Acacia Research Corp (ACTG) 2014 Q2 法說會逐字稿

Presentation

Good afternoon, and welcome, ladies and gentlemen, to the Acacia Research Second Quarter 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 question 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'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 patent rights acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority owned operating subsidiaries.

With me today is Clayton Haynes, our CFO. Today, Clayton will start our call by taking you through the numbers for this past quarter. Clayton?

Thank you, Matt. As detailed in our earnings release today, on a consolidated basis, Q2 2014 revenues totaled $50.1 million as compared to $23.1 million in the comparable prior year quarter. Q2 2014 revenues were comprised primarily of 15 new license agreements executed in the quarter as compared to 43 license agreements executed in the comparable prior year quarter. As we have discussed on previous conference calls, license fee revenues continue to be uneven from period to period.

For the second quarter of 2014, we've reported a GAAP net loss of $12.9 million, or $0.27 per share, versus a GAAP net loss of $12.5 million, or $0.26 per share for the comparable prior year quarter. On a non-GAAP, or pro forma basis, we've reported net income of $7.9 million, or $0.16 per share, as compared to a non-GAAP net loss of $2.7 million, or $0.06 per share for the comparable prior year quarter. As discussed on previous conference calls, non-GAAP, or pro forma, net income or loss excludes the impact of certain non-cash charges and the impact of certain tax benefits. 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.

Inventor royalties and contingent legal fees expense increased 91% and 76% respectively, relatively consistent with the 117% increase in revenues in Q2 2014 as compared to the prior year quarter. Average margins were 65% for Q2 2014 as compared to 58% for the comparable prior year quarter. The increase in average margins was due to a higher percentage of revenues recognized during Q2 2014 having no inventor royalty or contingent legal fee obligations and lower overall average contingent legal fee rates as compared to the revenues recognized during Q2 2013.

Litigation and licensing expenses were relatively flat quarter to quarter, with a slight net increase in litigation support and third-party technical consulting expenses incurred in Q2 2014 as compared to the prior year quarter. Total MG&A expenses, including non-cash stock compensation charges, were also relatively flat quarter to quarter. We ended Q2 2014 with $221 million of cash and investments as compared to $229 million as of the end of the first quarter of 2014. The decrease in cash and investments included the quarterly cash dividends paid to shareholders on May 30 totaling $6.3 million.

Patent-related upfront advances and scheduled milestone payments in Q2 2014 totaled $21.1 million, $16.3 million of which were accrued as of March 31, 2014 related to patent investments made in Q1 2014 or in previous quarters. Looking forward, for fiscal 2014, we expected fixed MG&A, excluding noncash stock compensation charges and including the impact of variable performance-based compensation for the first six months of the year, to be in the range of $28 million to $30 million. We expect patent-related litigation and licensing expenses to be in the range of $36 million to $38 million. Excluding additional 2014 patent portfolio acquisitions and any future amortization accelerations, scheduled fiscal year 2014 noncash patent amortization expense is expected to be approximately $55.3 million.

For additional details regarding the summary of information provided in these prepared remarks today, please refer to today's earnings press release and 8-K filed with the SEC. Thank you all for joining us today. I will now turn the call back over to Matt Vella to provide you with an update on our business operations and other information.

Thanks, Clayton. 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 who have contributed valuable patented inventions to an industry but who need a professional, experienced, and independent third-party licensing partner to get rewarded for those inventions. We call these people and companies, our customers, the patent disenfranchised.

In helping the patent disenfranchised, Acacia's placing itself at the forefront of an emerging secondary market in patent assets. Just as Acacia's mission remains the same, the operational framework management has put into place to achieve that mission, which we've described to you in recent Journeys calls, also remained the same. In short, one, we have decided to serve a smaller number of customers, each having higher quality that has higher revenue potential and more resilient patent portfolios. We call these portfolios Marquee portfolios.

Two, we have resolved to be more patient about getting the right prices for licenses under our own, and under our customers', patient portfolios even if it means enduring a temporary revenue trough. And three, we remain committed to increasing the transparency of our operations over the coming quarters to help the investment community better track our performance.

And just as our mission and operational framework remain unchanged, our perspective about the future of our Company also remains unchanged. Specifically, our future trial date calendar and revenue pipeline have never been more robust, and our Marquee portfolio opportunity pipeline remains strong.

Looking at the numbers Clayton just shared with you, we are guardedly happy about this past quarter's revenue, pro forma profit, and business development activity. By these metrics, we had one of the best quarters in the history of our Company. Our performance this quarter bears testament to the high return on investment potential, time- and risk-adjusted, of Marquee portfolios. It bears testament to the association of revenues with trial dates, and it bears testament to the operational leverage of our business model. And while we are not ready to say that we are out of the revenue trough that we and our shareholders have endured for the past three quarters, we remain confident that the revenue trough is only temporary. This is because of the large number of Marquees we are monetizing and the litigation and patent office status of our major portfolios.

Particularly, we are happy with our trial date calendar. Though not perfect predictors of revenue events, our trial dates are historically correlated to revenue events. In all of 2013, we only had three such trial dates, which was part of the reason for our revenue shortfall that year. In 2014, we've had roughly 10 scheduled trial dates, around half of which have already passed. And for the first few months of 2015, we will have over 20 scheduled additional trial dates scheduled right now, most of which relate to Marquee portfolios. While it was the paucity of Marquee portfolios in trial dates that put us in this revenue trough, it is our strengthened portfolio depth and more concentrated trial dates that we believe will soon pull us out of the trough.

Turning to our portfolio intake, we are delighted to have significantly expanded and deepened our licensing partnership with Renesas Electronics. It has been one of our most important customers since 2010. This expansion and deepening of our relationship represents a vote of confidence in Acacia's ability to monetize operating companies' patent portfolios. We expect our newly refreshed relationship with Renesas to yield multiple Marquee portfolios over the coming years.

Turning to the portfolio intake numbers, we advanced a total of $ 1 million for rights in the following three patent portfolios - nine issued US patents relating to EEPROM flash power regulation and configuration, four issued US patents relating to multi-core digital signal processor architectures, and 10 issued patents, along with foreign equivalents, relating to high-speed digital video interface technology such as those covered by the display port standard.

While we only had one Marquee portfolio in the beginning of 2012, we now have 11, and we still expect to have 12 to 15 Marquee portfolios by the end of this year. As previously stated, we expect a solid and consistent intake of new, high-quality portfolios to continue, thus diminishing the likelihood and severity of future revenue troughs.

Looking at our current roster of Marquee portfolios covering SmartPhones alone, for example, we have the [Rambis] backlighting portfolio, the Adaptix LTE and LTE Advanced portfolio, the Silicon Image chip interconnect portfolio, the Nokia Siemens 2G, 3G, and LTE portfolio, which we expanded earlier this year, the Palm Pilot software portfolio we are still working on for [access] company, the Voice Age portfolio, and now a new additional Marquee portfolio from STMicro Electronics. And soon, in the very near future, we'll announce at least another Marquee portfolio. All of these portfolios are in our revenue pipeline, and these portfolios are in our revenue pipeline in addition to the Bonutti Orthopedic portfolio, the Boston Scientific stent graft portfolio, and the Breed Automotive portfolio.

As mentioned in previous earnings calls, I invite you to visit our litigation calendar page, accessible from under the portfolio tab on our home page, for details about these and other portfolios.

As has become our habit in the past few earnings calls, we will briefly touch upon the government and its activities relating to patent reform. As many of you already know, the latest patent reform effort facing the bill Congressman Goodlatte passed through the House did not receive Senate approval. That development aside, our view regarding patent reform generally remains unchanged. To the extent reform has been enacted, its net effect has been, and continues to be, to make the practice of patent licensing more complex and needful of experienced guidance and resources, which in turn means our customers need us, our expertise, our experience, our risk reduction models, and our financing more than ever.

Last quarter we discussed our commitment to giving our shareholders more information to better track our licensing progress. We spoke of our litigation calendar page, which describes the technology, trial posture, and addressable markets for a lot of our Marquee portfolios. We also spoke of sharing some forward-looking pricing information with you where possible for certain types of patents in the form of licensing rate tables. Today, the rollout of those tables has started. If you go to our litigation calendar page, you will see a rate table for our VoiceAge portfolio. We're -- encourage you to visit this page.

In conclusion, thinking of our upcoming trial dates in the Marquee patents that will go to trial on those dates, the continuing high quality of our patent intake, the increased need of our customers, the patent disenfranchised, for the services we provide thanks in part to patent reform, and thinking of our quality and technical skilled professional staff, we have never been better positioned for high-caliber, long-term performance. And we remain as optimistic as ever about Acacia's future.

I look forward to reporting our progress to you next quarter and, in the meantime, please tune in to our presentation at the Citi Global Technology Conference at the beginning of September.

With that, I'd like to now ask the operator to open up the call to questions.

Thank you, sir. (Operator instructions.) Mark Argento, Lake Street Capital Markets.

Yes, good afternoon, guys, and thanks for taking the question. Nice big quarter out of you on the top line and pro forma, so that's exciting to see. Maybe we could talk a little bit -- and [now], Matt, I know you've talked over the last couple quarters of the focus on the Marquee portfolios around these 10 or 11 portfolios you have right now. And when you think about those portfolios and kind of the business overall, and when Acacia was started or it really kind of cut its teeth in the IP business, it was more focused on more of a -- more velocity, smaller type litigations, or smaller type portfolios that were maybe a lot more kind of hands-on on a day-to-day basis.

And when you think about the infrastructure you have, the number of people that you have, is there an opportunity to kind of lean out the expense side of the equation now that you're focusing more on some of these larger but bigger dollar value portfolios? And how do you think about the business today from an infrastructure perspective than, say, maybe three years ago when you only had one or two Marquee portfolios?

I guess I'd answer that question with two points. First, we made some cuts as you know, Mark, in January. We reduced our workforce by around 15%, 20%, and there were some SG&A savings as a result. And what we found is that we have a lean, mean team right now. I think the best patent evaluation engine in the industry, certainly the best patent evaluation engine that has flexibility to look at different portfolios.

And so, on the SG&A front, I think that we'll basically leave it as it is, and we'll probably increase it as we decide we can now try taking more Marquees. The place where I do see an opportunity for some revenue or some -- excuse me, expense consolidation, some expense reduction, is that $36 million to $38 million a year Clayton mentioned for what I think of as litigation expenses that we advance. Now, that's money we advance and we get back when the revenues come in. It comes off the top before we do any revenue share with our customers.

But, back when we were working in the mode that you mentioned earlier on, we really were not looking to consolidate or optimize the way we staffed and the way we financed and the way we operated all those operating subsidiaries. I think with a smaller number of Marquees and with, frankly, better, more skilled, more experienced licensing and business development and engineering personnel than what we had, say, five years ago, we are now in a position to really start looking at paring down those costs. And I think that's certainly the operating task for the -- the task I've given to our staff, the leaders of our company, and I expect they're going to deliver.

We've already seen some good progress in that regard in the last couple of weeks. I just sort of put the edict in place three, four weeks ago. And so, I think you're going to see us focus on that expense item.

That's helpful. And then, when you're thinking about kind of the ROI profile, or return on invested capital for the cash you've deployed to date when it comes to these Marquee portfolios, when you evaluate an opportunity and you decide to bring it into the firm and manage that portfolio, obviously you're not going to tell me the specific ROI hurdles, but maybe you could just explain how you evaluate it from a -- is this a good opportunity for Acacia, and is this something that we should undertake and dedicate our resources to.

I know before it was we want a 3X or 4X or 5X return on capital. Obviously the bigger portfolios you go, or the bigger -- the law of larger numbers kind of sets in, and so it's not potentially as big of an absolute return on a percentage basis, but on a dollar basis it makes more sense. If you could just touch on a little bit on how you guys think about your return on invested capital, your return on these portfolios, I think that would be helpful given that you guys are really going to solely focus on these, moving forward.

Not much has changed in the last couple of years. We still aim for 3X. We still -- and that's on profits -- we still try and get return off capital within 18 months. We try, and we expect these programs to keep going for three to five years, right? So, all those parameters are there. And the one thing that I've been emphasizing is that obviously it's time- and risk-adjusted. So, if you have a situation where you can deploy $1 and immediately get back $0.25, right, or immediately get back $0.50, or immediately get back any kind of return that might not fit 3X exactly, but you're getting it back with a certainty and a relatively small amount of (inaudible), and obviously you make an exception.

But, really beyond those very basic -- those very basic parameters, right, 3X, less costs, and then you're going to have essentially a return of capital being a big focus. And then, you certainly model a 3X. We hope they all come in that way. That's really all there is to it, and then the rest is execution and the -- essentially seeing what happens.

Great. I'll open it up. Congrats on the strong quarter.

Thanks, Mark.

Brian Prohm, Cowen and Company.

Hey, good afternoon, Matt and Clayton. Congratulations on the very solid quarter, and thanks for taking my questions.

Hi, Brian, thank you.

Hey, first, let me just clear up a couple items on the pipeline for the balance of the year. It sounds like there are five top tier Marquee trial dates pending through the back half of the year. How many of those are in the current quarter? I know that there's something in Germany related to Boston Scientific, but I want to make sure that I have the right portfolios in the right quarters.

Well, what I'm going to do is -- and I don't want to necessarily characterize too many of these things, but I can give you a rough idea of when trials are happening in the next little while. There is a -- and this might not be exhaustive, but I'll try and sort of capture the highlights. There is a trial relating to our Boston Scientific portfolio in Manheim. That's occurring -- the hearing's in August. The decision is expected in September. There is another hearing on Boston Scientific with the same company, and that's going to heard in Dusseldorf, I believe, and that's going to be some time in November.

And maybe the issue is that I'm only thinking of what's coming up the next couple of months, because that's the extent of my radar. The other one I can think of off the top of my head is there is an interesting case from a portfolio by Dr. [Rhodes] that's going to go to trial in Indiana in September. And other than that, I think I'd have to go back to that website and use the same information that you all have, which is -- it's got all those dates listed. But, that website is up to date.

Okay. Thanks, I'll take a look after we conclude. Hey, so then second question, on the Renesas deal, I went back and I looked at the initial signing of the deal in 2010. It sounded like that initial licensing programs had commenced and were generating revenue already in the following quarter in 2010. Is that something you expect to be the case again here with the recent expansion?

I'm not sure about when it'll start to yield. It could start to yield soon. It could start to yield later. What I'm sure about is that the relationship is deeper, it's wider, and it's more involved. And we are delighted. We know Renesas is delighted. We're getting some information the last couple of days to that effect, and we're really looking forward to seeing what we can do with access to even more Renesas patents. We think Renesas is a classic example of a company that has terrific technology and has not been getting as many sales on the product and service side as would be befitting of that technology. So, we're looking forward to helping them monetize their patent position.

And maybe a quick follow-up there. How many other companies of this size and patent weight of a Renesas are under-monetized and under-licensed that would be likely partners for you as part of your growth, going forward?

I don't have a number, because that's -- there's a bit of a confidential aspect to this. And also, it's difficult to exactly quantify. It certainly depends on what sector you're looking at. It depends on what you mean by under-utilization. But, I do think we have a lot of prospective customers of that ilk that we can contact and help, and I believe that, when you look at what our intake is going to look like a year from now, looking back in time, we'll see some other big names on it.

Great. All right, last question from me. So, the last 60 days or so, we've seen, I think, three or four recurring or royalty-bearing licenses from Acacia. Is there something specific about the VoiceAge portfolio that's driving this, or is this something that you're starting to look for in the net intake that we should be aware of as something that may become an increasingly large percent of the mix over time? I mean, you put four together in 60 days, and suddenly in a year or 15 months from now, you could have 25 or 30 of these, and that's something that, having that in place, you'd certainly be able to put some guidance around, right?

Yes. A lot of it is because of the skill of our licensing team on the VoiceAge matter. A lot of it is because of the inherent great qualities of that portfolio, and some of it has to do with the context in which that portfolio is situated, being some critical technology on a feature that is very discernible, that being high-def voice. So, a lot of it is VoiceAge specific. But, I think you are going to see, generally speaking, a push into agreements that will have components -- payment components that are a function of future sales volumes. And I think that's what naturally happens as you put more high quality patents in front of companies, and the companies are looking at would they need to pay, and they're asking themselves, do I really want to pay based on certain static assumptions about what my volume shipments look like, going forward, when in fact those shipments can drop.

And likewise, on our side, we're looking at what we're offering, and we're asking ourselves in some sense the same question driven by the converse concern, are we really happy with making pricing assumptions based on static unit volumes, when in fact they can go up. So, as a result of those two concerns, I think you will see more of those sorts of structures. Sometimes they'll be running royalties. Sometimes it'll be payments that would be triggered by certain changes in -- certain increases in volume.

Great. Thanks for taking all my questions, and I'll pass it on.

Thanks, Brian.

Paul Coster, JPMorgan.

Thanks for taking my questions. Just to build upon that last point, so it doesn't sound like it's actually a strategy to drive royalties to a significant level at the firm. It's more a question of what makes sense sort of given [counts part]. Is that correct?

Yes. Now, what we might find is that what makes sense across a lot of these things, a lot of these portfolios, is to go in this direction, but we look at it portfolio by portfolio, individual situation by individual situation.

Okay. So, the [Martment], there's a bunch of Martment hearings and trial dates coming up, and that's obviously going to catch live some settlement activity. In the past, though, Matt, you've also sort of complained that maybe the team was not executing as well as you'd hoped for on the sort of more routine businesses in between trial dates, and that was particularly true in the MedTech space, if I remember correctly.

Can you talk to us a little bit about your progress and just making the negotiations a bit more compelling and results-oriented without trial dates?

Well, the first thing we've done on the MedTech space is we've overhauled our internal team, and we're very happy with the people working in the MedTech space, all of them.

And also, we've recently promoted Jamie Siegal to oversee our licensing function. This is the person that came out of Sony and was directly involved in managing hundreds of lawsuits with Sony Corporation and running a lot of their offensive licensing programs. And he's done a superb job of marshalling resources and coaching our license execs and coordinating approaches, particularly in that space. So, although we have not seen, for example this past quarter, a very large MedTech deal, we are happy with the progress being made on that front.

More generally--.

--Do you (inaudible) change -- sorry.

I'm sorry, go ahead, Paul.

Well, I was just going to say, have you done anything to change the incentive program for the staff so those motivations are better aligned perhaps?

No. The incentive program was fine, at least we think it's fine. We thought it was fine, and we still think it's fine. I think sometimes you just change out the personnel and, for whatever reason, you get a better quality of work, and that's what we're seeing.,

Okay. You give a bit, and we want a ton more, of course, so we've got pretty good visibility into some interesting activity through mid '15. Do we have enough time in which to fill up the calendar with trial dates and Martment hearings for late '15 and '16, or will we be entering another trough, given what you currently know?

No, I think we've got enough time. The trial date calendar is filling out. We'll provide more specific viewpoint on that in the coming months, probably by the next earnings call. But, we're not worried about the way the trial date calendar's filling out. We've been very diligent at pulling in portfolios. There've been a couple of instances where we've pulled in a Marquee, and we might have maybe filed it a month or two later than what I'd liked. But, generally speaking, we've been quite diligent about keeping both the intake pipeline and the trial pipeline well stocked.

Now, are you going to get pockets here or there? They'll happen, but if we get those pockets, we don't expect it to be anything resembling what we've just been through, because the pocket -- the trough we've just been through was a result of a systematic issue, right, and we think we've addressed it.

All right, thank you very much.

Thanks, Paul.

[David Hoff], Private Investor.

Hi, how's it going? Great quarter. I just had two quick questions. One was on the RPX agreement announced on May 28. Can you provide any color on that?

We've done a number of agreements with RPX. We find that they provide a very valuable market clearing function. And what I'd say about that particular agreement is it's a lot like all the other ones we've done with them. They have certain ranges. They have certain characteristics, and we're happy to see those agreements keep popping up every so often. And we think that's a good example of the market functioning correctly. They're aggregating people that need patent rights, and we're aggregating people that have patent rights. And hopefully we can keep doing our jobs, our respective jobs, and keeping this market functioning correctly.

Okay, thank you. The next question was on inter-party review. They're a pretty common -- and they're accelerating defense mechanism. Is this something that can be handled in-house? I'm pretty sure it's outsourced now. And is this something that could be developed into a service to help other patent owners and kind of generate fees from the in-house work?

Well, let's talk about the second part of the question first, and I'm going to give you a brief answer. And if I've clearly misunderstood your question, then you can repeat that part, and then we'll come back to the first question, which talks about the impact of IPRs more generally. We don't plan on spinning out any service relating to IPRs. To us, IPRs are another tactic that is in play, and we model it and think of it as such. So, maybe I'll stop there and give you a chance to either [read back] to me on the second question, or we then -- give me an idea and I can go ahead and answer the first question.

I actually have a different question related to [again]. [It answers] the first question. Have any current cases been affected by inter-party reviews? Have there been stays issued on any of the cases in District Court?

No. No stays have been issued. There've been IPRs filed, obviously, but no stays have been issued, at least not that I'm aware of. And that would mean there's been no stays on significant portfolios.

Now, the IPRs, the way I think of them is the way I think about patent reform generally, right? To the extent it's been enacted, patent reform, and IPR's probably being the prime example of patent reform, it effectively makes licensing more complex, more risky, and yes, more costly. Those in and of themselves, they are what they are for our company. But, what they have done in practice, and what we see them continuing to do, is much more complexity and risk in prices we see when these things happen, like IPRs start proliferating. Our customers, our prospective customers, our competitors, we think they're even more impacted.

And so, what that's done, in effect, is driven higher quality portfolios, customers with higher quality portfolios through our doors. And the increase in benefit from having those higher quality portfolios, in our opinion, more than offsets that increased cost risk, et cetera. So, that's how we model IPRs, but we do see IPRs as sort of a prime example of one of the things that have changed in the last little while.

The other thing I'll say about IPRs in closing on this question, what's interesting is there'll be IPRs, and there'll be patents taken out with IPRs, but we're going to win a lot of these IPRs. And when we win a lot of these IPRs, we expect, and we're pretty sure the valuation of those patents is going to soar. And we say this because, one, the law's pretty clear. Once you win an IPR, all those defenses, those pieces of prior [art] that you would have normally used in the trial are now not going to be in play. And so, you're effectively making someone fight at trial without an invalidity play, and that is a much, much harder proposition than people would think. That doesn't mean that the odds drop by 50% in terms of a successful defense. They drop by more, in my opinion.

The second thing is, when, again, you come out with these IPRs and you come out with increased odds in terms of winning the trial, or in terms of how people assess the trial and giving you a good deal. There's another thing that's changed, which people don't often talk about, and that's what courts are doing when someone wins a trial. When someone wins a trial, courts are awarding an amount for past infringing activity, and then they're also saying, going forward, here's the royalty rate. And if that' royalty rate's not paid, [treble] damages might be in play.

And so, having that rate and having that amount in the past, what it's done effectively is it's made the situation much better once you get through that IPR -- let's call it an obstacle. So, IPRs are sort of emblematic of what's going on. It's making the practice of monetization riskier, costlier, right, and at times it'll take a bit more time, although these IPRs are time-capped to a year, so that's not really an issue so much. But, the flip end of that is, once you're through them, you get paid better. And so, this is sort of, again, why -- one of the reasons why we've gone to a smaller number of portfolios, of higher quality patents. It was in anticipation of these sorts of developments.

Okay, thank you. I appreciate that explanation.

Tim Quillin, Stephens Incorporated.

Good afternoon, and congratulations on the strong revenue level. In terms of the running royalty agreement, is it fair to say right now they don't add up to any significant number that we should think about in our quarterly modeling?

It depends on what the sales volumes are. So, I don't think we're in a position really to comment on those. They're running royalties. We like the rates. In fact, we have a rate table for some of these things, which you can look up, right? In terms of the volumes, I think you can look up who we've signed deals with, and you can probably get some notion of where the volumes stand now. And that's as good as information as I have. In other words, I think you and I are equally situated to model those out right now, but thanks to the increased disclosure we've provided about those deals in particular.

Right. And then, on that rate card, was the Samsung deal a perpetual license?

I can't comment on the deal to that level of detail because it's confidential, but we think the deal is encompassed within the rate card. But again, we can't comment on the specifics of particular agreements.

Okay. Well, I'm just looking at the rate table, trying to think about the rate table. So, I guess the way I read it, if you prepay for 100 million units, that would be about -- at $0.40 a unit, that would be about $40 million. Now, presumably, Samsung was half that, so they're either licensing fewer units or came in quite a bit lower than that. How did -- and a big licensee may expect to get some kind of discount off of the published rate card, but how do you think about the rate card relative to bigger customers like that?

Well, the rate card will have a phrase or a sentence in there, and I think there's a two-level rate card. There's something you see on the site, and then there's a link you can drill into, and you get a more complete card.

And certainly as mentioned in the rate card, and as reflected in what happens in reality, there are discounts for licensing early with a minimal amount of fuss and a minimal amount of risk. And just as I was saying that we can adjust our ROI expectations when that happens, that certainly applies for individual portfolios. And the converse is true. If someone's going to stick around and cause more risk and cause more expense, they're going to pay a higher rate. So, that is baked in to what we do. You'll find some phrasing in the rate card to reflect that.

Beyond telling you those general things, Tim, which I can assure you we're pushing, I can't comment on individual agreements and individual circumstances because of confidentiality obligations and agreements.

Okay. So, even on that you wouldn't be able to say that, in some period of time, would they have to re-license for additional volumes?

No, I can't say that, okay? Again, that's a confidential term and condition. But, I can tell you what our general approach was, as I just did.

Yes. And then, on your STMicro portfolio, which I think is around shared memory, but if you can just talk about what the opportunity is, the licensing opportunity is on that.

We have several patents that relate to how you can more efficiently store, on one hand, data that's destined for video output, on the other hand data that needs to be computed and crunched upon. And so, if you have some background -- actually you have this background, so you always think of a computing platform, right, as having a GPU, a Graphics Processing Unit. It typically had its own memory, its own frame buffer, and you think of it as a CPU and the memory structure associated with that. And of course, when you go to mobile, you want to be able to cut all of that back because memory soaks up power. Memory takes up real estate. And so, the patents generally relate to that area, first and foremost.

Now, beyond that, we'd have to probably sit down, and I could walk you through the patents. But, let's just say it's a lot of patents in that general space, and we're very happy with their posture.

Okay. And then, the other 11 Marquee patent portfolios, that's something you've already sourced but just can't discuss the details yet. Is that right?

Yes. What happens -- I mean, that's basically right, but just to give you one other possibility, we rake in the portfolio. We look at it. We're happy with it, it passes due diligence. Then, of course, we prepare it for licensing discussions or lawsuits. And as we work on the portfolio, immediately upon acquisition and upon passage of due diligence, as we do that work on the portfolio, we get a little bit more insight.

And so, what I've done is I've -- at some point we have to tell folks, whether or not it's a Marquee. I usually wait till that exercise is completed, the pre-litigation and initial licensing discussions, if any, are occurring, and then at that point we declare. So, what you'll be seeing is something that isn't under our control when we talk about the so-called 11th one, but it's either about to be put through diligence successfully, or it is past diligence and we're about to publicize it through a lawsuit or through a license agreement.

And if you go back to last quarter, Tim, we talked about a 10th one, and we didn't really come out and say what that was. It turned out it was STMicro.

Right. Right, right. And then, taxes are always a little bit difficult to figure out from afar for Acacia, but looks like you accrued or booked some GAAP taxes. Now, are those foreign tax withholdings perhaps in Korea, or exactly what happened there?

Yes, this is Clayton here. In Q2 2014, the majority of the tax expense reflected in the income statement relates to foreign withholding taxes on some deals executed with licensees in foreign jurisdiction.

Okay. And Clayton, do you have any help on how to think about taxes for the next couple quarters?

Well, we tend to treat foreign withholding taxes discreetly in the period that those taxes are incurred, and so it's difficult to sort of -- to model that out. But, at the end of the day, we're sort of in a full I guess valuation allowance position, so we don't expect to incur any tax benefits for the rest of the year. But, it's difficult to model just based upon the discreet treatment of those foreign taxes.

Yes, yes, fair. All right, thank you very much.

Thanks, Tim.

[Nicholas Radelli], CFRA

Good afternoon. My question is -- it's related to the Adaptix litigation. Was wondering if you had any thoughts on the efforts by Apple and others to limit the base for royalties to baseband as opposed to the end unit device.

And on that point, some success Apple has had on that issue before Judge Grewal in the Northern District of California, and of course that's the same judge in your litigation. Thank you.

we're not going to comment on individual cases and individual defendants, especially when something is three months out, or five months out from trial. There's obviously a lot of briefing that's happening, much of it public. There's a lot of argument going back and forth. And of course, anything I see on that point would potentially be evidence. So, we're not going to comment on individual cases.

I can talk generally, though, without referring to any particular cases, it's a standard defense, a standard approach, right? If you are Apple or any other defendant in a lawsuit, you're going to try and do two things on the damages front. You're going to try and reduce the rate, and you're going to try and reduce the royalty base. And each case stands and falls on its own facts, and a judge might decide one -- might go one way on one set of facts and might go one way -- another way on another set of facts, right?

And so, effectively, we take each case as it comes. We note that there's a ton of units regardless. The one thing they can't do is change the number of units they're selling, right? But, other than that, we'll let our briefing speak for itself, and at the end of the day, that's for the judge or jury to decide in terms of how those two issues come out.

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

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