Digimarc Corp (DMRC) 2010 Q3 法說會逐字稿

Good morning and thank you for participating in today's conference call to discuss Digimarc's third-quarter financial results. Now I would like to turn the call over to the Chairman and CEO of Digimarc, Mr. Bruce Davis. Sir, please proceed.

Thank you. And thank you and good morning to everyone. Welcome to our quarterly conference call. Mike McConnell, our CFO, is with me. We are pleased to discuss our third-quarter 2010 results, which were issued in the press release this morning. The objectives of this call are to summarize and comment on these results, review significant business developments and market conditions and provide an update on our strategy and operations. This webcast will be archived in the Investor Relations section of our website and we expect to file our 10-Q with the SEC soon providing more details of our financial results.

Please note that during the course of this call, we will be making certain forward-looking statements. These statements are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we offer about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call.

For more detailed information about risk factors that may cause actual results to differ from expectations, please see the Company's filings with the SEC, including our latest Form 10-Q and our earnings release posted on our website this morning.

Mike will summarize and comment on the financial results. Following Mike's presentations, I will return to discuss some of the important events and achievements during the quarter and provide an update on strategy execution. Then we will open the call to your questions. Mike?

Thanks, Bruce. Good morning, everyone. Thanks for joining us to discuss our third-quarter operating results. Our revenues in the quarter increased 10% to $5.2 million from $4.8 million for the same quarter a year ago and this increase reflects 27% higher royalties from our licensees and the consistent trend of revenues from our service customers billed in accordance with contractual schedules.

More specifically, the quarter reflects record revenues from Civolution, a leading supplier of digital watermarking-based security for digital cinemas and other technology and solution for identifying, managing and monetizing media content. Also, deferral of some federal service revenues that we anticipate will be reflected in our Q4 results and failure to pay quarterly revenues by one of our larger licensees due to a contractual dispute.

Our gross margins grew to 72% from 68% in Q3 of '09. This reflects a higher mix of license revenues to the total, as well as benefits realized from improving operating leverage and providing our services. Operating expenses increased 23% to $4.6 million from $3.7 million in the third quarter of 2009 and the increase primarily reflects increased investment in marketing and R&D personnel and consulting for our mobile product initiatives. And the professional fees associated with the Company's recently completed transaction with Intellectual Ventures.

Our operating loss totaled $800,000 compared to $500,000 in Q3 of 2009 and reflects the impact of the higher revenues offset by the investments we have discussed to our business. Our net loss was $1.5 million, or $0.21 per diluted share, compared with a net loss of $700,000, or $0.10 per diluted share in Q3 of 2009. $600,000 of the current loss reflects our share of operating results from our joint venture investments with the Nielsen Company as compared to $300,000 in the prior year and the net loss also reflects a tax provision of $150,000 for AMT based upon evaluation of our tax reserves and minimum taxes due to government.

Operating cash flow was about breakeven, an improvement of approximately $300,000 over the 2009 quarter and we ended the quarter with more than $45 million in cash and marketable securities, up about $2.7 million from year-end.

Our results reflect prudent investment in our growth, including $700,000 of investment in our early-stage joint ventures with Nielsen and that is expenses as it is incurred. Increased spending on marketing and R&D initiatives in the mobile area and incremental spending in IP marketing activities to expand our licensing program, which has produced numerous new licensee so far this year, including Intellectual Ventures, Arbitron, Catalent and AlpVision.

Further discussion of our results and our business and financial models and risks and prospects for our business will be included in our third-quarter Form 10-Q that we expect to file later this month and now Bruce will provide his comments on our outlook and the execution of our strategy. Bruce?

Thanks, Mike. It has been quite a year for strategic and financial progress so far with the Arbitron license in Q1, strong growth by current licensees, the new partnerships Mike referred to a moment ago, the first glimpse of the fruits of our joint ventures with Nielsen and most recently the announcement of a long-term collaboration with Intellectual Ventures.

Intellectual Ventures is the global leader in the business of invention, funded with billions of dollars of committed capital. IV collaborates with leading inventors, partners with pioneering companies and invests both expertise and capital in the process of invention. Their mission is to energize and streamline the invention economy that will drive innovation around the world. We are honored to be working with them on our shared vision.

The latest accomplishment sets the stage for large-scale licensing, which we hope will accelerate broad adoption of our proprietary technologies in various product markets. A key goal of the collaboration is to seek network effects wherein freedom to operate via IV licensing for some large companies will foster demand for our software and services creating competitive advantage for early adopters that disadvantages competitors who in turn will seek licenses from IV and services and support from Digimarc to remain competitive. Our strategy is to create a virtuous cycle of licensing and software and services demand creation.

Over the course of many conversations with investors since the announcement, I have [distilled] a succinct and clear explanation of the financial aspects of the relationship. We licensed 600 patents issued prior to the end of March 2010 and 300 related applications to Intellectual Ventures. Intellectual Ventures is guaranteeing a minimum $36 million return on investment to Digimarc over the first three years in return for the exclusive right to sublicense licensed assets.

They are also obliged to pay at least $4 million to Digimarc over five years for helping to maintain and further develop licensed assets. IV is taking responsibility for third-party costs for prosecution and maintenance of the licensed assets, which will reduce our annual costs by approximately $1 million per year. Thus, over the first five years of the relationship, the minimum financial return to Digimarc is approximately $45 million.

If this is all we get, the collaboration will have been a failure. IV is putting its capital at risk to make profits. Digimarc will receive 20% of any profits from the IV licensing program. This profit-sharing kicks in after IV recovers all the costs associated with the licensed assets, including the amounts paid to Digimarc and third parties that I just summarized.

We and they are very focused on making this a successful venture in which IV's investors will make a superior return on their investment and the licensed patents and we will add profit to the guaranteed returns. The relationship focuses on monetizing the unexploited potential of the licensed assets. Digimarc has a grant-back license in which it retains all the revenue streams that it enjoyed prior to the transaction, including maintaining and renewing existing patent licenses and providing software and services to existing and new customers.

Given the profit participation and the virtuous cycle strategy described above, we will work very hard to support the IV licensing program, including increasing our R&D and marketing investments in areas covered by the licensed assets. Consistent with our legacy business model, this commitment to support of our partner is intended to increase direct financial return via the profit share, whilst a broader adoption of our technologies and increase the rate of growth of our software and services business.

These are the primary substantive economic aspects of the relationship. Please keep in mind that we are still considering the appropriate financial statement treatment of the various revenues and expenses described above.

In my view, this is the perfect relationship at this stage of Digimarc's evolution. As I have noted with many investors, we are a young company, only 15 years old. With continued success, we would likely look like successful IP-centric public companies such as Dolby, QUALCOMM, and [Robi] who have operated for 25 to 45 years. I believe that IV will accelerate progress toward realization of our vision and mission by expanding the scope of our license program, improving financial performance by more effectively monetizing the license and patent assets and encouraging large-scale adoption of Digimarc technologies by industry leaders. All of this will accelerate growth of our software services business and lay a foundation for continuing innovation and IP development at Digimarc.

We continue to see significant potential in our target markets and are executing very well on our strategy. The mobile device market is on fire. As I noted in our last quarterly call, much of our R&D is focused on improving the discovery capability of mobile devices, particularly in visual search. We are anticipating making more of our work in this area public in the fourth quarter and the first quarter of next year.

It has been a momentous year so far. Our growth strategy is on track. It has many facets, all organized around a coherent vision to teach computers to see, hear and understand the world around them, simplifying access to computer technology and contributing to a future of more ubiquitous and intuitive computing.

In closing, I would like to thank our partners, clients, employees and shareholders for their continued support and commitment to Digimarc's progress toward making this vision a reality. Now we will open the call to questions.

(Operator Instructions). Bill Gibson, Anderson Strudwick.

Could you go into a little bit on, not the IV relationship, but the Nielsen JV 2 partnership?

Sure, Bill. What would you like to know about it?

Well, I saw something recently with the Apple iPad and just wanted to know if we have already got some business there and are playing there?

For those who are interested in work of that joint venture, there was a public disclosure, the first public disclosure of the nature of the work that we are doing together. And the application is known as Media Sync and there is a short video on YouTube that was created by ABC, which can be found by typing in the words ABC My Generation iPad and there, you will see a glimpse of the future. The first implementation here is pretty basic, but what we saw in the trade press was everybody's sort of got where we are going, which is really to revolutionize the television viewing experience.

And so that is a joint venture that we own 49% of and Nielsen is taking the laboring war on the business. They have the relationships with the programmers and the advertisers and we are doing all we can to support them with our technical expertise. They have quite a strong R&D department themselves in this area and they are very familiar with the basic signaling technology.

And so our ambition here is to create a platform, which will allow for a new kind of viewing experience that has many different refreshing attributes to it, some of which relate to overcoming inhibitions to broadscale adoption of interactive television. From another perspective, creating an opportunity for a much higher level of engagement between the sponsors of television programming and audiences and between programmers and audiences and really creating an audience that has both the physical parameters, as well as virtual in the social networking space. So it is a progressive notion that is kind of a 21st-century view of TV. It is targeted towards Gen X/Gen Y and we are pretty convinced it is the future and that it will have a major impact on the television industry and the advertising industry that supports it.

Thanks.

Andy Hargreaves, Pacific Crest.

Hey, guys. So following up on that, have you released any details yet on JV 1?

Not much. What we have talked about in the past is still true, which is that we are working in that joint venture on improving the management of digital media in the new distribution channels, largely in the Internet. And we had thought we would perhaps get it going a bit earlier, but the media industry transformations that are going on are running at a slower pace than the mobile market.

I have noted this whenever I talk to investors that our current income from the transformation media industries is much higher than our current income from the mobile space, but the pace of growth in that area is such that it will continue to grow at I think a fairly high rate and steady rate for many years. And the mobile industry is kind of exploding. So it is kind of a steady ore in the water on the media transformation and then the explosive growth opportunities in mobile.

So in the two JVs, actually Media Sync is in the mobile space and JV 1 is in the media transformation space. So I think we are seeing kind of consistent developments there and it is taking longer for us to figure out how to position these technologies within that transformation than I had hoped. But I think we are still optimistic that we are on the right track here to provide good value and growth opportunities for us and Nielsen.

Okay. And then just a couple technical things. So did you say how big the costs were, the one-time costs for the IV deal in Q3?

This is Mike, Andy. We did not, but the increase of the expenses over last year were almost $300,000 and so a pretty large portion of that related to that legal and accounting cost.

Okay. And assuming -- is the government revenue that was deferred split between licenses and services?

There is no licenses. It is more services product-related.

Okay. Do you know, do you have any sense for what kind of the timeline we should expect for Verance or at least the sequence of events?

The complaint has been filed. I don't believe it has been served yet; it is at their discretion to serve it and we would have time to answer. So it is really up to them on the next step. Until we are served, there is no official response from us. We are attempting to begin communication with them to see where they want to end up, what their goals are.

Did they do this once before?

Yes, yes, it seems to be a style with them.

Okay. And then my last question is just on the IV deal, any idea when we will have clarity on the accounting there?

No. The transaction doesn't fit neatly into a category and has a number of parts to it and so we are -- as you know, we live in a rules-based accounting world, so we are trying to conform while still providing a sensible and informative and accurate characterization of the economics. That is why I have tried very hard here to make quite clear what the economics are and obviously, the accounting will be what it will be. But I think everyone has got a good understanding now of the nature of the transaction and the various flows of revenues and expenses and margins.

Okay. But are they selling and marketing the patents at this point?

Yes, well, everything is cooking. We are out of the starting gate here and we are all -- both teams are working quite hard and quite well together. We are very busy.

Okay, thank you.

Paul Sonz, Sonz Partners.

Good morning. On the progress that you are making with IV, how much of this will become public? If they make deals -- they are a private company, how much should we expect, Bruce, to see public announcements of any deals that are made with IV on the licensing?

I think it will vary, Paul. It actually is mostly a function of the licensee's desires. Both of us will respect any desire for confidentiality that anyone wants to have and that is customary in our business. Obviously, if someone begins a major implementation that appears to use our stuff, they will be in a situation where people will ask them what is going on. And I think some will say that we have embraced the technology because they consider it to be a marketable attribute of their business. So I think it will be a mixed bag.

Okay. Any plans that you can talk about in terms of further experimentation with the Media Sync or the My Generation experiment?

Well, the pilot that we did that any of you can go on the Web, the new world here of information flow, and see lots of commentary about the pilot. It was just a couple of shows and the My Generation show got canceled for ratings. Everybody seemed to like it. I actually didn't see anybody saying that they thought it wasn't a good idea. So I think our purpose in doing the pilot was to test drive the technology and it worked and to get the sense of how the market might view this general innovation, which appeared to range from positive to extremely positive. So I think it was a very good and bold national test and so we are continuing to build a platform and whether we do more tests or not, I will leave to later discussion when and if they arise.

Okay. Google has recently I guess taken Google Goggles to a new level and I wondered how Google Goggles relates to what you are doing in terms of digital search?

It is in the same general deal depth we operate in. I like what they are doing. I think it is impressive R&D. It is driving the vision we want to drive. So we like what they are doing. We think that our technology would be an excellent complement to theirs, rounding out the experience and improving the reliability and range of object identification.

They use scene analysis. They do things quite differently right now in terms of the basic identification approach, but the experience they are trying to create is the one we are trying to create, which is the new world of intuitive computing.

Okay. There was a magazine group that has as used watermarking to enhance the experience. I believe it is a Spanish magazine group, mostly cars. I know that there was some plans on bringing it to this country. Is there anything more you can tell us about how that is coming?

Yes, we are working on it. That was part of what I was alluding to in the script. We will bring it to market when we are ready. We want to do a really good job. Our friends in New York have been quite entrepreneurial and have been teaching the market a lot and doing a lot of good work.

Our approach here is a bit more conservative and we are addressing significant market opportunities and we want to make sure that we have got everything buttoned up when we get ready to roll. And we are comfortable on the timeline that we are on, which would be no later than during next year. And we are addressing the newspaper industry and the magazine industry and the packaging industry all roughly simultaneously. So that is why you see the R&D spending going up. We've got a lot of work going on in that area.

One last question. A lot of technology I think has been taken or looked at by the government, especially I think in terms of taking images from our unmanned flying machines and correlating it. And I wondered how that program is going in the sense of uptake? Is there any recognition by the government that this should be broadly applied across many platforms?

Well, in that area of our business, I always readily confess my inability to know exactly what is going on because of the nature of the market. And so we know the government likes our work, likes our technology. We have some technology available for sale. The way those things work is that bigger players deal with the customer, the customer sort of recommends us to the bigger players. The bigger players come back around with whatever agenda they have and they buy whatever they want to buy whenever they want to buy it. So there may be a really nice opportunity there and there may not. It is just hard to tell, so I never like to put much of a bet on the line.

We have been paid by the government for all the work we have done thus far. So it has been a good business for us and we are patriotic and concerned about national defense and we want to help where we can. And there may be upside and if it comes, we will enjoy it. It is just not an area that I have the capability of understanding very well because of our small size in relation to the partners that we deal with.

All right. Thank you very much.

Walter Schenker, MAZ Partners.

Hi, Bruce. The IV joint venture has multiple, but two major opportunities as you describe it -- the licensing revenue you will get or the percent of their income they get from licensing it and your ability to sell software to the people who license the technology. As you look at this three to five years out, which component do you think is bigger?

Hard to tell. It is hard to tell. If the whole thing works, everything will be great. The software and services piece of it makes a lot of conceptual sense, but we have got to prove it out that the big guys would rather contract with us than try to build themselves. We think that that is the way it is likely to go. If it does, then the software services business that we have will get a big boost in growth. And if our theory about demand creation is correct, then the licenses will get a big boost. So it kind of goes back and forth and that is the idea here.

Over the course of the 20 year life of the relationship, we would like to keep sort of spinning that cycle of demand creation through all the innovation in the portfolio. And it is 900 patent assets, it is probably 20,000 -- 15,000 to 20,000 claims, a remarkable range of innovation, not just digital watermarking and we are going work together to exploit the full potential of all of that in both of those venues, both the licensing and the software venues. So it is really exciting, but we are just getting going. So we have got to prove out what we can do.

And as you look at software services, that is -- services tend to have different margins than when I think of just selling software. You would expect this to be a high gross margin business closer to software or more like a services business, which would have a lower margin?

Well, you are getting more into the nuances of the uncertainty here. I don't know. You are right about the margin assumptions generally, but I don't know both what the mix is between licensing and software services and between software and services. Today, most of our software and services are in fact services and our margins run around 50%. Obviously, a good software business will have margins that approach licensing margins. So the margins should be nice, but the mix is indeterminable. It is just too early for us to be able to guess much about that.

Okay, thanks.

Kevin Hanrahan, KMH Capital Advisors.

Good morning, Bruce. Congratulations again on the IV partnership. I guess it is not a joint venture. You have got to watch your terms here. My questions all surround the patents. Can you just go through that with us again? I think you have transferred all your patents except four and any patents that might be pending for Digimarc. And then I have some more questions to follow up on the patents.

Okay. As you were correcting, Walter, correctly, it is not a joint venture, but now I will correct you; it is not a transfer of the patents. It is an exclusive license and we continue to hold title to the patents. So in the exclusive license, we have licensed 600 patents and 300 applications, which represent our intellectual property development prior to the date that I described earlier.

All of the R&D and the fruits of the R&D after that date are retained by us and without any option by IV on that property. And as of the date that we did the announcement, obviously everything changes every day in terms of the growth of the portfolio, but as of the time that we made our last announcement, we had four issued patents and about 130 applications. And that will mature into a second wave of IP that will be quite large we expect.

And because of the nature of the innovation captured in the second wave, and because of the 15 years of experience that we now have with the team that has been unchanged during that period, you might expect we are going to do a pretty good job at it. So we have the young IP that hasn't yet matured into a licensable portfolio and they have the exclusive right to license the mature IP. So that is the nature of the deal, the split.

Okay. So the mature IP, that is where I am going, that is the whole thing I'm driving at. Can you give us a feel for the -- and I know you told me recently that, as patents mature, they cost more to maintain and now you are going to get some help on the maintenance, but can you give us a feel for the maturity of the portfolio? In other words, can you give us a rough weighted average life of the patents that IV now has access to?

I actually don't have handy the weighted average age of the patents, but that would be a measure we could calculate. None of the patents have expired thus far. The first expiration will be several years in the future. The value of the portfolio will be determined by the marketplace over its life. The maximum life of the licensed assets is 20 years and so as I have said to everybody all the time previously, patents tend to have their most robust profit potential in the later stages of their life and generally, in the last quartile of the 20 year life. And so we have some patents that have just moved into that space and that is part of the enthusiasm that Intellectual Ventures and we have. But there are a lot younger patents in the portfolio too, which we think will continue to create profit opportunities for the full term of the relationship. So I am not sure if I'm answering your question or not.

Oh, that helps. I appreciate that. With that information -- you said you could probably calculate that. Would that have been in any previous 10-K?

No, it's not terribly useful. That's why I say you can calculate it, but it is commonly not calculated. It sort of misses the point. And this goes to just the subtleties of intellectual property marketing. Once a particular patent or family of patents has been well established as critical to a certain industrywide practice, then you know that family has a lot of value. When you are in the early stages of adoption, it is more speculative. And so the age of the portfolio is not terribly relevant until you figure out where the value is.

Right, right. (multiple speakers) and so the patents would be worth more --.

(multiple speakers) calculate that statistic. You can calculate it, but it's not terribly useful.

Right. And I am sure some patents are worth more than others. And can you talk about the potential for IV to put your patents that you still retain, but they have access to, together with other patents that they might have?

Well, they have the discretion to package our licensed assets with other assets that they have to increase leverage and monetization. And we are fine with that and there is an agreed-upon formula for splitting of the proceeds in those situations. So we anticipate that they may want to do that and we will be happy to support them in doing it.

Okay, thanks, Bruce. Best of luck.

Andrew Weiner, Burnham Asset Management.

Good morning, Bruce. So a little bit of a follow-up to the prior questioner. Earlier in the year, you had talked about sort of four or five different areas that you were pursuing that you thought could be potentially substantial license opportunities. It seems like, over the course of the year, the opportunity that has sort of stood out from the pack related to both market development. Sort of meeting with our capability is this mobile space, particularly around object and content identification and enabling sort of more rapid and more accurate search in commerce.

One, I guess maybe the question is is that a fair assessment of where the focus is? And two, given the pace of innovation in the mobile space, does that mesh with your prior comments about the need to get it in the hands of someone like Intellectual Ventures, plus the near-term opportunity around the size of the business opportunity is so great that you sort of perceive a sort of window within the next couple of years to monetize that?

Yes, yes, that's a fair summary, Andrew. That is how I feel. I think there is a huge opportunity in the marketplace operating on our own -- I struggled with how to foster adoption and get paid. And I think IV is uniquely qualified to help us to do both simultaneously, which will be wonderful for our business and for the society and the economy because this change is going on very fast and it is all big players. There are no little guys out there like us. So we are kind of like the little flea in the midst of the elephants here.

So now we have a big player on our team who shares our vision and who has extraordinary competence in intellectual property, particularly in the licensing area and both knows and is well known to all the people that we would like to have conversations with. So yes, that is why I say it is perfect. It is just what -- I can't think of a better relationship to put in place than the one we have right now.

And related to the idea of sort of a focus on age of the portfolio, is your assumption that given the pace of smartphone or multimedia mobile device adoption, that sort of the overwhelming economics it sort of captures within that marketplace will occur in the next two, three, four years? And whoever has perhaps the best or most elegant solution is likely to capture sort of a significant share of that market similar to the way Apple has demanded an overwhelming share of the media player, mobile media player market by having the most sort of elegant solution and the first generation. And that as a result, regardless of whether the patents having 5 or 10 or 15 year life, having access to those patents over the next few years will be critical to someone's market development?

Well, I have maybe a little bit of a different way of saying it. I think I generally agree, but what we believe will be true is that the change in -- I will call this my personal vision -- I quite strongly believe that whereas Apple pioneered the application orientation of mobile devices here over the last few years that the next move really is this move toward intuitive computing. And I think that we have technology that can be very helpful to the realization of that generational change in the meaning of the device in the lives of the users.

But once that catches on, if it does, not only do we get the early licensing the next few years, but the portfolio all relates to that kind of stuff. So I think we get really long legs, as well as hitting early. So I don't -- if your characterization was that there is kind of a window and then the window goes away, I disagree, but I do agree that there is a window. I just see it really as a step-up.

And part of this strategy of our business here from the time that I got started was that we need to build a base of adoption of the signaling means, the Digital Watermarking, from which then we can continue to innovate and continue to generate substantial license income and software and services business. And our adoption has just -- the pace of adoption has just picked up pretty significantly as you see from the Civolution success and you might imply from the Verance resistance to their license.

And in the case of the Nielsen joint ventures and the Media Sync introduction, it is coming together. But it coming together doesn't mean that we are done. It means we are getting started. But it is really important that we foster adoption, as well as licensing, during the next several years, not just licensing.

With respect to Verance, I mean is there any color you can provide around sort of what that payment this quarter would have been? Would they have been a 5% customer, a 10% customer?

No. Probably best, because we have got some litigation pending, probably best not to go into a lot of details. But what I would note, for everyone's benefit, is that the ACS license, which they are the chosen security watermarking technology supplier for, has been finalized and thus the inclusion of our license technology will be mandatory globally. So it is what both of us were waiting for 10 years. So it has happened and as you know, I was quite cautious over the last couple of years when there was sort of -- they called it an interim final license where they hadn't quite gotten it final final, but now it is final final, which means that a nice income stream for both of us for many years. And I think you ought to assume that, because we had an income stream before it was final, that the income stream after it is final is going to be significantly larger.

Bruce, that gets back to -- I was trying to sort of think about the modeling of the business and I realize there is a lot of variables, but the core business appears to have been growing even if you back out the Arbitron stuff sort of in excess of 25% on a blended basis. And there seems to be an acceleration to that driven by digital cinema adoption, driven by the finalization and sunsetting date of the Blu-Ray DVD standard and some new licensees that were signed prior to the IV deal. Is that a fair comment?

Yes.

Assuming we can come to a resolution with Verance, we would assume -- we would anticipate that to continue in the future without sort of asking for specific guidance, but sort of the general directional trends of the core business is for improving growth off of that base rather than --

Given that we don't give guidance, I will state my aspiration to have that contingent to be true.

Okay and then --

Rather than my expectation. Yes, I mean we are obviously quite enthusiastic about a wide range of opportunities across government and commercial markets and we are dedicated to continuing to improve our shareholder value. So we are doing all we can to get growth. And I just would remind everyone of the thing I always say, which is that we are young and we tend to have kind of jumps in our business as opposed to steady growth. But as we mature, those curves will get a little smoother, but we are still young.

Right. So Bruce, I am just talking about on that base business that we already have in hand and then it sounds like the way to think about the incremental software and services opportunity associated with the network effect from IV is that would create one of those jumps you are talking about or a step function increase in the growth rate if that was successful.

Yes, yes, that is my point. We are still sort of in step function mode as opposed to linear exponential growth. And I am not quite ready to go into all the details yet. It probably be a bit more into next year, but we are doing a lot of R&D intended to create licensable software in the mobile space. And the modeling we are doing is very encouraging. If we are right, it would yield a very big growth opportunity for us. So we have upped our investment. We have an excellent team working on it. I am quite focused on it. And we are not yet ready to go to market, but we are telling everybody sort of the general notions that we're working on here. And as I have said earlier, we will be giving more information over the course of the next couple, few quarters. But I am very excited about that opportunity for growth in software.

When you look at that opportunity that you expect to be able to share more over the next couple of quarters, is the strategy to unveil this with once we secure customers or partners for this or when we believe the software and applications are commercially ready?

Both. Catalent is one of our partners that has already been announced, so that -- we'll have more announcements like that, we suspect and then there may be partners that come through the Intellectual Ventures relationship that get announced. There may be some that don't get announced. I don't know. And then we will hopefully have some real customers at the time that we announce we are launching, but that part is not yet clear in the sense that the style of market development that is popular in the 21st century is more tentative than that.

Generally speaking, entrepreneurial companies like us kind of push the stuff out with a little bit of hair on it and then sort of smooth out the edges over the course of some period of time and then build a solid business model and then yield the profitable returns. And a good example of that, which I am quite familiar with, is Pandora, which is about eight years old or Shazam, which is about 10 years old.

Then they both kind of -- for a few years, they were kind of muddling around and now they have taken off. I am not anticipating that long a cycle for us, but the approach to the market is not a bad one. And we may decide that that is the route we want to go. It certainly is a lot more persuasive if we have got a bunch of people lined up day one. So we are working on both of those approaches at this point in time.

I guess the last question I had was we obviously have a lot of cash on the balance sheet and as you described, we have roughly sort of $45 million of economic value regardless of how the accountants determine the treatment. That will accrue to our benefit over the next sort of few years. Have you had an opportunity to further refine your capital allocation plans and strategies for the excess cash?

I have begun to discuss that with the Board. We will focus considerable energy on that over the course of the next few quarters. We want to do a good job of maximizing the financial return for our shareholders. So we are quite conscious of the varying rates of returns and risk profiles and we are going to do a good job on that. But because we just got the deals done, we haven't really gotten down to a lot of work on it yet, but I have told the Board I want to have it be a high priority for us going into next year.

Thank you.

(Operator Instructions). Paul Sonz, Sonz Partners.

Hi, two things. Bruce, you said Shazam and did you say Pandora as in P as in Paul?

Yes.

That is the Internet radio station?

It is. Yes, Pandora has just taken off like a rocket in the last year and if you talk to their founder, three years ago, he was wondering whether he was going to be able to stay in business. They figured out the formula. That is my point. They kind of poked around for a while and they found the formula and that has proven to be a decent market development approach in the new world in the last decade.

Right. I got it. The second thing is, and this -- unfortunately you are going to have to go back to teaching school because I don't understand this. You said you licensed 600 patents and 300 applications. What is the -- could you explain that? I don't understand -- I mean I understand what a patent is, but I don't understand licensing applications. How does that work?

Yes, it is a little bit technical. The applications that we licensed with the patents are called children of the patents. They are part of the same family, which means they have a reference back in the application to the disclosure that is in the issued patent. So it is more interventions from the stuff that yielded the patents and that is why they are all kept together, they are all part of the same family, so we licensed the family. But there is actually -- there is many families. We licensed the families to Intellectual Ventures.

I understand. Would there be some things out of that 600 patents, some applications that weren't -- that are still available to you to license to other people?

All of them are for the continuation of existing patent licenses and renewals and extensions.

But there would be no applications from the 600 patents that you could license on your own to new customers?

Not without permission from Intellectual Ventures.

Okay. All right. So when you say the 600 patents and the 300 applications, it is just that -- does that represent all of the applications? Because I think that when you talked about the 600 patents, you said that there was something like thousands and thousands of -- oh, I see -- claims. There were thousands and --.

Claims, yes. In our world, the 900 total would be called patent assets, so the lingo that those guys use. So we licensed 900 patent assets and we kept 130 patent assets would be the way we talk about it. The licensed assets are mostly issued patents. The unlicensed assets are mostly applications.

I got it. Okay. All right, good. Thank you very much.

At this time, there are no further questions. Mr. Davis, are there any closing remarks?

Well, I want to thank everyone for your continuing support and confidence in us and we are obviously working as hard as we can to continue the extraordinary success we have enjoyed thus far this year. And we have plenty of exciting things to work on. So we will look forward to talking to you again soon. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.