Acacia Research Corp (ACTG) 2013 Q4 法說會逐字稿

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

At this time, I'd 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.

Thanks Keith.

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 rights, acquisitions, developments, 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.

Acacia's mission statement remains the same.

We empower patent owners and reward invention by providing a path to patent monetization for the people and companies that have contributed valuable patented inventions to an industry but need a professional, experienced, independent third-party licensing partner to get rewarded for those inventions.

We call these people and companies our customers patented and franchised.

In so doing, Acacia is placing itself at the forefront of an emerging secondary market in patent assets under which all holders of high-quality patents, including the patented and franchised, can get rewarded for their patents, even if they do not have the finances and expertise to engage in lengthy, costly, and risky patent litigation.

Today, I will provide an overview of Acacia's patent licensing business during this past quarter and during much of the past year.

In doing so, I will reemphasize the following three aspects of Acacia's business.

First, we remain financially strong with over $250 million in cash and no debt.

Second, as stated in previous earnings calls, Acacia has evolved into a company that will be even more determined to get the right prices for licenses under its own -- under its customers' patent portfolios.

It will be more patient even if it means enduring a temporary revenue trough to get to those right prices.

In discussing this aspect of our evolution today, I will provide more information about upcoming trial dates in our patent lawsuits which we think will serve as a catalyst for getting the right prices from prospective licensees and positive cash flows for Acacia and its customers.

Third, and also as stated previously, Acacia has chosen to become a company that increasingly serves a smaller number of customers, each having higher quality portfolios.

In discussing this aspect of our evolution later on in this call, I will outline some of the rationale behind this shift and some of the significant steps we have taken to focus our operation on a smaller number of customers and high quality portfolios.

After providing an overview of our business, I will briefly touch upon the topic of patent reform and its impact on our company and our industry.

Afterwards, Clayton Haynes will provide you with an analysis of our financial results for the quarter and the year.

Then we will open the call for questions.

Onto our business overview.

Acacia remains confident that it has and will continue to obtain the high-quality portfolios, best-in-class professionals and capital required to profitably serve our growing number of potential customers, the patented and franchised.

And Acacia believes that revenues and profits will stem from serving this important community of companies and people.

Acacia has now made all the changes we said we would make last quarter.

As a result, Acacia is, one, poised to license many of its top patent portfolios or submit them to trial for adjudication within the next 12 to 18 months, and two, Acacia's position to continue gathering high-quality high-revenue potential patent portfolios, marquee portfolios, at an unprecedented pace.

This combination of upcoming trial dates and continuing marquee portfolio intake bodes well for our not-too-distant future.

In the meantime, however, the company now finds itself in what we think is a temporary revenue trough and it's to this trough that I now turn.

Specifically, Acacia generated $15.1 million in revenues in the fourth quarter from 24 new revenue agreements which covered over 23 different licensing programs, including four new licensing programs generating initial revenue.

Trailing 12-month revenues at the end of the fourth quarter were $130.6 million as compared to $250.7 million as of the end of the prior year's quarter.

Acacia's cash and investment position was $256.7 million at the end of the 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.

When this occurs, we will experience quarterly revenue numbers that don't reflect our potential growth potential, as was the case for the fourth quarter of 2013 and for much of 2013.

We believe the revenue and profit numbers of the past few quarters, this revenue trough, belies the underlying strength of our company and is temporary.

Turning to the underlying strength of our company, if one looks at the litigation and patent office records pertaining to our portfolios, our major patent portfolios remain as valuable as they ever were.

We think that a close analysis of public litigation and patent office records shows that, one, virtually all of our major patent portfolios have remained intact or in some cases even been strengthened; that, two, we have more valuable major portfolios than we have ever had thanks to our recently heightened portfolio intake activity; and that, three, our future trial date, calendar and revenue pipeline has never been more robust.

We think it is only a matter of time before prospective licensees recognize the value of our IP and negotiate for a reasonable license fee for use of that IP.

That brings me to the temporary nature of the revenue trough.

Historically, many prospective licensees will settle major patent cases, patent cases involving marquee portfolios, by paying reasonable license fees only if those patent cases approach a trial date.

In all of 2013, we only had three such dates, and they almost all occurred nine months ago, in the late first quarter and early second quarter.

This proxity of dates largely explains our lack of major settlements throughout 2013, the timing of a revenue generation within 2013 and consequently the overall decline in our 2013 revenue.

Turning to 2014, however, our number of trial dates should increase to roughly 10.

More importantly, in the first half of 2015 alone, we currently expect to have 15 to 20 trial dates.

And the majority of these 2015 trial dates shall involve marquee portfolios.

These trial dates, though not perfect predictors of revenue, are historically correlated to revenue events.

We can already start to sense the connection between these upcoming dates and the altered cadence and tenure of our negotiations with prospective licensees.

Though we take solace in our approaching trial dates and the opportunity to validate our patents and/or consummate high dollar licenses, I would like to discuss how we plan to minimize revenue fluctuations, revenue troughs, in the future.

If we continue with our recent success of partnering with owners of high-quality marquee portfolios, by which I mean portfolios whose hallmarks include lots of very defensible claims which reduce the risk of losing at court, lots of covered revenue, a high pedigree background, and/or lots of prospective licensees.

And if we keep associating those marquee portfolios with trial dates whenever prospective licensees refuse to pay reasonable license fees, we think extended revenue fluctuations, the troughs, can be minimized in the future.

It was for this reason, to ensure we consistently bring in enough marquee portfolios to avoid future revenue troughs, that we said during our last earnings call that we would focus on quality over quantity when it comes to patent intake and for this reason that we have in fact transitioned to higher revenue potential marquee portfolios during the past few months.

We have continued, even accelerated, a shift in our focus at our points of patent portfolio intake from quantity to quality.

We've been conducting our comprehensive review of our company last year.

We, one, confirmed our high correlation between portfolio quality and the force of quantity on one hand and profits on the other hand.

We realized that we historically have profited the most from marquee or near marquee portfolios.

Two, in conducting our review, we also realized that patent reform has made it harder to make money not from the higher marquee portfolios, the higher-quality portfolios, but from the mid tier portfolios.

And three, most importantly, we realize, as a result of our review, that there are plenty of marquee portfolios out there for us to service because of the array of flexible partnership models we offer our customers and because we are competitively well-positioned to help our customers monetize those portfolios.

We have been pulling in on average one marquee portfolio per quarter and think we can continue meeting and perhaps even exceeding that rate of intake throughout 2014.

Taking all three of these factors into consideration, as signaled last quarter, we are focusing on quality over quantity in our patent intake.

To that end, besides creating larger licensing and portfolio intake teams characterized by more specialized divisions of labor, we have now also streamlined our operations to focus on marquee portfolio acquisitions, reducing our headcount, and helping us manage costs would be another focus of ours going forward in the process.

We now have a more streamlined team that has a best in industry capability to handle the world's top marquee portfolios.

The quality of our team can be seen in the backbone of our people prior to joining Acacia, the quality of portfolios that are customers entrusting to Acacia, and the quality of outside counsel assisting us and our partners on a contingency fee basis.

All of this information can be gleaned from our website.

Turning to our portfolio intake for the past quarter, our focus has resulted in our partnering on a terrific set of portfolios.

We invested a total of $14.65 million in upfront advances to enter into parking agreements covering the following three patent portfolios -- Austin Geo.

It is a portfolio relating to real-time user interfaces for displaying, interpreting, and managing 3-D geophysical data used for oil and gas reservoir planning and management.

Two, a portfolio of standard essential patents for a major American telecom equipment company that cover both 3G and 4G cellular technology for improved communications reliability, more specifically technology relating to adaptive error correction as used in HSPA and LTE standards.

And three, the VoiceAge portfolio, a well-known portfolio of patents that originated at a Canadian research lab, the portfolio covering high-definition voice and audio compression technology used in both wireless and wireline applications and more specifically AMR wideband, AMR WB, and AMR WB plus codecs used in 3G, 4G, voice-over-LTE and wireline applications.

We think this set of portfolios demonstrates our continued ability to persuade high-quality patent holders, our future customers, to entrust their marquee portfolios with us at an unprecedented pace.

We started filling our pipeline at a record rate starting in the beginning of 2012 when we only had one marquee portfolio.

Today, we have close to 10, and we expect to be at close to 15 marquee portfolios by this time next year, which in turn should enable us to consider providing limited forms of revenue guidance to our shareholders.

This solid and consistent intake of new high-quality portfolios will diminish future revenue troughs.

As has become our habit in the past few earnings calls, I will briefly touch upon the government and its activities relating to patent reform.

Our view regarding patent reform remains completely unchanged from a quarter ago.

As I mentioned in previous public remarks, we think that many of the draft bills circulating through Congress that unduly target patent plaintiffs that are NPEs, nonpracticing entities, for the benefit of infringing defendants who are practicing entities will not pass into law.

As we also mentioned before, Acacia sees nothing detrimental in the draft bill that we understand might pass into law, the one that is sponsored by Congressman Goodlatte.

We are neutral to positive on the Goodlatte bill.

Turning to patent reform generally, also as mentioned by us before, its net effect has been and continues to be to make patent licensing riskier and more complex.

This increased complexity and risk makes it even harder for our potential customers to monetize their own patents, which means our present and future customers need us, our expertise, our experience, our risk reduction models, and our financing more than ever.

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

So, thinking of, one, our upcoming trial dates and the marquee portfolio that will go to trial on those dates, two the continuing high quality of our patent intake and our increased focus on such high-quality intake, three, the increased need our customers, the patented and franchised, half of the services we provide thanks in part to patent reform, and four, the quality and technical skill of our professional staff, we have never been better positioned for high-caliber long-term performance.

And I'm determined for Acacia to take advantage of its superior positioning to become strongly and sustainably profitable.

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

Management believes that if we are patient, our customers and shareholders shall be rewarded.

Going back to our licensing opportunities page under the portfolio section of our website and focusing on the tab for smartphones for example, management thinks that the foundation for this belief is there for all to see.

A large number of portfolios, a fermentable array of high-quality patents, high unit counts, billions of dollars of exposed revenue, extensive geographies, an increasing number of trial dates driving negotiation deadlines and most of all, they have high-quality patent portfolios themselves.

They include the Rambus backlighting portfolio, which applies to backlighting mobile phones; the Adaptix portfolio, which originated from a Texas startup headed up by a University of Washington professor who was building 4G and 45 G technology implementations more than a decade before its widespread rollout.

The portfolios include the silicon image portfolio which originated from a Silicon Valley leader in high-speed connectivity technology, technology that more than a decade after its invention is now migrating to high-speed chip interconnects.

The portfolios also conclude include Nokia Siemens, which came from one of the most significant pioneers in the communications industry.

Those high quality portfolios include the Palm Pilot software portfolio we are working on for ACCESS Co., which covers critical building blocks of today's smartphones.

And now, as of the start of this last quarter, those portfolios additionally include one of the industry's leading high-definition voice patent portfolios covering technology that is set to proliferate smartphones in the coming months and years, the VoiceAge portfolio.

So, while our revenues and the number of portfolios we acquired declined in 2013, if one considers our present portfolios and the portfolios I believe we can soon bring into Acacia, I am more optimistic about Acacia's future than I have ever been.

I look forward to reporting our progress to you in the future.

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

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

Beginning with the fourth quarter of 2013, on a consolidated basis, revenues totaled $15.1 million as compared to $66.3 million in the comparable prior-year quarter.

Fourth-quarter 2013 revenues included license fees from 24 new licensing agreements covering 23 of our technology licensing programs as compared to 27 new license agreements covering 27 of our technology licensing programs in the comparable prior-year quarter.

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

Consolidated trailing 12-month revenues totaled $130.6 million as of December 31, 2013, as compared to $250.7 million as of the end of the comparable prior-year quarter.

License fee revenues continue to be uneven from period to period based on the various factors discussed by Matt earlier on this call and on previous earnings conference calls and in our periodic filings with the SEC.

For the fourth quarter of 2013, we reported a GAAP net loss of $33.3 million, or $0.69 per share, versus GAAP net income of $9.8 million, or $0.20 per share, for the comparable prior-year quarter.

The GAAP net loss for the current quarter included the impact of non-cash stock compensation charges of $7.1 million versus $8.3 million in the prior-year quarter and non-cash patent amortization charges of $16.7 million versus $18.1 million in the prior-year quarter.

Fourth-quarter 2013 non-GAAP net loss, which excludes the impact of non-cash patent amortization and stock compensation, was $10.6 million as compared to $41.8 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 58% for the fourth quarter of 2013 as compared to 80% 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 fourth quarter of 2013 as compared to the fourth quarter of 2012 was due primarily to a higher percentage of revenues generated in the fourth quarter of 2012 having no inventor royalty obligations and lower overall average inventor royalty and contingent legal fee rates for the portfolios generating revenues in the fourth quarter of 2012 as compared to the fourth quarter of 2013.

In this regard, quarter-to-quarter inventor royalties expense decreased 14% and contingent legal fees expense decreased 42% from the prior-year quarter despite the higher fluctuation percentage in revenues for the same period.

Litigation and licensing expenses in the fourth quarter of 2013 increased $1.9 million or 28% over the prior-year quarter due primarily to an increase in international enforcement costs and an increase in strategic patent portfolio prosecution costs.

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 our investment in international litigation and both domestic and international patent prosecution.

Fourth-quarter 2013 non-cash patent amortization charges decreased $1.4 million, or 7%, due primarily to a decrease in accelerated amortization related to the recovery of upfront advances totaling $10.1 million, which was partially offset by an increase in accelerated patent amortization related to patent portfolio dispositions totaling $4.6 million and scheduled amortization on patent portfolios acquired during the prior-year quarter totaling $3.2 million.

MG&A expenses, including non-cash stock compensation charges, decreased $2.5 million or 15% due primarily to a reduction in the non-cash stock compensation charges totaling $1.2 million stemming from a decrease in the number of restricted stock shares vesting in the fourth quarter of 2013 and a $2.3 million decrease in variable performance-based compensation, partially offset by a net increase in personnel, corporate, and facilities expenses.

Next, I would like to provide a brief summary of full-year fiscal 2013 results.

Fiscal year 2013 revenues decreased 48% to $130.6 million as compared to $250.7 million in 2012, as discussed by Matt earlier on the call.

2013 revenues included license fees from 120 new license agreements covering 53 of our technology licensing programs, as compared to 138 new license agreements covering 68 of our technology licensing programs in 2012.

We reported a fiscal 2013 GAAP net loss of $56.4 million, or $1.18 per share, versus GAAP net income of $59.5 million, or $1.21 per diluted share, for fiscal 2012.

Fiscal 2013 non-GAAP net income, which excludes non-cash stock compensation and patent amortization charges totaling $81.6 million for 2013, was $23.7 million, or $0.48 per share, as compared to $137.3 million, or $2.80 per share, for fiscal 2012.

Our average margin for fiscal 2013 was approximately 58% as compared to 80% for fiscal 2012.

Fiscal 2013 MG&A increased 10% over fiscal 2012 MG&A due primarily to a net increase in personnel costs in connection with the enhancement of our business development, licensing, and engineering teams, an increase in other nonrecurring personnel severance costs, including the impact of nonrecurring cash and non-cash charges associated with Mr. Ryan's approved retirement severance package, and a net increase in corporate, legal, facilities and general and administrative costs.

The increase was partially offset by a decrease in variable performance-based compensation costs for 2013.

2013 litigation and licensing expenses increased to $17.7 million, or 82%, due primarily to an increase in international enforcement costs, an increase in strategic patent portfolio prosecution costs, and higher net levels of litigation support and 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 period.

Fiscal year 2013 non-cash patent amortization charges increased $14.6 million due primarily to $20.9 million of increased amortization expense related to new patent portfolios acquired in late Q4 2012 and since the end of the prior year, and an increase in accelerated amortization related to patent portfolio dispositions totaling $3.3 million, partially offset by a decrease in amortization related to the recoupment of upfront advances totaling $10 million.

The tax benefit for 2013 of 27% reflects the application of our annual effective tax rate to the GAAP pretax net loss reported for the period.

The effective tax rate for 2013 is lower than the blended federal and state rates due primarily to a valuation allowance on $4.6 million of foreign tax credits generated during 2013 and certain nondeductible permanent items.

The effective tax rate for 2012 reflects the impact of the release of valuation allowance in Q1 2012, as discussed on previous calls.

As of the end of 2013, we estimate that we have approximately $80 million of net operating loss carry-forwards and approximately $25 million of foreign tax credits available for use in future periods.

From a cash flow perspective, we ended 2013 with $256.7 million of cash and investments versus $311.3 million as of December 31, 2012.

Net cash outflows from operations through 2013 totaled $3.5 million versus net cash inflows from operations of $104.6 million in 2012, primarily reflecting the decrease in revenues in 2013 and higher average margins in 2012 as compared to 2013, as discussed earlier.

2013 patent acquisition costs paid totaled $25.1 million as compared to $178.3 million in 2012, excluding Adaptix.

Cash outflows during the 2013 year reflect year-to-date quarterly cash dividends paid to shareholders totaling $18.6 million.

And as stated in today's earnings release, the board has approved a fourth dividend payment in the amount of $0.125 per share which will be paid on March 31, 2014 to shareholders of record at the close of business on March 3, 2014.

In the fourth quarter of 2013, we also executed share repurchases totaling $7.9 million pursuant to the buyback plan announced in November of 2013.

Looking forward, for fiscal 2013(sic), we expect fixed MG&A, excluding non-cash stock compensation charges, to be in the range of $27 million to $28 million.

For fiscal 2013, we expect patent related litigation and licensing expenses to be in the range of $36 million to $38 million, depending on net patent portfolio litigation, including increased costs associated with international enforcement and strategic patent prosecution activity occurring in fiscal year 2014.

Based on current outstanding grants of restricted stock, we expect scheduled non-cash stock compensation charges for fiscal 2014 to be approximately $18 million.

Excluding 2014 patent portfolio acquisitions, scheduled fiscal year 2014 patent amortization expense is expected to be approximately $48 million.

At this time, I would like to turn it back over to Matt Vella.

Thanks.

Let's open the call for questions.

(Operator Instructions).

Tim Quillin, Stephens Incorporated.

Good afternoon, and that was a nice overview today, Matt.

I appreciate that.

And I just wanted to confirm.

I think close to 10 marquee portfolios means nine, and I think you named all nine of them in your prepared comments, and that's Rambus and Adaptix, NSN and Palm, Boston Scientific, Breed, Bonutti -- I'm not sure you mentioned those, and then the voice, the new HD voice and the silicon image patent portfolio.

Are those the nine?

Yes.

Pretty close.

Okay, okay.

And could you help us understand the timeline on some of those trials or getting to trials or when the trial dates might come or what we should be keeping an eye on in terms of either Markman hearings or trial dates?

Yes, two parts to the answer.

One, it's all discernible from our website if you go into the portfolio section and you drive into Pacer.

Now, I know that's difficult for a lot of folks, so having said all of that, the visibility we do have and the visibility that's in my mind right now extends out through midway of 2015.

And the first marquee that goes to trial will be -- I'm not going to get the sequence exactly right -- Adaptix which will be early January of 2015.

You're going to have Palm actually going before then, the PalmSource portfolio, in March and June of this year.

There will be German litigation in March; there will be US litigation District Court in June.

You've got the David Breed car portfolio at American Vehicular Systems.

That's going to go in I believe March or April of 2015.

You have Nokia Siemens, which is going to start to hit trial in I believe February or March of 2015.

And there are I think one of the Bonutti matters on the suture anchors is scheduled to go to trial in Q1 of 2015 as well, perhaps early Q2 of 2015.

So those are the ones that come to mind and of course a lot of the trial dates have to get set down, and so we expect that filling of the trial date pipeline to continue in the coming weeks and months.

Okay, that's fair.

And on the Palm Pilot assertions that are coming up here relatively quickly, are the remaining litigants Huawei and ZTE?

The litigants on those matters are Huawei and ZTE.

When you say remaining, they might be the only two outstanding right now, but bear in mind that for that portfolio, it turns out that the cars are all going to be outfitted with effectively Android smartphones, and so we expect a lot more licensing activity to occur as that rollout happens.

And we understand that rollout is supposed to start this year.

Yes, yes.

No, that's fair.

And then in terms of the temporary revenue trough and I think given kind of what you see in terms of the timing of trial dates, how should -- how prepared should we be in terms of that trough continuing for a while?

It sounds like most of the marquee patent portfolios would have 2015 trials.

Should we think about 2014 still as a little bit of a transition year?

It is a transition year.

But how much of a transition year, meaning will the revenues come in now?

Will they come in closer to Q4?

That's the question we've been wrestling with at Acacia.

All we know though for certain is there's trial dates.

We know that historically the correlation between trial dates and revenue events and the correlation materializes in the weeks and months prior to the trial dates.

Yes, that's fair.

Thank you very much.

That's all I have.

Mark Argento, Lake Street Capital Markets.

I know you talked a little bit about streamlining the operations now that you're focusing a little bit more on some of the marquee portfolios.

Could you talk a little bit about any kind of headcount reductions you've done or what you've done to realign the cost structure, streamlining things?

Yes.

Bear in mind we've done two things.

We've made the teams that work with marquee portfolios a little more large and a little more complex.

So, in the first half of 2013, we added about 10% to our headcount, and a lot of those hires were the high-profile talents that we took with us to our shareholder day in New York City, you know, the Jaime Siegels, the Charlotte Rutherfords, and very good engineers.

But then what we did -- and this is where your question is going.

After that, in the latter half of the year and in the early part of this year, we reduced our headcount by about 20%, and we did that effectively with folks that were working on the non-marquee portfolios.

So, that's been the headcount reduction.

It's been about 20% after we added the 10% before, so overall the number now is 58% and I see that number as a good long-term number for us, maybe the odd pick up here or there, but I think we are in a nice, solid position.

Great.

And then in terms of being able to service the existing portfolios that you have, maybe the non-marquee portfolios, are you outsourcing a lot of that work, or how are you guys handling that going forward?

No, we've hung on to it.

We take our obligations to our customers very seriously.

There is quite a bit of it in the pipeline, and that will continue to yield the revenues and profits going forward.

What we are really saying is that we're going to change our behavior on the intake end.

Got you.

Okay.

In terms of the -- I think you mentioned the buyback.

How much stock did you guys buy back in the quarter?

About 600,000 shares.

Clayton mentioned the number.

I think it was $7.9 million.

Correct.

And what do you still have available on the -- did you guys renew?

Was it a $75 million (multiple speakers)?

$70 million and it's -- I think it's going until May 15, roughly, the authorization.

I've said this before, we're going to keep the authorization open for quite a while.

We'll renew it.

Okay.

And in terms of the political environment out there, I know it seems like things have died down a little bit.

It's not as popular right now, see stories about patent rules as it was over the last few months.

Are you feeling any kind of sentiment shift within -- or at least maybe an educational shift within kind of the marketplace within some of the legislators out there?

Are they getting smarter and educated finally on the topic of patents?

I know there was some chatter on some lobbying efforts or some industry group coming together.

Any updates there?

We definitely see a news report, just like the ones you're seeing, where for example, which are universities starting to flex their lobbying muscles, right?

So we definitely see data points like that, but really overall, in terms of the larger market, meaning the public market, the market of legislators, I think things have remained relatively unchanged.

You know, in terms of the market that counts, which is the folks we are dealing with, I definitely think that we are perceived as a company that's going to be around, a company that's going to survive whatever patent reform goes through.

And the issue of patent reform just does not come up that often when we are dealing with them.

Last question.

I know you guys had done a handful of these kind of term based license deals.

I believe there could be a couple coming up for renewal.

Any thoughts on progress made in that vein?

Do you expect up till you renew -- what are you doing there to see if you can continue that business or grow that business?

Well, I think, first of all, when you have as many marquee portfolios as we do, on a smart phone for example -- and Tim was doing the count at five, six and soon seven, eight -- you end up getting into structured or comprehensive deals.

The question is, what's inside them, right?

They're going to vary quite a bit because when people pay you as much money as we think we are owed under those portfolios, the payor, the licensee, is going to need some kind of regulated system of dealing with us, or a regulated set of encounters with us going forward.

So, at least under that definition of a structured deal, we expect more of those going forward.

At this time, we are negotiating several.

You know, in the past three quarters, there simply has not been the right time to grow either because of the gap in pricing or because there's been a disagreement over how to regulate that future interaction.

And so I think that's the response.

We are negotiating several of these deals right now but, again, it's difficult to forecast when they are going to come in.

And in terms of forecasting, I think our remarks, our prepared remarks, vis-a-vis trial dates speak for themselves.

Good, thank you.

Craig Hoagland, Anderson Hoagland and Company.

I was just wondering if you would comment on the cases being reviewed by the Supreme Court and a recent decision relative to the discovery process in patent litigation.

You'll have to give me a little bit more data on -- because I end up seeing a lot of data feeds on patent cases decided on the discovery issue.

I can say this, though.

There are some cases before the Supreme Court that have to do with fee shifting, and our position on fee shifting is quite well known.

As long as it cuts both ways, we are for it.

And if that's the issue you're dealing with when you're talking about discovery, the Octane Fitness case and Highmark, then again we are for fee shifting as long as it cuts both ways.

Yes.

There are some cases that deal with the patentability of software and of business methods.

And our position on those cases is that we haven't really been heavily invested in those portfolios for the last couple of years.

We've detected the uncertainty in that law, and we haven't done too many acquisitions in that area.

And so we'll react once those decisions have been laid down.

The final point and the meta-point really is to the extent the law makes litigation more complex and more uncertain, we think it's going to drive more marquee portfolio customers towards Acacia.

And so, as unfortunate as the complexity might be for the patented and franchised, net-net, we think that this trend helps our business.

Yes.

The case I was reading about had to do with the obligation to incur discovery expenses being shifted from the defendant to the plaintiff.

Okay.

In that case, I kind of see that in the same vein as the fee shifting, as long as it cuts both ways right?

In other words as long as you are both punishing plaintiffs for abuse of discovery practices as well as defendants, we are for the sorts of changes that are being contemplated in those cases.

Okay.

Thanks a lot Matt.

Wayne Cadwallader, Elkhorn.

I actually have a couple of questions here.

One is if some of these marquee portfolios end up going to trial and therefore go through the whole process and appeal process, has that been factored into your thinking?

And if so, how long do you think that would take?

And then I'll get to the next couple of questions after that one.

Sure.

And I appreciate you chopping the questions up one by one.

Not all big patent cases that are heading towards trial in fact settle out before trial.

Some might go through trial, and some might even go through appeal.

The big thing is that we have 10, 15, 20 of these cases coming up, and so we definitely expect some to proceed to trial.

We hope none do, but we are prepared for that and it has been factored into our modeling.

Okay.

Second question.

First, you did touch a little bit on the share buyback program.

About 600,000 shares actually expires May 14 and then -- or the press release.

I'm just wondering why the share buyback was as small from November 15 on as it was, or where are the restrictions and how is it going year-to-date I guess?

No restrictions.

You know, whenever we look at the share -- I mean the restriction is the number that -- well there's a blackout period, right, so we can't always buy back shares.

And then we are only authorized up to a preset amount, which we told you guys about.

But having said that, your question still needs to be addressed because we obviously didn't get to the ceiling on the authorization.

Whenever we think about capital allocation, we obviously think about dividends, buyback, as well as investments in the business, whether it's through portfolio acquisitions or other activities.

And for our current formation, our current business as we have been running it, we don't need to go out and raise more cash.

We are very happy with our cash position, and we think we're going to start generating positive cash flows.

Having said that, there are some factors out there that make us stop and think before we just decide to do a significant buyback.

One is, for example, the kinds of changes in the law you were just referencing, be they legislative or judicial.

Right?

If there is any kind of major change in fee shifting, then even though we think that benefits our business in the long run, we still have to revisit our capital structure and make sure that we can accommodate that world.

So that's one factor we are looking at.

We also obviously look at what's happening with the patent market and the intake opportunities, and so we pay attention to that as well.

I can tell you though that the issue of whether or not to do the buyback, the issue of how much has dividend add, it's something that we are continually revisiting.

We are continually thinking about it, and that's why we're going to keep the authorization open even after May 14.

We'll extend it or we'll open a new one up.

Okay.

You got me to think of another question then, well, your response to that, which was terrific.

You talk about capital structure.

Is this sort of a floor on the amount of cash you'd like to keep to be able to go after all the various strategies that you've implemented within your organization?

Well, in some sense -- go ahead.

How do you think about that I guess a little bit more?

I'll tell you how I think about it.

I really shouldn't be giving you the number because I think there's companies out there that would love to know that number.

But --

Sorry, step change (multiple speakers)

What we think about is we think about what a loser -- a fee shifting award might look like, even with the sorts of high-quality litigation we are engaged in and even with the high level of ethics which we engage in litigation, we have to think about that.

We have to obviously think about the acquisition opportunities out there.

We have to think about our expectations for cash flow in the future from licensing.

And obviously we have to think about our loyal shareholders, which is where the dividend and the buyback comes in.

Okay, terrific.

Last question.

If you look at the company and say is it -- and I think this question has been asked before.

I'm just curious as to where you think you might be today or if there's any change in the thinking?

Would the company be better as a private company or a public company, and therefore why do you continue to stay as a public company?

Well, right now, we think it's better as a public company.

You know, in the next 12 to 24 months, we'll find out what the data tells us on that score.

But let me tell you why we think it's better off as a public company now.

First, as we've said before, it is the transparency of being a public company.

It's transparency for both our customers, our patent partners, as well as our future customers, right?

They know there is no Hollywood accounting and they can see exactly what we've done.

It's also good from a transparency perspective that our licensees know what we're up to, especially given the way we recognize revenue.

We don't amortize or defer on revenue recognition.

We recognize it as it comes in.

And so as a result, our licensees can often tell what other licensees have paid on major portfolios.

And I think that's useful data.

So, that's one issue, the transparency.

The second, it is still great for talent retention even when the stock price is down as it is now, as long as the belief is there in our employees that the stock price will go back up.

And believe you me, there is belief.

Our license executives know as much as anyone what those portfolios are made of and how they are positioned.

And it's really -- I mean the only person I can think of that we've wanted to keep that has quit the last couple of years was Paul Ryan.

And so, it's been a good talent retention tool for us.

Finally, and perhaps most importantly from the long-term perspective, even though, the way we are running our business now, I don't see a need for us to go out and raise capital for the reasons I mentioned before.

It's clear to us the long-term trend is that this business is becoming the sport of kings.

What big companies are doing, what Washington is doing as a result of lobbying by big companies, they are making patent litigation more costly, more risky, more complex.

Now, that helps us because it means that our customer intake looks a lot better, but it also means that we might need to go and revisit the market at some point in the future for capital.

And so being public lets us do that.

The final thing I'll mention is there are a number of small licensing entities out there that are buying shell companies that are public and kind of fork-lifting their operations into those shell companies right?

And I think the reason you see that happening is because they are seeing the same rationale we are seeing.

Okay.

That's very helpful.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer session.

I will now turn the conference back to Mr. Vella.

Thank you very much for your attention, for your time, to our shareholders for your loyalty.

We look forward to reporting on our progress in three months' time.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-203-1112 or 719-457-0820 with the confirmation code 5728779.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.