a higher quality patent portfolio with larger licensing deals per patent.

So is -- do you just have to clean some things up before you get to the promised land, or why are we seeing things go backwards in terms of revenue per licensing agreement?

I'll start that, and then Matt can finish it off.

A couple of things, probably aside from the top 10% licensee, the balance of that would be considered normal licensing transactions.

So I wouldn't take the second and third ones out, because those would normally would be considered normal activity.

We also do have two licensing programs that just happened to lend themselves -- as you know, we have to enforce against all infringers.

It's unfair to enforce against certain companies using your technology and not enforce against their competitors.

And we do happen to have a couple of programs where there are very large number of fairly small revenue transactions.

The good news is most of those are coming in with virtually no litigation, and are being paid out.

But they're skewing the numbers dramatically this quarter and probably into next quarter a little bit on a per licensee dollar revenue.

But it's really two programs where there's unusually small amounts, but they're the appropriate amounts for those technologies.

As regarding the promised land, I'll turn that over to Matt.

And I've mentioned this in previous calls, previous quarterly calls, the notion of core business, the one you have is different than the one we have.

If core businesses is lining up a bunch of deals of a certain size and saying it's our base revenue, the core business for us should be you get high quality portfolios, and you get them in nice concentrations.

And when you've got a lot of high quality portfolios against a company, they'll tend to be licensed in clumps.

And so what you're going to see is bigger bite sizes in our revenue, and you're going to see clumps, because that's what happens when you aggregate quality portfolios.

And it's a reflection of the environment we're operating in, and it's a reflection of the promised land.

And the promised land, just so we're all on the same page, there's going to be a point in time and we're already starting to hit it, and we're going to start hitting it more and more where we're going to show up as an NPE with 5, 6, 7, 8, 9, 10, 11, 12 more high quality portfolios that read on a company.

And as we're negotiating around those portfolios, say over three months, six months, one year, we might pull in another 5, 6, or 7 portfolios that are high quality.

And what's going to happen when we hit that promised land, it depends on what your anticipation is will be the Company's response to that situation.

I'm not worried about any kind of government response to that situation, because they're legitimate portfolios from reputable companies that cover patent infringements.

And so what I do know is that when we hit that promised land, the bite sizes of the revenue are going to be different.

And so we have to start rethinking, as I've mentioned before, what core business means, Tim.

So trailing 12 months revenue was $201 million, down as you mentioned and I am just wondering, in that context, is that a disappointment to have that decline and not to have the revenue start to increase based on the aggregation of patent portfolios when you're walking in the door and having those conversations?

Or what would you attribute, if it is a disappointment, to what would you attribute the disappointment?

We want to be in the promised land here and now.

And when that promised land -- we want revenues and profits to reflect it here and now.

But the disappointment would be if we went in and started giving away deals to [hit] quarters when we could be essentially waiting for the right price, time and risk adjusted and getting the better deal next quarter or the quarter after or the quarter after that.

So what we're not going to do is artificially constrain ourselves to pretend we're doing something we're not doing, which is managing for smooth sequential quarterly growth.

We just don't do it.

And what we need to do is scale, diversify, and get the right price, time and risk adjusted, bearing in mind we're not in the litigation game, we're in the licensing game.

But that doesn't mean it's a fire sale every quarter.

We've ever done that, and we never will.

And for that reason we've always talked about lumpy quarters.

And that's what's happening.

So the disappointment is when you give stuff away, and it's forever gone.

Right?

Right.

So and just one last question and then I'll hop back in the line.

But Matt I think at one point you'd talked about the goal or hope of getting another $50 million plus in licensing revenue from the Adaptix patent to essentially get your full $150 million capital outlay back.

Do you still think that could happen within the calendar year?

Thanks.

Well, I think I'll let Matt finish this.

But think we're probably in discussions with companies that represent well over 50% of the additional revenue potential at the current time.

Now when and if those deals get completed, is unknown.

But certainly we are in discussions with a significant portion of that market.

As you know, we've recaptured basically two-thirds of the capital we invested a year and half ago, and so certainly it's a goal of ours to certainly get in the money on that portfolio by the end of the year if possible.

What Paul said in addition we're seeing, if I can call them cracks I guess, people suddenly showing up and realizing we need to talk in a very meaningful way, not just in a silly way or in a meaningless way.

And whether -- we're not going to sit here and tell you it's $50 million this year.

It's self-defeating, but we're in discussions with a massive, massive chunk of that market and the facts are on our side.

And what we're going to do is we're going to wait to get the right deal time and risk adjusted.

And if we look at what's happening in the litigation, and we like the way the risk is looking.

Thank you.

Matthew Hoffman of Cowen and Company.

First of all, best wishes to you Paul in retirement.

So Matt, let's look at the -- we have to bring us back to a model at some point.

And I think your points on the quarter and stretching to make a quarter essentially are valid.

But as you take a more aggressive line with trying to maximize ROI here on the patents, are we looking at quarters or years in terms of how we should build out the models?

The answer is going to come, it's coming now.

It's going to come the next few quarters.

If I honestly knew that, I'd say it.

But the reality is that, again all I can tell you is the facts are on our side.

The risks are on our side.

We're building out the models.

And remember, it 's not just a matter of taking a portfolio and monetizing it along a natural life cycle.

When you've got multiple meaningful portfolios in play, there's a synergy between them.

And they start to impact timing.

And especially when you're pulling more stuff in as you're negotiating, and we're in uncharted territory.

Not for Acacia, for the industry.

Now, I could tell you it's annual, and I could be dead wrong.

And I could tell you it's quarterly, and I could be dead wrong.

The reality is, we're finding out, that and we're excited to find out, but what we're not going to do is find out the wrong way by discounting to the point where we kill off the business case.

All right.

So this it probably leads into a wider discussion maybe you will discuss it at the Analyst Day.

But as you think about being a publicly traded company and you benefit from having a lower cost of capital, maybe access to capital that other entities in the technology licensing space don't have.

On the other hand, maybe having guidance and talking to public investors can hamstring you or reduce your negotiating leverage.

Talk through how you see the model and being a public company, and the puts and takes on that.

Thanks.

Well I'll start, this is Paul.

With our perspective, of course there's been tremendous benefit, not only in terms of recruiting people, but in terms of getting licensing deals done.

Our counterparties know our financial strength.

They know our history.

We're public.

It's been fabulous for us on the business development.

You can imagine if you're company like Rambus and you want to partner with somebody, you want to partner with the leader in the industry and we're the proven leader, and we've got the capital and we've got the public track record.

So we have found it has been a fabulous tool to build the business from a business development standpoint because people realize they're dealing with best in class and well-capitalized company.

For the licensing, we think our financial strength helps us get better pricing than a patent owner could normally get as well.

Certainly from recruiting employees, it is a huge plus.

And obviously in the capital markets.

So the only flaw in the ointment is that we understand that you analysts have to do quarterly projections, and we are not a quarterly driven revenue Company.

And so that's the disconnect.

So what we need are shareholders who are willing to look beyond the 13 week periods.

And we've got a little under 50 million shares, and our goal is to try to find the right shareholders who see this sector, see the next 3 to 5 years.

See the people joining our Company.

See the fact that we've got the capital base to be the leader in the field, and know that this is an emerging market, and want to profit in the long term.

And we think those shareholders could be very well served.

And anyone who's got constraints on 13 week periods, or if they think that the 13 week period numbers are going to lead to too much volatility in their portfolio they should not own our stock.

I'll add something else to that which is, the end objective.

We discussed it about 5, 10 minutes ago.

And if the end objective is to be the principal player in a smoothly functioning secondary market in patents then the market has to smoothly function.

And the way markets smoothly function is through public disclosure.

And so if you don't have public disclosure of price points that people can discern, then the market is not going to smoothly function.

And so I have a hard time seeing, personally, how the dominant player in this space whoever it is going to be is going to be packaging any vehicle other than the publicly traded company in the interim period.

We sympathize, look, the analysts have done a fabulous job for us I think telling our basic story and giving the basic metrics.

And we understand the unfortunate situation is that you're forced, as analysts, to put out quarterly numbers.

And we don't know what our quarterly numbers are, so certainly it's very difficult for an analyst to judge which particular quarters money is going to come in at.

So we appreciate the fact that we have the analyst coverage we do, given the fact that we're not a 13 week revenue driven company, and many of the analysts I think have done a very good job explaining to institutional shareholders that very point.

And enable them to attract shareholders who can ride through these uneven quarters.

And the focus at the Analyst and Investor Day next week is to have a candid discussion about that very point.

That's the challenge we have, and we look forward to embracing it.

Because we think that if we get past that fly in the ointment, as Paul is calling it, it's a problem, and we're going to work to solve it.

Once we're past that, we really like where we are.

We like where this market is going.

We like the competitive landscape, and we love the position of our portfolios.

We like where this is all going.

We've got to find a way to get you guys some help on the modeling.

But at the same time, we can't manage for sequential quarterly growth.

But you can also see the evidence that we've got more people coming.

The quality, these are the top licensing IP people in the industry that are joining our Company.

So certainly, the Company is healthy.

And the only issue is, it's we're not a 13 week driven revenue company.

And congratulations on bringing Charlotte and Jamie in.

So the open question is, is that -- well I shouldn't say, it's just an observation you have even in the quarter like this should solid operating cash flow, generated cash.

In times like this, is Acacia with a steady buyback the best shareholder or the best buyer of the shares is the guy the entity that steps in and says this is the floor?

We're confident in our outlook.

Well of course our Board and management has a very complex decision.

We raised the capital to grow the Company, and we now see unbelievably we have less competition than before.

So we have a huge market opportunity, and our capital is a significant advantage to grow this Company.

And so the question becomes, do you try to affect -- which never works -- support a share price with stock buybacks.

We understand the assets we do have in house eventually pay off at a higher EPS with a smaller share count, and that's the balance we look at.

And our Board and management has been very thoughtful about that.

During the second quarter, we continued to see some of these new people that are joining our Company, some of them are coming with strong industry contacts and likely opportunities for major acquisitions that we think could drive future revenue significantly.

And we've got to balance that.

So the question is, we have an authorization that remains in place until what, mid August right now, and obviously it's not in our shareholders best interests for us to telegraph any specific intentions.

But the Board looks at that and will make judgments and make the decision of capital allocation based on that.

But it is, in light of the fact that we do have a lot of great opportunities to grow this business with capital, and that's an issue for us which we'll continue to deal with.

Thank you very much guys.

Mark Argento of Lake Street Capital.

Hello, good afternoon.

First off, Paul want to say congrats on a great run, truly a pioneer in the space and you leave a great legacy.

So congrats in your retirement.

When you look, Matt, going forward in terms of the complexion in the business, maybe talk a little bit about as the business gets bigger and you bring more portfolios in on the assets, the complexity of managing all those relationships.

Do you see doing -- I know there's a concept of this comprehensive deals or multiple IP components or portfolios, cross licensing, do you see shying away from that in favor of just more one and done but specific on a particular patent or a portfolio?

And how does the business or the complexion of the business change as you bring more and more larger portfolios in these various segments you're involved with?

I've spent the better part of the last three, four years thinking about that very problem, as has our management team in general.

Because that's where we've been driving the Company, and that's the state we're edging to closer and closer, so-called Nirvana.

And things that we look at, we look at for example what happens in the copyright industry.

You've got a lot of restaurants and bars out there playing copyrighted and intellectually property protected content, and you see a collection mechanism that's formed around that where there's a periodic structural payment.

So that could be a model that we go after.

And the reason you see a lot of those models eventually emerge, is because again as we're negotiating around 5, 10, 12, 15 portfolios, we're picking up another 4 or 5. So it's a moving target.

And when you have a moving target, in terms of what you're paying for, you have to come up with reasonable structured arrangements to handle that dynamic nature.

It's not like we're going to sell you a house, and you're not going to have buy another house for another 20 years.

So that's one pull that we look at.

The other pull then, what makes this space different, these portfolios especially as they become more capital intensive, especially if they become more relevant to the prospective licensees with whom we are negotiating, they each have different valuations.

So you can't just go in there and say we're going to license you at $1 a patent.

That's also not going to work.

So we're going to have to find a transactional mechanism that blends both those pulls.

On one hand, because it's a dynamic situation, we want to be the clearinghouse, the main clearinghouse for patents in the world.

And because to do that we have to continually collect.

And because we're continuously collecting, we have to in some sense get continuously paid.

What you've seen in the past with such economic models are transactions that start to have a more periodic regularity to them.

And you're not going to have book marked transactions where a check flies across the table, and that's the end of the story.

So that's one [trim].

But on the other hand, they all have different valuations.

And so that's the intellectual property Acacia has.

We started off with relatively simple so-called structured agreements, and we also started off trying to unsuccessfully negotiate some structured agreements.

We have a lot of intellectual property around the complexity of what happens when you try and marry up a bunch of patent holders that have infringed patents really with a bunch of companies that are infringing those patents.

And so we are seeking models and transaction.

And I think you can see that our structured views are evolving as well.

And it's my opinion that we are on a steady evolutionary patent in terms of what those agreements look like.

And so I guess I'm answering your question by saying we're not going I think in my opinion, engage in a bunch of single separated orthogonal deals with respect to one another with a given company.

Some companies might choose to do things that way, and there might be companies where we're showing up infrequently enough where they might want to do things that way.

But a lot of companies, it's going to be different story because we're sourcing a lot of very high quality IP that reads on them.

Just a follow up on the last question for me.

In terms of time to money, I know you brought some portfolios in.

And it seems like as you bring these portfolios in, it's like the kind of money or the activity levels are -- I think it's kind of like a barbell where you have a lot of maybe some initial activity right up front or you have some parties that are willing to settle at economics that make sense, and then maybe just a few at a time where activity levels are smaller and then a bigger of that.

Is that consistent?

That's something I've been seeing.

I think I see it a little bit in your business.

But is that a fair way to think about how you've seen some of the activity levels in these larger portfolios?

Well, the only data points we really have since we started deploying capital 18 months ago is that our first portfolio where we've put out working capital, we've got two-thirds of the money back in 18 months, and another portfolio we've gotten back 74% of our money in 12 months.

And quite frankly, some of the other transactions were either very late last year or very early this year, so they're really around the six month window.

So, to have any meaningful data I think you've got to get out of year, and our two main data points on those were pretty much, if you blend the two, 74% and 67% on an average between 12 and 18 months.

We've been fairly consistent in the first two deployments of capital.

We've had some smaller deployments of capital where we've had some pretty good returns.

Not all of them.

And I think one of the misnomers has been is because we did the one large transaction with Adaptix where we put out more money than we put out collectively on every other working capital advance.

Most of our advances are in the $2 million to $5 million to $10 million area where we think there's a very strong opportunity we can get that money back, and it 's very low risk and reuse that capital.

And those are the prototype transactions we're doing.

It's the same exact business model that we've been doing, except by having working capital you get access to higher quality, higher revenue, less risky patent portfolios by simply advancing some money generally from 12 to 18 months and a 1% interest rate environment.

So, we think it's a fabulous thing to have this working capital.

And by doing it, we're becoming the dominant player in the patent space.

It's a remarkable opportunity given four or five years ago when it was in question, who would be the leader in this field?

The capital we have right now and our ability to deploy this strategy where we can advance the patent owner some money and have skin in the game, I think is giving us the ability to capture the quality portfolios.

Matt's dilemma, if you call it a dilemma, is getting paid for all of this high quality patent portfolios as we continue to aggregate.

But it's a high quality issue for us, because if you compare the quality of the assets that we have now with where we were five to seven years ago, there's just absolutely no comparison.

And the pipeline similarly.

So it's again, the capital is a huge advantage and we think using the working capital model to access higher revenue portfolios is fabulous for our shareholders long-term.

And just to pick up on what Paul is saying, if you have a significant portfolio, or heck, even a not so significant portfolio in isolation and if you look at the various points in time at which folks get paid, I think by and large you do see patterns.

And are on [markmans] or on trials.

But that's not what is going on with our Company.

Because remember, we rarely for the marquee portfolios are talking to someone in isolation about one portfolio.

You've got to think about where this portfolio after portfolio are layered upon one another one time wise.

And so we're pushing it into a pipeline, and that in some sense, Mark, wreaks havoc with the barbell or whatever model, I have to look at the transcript to look at the details of your question.

But whatever model you're assuming, that's an isolated portfolio model.

When you're in doing multi significant portfolio assertions and licensing negotiations, you've got to layer all of those models on top of one another and it's not a linear layering.

You're not just adding them up.

So that's a really critical thing.

And again, we look forward to discussing this dilemma which we know exists for the folks that want to model what we're doing next week.

Thanks Matt.

Congrats on the promotion, and Paul good luck.

Nicholas [Redelli] of CSRA Research.

Thanks.

First just a quick one with respect to the Northern District of California Adaptix case with Apple.

And others that you have in front of Magistrate Grewal.

Do you have an estimated trial date for the initial trial?

And with that a question, would that first trial also include Apple?

Thank you.

And just so I make sure I understand the question, you're talking about the Adaptix case that's recently been transferred in the Northern District of California that involves Apple, and you want to know a trial date for it basically?

Yes.

I'm not sure that there's been one.

I don't think they've had the Rule 26 conference yet.

So I don't think there has been a date established yet, but if there is it's public.

You can look it up in the records.

I'm not aware of --

Okay.

And then a broader question.

Matt, you mentioned in your remarks a shift towards stepped-up engagement on the policy and legislation front.

My question is, is how large of a factor has this recent step up in the NPE policy debate had in terms of slowing or stalling discussions on large licensing deals?

In other words, isolating for the policy debate factor versus garden-variety lumpiness that is associated with your business.

Thanks.

Truthfully on the major portfolios, none.

Again, the only legislation we see coming down the pike, so to speak, and it's going to really impact lower dollar nuisance kind of deals and our business just isn't there right now.

And so we're not seeing an impact.

In terms of the portfolios we are monetizing, they look nothing like the portfolios people have in mind when they think of patent reform, at least the realistic bills that have a chance of passing.

And so we're not seeing the impact.

The impact really to the extent that we're feeling one, it's again the factors that Paul and I have been speaking to on this call, what happens in the case where you've got 5, 6, 7, 8, 12, 13 portfolios in play.

All high quality.

And as you're negotiating, your bringing on more.

That's the lumpiness.

Okay, thanks.

Fred Falkenberg of Ferborg and Falkenberg.

Hello?

I think we lost them.

Operator, I think we have lost them.

Tim Quillin of Stephens Inc.

Thank you for taking my follow up.

And Paul, I forgot to tell you how great you were.

(laughter)

Well, it would have been nicer to have a higher revenue quarter.

That's for sure, but thank you.

It would have made it a happier time to go.

But enjoy your retirement.

So on patent intake, I know that it's quality a lot of times not quantity.

But so far this year, 16 new patent portfolios coming in the door.

That's lower than any two quarter period for a couple of years anyway, it's maybe three years.

So the numbers are not high, but what can you tell me maybe about to the quality of the patents that have come in this door?

Are there any, especially in the quarter, were there any marquee patent portfolios that you think can do $100 million plus in revenue, and if so can you describe them a little bit more?

Answer is yes, when it comes to the marquee portfolios.

In terms of describing them, we always have this issue about describing stuff in detail before we file a lawsuit on it because it's not public and we don't want to have anyone jump the gun litigation wise and file a degoratory judgment action in case the patent owner that we're partnering with had previously put people on notice.

So during Analyst and Investor day, we'll certainly give you looks and we'll be able to give you looks in a controlled way bearing in mind the risk I just mentioned.

Okay?

But the answer to your question is absolutely yes, higher quality.

Higher-quality, by the way with capital advances takes more time and care to bring in.

So that might explain the numbers game.

And look, this is not just a numbers game.

Obviously, it's also a quality game.

And again, Paul and I have never been happier with the intake.

We think of where we were and where we are now, and we can cover very important platforms like the smartphone with several, several very high quality portfolios.

And again coming back to what we've pulled in this quarter, we think we've got several that are very high quality and they come in different shapes and forms in terms of how the money is going to come in and from where it's going to be collected.

But the one common denominator in terms of what we're pulling in, is that a far higher ratio of portfolios that we're bringing each quarter are what I would call very high quality.

(multiple speakers)

And were the portfolio sourced during the quarter from pulled in by your new hires?

Well, they've just joined the Company.

But no -- (multiple speakers)

I'm kind of whistling.

I think one of them took a real shot.

But you'll start seeing activity.

We're very happy with the energy and creativity and the urgency they've brought to the Company.

They have both fit right in.

And also if you think about it, we eventually will be the beneficiary of the depth and quality of these patent portfolios.

Historically, if you'd look back five plus years ago when we had portfolios with two or three patents and three or four claims, it's just a natural inclination if there's any money significant money to be challenged.

But if you look at some of the portfolios we've brought in, like the [Binuti] like the Nokia Siemens, like the Adaptix portfolios that are that deep, it leads companies into substantive negotiations around reasonable pricing absent a litigation or a trial event.

And as we aggregate we'll be the beneficiary of that.

Right.

My last question, or maybe I have two questions.

But one question is regarding the capital outlay strategy.

And so I understand that there's no cookie-cutter formula on your partnerships and you use capital where you feel like it can help you get higher quality patents and grease the wheels of progress.

But in 2012, even excluding Adaptix, $175 million in capital outlays and we got used to a certain capital intensity to the business and expected some revenue to start shooting out maybe more in 2014.

The capital intensity this year is much, much lower.

So I'm just wondering what has been the difference this year versus last year?

There's less competition.

And I think the perception is that it's harder to license.

And frankly, again, the patents were for Media Blitz I think has helped us.

So we are again, I think we've had some terrific portfolios come in.

We've got revenue shares on them.

And I just think that the competition, the competitive landscape is a little different now.

(multiple speakers) I do want to say one more thing.

We haven't deployed as much capital this year as last year.

That doesn't mean we're not working on deals like that, and those deals take time.

Again, the more capital you are thinking of deploying the more careful have to be and the more time you need to take.

Right.

Okay, fair.

And then when I think about capital deployment in a simplistic way, I like to think that over a five to seven year period, If you put out $100 million in capital that you should get 3X plus that back in terms of licensing revenue with some kind of lag.

And I would like to know how you think about that in the context of 2012, and again maybe you take Adaptix off the table.

But $175 million in capital outlays, what kind of revenue theoretically should you be generating in 2014 in order to meet your return on investment targets?

Well, we aim for what we said we were aiming for.

Which is, capital back in 18 months, and a 3X including original money within three years.

And so far with the portfolios we've had underplay for a sufficient amount of time, we appear to be pretty much on track to do that.

But it's still very early, and we've only got a couple of them that we've really had for 12 to 18 months.

Right.

And is 2014 the right way to think about starting to get you a higher level of monetization from your 2012 outlays given that time to that lag to revenue?

Yes, but don't rule out 2013.

Well, after this quarter -- just kidding.

Thank you.

Remember it's only 13 weeks.

Ladies and gentlemen, we've reached the allotted time for questions today.

I would now like to turn the call back over to Mr. Ryan for any closing remarks.

Okay.

Thank you operator, and I thank you all for being on the call with us.

And look forward to the next call, Matt will be leading the call with the senior management team.

And if you have any questions in the meantime, please feel free to give Matt or I a call, or Rob Stewart.

Thank you.

And again, we encourage everybody who is on the call in the East Coast if they can make it to Analyst Day, we think that would be a day very well spent.

Thank you.

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This concludes our conference for today.

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

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