Acacia Research Corp (ACTG) 2013 Q3 法說會逐字稿

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

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

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

I will now turn the conference over to Mr. Matthew Vella.

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 calls, the terms we, us, and our, refer to Acacia Research Corporation and its wholly and majority owned operating subsidiaries.

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

With us today are Clayton Haynes, our Chief Financial Officer, and Ed Treska, our General Counsel.

Today, I will first give you an overview of our patent licensing business this past quarter.

I'll will secondly address some of the patent reform initiatives currently underway in Washington DC.

And I will then close by outlining the changes we have been making since I first became CEO a couple of months ago.

After we speak, Clayton Haynes will provide you with an analysis of our financial results.

Finally, we will open the call for questions.

Acacia empowers patent owners and awards invention by providing a path to patent monetization for the people and companies who have contributed valuable patented inventions to an industry, but who are still not getting paid for those inventions.

We call these people the patent disenfranchised.

In the face of unprecedented pressures being generated by those who seek to distract, dishearten, and dissuade the patent disenfranchised, Acacia remain confident that it has and will continue to obtain the high quality portfolios, best in class professionals, and capital required to profitably serve this underserved and very deserving constituency.

In the face of these unprecedented pressures, Acacia is also adapting.

After the CEO transition of last quarter, we instituted a comprehensive review of all of Acacia's practices, and implemented changes where we saw opportunities for improvement.

I will highlight some of those changes a little later this afternoon.

As we have been implementing these changes, however, I must say that we had a slow and disappointing quarter from both the revenue and portfolio rights acquisitions perspective, and this is where I want to start my remarks today.

Specifically on the revenue side, Acacia generated $15.520 million in revenues in the third quarter, from 24 new revenue agreements which covered 24 different licensing programs, including five new licensing programs generating initial revenue.

Trailing 12-month revenues at the end of the third quarter were $181.755 million, as compared to $205.258 million as of the end of the prior-year quarter.

And, Acacia's cash and investment position was $285.301 million at the end of this past quarter.

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 pushed into subsequent quarters.

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

Nonetheless, make no mistake about it, our job is to close the deals at the right price points, preferably in a timely manner, and management is disappointed that we could not close more deals at the desired price points in this most recent quarter.

As was the case with the previous quarter, a lot of prospective licensees tested our resolve around price discipline at the end of this past quarter.

Though agreements with many of these prospective licensees could have been reached, that would have resulted in far better revenue numbers for the quarter, in some cases, some of those agreements, through their terms and conditions, would have impacted our ability to acquire rights and portfolios going forward.

In some other cases, executing some of those agreements would have placed us at pricing that is below what we consider reasonable, based on comparable rates at where similar portfolios have been licensed.

This in turn would have directly impacted our shareholders' returns under invested capital, and it would've impacted our partners' returns, under intellectual capital, their patents.

In such cases, we believed the right move for this past quarter to be simply continuing with associated patent litigation, until we get better pricing.

Consequently, we postponed the consummation of those agreements until future quarters, at the expense of this quarter.

Having said that, our revenue performance this past quarter is not entirely attributable to the attitudes and actions of the prospective licensees with whom we are dealing.

There are things we could have done better in some of our license negotiations during the past few quarters, that we will now from now onwards to better.

As we undertook the comprehensive review of our company this past quarter, we did come to realize for example that we were being too optimistic about medical technology companies' willingness to pay reasonable licensees without having to resort to intense patent litigation.

As a result of this misplaced optimism, which was initially triggered by some early licenses that were achieved in this space, without litigation, we decided to modify, these past nine months our usual playbook of remaining aggressive on the litigation front, as we attempt to negotiate medical technology patent licenses.

But, we did not get rewarded for this kinder gentler approach in the medical technology space.

Instead, we had two to three quarter of under-productive discussions that ultimately did not lead to the early license agreements we hope to close.

We have now returned to our more characteristically aggressive litigation posture, even as we continue to pursue licenses in the medical technology space.

So to recap, while we attribute much of this quarter's disappointing revenue performance to stubborn pricing positions of prospective licensees, we are taking steps to adapt to this stubbornness, and we think our current revenue performance will be compensated for in future quarters.

Our final point with regards to our future revenue prospects needs to be made.

It is one I have made before, and which holds as true as ever.

Our agreements are inherently more complex to negotiate than past license agreements, and thus require more time, because they typically involve more money, and they involve more marquee portfolios.

Four or five marquee portfolios at times, meeting single prospective licensee at any one time, take a lot longer to license to one company than just one marquee portfolio, which for us was we must always the PalmSource portfolio.

As the drawback of having so many marquee portfolios, having all of those portfolios also means more revenue, higher returns on investments, and less overall risk, and ultimately collecting that revenue.

All of which we expect to start significantly materializing in 2014.

Turning to our portfolio intake, I think we, as a company, temporarily lost focus on our portfolio intake deal flow this past quarter, as we have been implementing the changes, the adaptations I mentioned at the start of this call, and as we added several new people to our business development teams.

As a result, we had a slow and disappointing quarter, from portfolio intake perspective, especially when compared to the previous six to eight quarters, which collectively resulted in the accumulation of our present fleet of marquee portfolios.

Specifically, during this past quarter, we invested a total of $5 million in upfront advances and future guaranteed payments to enter into partnering agreements covering the following six new patented technologies.

Fluorescent microscopy technology is of key relevance to the life sciences, because it enables three-dimensional imaging of cellular constituents with unrivaled specificity.

Professional and social media networking technology, that is relevant to key features of the product and service offerings of several major social networking companies.

Multiple coordinated video viewing devices technology, that has become increasingly important as smartphone and tablet apps become integrated with TV viewing.

Intelligent beverage dispensing technology, that is starting to become more and more prevalent at theaters and other public entertainment venues.

Power managed security system technology, using high-end electronic locks, and semiconductor testing technology, used by designers to test wafers.

And while we are delighted with each of the portfolios and partners we picked up this quarter, taken in aggregate, we are disappointed with the number of portfolios regarding this quarter.

With the changes we will discuss largely behind us, however, and with our best in industry business development executives now settled into their respective teams, we think, from a portfolio intake perspective, that this past quarter was an aberration that is being reversed.

Put another way, we remain confident about the number of high quality portfolios that are being presented to us, and that we expect to pick up in the coming quarters.

The next topic I want to briefly touch upon is the government, and its activities relating to patent reform.

These activities are certainly examples of the pressures I referenced at the start of my remarks.

As I mentioned in previous public remarks, we think that many of the draft bills circulating around Congress that unduly target patent plaintiffs or non-practicing entities, at the expense of patent defendants or practicing entities, we do not think that any of these draft bills will pass into law.

Accordingly I will not address any of them today.

The draft bill that we understand might pass into law, the one that is sponsored by Congressman Goodlatte, focuses on abusive patent litigation behavior, without unduly impacting the rates of plaintiffs or non-practicing entities.

This bill is not about discriminating against one class of patent holders versus another, it is about abusive practices.

As a result, there is currently nothing in Congressman Goodlatte's draft legislation which we think will be materially detrimental to our business.

In fact, we expect the bill, were it to become law, to drive marginal and unscrupulous players out of our industry, which would be of benefit to us.

Moreover, because the fee shifting and other provisions inside this draft bill would make it riskier for a smaller patent-driven franchise plaintiff to assert its patents, we expect the bill, should it become law, to drive new business our way.

As we have seen with virtually all patent reform legislation enacted into law over the past five years, the riskier and more complex patent assertion becomes for the patents enfranchised, the more they shall turn to Acacia to help them monetize their IP.

It is no coincidence that our company has experienced record growth since the first time significant patent reform rumblings began to be felt, about five years ago.

While on the topic of patent reform, many of you have also heard that the Federal Trade Commission is set to launch a formal inquiry into 25 wireless communications patent assertion entities.

We have not yet been contacted by the FTC, but we expect to be.

The FTC study will be a long-term multi-year information gathering process, ultimately leading to a set of suggestions to be present to Congress for potential additional legislation several years out.

We look forward to actively participating in the study by constantly explaining our business and its benefits to the patent disenfranchised, and the innovation economy all of us value and cherish.

And in doing so, we also look forward to raising issues that are currently not being emphasized in the FTC study.

Including the holdups being committed, not just by unscrupulous patent holders, but by recalcitrant patent infringers that engage in scorched earth litigation, even in the face of valid infringed and reasonably-priced patents.

Our final point about these government reform initiatives, if we sound relatively calm and confident about them, it is because we have done a lot of work to understand them.

For the first time in our Company's history, we have created a dedicated function in charge of government relations.

We have been very actively reaching out to Washington DC insiders, politicians, and similarly situated companies like ours, but also champion the interests of the patent disenfranchised.

Finally, I would like to turn to the comprehensive Company-wide review that I have been referencing.

And specifically, to the changes, and the adaptations that this review has spawned these past few months.

First off, let me say that management expects the changes to be largely complete within the next four to five weeks.

I do not expect to be talking to about changes during our next quarterly call.

Secondly, I want to briefly touch on the impetus for the changes.

When we started our review nearly 3 months ago, we thought that the processes that we had in place might be improved to one, better absorb the pressure is being applied to the patent monetization industry.

And two, to take into account the growing sophistication of our company.

Specifically, as the amount of capital deployed by the Company has increased these past few years, as the quality of its people and portfolios have increased, as the stakes of its litigation and licensing activities has increased, and as the environment in which the Company operates has become more complex, with the benefit of hindsight, we thought we might find several opportunities for improvement.

We turned out to be right.

As a result, we instituted the following changes.

First, we have added increased discipline to our process of pricing patent licenses.

As mentioned above, we will be more patient to get the right price.

We will do this because we think it leads to better returns of investment, better future patent intake opportunities, and ultimately, smoother and higher earnings for shareholders.

Second, we shall continue to shift our focus and our point of patent intake from quantity to quality.

And in conducting our comprehensive review, we confirm the high correlation between patent quality as opposed to quantity on one hand, and profits on the other.

Third, we created larger licensing and portfolio intake teams, characterized by more specialized divisions of labor.

We Will no longer be asking largely solitary executives to single-handedly bring in or manage eight and nine-figure patent portfolios.

We underwent a significant reorganization to do this.

Fourth, we decided to make higher levels of operating expense investments in the portfolios we already have under management.

Litigation, including international litigation, we are now prosecuting six overseas lawsuits, and expect to add more.

And continuing patent prosecution are being ramped up.

We have also started to very selectively turn to the International Trade Commission for especially strong cases that amount to serious trade disputes involving US companies whose patents we control, which is also a more costly way to enforce patents.

We have done all of this because we believe so strongly in our portfolio, as currently under management.

Fifth, as we have increased our investment in patent portfolios, we have also added more risk and cost controls by enhancing our financial tracking and budgeting processes.

Six, we are making increase in investment in information technology, to enable us to do a better job leveraging the rich patent licensing data we have gathered in the past decade, and to do a better job tracking our progress, acquiring and licensing rights, and patent portfolios.

Seven, we are also planning closer attention to what is happening in Washington DC, as I mentioned before, by for the first time creating a dedicated government relations function in our Company.

Eight, we have revamped our website and branding.

The first fruits of this effort can be seen at our new website which can be reached at www.AcaciaResearch.com, which serves as a vital step in educating all of our constituencies.

Our shareholders, our perspective patent partners, our existing patent partners, folks in Washington DC, and the patent licensing community at large, about who we are and what we do.

Ninth, we are providing more information to our shareholders about our portfolios by supporting some of the facts associated with our major licensing opportunities.

You can see all of this at You can see all of this at www.AcaciaResearch.com/investors/license_opportunities.

We will continue to build upon this initial effort, for example, we will add information relating to our automotive licensing opportunities in the coming weeks.

We also add more portfolios to some of the regular list of opportunities such as smartphones.

I will discuss this change at the end of my remarks.

Finally, and this change preceded the CEO transition that just occurred.

As some of you might have noticed, we are making additions to the metrics we use to judge our own performance.

Before, we used to talk about trailing 12 months revenue, portfolios under management and portfolio growth.

Now, we are adding a few more metrics.

While still talking about trailing 12 months revenue, portfolios under management and portfolio growth, we will also talk about portfolios under management that are at a yield or pre-yield stage.

We will talk about deployed capital and the returns on investment we earn on it.

And finally, we will talk about the so-called quality metrics.

The quality metrics cannot easily be quantified.

But it is embodied by the data we put up on the licensing opportunities webpage I just mentioned, at www.AcaciaResearch.com/investors/license_opportunities.

And it is the metric management is most closely tracking going forward.

All of these changes build upon the strong foundations of our Company.

As the market leader, Acacia continues to see an acceleration in opportunities for partnering with the patent disenfranchised, in the technology, energy and med tech sectors.

Our partnering opportunities, and our revenue-sharing opportunities are still as good as ever.

We continue to partner with patent owners on approximately 90% of new assets under management.

On some portfolios, we are providing upfront advances to the patent owner, which we recapture some of the initial licensing revenues we generate.

And our strong balance sheet is giving us the ability to utilize these upfront advances to acquire control of higher-value, lower-risk patents.

And as we gain more and more control of these higher-value lower-risk patents, as we repeatedly and predictably help the patent disenfranchised get paid for their infringed-upon patents, we expect to be at the forefront of the emerging market of patent assets, by providing a clearinghouse function that will match up the disenfranchised patent holders with those that need rights under their patents, using a minimal amount of cost and litigation.

But again, to get there, we must be patient.

Management believes that if it is patient, our shareholders shall be rewarded.

Going back to our licensing opportunities webpage, and focusing for example on the smartphone entry, management thinks that the foundation for this belief is there for all to see.

Lots of portfolios, lots of patents, high coverage unit counts, lots of exposed revenue, lots of geographies, lots of losses driving negotiating deadlines.

And most of all, the high quality patent portfolios entrusted to us by the patent disenfranchised.

These are there for all to see.

We think the quality can be discerned through the patents themselves and their associated litigation dockets, which can also be reached from this place in our website.

These portfolios include the Rambus LED backlighting portfolio, which originated from an Ohio company that took their technology for backlighting blankets for jaundiced babies, and applied it to backlighting mobile phones many years ago.

The Adaptix portfolio, which originated from Texas startup headed up by a University of Washington professor, that was building 4G technology implementations more than a decade before widespread 4G rollout.

The portfolios include the Silicon Image portfolio, which originated from a Silicon Valley pioneer, and high-speed network interconnection technology.

Technology that more than a decade after its invention is now migrating to high-speed chip interconnections.

They also include the Nokia Siemens portfolio which came from one of the very most significant pioneers in the communications industry.

And of course, those high-quality smartphone portfolios include the PalmPilot software portfolio we are working on for Access Co, which covers critical building blocks of today's smartphones.

Based on the information that we have, these and other marquee portfolios do not deserve, and will not suffer under our management, a quick and discounted license fee outcome reached an interest of serving short term expediencies.

If we are patient, we will get, as our reward, the right prices for each member of this formidable and widely-infringed coalition of patent portfolios.

The right return on our capital, more profits for Acacia, and ultimately a higher share price for our shareholders.

I would like to conclude with this most emphatic statement.

Notwithstanding the pressures that are weighing down on the patent disenfranchised, I remain unbowed in my enthusiasm for our business and strategy.

My confidence in the quality and technical skill of our professional staff, and the strength of our patent assets.

We have never been better positioned for high-caliber, long-term performance.

And I am determined to lead Acacia in realizing that opportunity.

Thank you for joining us today, and thank you for your support.

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

Thank you, Matt.

Thank you to everyone joining us for today's quarterly earnings conference call.

On a consolidated basis, revenues in the third quarter of 2013 totaled $15.5 million, as compared to $34.9 million in the comparable prior-year quarter.

Third-quarter 2013 revenues included license fees from 24 new licensing agreements covering 24 of our technology licensing programs, as compared to 33 new licensing agreements covering 31 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 $181.8 million, as of September 30, 2013, as compared to $205.3 million 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 by Matt earlier on this call, and on previous earnings conference calls, and in our periodic filings with the SEC.

For the third quarter of 2013, we reported a GAAP net loss of $15.7 million or $0.33 per share, versus a GAAP net loss of $6.6 million or $0.14 per share for the comparable prior-year quarter.

Please note that earnings and loss per share amounts included in the release today are preliminary and were estimated using the two-class method of computing EPS, pursuant to the ASC 260 accounting guidance.

Management will finalize EPS calculation for the periods presented in accordance with the applicable guidance, in connection with the preparation, review and filing of the Company's quarterly report on Form 10-Q for the third quarter of 2013.

The GAAP net loss for the current quarter included the impact of non-cash stock compensation charges of $9.4 million versus $6.3 million in the prior-year quarter, and non-cash patent amortization charges of $12.6 million versus $10.4 million in the prior-year quarter.

Third quarter 2013 non-GAAP net income, which excludes the impact of non-cash patent amortizations, stock compensation, and excess benefit related to non-cash tax benefits, was $5.1 million, as compared to $6.8 million 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 68% for the third quarter of 2013, as compared to 60% 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, conditions, 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 change in average margins in the third quarter of 2013, as compared to the third quarter of 2012, was due primarily to a higher percentage of revenues generated in the third quarter of 2013, on average, having lower contingent legal fee rates, as compared to the revenues generated in the third quarter of 2012.

Inventor royalties expense decreased 53%, relatively consistent with the decrease in revenues quarter to quarter.

Third-quarter 2013 non-cash patent amortization charges increased, due primarily to an increase in amortization expense related to patent portfolios acquired since the end of the prior year period, totaling $4.4 million.

The increase was partially offset by a decrease in accelerated patent amortization, related to the patent portfolio dispositions, totaling $2.2 million.

MG&A expenses, including non-cash stock compensation charges, increased $6.3 million or 53%, due primary to non-cash stock compensation charge related to the acceleration of vesting of shares of restricted stock, totaling $1.8 million and cash severance totaling $850,000, incurred in connection with the Board-approved retirement package for Paul Ryan, as previously announced.

The increase in MG&A also reflects a net increase in licensing, business development, and engineering personnel since the end of the prior-year quarter, an increase in other employees severance-related costs associated with certain internal structural changes during the current quarter, and a net increase in corporate legal, facilities costs related to the expense of our Newport Beach and Texas facilities, and other general and administrative costs.

Approximately 70% of the increase in MG&A quarter to quarter relates to one-time nonrecurring expenses incurred in the third quarter of 2013.

Other operating expenses incurred in the third quarter of 2013 included one-time nonrecurring charge related to the resolution of a dispute concerning legal fees associated with a prior matter totaling $3.5 million.

Litigation and licensing expenses in the third quarter of 2013 increased $4.4 million over the prior-year quarter to $10.4 million, due primarily due an increase in our investment in international enforcement costs, as described earlier by Matt, and an increase in strategic patent portfolio prosecution costs associated with certain of our ongoing licensing enforcement programs.

We expect to continue to incur increased costs related to our international enforcement and patent prosecution over the next several fiscal quarters, as we continue to ramp up international litigation and both domestic and international patent prosecution.

From a tax standpoint, the tax benefit for the third quarter of 2013 and 2012 reflects the application of an estimated annual effective tax rate to the GAAP pretax net loss reported for the period.

The effective tax rate for the third quarter of 2013 is higher than the blended federal and state tax rates, due primarily to certain nondeductible permanent items associated with sections 162 and local code.

The tax rates for the prior year reflects the impact of the release of the valuation allowance in 2012, as previously discussed.

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

From a cash flow perspective, we ended the third quarter of 2013 with $285.3 million of cash and investments, versus $311.3 million, as of December 31, 2012.

Net cash outflows from operations for the third quarter of 2013 totaled $22.9 million, primarily reflecting the decrease in revenues in the current quarter, and payments to our patent partners and contingent law firms, related to Q1 and Q2 revenues during Q3 2013, versus net cash inflows of $6.8 million for the third quarter of 2012.

Third-quarter 2013 patent-related acquisition costs paid totaled $4.2 million, as compared to $24.5 million in the prior-year quarter.

On a year-to-date basis, we have paid quarterly dividends to shareholders totaling $12.4 million, and as stated in today's earnings release, the Board has approved the third dividend payment in the amount of $0.125 per share, which will be paid on November 29, 2013 to shareholders of record as the close of business on November 1, 2013.

Looking forward for the remainder of fiscal 2013, we expect MG&A, excluding non-cash stock compensation charges for fiscal 2013, to be the range of $30 million to $31 million.

For fiscal 2013, we expect patent-related litigation and licensing expenses to be the range of $35 million to $36 million, depending on net patent portfolio litigation, including increased costs associated with international enforcement and strategic patent prosecution activity occurring throughout the remainder of the fiscal year, as discussed earlier.

Based on current outstanding grants and restricted stock, we expect scheduled non-cash stock compensation charges for fiscal 2013 to be approximately $27.4 million.

Excluding any Q4 2013 patent portfolio acquisitions, scheduled fiscal year 2013 patent amortization expense is expected to be approximately $48.1 million.

At this time, I would like to turn the call back over to Matt Vella for the Q&A session.

Kayla, could you please open up the call for questions?

(Operator Instructions)

Mark Argento, Lake Street Capital Markets.

I just wanted to touch base on, it sounds like you have reevaluated a little bit of your go-to market strategy with some of the med tech portfolios.

And I know you had originally had thought about more of a comprehensive model, where you'd work on a broader basis with the potential licensee and not only settle out existing infringement activities, but also, a go forward piece.

And then you kind of moved away from that of the last year or so.

When you re-look at the whole go to market strategy and the licensing strategy, is that something that we could start to see some more of, and then dovetailing on to that, I know you had a couple of these types of deals that you had out there, two or three or four years ago that potentially would be up for renewal, and maybe you could touch on the ability to renew and use the strategy going forward?

Sure.

On the med tech question.

And answers to both of these questions, Mark, are going to be similar.

When you end up pushing a large portfolio and getting a license on it, and you end up getting a lot of money for that portfolio, people want some period of tranquility to be coupled with the fact that you no longer are suing them under the major portfolio at issue.

And so, we have seen on many occasions, not always, but on many occasions, some notion of that protection built out into our larger agreements.

That hasn't changed, and that will not change.

I think if anything has changed, it is the idea of what is the tail and what is the dog so to speak.

What is driving everything ultimately is the patent matter, before the prospective licensee.

The go-forward protection, which varies quite a bit from company to company, some don't even want it, and the terms vary quite a bit.

That is the tail.

So turning to the second part, the part about renewals, again, these deals are a function of the portfolios that you have in front of those companies at that point in time.

If you look very closely at our docket, our litigation docket, and if you go to the webpage I just described Mark, you'll notice for example a flurry of lawsuits occasionally filed, all at once.

And when you see that, that might tell you something that what happens is a result of a negotiation that was occurring.

So overall, just to recap, the go forward piece, that's the tail, the dog so to speak, those are the large portfolios, the marquee portfolios often, that we are bringing to bear in front of prospective licensees.

And our approach consistently has been, let's get the right price for the portfolios in front of the perspective licensee.

And then, we are going to talk about go forward protection, we would see all manner and all variety of protections that are bargained for by the parties.

All right.

And then, in terms of, I know you mentioned the ITC.

You talked a little bit about using the ITC, I know historically it hadn't been a venue you had spent a lot of time, and just given the business model that you have.

Maybe talk a little bit about where you see the opportunity to use the ITC?

I will talk about the opportunity that we have in front of us now because I think it exemplifies how we would use it.

We have some pioneering 4G patents from Adaptix.

And we think that these patents are critical to the 4G rollout that is occurring right now.

And it is a rollout that is just starting.

If you really think about it, your smartphone only began saying 4G about a year ago.

So if you were to just pursue that very significant portfolio in District Court, the typical focus of one of those actions is on past damages, and on the royalty rate you can get on past damages.

And then you add to the go-forward piece to cover future sales, but usually when we're going in to District Court, there's a lot of past damages involved.

In this case, we're getting to a resolution quite quickly, there will not be a lot of past damages, because this technology has just started to be deployed.

It is going to be around for years and years and years and years.

And using the ITC, for that reason, the ITC is not about past damages, it is essentially about validating patents, and showing that they are infringed, and then letting the parties sort out where the license agreement should be going forward, that's very appealing to us.

Now, I can also talk about a number of things like the Adaptix patent involved in the ITC, a number of things that it is not.

That also will be a good guideline for how we plan on using ITC going forward.

We want to be very selective, when we go to the ITC.

We don't want the ITC to be a default enforcement mechanism, and we do not want to raise the specter of non-practicing entities continuously going back to the ITC and flooding that very important body with non-practicing entity litigation.

The Adaptix portfolio, those patents, including the one in the ITC, that was never subject to a standards friend obligation.

The owners of that patent were never invited and never participated in standards essential negotiations.

Their technology was just taken the folks from the standards body.

So that was a guideline that we plan on following.

We did not plan on bringing a lot of standard essential patents, any in fact, to the ITC.

We also like the quality of the invention, and frankly, we like the circumstances very much.

We think it is just the kind of thing that the ITC should be looking at.

Just to recap, Adaptix was a technology start up founded by a University of Washington professor.

The start up raised about $40 million in venture capital, and was out there with a box that exhibited a lot of the features that are currently being rolled out in 4G networks.

And that box was about 10 years too early.

There is nothing for to plug into.

Fast-forward, and we are suddenly seeing the technologies in the box being disseminated through a number of standards, like the 4G standard.

And we are seeing a number of companies making a lot of money and gearing up to make even more money, essentially using that technology.

The $40 million in venture capital money, that all went away, the boxes never got sold.

We came along, we cashed out the venture capitalists, and now we've got the portfolio.

And we think it is important that we are able to get our day in court, so to speak, that we're able to vindicate his American patent rights.

Because, next time somebody comes along with a terrific technology product, that might just be a little bit too early, I think we want the venture capitalists that did pump the $40 million into Adaptix to make the same decision.

Knowing full well that if things don't work out because of the technology's just too early, or some other thing happens, independent of the value of the technology, that prevents that company for making a lot of money, there will be companies like us around, there will be a secondary market of patents around, and we will be around to essentially reward these folks for taking the risk in great technology.

For all of that to be there, we need to be able to take advantage of bodies like the ITC.

So that is how we plan on using the ITC going forward, in a nutshell.

Okay last question in terms of buyback, stock is in big, probably will be in big tomorrow.

You haven't been active with the buyback.

Any thoughts on reactivating that, or potentially returning some capital to shareholders here?

At some point in time, I have to assume instead of buying other guys' IP or acquiring other IP, it just makes sense to invest in your own IP that you already have.

I don't know if you have any thoughts or comments on that yet?

Yes the Board is constantly considering how to best allocate the company's capital.

Including buybacks, dividend payouts, and of course the portfolio investments that you just referenced.

At present, it is disinclined to engage in buybacks, because it sees better capital allocation opportunities elsewhere.

But circumstances change.

So we will see what happens.

All right, thank you.

Paul Coster, JPMorgan.

First up, some of your counterparties decided to test your resolve this quarter.

We changed?

Now that they have heard you really explaining your situation and with the stock down, why wouldn't they test your resolve this quarter as well?

In terms of what changed, we can only speculate.

And I would rather not do that, meaning, it's not like these guys sent a note saying, sorry we couldn't do the deal, and here the five reasons that we did not cut the deal.

In terms of why we don't think this is going to keep going on and on, there are court dates, and there are trial dates and there's Markman dates.

So ultimately, that is the ultimate backstop.

And we have put our lawsuits up on our webpage sp everyone can see when those are coming along.

And in most cases, that is the ultimate backstop.

Now, as we keep walking away from sub-standard license offers, there is also psychology playing on the other side.

At some point, someone is going to take a deal at a reasonable price.

And when they do, we will cut that deal, and we will ensure that their competitors that are making us take more risk and spend more time pay more.

And so we will count on the ultimate backstop of trial events, and we will count on the promise that if somebody tests our resolve, a competitor is liable to come along, pick up the portfolio, at a price point that is going to be better than what the folks that are going to keep testing our resolve are going to pay.

Okay.

A couple of things in your strategic review, which did not quite resonate with me.

The first one was that, you are going back and utilizing more discipline needs to be applied on the deployment of capital.

And you sort of have this one really big deployment, which was Adaptix.

Do think you overpaid?

Is this an expression of buyer's remorse?

No.

And in fact, I'm sorry Paul, there was a verb in your sentence I was muffled.

Can you repeat just the very first part of the question?

Yes I don't know if I'll get the words exactly right, but in your strategic review you talked about going back and said of applying some more discipline in your processing to patents.

And of course the most visible deployment of capital was on Adaptix.

Is this buyer's remorse?

No.

And a couple of things.

One, I was talking about pricing patent licenses.

Having said that, we have always exhibited disciplined about how we price intake, and we have always use the metrics that we have been talking about these past 20 months.

The 3X and capital backing into 24 months.

That has not changed, and that is not going to change.

In terms of Adaptix, no I don't think that we overpaid.

And I think that over time, we will see that we haven't overpaid.

You talked about, you were disappointed with the intake but I think also in a strategic review I got a bit muddled about whether it was quantity or quality that mattered.

How do I reconcile that?

It sounds like it is a quantity issue?

Or maybe it is also quality issue?

It's a bit of both.

Again, we have got, especially the past 20 months, higher thresholds that need to be crossed before we pull something in.

And those thresholds are around the issues of infringement enforceability, and validity.

Now once you get beyond that point, the big differentiator is market size.

So obviously, markets on microscopes are not as large as markets on smartphones.

So when I talk about disappointment in the intake, I am still delighted with each of the portfolios that we pulled in.

We still think that, taken in isolation, they're wonderful.

They just don't always happen to cover widely-used markets or features to the same extent as say smartphones.

So that's what I'm referencing.

This quarter, you have acknowledged that maybe you were being a little bit too friendly with the potential licensees in the med tech space.

So what that implies to me that you do have a little bit of control over your destiny, it is not all outside of your control.

In that context then, can you commit to us on this call now, that you will post sequential growth this quarter, with a more aggressive assertion that you are now planning?

Commit what?

What do you mean by post sequential growth?

Sequential revenue growth in 4Q 2013.

No.

Because if somebody comes along and they want to slap a large check on us, for taking, for example, our entire smartphone opportunity away, and that's let our sequential early revenue growth, at the expense of what we have is a far higher amount of revenues going forward, we won't cut that deal.

So no, I cannot commit to that hypothetical.

But you can commit to driving revenue growth this quarter by more aggressive stance with your portfolios?

I mean, $15.5 million seems to me like it is rock-bottom, surely.

You cannot commit to climbing from this level?

It all depends.

Right?

So one thing that I'm not going to do, though Paul, is I'm not going to put myself in any more of a corner then I have arguably done already.

Because essentially, it is a self-defeating prophecy.

I think it is right on.

So just testing out this if you have got any control here.

(multiple speakers)

But you may choose not to exercise it, and that may be a rational business decision.

I totally get it.

But obviously while scrutinized by the public market, this business model is not at the multiple it probably deserves, and this is all obvious to you, and the new metrics that you plan on disclosing will help a little bit, but not much.

Last question is more benign in nature, not that these were unpleasant questions.

But can I just go back to Clayton's comments on the expenses?

I just kind of missed a little bit on the below the line expenses that you do, you are in a position to predict

Can you just reiterate what is $35 million to $36 million this year?

And in that context by the way, you said I think, that 70% of the increase from Q2 to Q3 is one-time in nature, and yet the guidance that you issued only calls for something like 15% or 10% decline in MG&A sequentially.

So I'm a bit surprised that it's not a more precipitous decline this quarter.

Sure, Paul.

So the reference to the 70% was just an estimate of how much of the increase in the current quarter versus the prior-year quarter related to those one-time nonrecurring charges.

For example the non-cash stock compensation charge associated with Paul Ryan's severance package, and other types of one-time costs that we don't expect to incur in future quarters.

But the reference to the $35 million to $36 million.

Yes but then you would expect the sequential decline in MG&A, including FAS 123 to be more than 10%?

You have said that $68 million, I think it was, you didn't say that.

You said MG&A was [30, 31 in France] was $27.4 million, so it was $0.57.

Okay.

I beg your pardon.

I am wrong.

My wrong.

Okay the first part of your question of the reference to $35 million to $36 million was a reference to the estimate of what we think the full-year litigation and licensing expenses would be, as of the end of the year just based upon the ramp-up in both international enforcement costs, as well as the strategic portfolio prosecution costs.

Okay.

Thanks, and good luck with everything.

Bryan Prohm, Cowen and Company.

A couple of quick things.

First, help me clarify your commentary around pricing resolve, amongst prospective licensees.

It was unclear to me if that was a general statement or more specific to med tech?

Pricing result was more general.

And it applies to med tech as well, but it was more general.

Okay.

That's a good segue into my next question.

So is the licensing space in general so contentious now that the company may actually need to record some meaningful litigation wins to build more credibility and unlock the true TAM in some of these portfolios long-term?

I guess my thought here is, is the space today such where you can get more from active compelling with sticks versus persuasion with carrots, for lack of a better analogy?

That's a great question.

And the answer depends on the prospective licensee.

I think there are some out there where you need sticks.

There are some we need carrots.

And there are some were they are in transition.

People come and go in these organizations.

And circumstances change in these organizations.

You do see some flux.

Speaking generally, I think we are going to find out a lot in the next year.

We have got this interesting and very strong set of patents.

For example, in the smartphone space.

We have a number of trial dates, for example in Japan, or in Germany, or in the ITC, right?

That are going to be triggers for activity.

And if we start seeing that folks are only paying us the money that we think we ought to be getting when the dates approach and when those dates pass, then the answer to your question generally will be yes.

If we're able to generate revenue without those dates and deadlines, which I am not ruling out by the way, then I think the more nuanced answer I started out with is the one that we're going to go with.

Okay.

Last question on intake.

How do you use the key portfolios that you already have, and the relative success in licensing them to inform your longer-term strategies and decision-making about future intake?

Maybe specifically talk to smartphones and 4G here, because there's a meaningful opponent of patent portfolios and revenue from that space.

Sure.

If you are doing with the prospective patent partner, you really have to get to point across.

In the smartphone space, given where we are right now, which is, we have a very compelling fleet of portfolios that read on virtually every smartphone out there.

One, you obviously have to run them to the fiduciary obligations that we will respect, and let them know that we will get the part right price for their portfolio.

And two, you can tell them that you have a number of matters that are going to essentially force licenses and that your time to money, if you've just come to the fleet so-to-speak, at this point in time, is likely to be accelerated based on the past history, because we're going to have in some sense an avant garde, a bunch of forerunners that are leading on the prospective licensees that we both are seeking to grab.

So it is a little bit of those two elements.

And that is what informs, that's what is going on in the licensing hemisphere in terms of what is going on with the patent acquisition hemisphere, for example, with smartphones.

Got it.

Thanks for the time, gentlemen.

Good luck, and we will talk to you soon.

Tim Quillin, Stephens Banking.

So I guess one of the most common questions I get on Acacia is why this company public?

And it does seem like the business model does not lend itself well to consistent quarterly earnings that public investors like to see.

And I'm wondering if you have thought about setting up targets and maybe even tying your compensation to more long-term goals.

Setting a three-year out goal, in terms of where you can get to in terms of earnings, leaving yourself enough time to achieve that goal, and maybe having intermediate targets.

And kind of align your interests with investors around that long-term target in some ways.

Is that a consideration?

First of all thanks.

Those are two thoughtful questions.

On the second one, on the alignment, that is an interesting suggestion.

It is one that I will definitely think about.

I think again, a lot depends on what happens in the next year.

If we see that the past couple of quarters have been more of a blip, a bump and that we can get the revenue back on track, which is our current thinking, then I don't think there will be a need for that kind of change.

But if it turns out that will take trial dates to get the numbers we're talking about, then that is certainly an interesting suggestion, and we will definitely think about it.

Going back to the public and private piece, actually another point on your question, is bear in mind that comp right now, and quarterly I guess, there may be a question about whether we have absolute full allocation, but fundamentally there is full allocation because everyone is bonused off of P&L, everyone is bonused off of profit.

So I think it was important to make that point.

Coming back to the public private question, I think we are one of the one or two major public companies out there, and maybe we're the only one that partners with so many different patent partners.

So we are a bellwether, but we are also an isolated data point.

So looking at us in isolation, you might draw a bunch of conclusions about whether not we should be public.

The reality though is, if you look at all patent assertion and all patent licensing companies out there, including some that have gone private very recently, there has just been -- it has not been like those companies are doing spectacularly well.

So I think we have to be careful about drawing a direct correlation between what's going on now, to the fact that we're public as opposed to private.

But let me reiterate why we're public.

When we get into these dry patches, there's a lot of transparency.

We tell you.

And we don't just tell you, we tell the public, d our patent partners know.

Potential investors know.

And so that transparency has served us well, and we think that will serve us well going forward.

And I have given you all of the other stock responses about why we're public and not private, but I think it is at times like these when it's important for us to be public.

Okay.

And I know, I tend to ask this question each quarter and I know you don't like it exactly, but if you take out the top three licensees, you get to $2.5 million this quarter, which is the lowest I think it has ever been in terms of that remainder.

And I think if you dial it back a couple of years, it just felt like there was more breadth in terms of your licensing.

And I think just in sheer number of portfolios that you licensed in the quarter, there seemingly wasn't the breadth.

And so to a certain extent you have become a little bit more big game hunters.

But, are those two goals counter?

Do have to abandon the smaller patent portfolios with the more consistent revenue base, in order to be a big game hunter?

I think first of all we are hunting for more big game.

That is a lot of what is going on.

Can the two coexist?

Yes.

Do we want to coexist in the same ratios as before?

As I said in my prepared remarks, our answer is no and what we're really talking about is the long-term profitability.

When we look back in hindsight, and we look at what our portfolios have done, it is clear what has put us on the map, and it is clear what has made us the company that we want to be.

And in my mind, it is clear what would make is the company that we aspire to be.

And it is going to be more a twill, not so much the big game per se, but just the bigger portfolios.

Now bear in mind, and I didn't quite catch the detail for the statistic that you called out.

But we are cutting agreements, where we have actually amalgamated a number of portfolios into one transaction and they're showing up as separate amounts.

When I'm talking about RPX.

I think you've got to bear that in mind.

But again, the basic answer to your question, as I said in my prepared remarks, we are shifting, we are tilting, right?

We're still going to go after the smaller portfolios, but we are definitely tilting because financial history tells us that we should.

The other thing to bear in mind is that circumstances are changing.

In fact, one reason I'm not that stressed about what is going on with the government is because we have been acting like it is going to happen, and by it, I mean a crackdown on -- one way of putting it is a crackdown on patent licensing programs, where your price points fall short of your litigation costs, we've been acting like that is going to be coming for a while.

We have been getting away from that business for a while.

So that is also part of the reason you are seeing the tilt.

And I guess I'm a little bit confused in terms of the philosophy, in terms of using capital to drive higher quality patent portfolios.

See up until 2012, I think you would lean a little bit more towards pure partnerships or relatively light in terms of capital.

And I think that seems to be back where you are in 2013.

In 2012, you put $225 million in capital to work, and I think explains that maybe you needed to put capital to work to get the higher quality patent portfolios.

And now you don't?

I guess I'm just a little confused about the change.

We looked at that.

I think there couple of things happening.

One is, as I said candidly in this call, I think we could have been doing a better job on the business development front, and part of that better job would have resulted in more capital being allocated.

So, in a nutshell, no we have not changed our philosophy 2012 to 2013.

And by the way we expect that we have addressed -- we think some of the reason for that is the churn, and some of the changes we put in place in the last quarter.

We expect to -- we have maintained our philosophy.

So that is one big part.

The second big part is, I think we have been successful, and I have been pleasantly surprised at the success.

One good thing about this, and I'll look back in hindsight I'm quite sure about this, we have gotten some steals.

And so they are partnering deals, at the end of the day our partners are going to make out, but we have gotten some portfolios where we have not had to put the capital down, and we're very happy about that.

Okay.

And in terms of Microsoft, do you know offhand when the first scheduled trial is that might be a forcing factor in getting some kind of multiple portfolio deal done there?

Like your first opportunity, I guess, to get a multiple portfolio licensing deal done there?

Well on Microsoft.

All I can really say about that, is that we filed seven lawsuits, I think it was around that number, from October 1.

So we don't have trial dates.

There is a bunch of matters on the Nokia handset business, we have to see how that plays out.

So those might be forcing functions.

But ultimately, there is another forcing function.

Microsoft is a savvy company, and they are price sensitive.

And they know, and I guess I'm saying, that the longer that they wait the more that they will pay, that is a forcing function.

Okay.

Were there any notable new patent portfolios or ones that you would consider marquee or stud portfolios or pedigree portfolios that you brought on in 3Q?

Again as I mentioned, the market side, that's really what distinguishes them, I wouldn't say that any of those are marquee, just based on the market sizes.

We certainly think they're terrific patents, we think they'll get good rates, we think people will make good money off of them, including our patent partners but none of them really cover big markets.

At least right now.

There's a couple that could become very large markets.

But as of right now, those are nascent markets.

Okay and last question, on the other expense, the $3.5 million.

I was unclear what exactly that consisted of?

Thank you.

I'm looking at our General Counsel here.

There was a dispute, and one of the lawsuits resulted.

And in terms of their (multiple speakers).

Execute in terms of their fee, yes.

Okay.

Does it relate to some past period where you didn't--?

Yes, it relates to the period from our distant past, where we basically changed law firms.

Okay, thank you.

This will conclude the question-and-answer session, and I will now turn the call back to Mr. Vella.

Again, thank you for attending this call today.

I will repeat that last statement I made.

Notwithstanding the pressures that are weighing down on the patent disenfranchised, we do remain above for our enthusiasm for our business.

We have every confidence in the quality and technical skill of our staff.

We have great confidence in the strength of our patent portfolios under management.

And we think, I think, we have never been better positioned for high-caliber long term performance.

And I'm determined to lead Acacia in realizing that opportunity.

Thanks for joining us, and thank you for your support.

Ladies and gentlemen, if you wish to access the replay for this call, we may do so by dialing 888-203-1112 or 719-457-0820 with the confirmation code 1100393.

This concludes our conference for today.

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

All parties may now disconnect.