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Executives

JoAnn Horne - Investor Relations, Market Street Partners

John Amster - President, Chief Executive Officer, Director

Adam Spiegel - Chief Financial Officer, Senior Vice President - Finance, Treasurer

Analysts

Brian Karimzad - Goldman Sachs

Adam Carron - Barclays Capital Inc.

Tim Quillin - Stephens Inc.

Paul Coster - JPMorgan

Daniel Amir - Lazard Capital Markets

Dan Leben - Robert W. Baird

Eric Ghernati - Bank of America Merrill Lynch

RPX Corporation (RPXC) Q42012 Earnings Call February 12, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the RPX Corporation's fourth quarter and fiscal 2012 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) Today's conference is being recorded February 12, 2013.

I would now like to turn the conference over to JoAnn Horne of Investor Relations. Please go ahead, ma'am.

JoAnn Horne

Thank you, operator and good afternoon, everyone and welcome to RPX Corporation's fourth quarter and full year 2012 financial results conference call. I would like to apologize for the delay in starting the call but we had some logistical issues at our SEC filing service.

Joining the call today are John Amster, CEO; and Adam Spiegel, CFO. The agenda for today's call includes commentary from John followed by a discussion of the financial results from Adam.

This afternoon RPX issued a press release announcing its fourth quarter and full year financial results, which is available on the company's website at www.rpxcorp.com. This call is being broadcast live over the Internet and the audio of the call will be available on Investor Relations page of the company's website.

I would like to remind everyone that the conference call will contain forward-looking statements that are not historical facts, but rather are based on the company's current expectations and beliefs. RPX's actual results may differ materially from these forward-looking statements. Please refer to the company's SEC filings for detailed information.

In addition, non-GAAP financial measures may be discussed during the call. Reconciliations to the most directly comparable GAAP financial measures are included in a table attached to the earnings release on the website.

Now, I would like to introduce John Amster.

John Amster

Thank you for joining us today. I am very pleased to report that a strong Q4 capped a solid 2012 for RPX. Our progress on all fronts, financial results, client growth, renewals, new services, patent acquisition activity illustrates two key things about the company. One, RPX's unique approach to managing and reducing patent risk is being embraced by the market. Two, as we have often said, our business is best assessed over the longer period and not one quarter at a time.

The nature of our prospects and their experiences with patent risk means that our sales cycle and new client adds will vary from quarter-to-quarter but the frequency and high cost of patent risk means that our services are becoming increasingly valuable for a broad group of companies that collectively billions of dollars of legal and settlement costs annually.

Our data shows that transaction cost are nearly 50% and companies increasingly understand that this is not sustainable. RPX has proven to be the only scalable alternative to control and reduce these costs and we believe the company has a tremendous opportunity to grow if we execute as we did in 2012.

So looking first at some highlights of the fourth quarter. Revenues grew 22% to $51.6 million as compared to the fourth quarter of 20011, while non-GAAP net income totaled $12.3 million or $0.24 per pro forma diluted share. We completed seven acquisitions of patent assets investing over $23 million of our own money and over $100 million when counting contributions from two structured transactions completed during the quarter.

We ended the quarter with 140 clients, up 12 from the end of Q3. Again, our sales cycle can vary widely and the number of subscribers added in a given quarter is not always the clearest indicator of our overall operating progress. At the same time, we are pleased that our pipeline produced our strongest quarterly client increase in almost two years. Three of our new clients in the quarter came in connection with our insurance book.

This solid quarter contributed to 28% revenue growth for the full year with revenues totaling $197.7 million for 2012. Non-GAAP net income was $47.1 million or $0.90 per diluted share. This revenue growth and increasing profitability are clearly positive results but we are equally encouraged by the success RPX had leading a strategic roadmap we laid out for 2012.

For example, this year we expanded our product line to include insurance which remarkably increases the number of companies we can protect from unnecessary legal costs and operating risks. Our insurance products targets the long-tail of technology companies. They are just starting to experience NPE litigation. We ended the year with six insurance customers and are very pleased with the sales pipeline we have already done.

Adam will give you some more visibility on the insurance business in a moment but I want to take a minute to remind you how insurance is an integral part of our vision for RPX. Not only does insurance expand our addressable market, it also helps our core service and it should create new business opportunities in the future. Each insurance discussion that we have provides a continuing stream of cost information to add to our already unmatched database. This data will steadily improve our ability to predict and quantify patents risks and we are now using these actuarial and underwriting tools to help our clients and prospects manage their patent risk more effectively.

Visibility to accurately quantify risk also let us move the talk with prospects for the legal discussion to a business discussion. Looking forward, we will continue to leverage this data in our sales and client relations efforts and we continue to explore new ways we can monetize the data.

In 2012, we also increased our syndication activities which we believe illustrates how the transparency we are fostering with better and more accurate data is leading to a more rational market. Since inception, we have received client contributions totaling over $200 million towards the completion of 16 structured transactions. We believe our clients recognize the value we can add as a trusted third-party in the market.

Last year, we think we strengthened the perception that RPX's syndication process is a uniquely efficient way to clear risk with low transaction cost. One notable syndication was the Digitude/Preservation Technologies transaction we did in Q2. We previously discussed Digitude but I want to mention that it has continued to be important to many of our pipeline conversations. We believe that we can convert additional prospects going forward.

The impact of these large deals often unfold over an extend period of time. It is another example of the irregular and sometimes lengthy sales cycle for our services. With that in mind, I want to highlight three other syndicated transactions that were completed or announced last year.

In Q4, we completed an additional syndicated transaction with Graphics Properties Holdings, the successor to Silicon Graphics. In the GPH deal, we organized a syndicate that included 10 clients. In addition to resolving active litigation for participating RPX clients, we secured more than 180 GPH patents that were not yet in litigation, as well as the right to acquire licenses under the litigation patents for prospective RPX clients.

We also earned advisory fee in this transaction. Those of you who have been following us for some time will recognize that this is significant as it is the first time that we have been paid by our clients for organizing a syndicate. This is strong affirmation of the value that we bring to our client through these transactions. We expect to see more of theses fees in the future.

In Q4, we also acquired sublicense rights to the patent portfolio of Droplets, Inc. and was largely through contributions from several of our clients. This portfolio had spun a broad-based litigation campaign targeting providers of web-based software applications such as those used by financial services companies and other providers of online content. As result of the transaction, seven RPX clients were dismissed from the litigation and we acquired option rights to grant sublicenses to many prospective clients.

We immediately converted two important prospect, including our first pure financial services client, Bank of America. This is an encouraging step because our experience shows that signing a major player is an important catalyst for acquiring clients in a new vertical.

Lastly, we also organized a syndicate of some of the largest technology companies in the world to bid on the Kodak portfolio in its bankruptcy auction. Ultimately, we merged our syndicate with another formed by Intellectual Ventures securing licenses for our participating clients in advance of the sale of the asset in Intellectual Ventures. After a lengthy process, the highest valuation for Kodak was achieved by the formation of a broad consortium of companies that share in the patent rights. This transaction validates RPX's view that consortium based acquisitions represent the most economically efficient manner of transacting patent acquisitions.

This past year, we also continued to strengthen our ability to present our market intelligence and data to clients. Our involvement in the large scale MPE cost study that was published last year has given RPX a trove of market and litigation data. After we aggregate and anonymize this data, we make it available to the study participants. We have also enhanced the data in analysis available on the RPX portal and our clients are steadily coming to recognize just how valuable and how unique this information is.

As a result the portal is becoming increasingly important to our subscriber base and a key way we are strengthening the relationships with our client network. We will be doing a portal demo at our Investor Day on May so you can all have chance to see the functionality, utility and key benefits of the portal.

As I said at the top of the call, we feel very positive about the future of RPX. Operating companies are coming to more clearly understand the scale and scope of this threat, in large part due to our activities and the information we are putting into the market. The number of companies facing NPE litigation continues to grow and the ways in which technology is being used expands the scope of companies that could benefit from the cost effective patent clearance.

We are getting better at quantifying the risk companies face and pricing that risk and then communicating it to our clients and potential clients. We are getting better at developing, new products like insurance that can broaden on our ability to limit patent risk and reduce cost for large and small companies. We are getting better at structuring at complex patent transactions to minimize risk for our clients and generate strong returns for RPX.

Before I turn the call over to Adam to provide greater detail on the quarter, I wanted to discuss two additional topics. First the format in which we will be presenting revenue guidance going forward.

One of the hallmarks of our business is our subscription revenue base which has a high degree of visibility and stability. In the fourth quarter, this was a $195 million run rate business supported by multiyear contracts with a well diversified base of large, midsize and small companies. We have to generate revenues from structured transactions, historically license revenue and more recently advisory fees.

When it is the right outcome for our customers to structure a transaction that generates non-subscription revenue, we will report it separately and offer guidance as to its impact on the P&L but we want you to remember that these transaction are inherently more difficult to predict. Because of the differing characteristics of each new revenue streams, today we will provide guidance on each revenue lines separately.

Keep in mind that we may provide a quarterly outlook that shows zero for other revenue for the quarter if we do not have good visibility to a structured transaction closing within the quarter. We hope this approach will give you greater transparency and improve your understanding of our business.

Second, I need to draw your attention to the other release we put out today announcing that Adam will be leaving the company. I have to say, he will be missed. Adam is one of the early members of the management team and put the company's finance and accounting house in order and laid a strong foundation for our growth. But Adam's real love is building early stage companies and we are already on a solid trajectory. We have known that he would eventually be looking for a new opportunity to do so. Coming off this from 2012 seemed to be a good time to make the change.

So I want to thank Adam for all he has done for the company in the past four years. He has been an integral part of our success to date and all of us at RPX wish him the best in future endeavors. Adam?

Adam Spiegel

Thanks, John. Very much appreciated and it's been quite a ride. I am going to focus here on our non-GAAP metrics which excludes stock-based compensation, the amortization of acquired intangibles and 2011 payment in lieu of contingent obligation that we discussed last year. In each case these items are reflected net of the respective tax effects. A complete reconciliation from our non-GAAP metrics to our associated GAAP metrics can be found on our press release on our website.

I will start with the P&L for the quarter and for the year. As John mentioned, we are very pleased to report a strong fourth quarter that capped another terrific year for RPX. For the fourth quarter, revenue totaled $51.6 million, which was a 22% increase over last quarter's Q4 revenue of $42.4 million. We ended the quarter with 140 clients and was up 12 from the end of the prior quarter. For the full year 2012, revenue totaled $197.7 million, that’s a 28% increase over 2011.

As most of you know, 95% of our revenue for the quarter and for the year comes from our membership offering, which is recognized ratably on a subscription basis under multiyear agreements. Subscription revenue for the year was $185.6 million, that was up 23% from last year. This increase is primarily the result of continued growth in our membership base and in 2012 on a net basis, we added 28 clients to the network.

We also demonstrated our ability to generate significant licensing and advisory revenue in 2012. This line item contributed $12.1 million to our total revenues, that’s a 260% increase over 2011. In the fourth quarter, we generated $2 million in advisory fees and $600,000 in licensing fees.

Moving down to the other items in the P&L. Non-GAAP cost of revenue which is primarily the amortization expense from our patent asset, that was $21.8 million in Q4 of 2012 and that compares to $18.7 million in the fourth quarter of 2011. Expressed as a percentage of revenue, non-GAAP cost of revenue was 42.2% in Q4 compared to 44% in the year ago period. Non-GAAP cost of revenue for the full year of 2012 was $82.1 million as compared $63.3 million in 2011. As a percentage of revenue, cost of revenue for the full year was 41.5% and that compares with 41.1% in 2011.

Non-GAAP SG&A expenses were $10.5 million for the fourth quarter, compared with $9.9 million in the year ago fourth quarter. Non-GAAP SG&A expenses for the year were $41.9 million compared to $33.4 million in 2011. AG&A for 2012 was lower than we had anticipated as certain performance criteria were not achieved causing bonuses to be less than expected, as well as hiring more than we had planned.

Non-GAAP net income for Q4 was $12.3 million which compares to $11.3 million in the year ago quarter. For the full year 2012, non-GAAP net income was up 27% year-over-year to $47.1 million relative to the $37.1 million that we earned in 2011.

Looking at pro forma earnings per share, non-GAAP net income per pro forma diluted share was $0.24 for the fourth quarter of this year, up from 22% in the year ago period. For the full year of 2012, non-GAAP net income per pro forma diluted share was $0.90, up from $0.77 in 2011. For the full year 2012, our GAAP and non-GAAP effective tax rates were 37% and 36%, respectively.

Turing to the balance sheet. We finished 2012 with approximately $200 million in cash, cash equivalents and short-term investments. Our deferred revenue balance at the end of the year was $104.4 million and you might have noticed the new other receivable balance in the amount of approximately $34 million. This balance relates to contributions received in actually one of our structured transactions and has since been paid off in full.

Looking at our patent investment activity, we completed seven acquisitions of patent assets during the third quarter. Our gross acquisition spend was $104.4 million. Our net acquisition spend, which is from the RPX capital alone was $23.2 million. The largest parity between these metrics is a result of our two structure transactions completed in the quarter, Droplets and GPH.

Gross acquisition spend for the full year 2012 was $251.8 million which compares to $103.8 million in the year ago period. As we discussed previously, this metric will fluctuate based on the size and timing of our structured acquisitions. Our net acquisition spend for the full year 2012 totaled $116 million, up from $17.3 million in 2011.

Our headcount at the end of the year was 125 which compares with 110 at the end of 2011. We the recently announced our 2013 rate card which is effective for clients joining this year after a very short patent period. We decided to eliminate the fix cap on our rate card which will give us more pricing flexibility as we market to companies with greater than $5 million operating income. We have also raised the floor to $75,000 which is up from $65,000 for 2012 rate card.

I would now like to spend a few minutes providing some additional color on our recent insurance business. While our long-term ambitions in this market are large, our near-term goals remain quite modest, as there is still much to be validated in this product line. We are targeting somewhere in the range of 20 to 40 policies by year-end 2013 and policies are being sold in a bundle with RPX membership. We are modeling average revenue per client for the year on the order of $150,000 to $250,000.

Longer term, as we gain confidence in our underwriting model, we expect to increase the average revenue per client. Each policy we write is separately underwritten based on the client's loss history. The policies cover NPE litigation only and are focused on legal cost of reimbursement and in certain cases, we may also cover a portion of settlement cost. These policies have a specified retention amount as well as stage limits and other features that serve to align our interest with those of the insured and to manage our overall exposure.

As many of you know, we have reinsured 50% of the overall risk with three highly rated reinsurers but because we remain the primary obligor in the reinsurance relationship, we will reflect gross premium on our revenue line and will reflect the premium seeded along with our 50% share of any lawsuit in the cost of revenue line. We also receive a seeding commission which will useful to offset origination costs and then drop that lawsuit. We will be happy to provide additional color on the economics of this business as well more detail on what I provided above once it becomes material to our income statement.

I would like to now spend a few minutes talking about our guidance for 2013. Looking ahead for the first quarter of 2013, our current expectations are as follows. Subscription revenue in the range of $52.8 million to $53.3 million. Other revenue of approximately $7.2 million. Total revenue in the range of $60 million to $60.5 million. Non-GAAP net income in the range of $15 million to $15.5 million.

We are forecasting approximately 52.5 million diluted shares outstanding on a pro forma weighted average basis. For the full year 2013, our current expectations are subscription revenue in the range of $215 million to $225 million, other revenue in the range of $8 million to $10 million, total revenue in the range of $223 million to $235 million. Non-GAAP cost of revenue in the range of $96 million to $101 million, non-GAAP SG&A in the range of $48 million $52 million, non-GAAP net income in the range of $47 million to $52 million. We are forecasting a slight tick up in our non-GAAP effective tax rate for the year at 37% and about 53.3 million diluted shares outstanding on a pro forma weighted average basis.

In terms of SG&A for 2013, we expect headcount to rise slightly as we continue to build our infrastructure and hire the right people where in some cases we were unable to last year. We are targeting a year-end headcount in the order of 160 FPEs.

On the acquisition front, with revenue targets we have announced we are also targeting net acquisition spend for the year in the range of $115 million to $125 million. Many of you know that it is impossible to predict the timing of our acquisition spend so please don’t be surprised if we report quarters ranging from as $15 million to as high as $40 million. For the quarter and for the year we are forecasting a non-GAAP effective tax rate of 37%.

Before John and I answer your questions, I wanted to just briefly comment on our announcement today that I will stepping down as CFO. First, I want to say this is a really a win-win move. It is right for the company and it is right for me personally. I was asked earlier today, when I decided to leave the company and my answer was four years ago and I was not kidding. When I joined RPX, we always knew it wouldn’t be a permanent situation. Since the earliest days of my career, my interest and my strength has been building young companies. John and I agreed from the outset that once RPX got past the challenges of its early years, I will look for the right opportunity to move on.

The question, of course, has been when I will do that. John and I have been talking about it now for almost a year and now that we have closed our second fiscal year as a public company, I feel very comfortable that now is the time. I am extremely proud of the finance team that I have built and I am confident that they will excel in my absence. Our operating momentum is excellent with top and bottom line (inaudible) very extensive client network and good initial traction for our returns offering.

So as always, it is a delicate theme, when a public company changes the people, this is a very appropriate time for me to make my exit. Serendipitously, we have a great choice to take over. Ned knows the company well. He understands patent market and our value proposition to it and he is a very creative strategic thinker. I know he will help John continue to drive the company forward.

In closing, we achieved record revenue of $197.7 million in 2012, up 28% year-over-year. We have expanded our product portfolio and addressable market with our insurance offering and we made significant progress on our syndicate business. Finally we delivered non-GAAP EPS of $0.90, up 17% year-over-year. We enter 2013 with solid confidence in the strategy, our execution and our ability to create value for our customers.

John and the team looking forward to seeing everybody at our second annual Investor Day on May 21 in New York and I look forward to catching up with all of you personally as cost to the future. This concludes my comments and we will now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Brian Karimzad with Goldman Sachs. Please go ahead.

Brian Karimzad - Goldman Sachs

[AUDIO GAP]

Was that something that was a result of their exposure to online brokerage site? Or was that actually something where the reason they signed up was a broader consumer banking related issues?

John Amster

You were a little bit cut out at the beginning. I think you were asking about Droplets? So it’s a combination of both. I think we had an event driven as is often the case, an event driven customer acquisition through the Droplets litigation. That relates probably to people who have online content. So general (inaudible) that was certainly a very helpful (inaudible) for us that I definitely think that they buy into the broader addition of what we are trying to accomplish in the market in terms of creating broad scale patent clearance and I think, in particular, financial services is a good example of a vertical where they definitely faced increasing risk of over the last few years and I think there is a question mark as to where that goes.

One thing that’s pretty clear about the last few years is that things have changed pretty rapidly in terms of the way people interact with their banks. It is no longer driving up to the teller, but we all know that. Moving to mobile, moving to web, and it is just an interesting illustration in that vertical about how things can change very rapidly and I think it is important that they bought in to our vision that this membership and relationship should help protect them from some of the unknown things that are going to happen in the next few years.

Brian Karimzad - Goldman Sachs

Okay, and then on cash. Maybe this is something for Ned later on but it is becoming a consistent theme here that you have about $200 million of cash sitting there and your patent spending needs are fairly consistent with your budgeting. Any further comments or thoughts on use of cash going forward, you have this excess cash and potential for shareholder returns or should we continue thinking about this as a 100% cash will be going in growing the business?

John Amster

Adam and I are chuckling and I appreciate to answer the question. Look, first and foremost, we have always said this and I know it is hard to quantify but we believe it to be very true which is having a strong balance sheet makes us a more credible partner to do things like syndicated transactions. We think it is important for our business.

We also think it is important to have cash to be able to look opportunistically at acquisitions that may come up that we think it makes sense for the business. So it is important for us to have a balance sheet that is strong and frankly, if it could be stronger at some point that would probably be a good thing too. We also, as you would expect with normal corporate governance, have discussed a variety of uses of cash and I will just leave it at that.

Brian Karimzad - Goldman Sachs

Okay, and then a housekeeping one on the guidance. It looks like at the higher end of the revenue guide and just flowing through the expense items on the right hand side of that, the margin is actually a bit lower. Is that a function of the revenue upside potentially coming from the insurance business or is there something else going in there?

John Amster

I could tell you that there is no secret embedded in that. So we have extraordinarily, as I have taken pains to outline in my script, extraordinarily modest expectations for the insurance business this year. So I am not sure how you are doing the math but there is not a business secret embedded in that.

Brian Karimzad - Goldman Sachs

Okay. No, I was just wanted to use the numbers on the right hand side you had put a lower margin and pull everything from the (inaudible).

John Amster

Yes.

Operator

All right, thank you. Our next question is from the line of Darrin Peller with Barclays. Please go ahead.

Adam Carron - Barclays Capital Inc.

This is actually Adam Carron here for Darrin. Just a quick question following on that last question that was asked. It does seem like your expense growth is going to be a little bit higher this year, granted that we are going to see a decent amount of hiring. Just the question is, we think beyond 2013, we are going to go over the medium term. I know you guys have talked historically about expense growth being around 15% in year-over-year. Is that still a fair number to assume on a go forward basis?

Adam Spiegel

Reported in context, historically, in 2011 our SG&A non-GAAP was up 47%. Last year, our non-GAAP SG&A was up 26%. This year we are targeting a range of 14% to 24% growth. So we think that that’s appropriate for what we are looking to do this year and really going, I think it s reasonable to assume that we will continue to moderate over time. Can't really talk about what happens after this year but the trend is certainly in the direction where you are pointing. I will also observe that we had guided a much higher number in 2012 that came in below for a number of different reasons that I think that we adjusted the way we think about guidance on the OpEx line this year and the range we are giving you this year, we think is very much where we are likely to fall. What I am saying is, adjusted for the last year's under-spend in a way we think about it and this is range that we are feeling good about.

Adam Carron - Barclays Capital Inc.

Okay, I appreciate the color there. A follow-up in terms of the rate card. You mentioned that you guys lifted the cap on the high end. I am just curious is that going to be just for new client or for renewals as well and what kind of feedback you have got from of your larger clients on that?

Adam Spiegel

It would only be for new clients or for an existing client in theory, if they dropped out and then we sign them up later. In other words, if they lost the right to sign up for the rate card on which they originally signed. It really is more of a symbolic thing. To be perfectly clear about it, we don’t expect this to have any major change in what we expect from the current pipeline. It is symbolic in the sense that we had to have a cap initially as a way to ensure the trust of our clients.

Now remember, early days the idea of giving a company the ability to go buy a bunch of patents and then not locking to some sort of structure was a very nerve wrecking thing for a group of clients because they never going to have trust any one before in that space. The relationship was always, I am going to buy patents, I am going to threat to sue you and then you are going to pay me. And we were trying to turn that on its head. So the cap was a very important philosophical point for our early clients. So don’t expect any massive impact on it going forward.

Adam Carron - Barclays Capital Inc.

Okay, great, and then last question for me. Just in terms of renewal rates, just wanted to ask if you guys remained above that 90% threshold?

Adam Spiegel

We are happy to announce that we remain above that 90% threshold.

Operator

Thank you. Our next question is from the line of Tim Quillin with Stephens Inc. Please go ahead.

Tim Quillin - Stephens Inc.

I may have missed it but how many of the client additions in the quarter were insurance clients?

Adam Spiegel

So three of the client additions in the quarter were insurance clients but to answer the question that comes next, we actually added four insurance policies in the quarter and the answer is, we actually converted one of our existing clients to an insurance client. So we sold in the quarter a total four policies, three of them went to new clients and one went to an existing client.

Tim Quillin - Stephens Inc.

Right, and then in terms of renewals, how many renewal have you now gone through as of the end of December and how many renewals would you expect to be doing in the current quarter?

Adam Spiegel

Our renewal activity remains quite well and are quite good, quite strong. The right word. So we continue to have the same level of confidence on our renewals. We also continue to have the same policy about communicating renewal activity which is, we are not going to provide specifics on a quarterly basis. We can tell you that we have, one of the things that I think people are very much wondering about it is for 2013, what things would look like and we have on the order of 30 or so companies coming up for renewal and this is number that changes all the time.

They of course renew at any given point but where we sit today, it's about 30 companies come up for renewal this year. In aggregate they are probably a touch higher than our average run rate revenue, if you are looking to try to figure out what that means in terms of dollars. They are distributed across the year with a bit of a concentration in the second and third quarters. So they are not evenly spread across the year.

They are much more in the second and third than the first and fourth but there are some in each quarter. So hopefully that provides some information for your models and as you think about the business, kind of as we are looking forward but we feel really good about where we are with most of those guys and hopefully that comes across.

Tim Quillin - Stephens Inc.

That’s good color, thank you. Then just a couple of other questions. One, should I think of the $7 million or $7.2 million in nonsubscription revenue in 1Q primarily coming from the Kodak transaction? Then second what is your a total free cash flow expectations for fiscal '13? Thanks.

Adam Spiegel

So we do have some revenue from the transaction that we mentioned but we are not at liberty to discuss or quantify for you. So actually that was a great deal for our clients. It was a very great deal for us but in terms of breaking out the specific component of that, we are not at liberty to do that.

Tim Quillin - Stephens Inc.

And then free cash flow expectations?

Adam Spiegel

For the year?

Tim Quillin - Stephens Inc.

For the year.

Adam Spiegel

We think that we have turned the hump on a free cash flow basis whereas last year if you were to take out that $33 million other receivable that came up in the fourth quarter, we actually moved it on a free cash flow basis positive. This year we think that it will be meaningfully positive on the ramp to where we ultimately want to get.

We think, as we said before, there is leverage in the business. That leverage comes from the growing revenues faster than growing patent spend and I think we are almost at a point in time where we are going to able to see that meaningfully down to the free cash flow line.

Operator

Thank you. Our next question is from the line of Paul Coster with JPMorgan. Please go ahead.

Paul Coster - JPMorgan

Thanks for taking my question. The OpEx spend, what is it really sort of focused on? Is it building and having insurance products, bringing new clients? All of the above?

John Amster

Really, all of the above. I will give you a little bit more color. I think it is spread fairly throughout the organization. It is definitely one of the things that we talk a lot about and we are very focused on internally. It is the data and the tools that we have to make available that data to our clients and also for internal purposes. So there is general infrastructure, is the way I would describe, and it is pretty evenly spread.

There are definitely, we are planning on adding some additional insurance heads but those are primarily based on performance. So its, again as Adam mentioned, it is a little bit of (inaudible) infrastructure building that we need to do.

Paul Coster - JPMorgan

This is a perceived risk because you are now around free riders in your service and were there any examples in this quarter. I know you cannot name names, but you bringing a free rider in to your family and if so, what was the leverage? I know that you have got a number of things going to try and address this issue.

Adam Spiegel

Yes, just the person I would say is that if you compare it to any other patent business, we have got 140 clients, multiyear contract. We have only been around for five years. We have got great relationships with our clients. I think that, and I will say it again, it is not a free rider issue, it is a philosophical or it’s a theoretical one. There is not a real free rider issue.

I don’t think we are having any conversations where people look at what we are doing and say, I can get the benefit and not pay you because they know that about half of what we are doing is litigations and other transactions where we are not getting rights for them, they don’t get access to our data, they don’t get access to our team, and market intelligence that we have. I think our clients are really starting to see us a robust service that you can only get by signing up. So I really do think it is theoretical.

That said, if you characterize a client that we have been talking to who hasn’t signed up as a "free rider", then yes, we actually did last quarter sign up some of who we have talking to for a while. That happens every quarter and almost always its event driven, right, because again, remember that everyone, there are a lot of other people in our pipeline and never bought our service before because it didn’t exist before us. They don’t have a process for buying our service.

In a lot of cases, we have been talking to them since inception because we have known their risk and maybe now they are just starting to come to realize. So often the case with a companies like theirs, occasionally they have seen the light but quite often it is just seeing the litigation docket increase and realizing that we can more cost-effectively than they can reduce a significant portion of it just by signing up for insurance.

Operator

Thank you, and our next question is from the line on Daniel Amir with Lazard Capital Markets. Please go ahead.

Daniel Amir - Lazard Capital Markets

Thanks a lot and Adam, good luck in your future life. I have a couple questions here. So first of all, on the pipeline, in the past you have mentioned around 270 clients potentially in the pipeline or addressable market. Is that numbers still the right number? Or is it a different number?

John Amster

One of the things, that number is the right number. We are actually trying to think about, let's talk about on the call in terms of those metrics. The pipeline of the addressable market is still or meant to the same size yet we believe it is actually growing.

There are lot of statistics that show that NPE activity is up. The number of companies getting sued more frequently is up. I think that’s certainly something we want to speak in to the Investor Day but yes, the addressable market is absolutely there.

Daniel Amir - Lazard Capital Markets

Yes, and a follow-up-to that. Since you signed up Bank of America, the short view since that has happened, has that led to a more interest in the financial services vertical from other potential clients there?

John Amster

Yes, I think it is important to realize that this has been a focus of ours and led by a good team of people really thinking about it as we approach to quantifying the risk of the financial services industry in order to really engage them in a dialogue and the payoff with Bank of America it is certainly, our experience has been that once we do that, it definitely helps momentum with the prospect list and ultimately we would be successful once we again try to enter in a vertical of converted people and so our experience since we signed up a deal has been (inaudible).

Daniel Amir - Lazard Capital Markets

Okay, and one other question. In the past you talked about doing some changes on the sales force side and targeting, doing some revisions there. Can you give us any update on what you have done there, if at all and whether is that an issue?

John Amster

So it’s a continuing process to be very, again, an introspective analytical about what we do in terms of the sales process. I think that the things that we were doing throughout the first half of the year certainly have helped us in Q4. It’s a lesson for us that we need to be constantly looking at the nature of the clients in our pipeline, looking at the approach that we take from a perspective to try to hit that pipeline. I think our head of sales, Steve Swank has done a very, very good job of trying to figure out what the appropriate data is to look at.

That’s really a positive percentage, if you think about it, right. We are not selling a normal product. I just said earlier that when we are selling in to a prospect, it is the first time they have ever got what we are selling. They don’t have a process for buying what we are selling. So it is not exactly over the metrics that we should be looking to really set with the quality of the pipeline. We have been really growing our business over the last four years but it would be nice to being able to have a data to read in and more operational and analytical approach to it.

That’s something that we have been focusing on and we are trying to really determine what those metrics are. We couldn’t have done that two years ago. We didn’t have enough data. We are starting to get to a point where we enough experience and enough data that we could look for the right metrics to determine the quality of interaction with a prospect and we think that will continue to ensure that we are able to grow going forward.

Operator

Thank you, our next question is from the line of Dan Leben with Robert W. Baird. Please go ahead.

Dan Leben - Robert W. Baird

Great, thanks. Just within the 2013 subscription guidance, could you talk through some of the assumptions relative to low and versus the high end? Is it all on the bookings, new client addition side? Or is there some variances in renewal rates there as well?

John Amster

Both. Your short answer there. The answer is both.

Dan Leben - Robert W. Baird

Okay, just annualizing the low end of the first quarter guidance basically gets you the low end. So is the low end is now not as good, okay bookings but it is basically just enough to offset it and then upside from there?

Adam Spiegel

I think the range is a combination of what you just described and we look at a range of what could happen on the new client addition side. We look at range at what could happen on the renewal side. We look at all of that together and we get ourselves comfortable that this is a range that makes a lot of sense for us where we are today.

Dan Leben - Robert W. Baird

Okay great and then, over your relatively short history, has fourth generally been pretty strong for bookings. Is there some seasonal factor that’s helping fourth quarter out whether it's into your budget flush or whatnot that makes you think this will be a strong quarter in the future?

John Amster

Interestingly that is something we can answer the question. I think that in the last two fourth quarters, I think it has been more event driven.

Adam Spiegel

Well, I guess it is half event driven.

John Amster

Are year-end deals that sellers want to get done. There is a little bit of element of that. One of the things we are trying to do from a sales op perspective is actually try to look at what the different factors are. Trying to still figuring about what the meaningful things to track are to see a dotted pattern like that. But nothing in particular jumps up that says Q4 is a very good quarter. And we have had strong quarters. We have had lots of individual quarters that are strong. So not really. It doesn’t belong. It is a very long form of that answer.

Dan Leben - Robert W. Baird

Then last one for me. Could you just talk about outside of insurance the customers you signed, average size of those new clients?

John Amster

Sure. Because they are insurance plans are also members, the metrics we are providing are really for all of the addition and this quarter five folks were at the low end, below about $100,000 of revenue. The balance were roughly consistent with the overall average.

Operator

(Operator Instructions) Our next question is from the line of Eric Ghernati with Bank of America. Please go ahead.

Eric Ghernati - Bank of America Merrill Lynch

For the full year for the net clients that you added net of the insurance contracts that you added, can you just discuss where they stack in the rate card?

John Amster

For the full year of 2012, we haven’t really broken that out in that kind of detail ever before. I don’t think we are looking to do that at this point.

Eric Ghernati - Bank of America Merrill Lynch

Okay, can you just discuss in terms of deferred revenues, like it is the first time, as far as my mind goes, where it's down year-over-year. So how should we read into that?

John Amster

Thanks for highlighting that, Eric. Actually, this quarter a couple of things, the short answer is, don’t read much into it. The longer answer is that there are a couple of specific factors that accounted for that. One of which was, we had a late quarter renewal that got delayed into January. So we hadn’t invoiced them as of the end of the year. It is a pretty good client. So that’s a pretty big impact on what the end of the quarter balance looks like. We also had some impact from some folks who had paid us more than one year and that was in the year ago balance that had not been in. So if you are looking year-over-year, you look at that trend as function of some stuff that was in the year ago balances that is not in this year's balance from just having run off. So nothing super crazy going on there. Just a bunch of little things that all add up to that change.

Eric Ghernati - Bank of America Merrill Lynch

Is there a target net clients add that you have in mind for this year that you can share with us?

John Amster

No. Again, as I talked about in the past, we are focused on building the business adding to run rate and that really is a less of a function of the number of net new client adds and more of a function of the type of clients that we are bringing onboard. So that’s really what we are focused on.

Eric Ghernati - Bank of America Merrill Lynch

Did you get any clients from the Kodak acquisition? Or the transaction, I should say, excuse me.

John Amster

We can't comment beyond what we have already said in our prepared remarks on Kodak. We can't make any other comments.

Eric Ghernati - Bank of America Merrill Lynch

Okay, but there is revenue associated with that but you just can't disclose how much?

John Amster

Correct.

Eric Ghernati - Bank of America Merrill Lynch

Okay and then, like, should we think about any particular changes in terms of, on the insurance product, like the client that you add and how much of those 20 to 40 are existing customers versus just new consumers?

John Amster

That’s a pretty wide range, first of all. So acknowledge that they have done business and it’s a 100% variation in policy or possibility. We think that most of those are going to be new customers. We think that this is an offering that will help us track new folks. There are some folks who are already clients that we actually are able to upsell in to the insurance program as well. So when we target 20 to 40, we haven’t put a specific number on these. We think that a large portion of that will new folks.

Operator

Thank you, and I am showing there are no further questions. I will turn the call back to John Amster for closing remarks.

John Amster

Thanks all for listening to this conference call. We look forward to catching up pretty soon.

Operator

Ladies and gentlemen, this concludes our call for today. If you would like to listen to a replay of today's conference, you can dial 303-590-3030 or 1-800-406-7325 with the access code of 4590942. We thank you for your participation. You may now disconnect.

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