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Acacia Research Corporation (NASDAQ:ACTG)

Q1 2013 Results Earnings Call

April 18, 2013 4:30 PM ET

Executives

Paul Ryan - Chief Executive Officer

Matt Vella - President

Clayton Haynes - Chief Financial Officer

Ed Treska - General Counsel

Analysts

Matthew Hoffman - Cowen

Mark Argento - Lake Street Capital

Paul Coster - J.P. Morgan

Tim Quillin - Stephens Inc.

Larry Waldman - Private Investor

Operator

Good afternoon. And welcome ladies and gentlemen to the Acacia Research First Quarter Earnings Release Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions-and-answers after the presentation.

I will now turn the conference over to Mr. Paul Ryan. Please go ahead, sir.

Paul Ryan

Thank you for being with us today. Today’s call may involve what the SEC considers to be forward-looking statements. Please refer to our 8-K which was filed with the SEC today for our forward-looking statement disclaimer.

In today’s call, the terms we, us and our, refer to Acacia Research Corporation and/or it’s wholly and majority-owned operating subsidiaries. All intellectual property acquisitions, developments, licensing, and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly and majority-owned operating subsidiaries.

With me today are, Matt Vella, President of Acacia; Clayton Haynes, our Chief Financial Officer; and Ed Treska, our General Counsel. Today, I will give you a quick overview of the progress we are making in growing the business. Then Matt Vella and I will respond to questions we are getting asked most frequently by analysts and shareholders. Then Clayton Haynes will provide you with an analysis of our financial results. And we will then open the call for questions.

Acacia continues to build its market leadership position in patent licensing. Acacia generated the second highest quarterly revenues in company history in the first quarter. Acacia generated revenues of $76.9 million in the first quarter from 29 new revenue agreements which covered 31 different licensing programs, including 11 new licensing programs, generating initial revenue.

Acacia increased its cash and investment position to $327 million at the end of the quarter and has collected $30 million in cash from outstanding receivables from first quarter licensees and expects to receive an additional $11 million of outstanding receivables for first quarter licensees by the end of April.

During the first quarter, Acacia acquired control of nine new patent portfolios and invested a total of $4 million in upfront advances and payments. In the first quarter, Acacia expanded as patent licensing business into the energy sector by acquiring control of our first patent portfolios in that sector.

One of the portfolios relates to polymer-based drilling fluids used in oil and gas well drilling and the other relates to solid separation technology used in oil and gas wells. We have a very rich pipeline of additional portfolios. We are evaluating in the energy sector. An early indication as the energy sector could be an area of substantial growth for our company.

Acacia also continue to expand its business into the medical technology sector by adding a patent portfolio relating to vascular device technology. Acacia also added six new portfolios in the tech sector, including patents related to broadband technology such as DSL modems and Voice-Over-Internet Protocol phones, fiber optic network architectures and display technologies used in smartphones tablets, computers, HDTV and other devices, which was transferred to us by Rambus. We are very pleased to have been selected by Rambus for the licensing of this important portfolio.

As the market leader, Acacia continues to see an acceleration and opportunities for partnering with companies in the tech, energy and medical tech sectors for the licensing of their patented technologies. This should be the continued growth in licensing revenues.

We are expanding our partnering activity in international markets as well and expected that initiative will also contribute significantly to revenue growth. Management evaluates our company’s performance based on four metrics, annual growth on patent portfolios under management, annual growth in the new licensing programs, annual growth in revenues and annual growth in profits.

Last year, Acacia once again set new records in all four of its key metrics as we grow our revenues by over 35% for the fourth consecutive year. And we are obviously off to a great start again this year.

We always remind investors that management does not attempt to manage for a smooth, sequential quarterly growth in revenue and therefore quarter results could be very uneven. Unlike most companies, revenues not generated in the current quarter are not lost but most likely are just pushed into a subsequent quarter. Our focus is on getting paid the right price for the licensing of our patents.

I would now like to respond to questions we are asked most frequently by analyst and shareholders. The first question we are usually asked is what is your visibility for future revenue growth.

Our answer is that historically there has been a very high correlation between our growth in new assets under management and our subsequent revenue growth with 12 to 18 months lag to begin generating revenues. While our totally numbers are uneven, we have always seen very significant and consistent growth in annual revenues based on the previous 18 months of growth in new assets under management.

Because we have added a record number of new assets during the past 18 months, we expect to generate continued revenue growth. In addition, a number of the new portfolio as we now have under management in the technology, medical technology and automotive sectors have very significant revenue opportunities based on the depth and breadth of the patent coverage and the size of the market these technologies address.

Our focus over the past 18 months is increasingly on gaining assets under management which have the potential for producing very significant revenues. The revenue opportunities these assets represent is now beginning to be realized in the higher dollar amounts of revenues we generate from certain licensees.

As we continue to add these high revenue potential assets which have diverse licensing opportunities, our business will continue to mature and our revenue visibility should continue to improve.

The second question we get asked is, are you changing your business model from partnering with patent owners to buying patent. The answer is no. We continue to partner on approximately 90% of new assets under management which is our historical average and purchase about 10% when the patent owner does not want to wait for the revenue share.

We are however deploying more capital in the form of upfront advances which we recapture from the initial licensing revenues we generate. Our strong balance sheet is giving us the ability to utilize these upfront advances to continue to shift our company’s focus from lower revenue high-risk assets to higher revenue low-risk assets. We think this is the right strategy for growing the company and increasing shareholder value.

The last question I will address is regarding the changes in Acacia’s free cash flow over the past three years. Some investors have expressed concern that we have gone from positive free cash flow generation to a negative free cash flow in 2012.

In responding, I think it’s important to distinguish the free cash flows provided by Acacia’s business operating activities to the cash flows after acquisition cost of new assets. Acacia has continued to generate consistent and growing net cash flows from its operating activities including 2012, as we generated $45 million in net cash in 2010, $61 million in 2011, and $105 million in 2012.

The change in free cash flows after new investments over the past three years is simply a function of the amount of new asset investments we made each year which were $8 million in 2010, $15 million in 2011 and $328 million in 2012.

We anticipate that our cash -- net cash provided by operating activities should be favorably impacted in the future by the significant investments we made in new assets during 2012. And this should be viewed as a positive, not a negative.

In the first quarter of 2013, we generated $17 million in net cash from operating activities and invested $4 million in new assets. Acacia has a history of being very disciplined when investing shareholder capital and has a record of generating exceptional annualized returns from the investments we have made in patent assets, that have been under management long enough to generate a majority of the expected return.

Acacia’s extensive experience in completing due diligence on thousands of patent portfolios, now across multiple industry sectors, gives us great insight into the risk factors associated with enforcement of prospective patent portfolios. And similarly, Acacia’s experience in completing over 1200 licensing transactions gives us the significant insight into the likelihood of being able to enter into negotiated licenses with prospective licensees, at price points required to generate the expected returns.

With that, I would like to turn the call over to our President, Matt Vella.

Matt Vella

Thanks Paul. We also get a lot of questions regarding potential changes in patent law, and how it may impact our business. As we mentioned before, the answer to these questions is that we carefully monitor changes on both, the legislative and judicial front. And we’ve been doing so over the past six years.

We have modified our business execution, lot of those changes. And through all of those changes, we have grown annual revenues from $35 million to over $250 million. While many investors have been concerned that these changes would have a negative impact on our company’s business. Some of these changes have most likely given more patent owners who want to partner with us. And it’s had a positive impact on our business.

The more complex and difficult it is to monetize patent assets, the more valuable our expertise becomes for patent owners. Of course, we’ll continue to monitor potential changes. And we’ll adapt, if any changes are made that require adaptation. The bottom line however, as of right now, is that we’re not seeing anything coming out of Washington that is a material threat to Acacia’s business.

Paul Ryan

Okay. Thank you, Matt. And with that, I’d like to turn the call over to Clayton Haynes, our Chief Financial Officer.

Clayton Haynes

Thank you, Paul. And thank you to everyone joining us for today’s first quarter 2013 earnings conference call. On a consolidated basis, revenues in the first quarter of 2013 totaled $76.9 million as compared to $99 million in the comparable prior year quarter.

First quarter 2013 revenues included license fees from 29 new licensing agreements covering 31 of our technology licensing programs, as compared to 40 new licensing agreements covering 32 of our technology licensing programs in the comparable prior year quarter. For more details, please refer to today’s earnings press release for a summary of technology licensing programs contributing to revenues during the quarter.

Consolidated trailing 12 months revenues totaled $228.5 million, as of March 31, 2013, as compared to $222.6 million as of the end of the comparable prior year quarter. On a consolidated basis, our operating subsidiaries have generated revenues from 154 of our technology licensing programs, as compared to 118 technology licensing programs as of the end of the comparable prior year quarter.

License fee revenues continue to be uneven from period to period, based on the various factors discussed on previous earnings conference calls and in our periodic filings with the SEC. For the first quarter of 2013, we reported GAAP net income of $5.1 million or $0.11 per share versus GAAP net income of $49.9 million or $1.09 per share for the comparable prior year quarter.

First quarter 2013 non-GAAP net income, which excludes the impact of non-cash patent amortization, stock compensation and excess benefit related non-cash tax expense, was $22.7 million or $0.47 per share as compared to $67.8 million or $1.48 per share for the comparable prior quarter. Please refer to our disclosures regarding the presentation of non-GAAP financial measures in today’s earnings release and 8-K filed with the SEC.

Our average margin, defined as total revenues, less inventor royalties and contingent legal fees for the portfolios generating revenues during the period was approximately 56% for the first quarter of 2013 as compared to 89% for the comparable prior year quarter. Average margins continue to fluctuate period to period, based on the mix of patent portfolios with varying economic terms and characteristics that generate revenues each period and specifically, based on the related economics associated with the underlying patent acquisition agreements and contingent legal fee arrangements, if any.

The decrease in average margins in the first quarter of 2013 as compared to the first quarter of 2012 was due to a -- was due to a significantly higher percentage of revenues generated in the first quarter of 2012, having no inventor royalty obligations or contingent legal fee obligations, as compared to the revenues generated in the first quarter of 2013. As a result, inventor royalties expense increased to $18.5 million from $7.6 million in the prior year quarter, and contingent legal fee expenses increased to $15 million from $3.7 million in the prior year quarter, despite the 22% decrease in related revenues for the same period.

Marketing, general and administrative expenses remained relatively flat quarter over quarter. Litigation and licensing expense in the first quarter of 2013, increased $6.3 million over the prior year quarter to $9.6 million, due primarily to higher net levels of patent portfolio litigation and enforcement expenses incurred in the first quarter of 2013, including litigation support, patent prosecution, third-party technical consulting, and professional expert expenses, associated with our continued investment in ongoing and new licensing and enforcement programs commenced since the end of the comparable prior year quarter.

We continue to expect litigation and licensing expenses to continue to fluctuate period to period, in connection with our current and future patent acquisition, development, licensing and enforcement activities. First quarter 2013 non-cash patent amortization charges increased $6.6 million due primarily to $5.9 million of scheduled amortization expense related to new patent portfolios acquired since the end of the comparable prior year quarter.

Our estimated annual effective tax rate was approximately 39% for the first quarter of 2013 as compared to an effective tax rate of 23% for the comparable prior year quarter. During the prior year comparable quarter, the effective tax rate was impacted by $10.2 million of tax benefits recognized, resulting from the release of valuation allowance, on the majority of our net deferred tax assets in the period, resulting in the lower effective tax rate for the first quarter of 2012.

Non-cash tax expense, calculating without the excess tax benefits related to the investing of equity based incentive awards, which are credited to equity, not taxes payable, totaled approximately $709,000 for the first quarter of 2013, as compared to $7.6 million for the comparable prior year quarter.

As of March 31, 2013, taxes paid or payable, totaled approximately $3.4 million, primarily comprised of $2.2 million of foreign withholding taxes withheld by the applicable foreign tax authority on revenues agreement executed with third-party license fees, domiciled in certain foreign jurisdictions, hence federal and other state related taxes payable.

The 2013 tax provision contemplates utilization of the $2.2 million in foreign taxes withheld in the first quarter of 2013 as a credit against income tax expense calculated for financial statement purposes.

As of the end of the first quarter of 2013, we estimate that we have approximately $25 million of net operating loss carry forward and $20 million of foreign tax credit available for use in future periods.

From the cash flow perspective, net cash inflows from operations for the first quarter of 2013 totaled $16.8 million versus net cash inflows of $49 million for the first quarter of 2012.

First quarter 2013 patent-related acquisition costs totaled $4 million as compared to $152.1 million in the prior year quarter. We ended the first quarter of 2013 with $327.4 million of cash in investment up from $311.3 million as of December 31, 2012.

As Paul mentioned, the majority of accounts receivable from licensee at March 31, 2013 totalling $45 million has been collected or it’s scheduled to be received from licensees by the end of April.

Looking forward for fiscal 2013 we expect MG&A excluding non-cash stock compensation charges to be in the range of $29 million to $30 million relatively consistent with fiscal 2012.

For fiscal 2013 we expect patent-related litigation and licensing expenses to be in the range of $18 million to $20 million depending on net patent portfolio litigation and prosecution activity occurring throughout the remainder of the fiscal year.

Based on current outstanding grants of restricted stock we expect non-cash stock compensation charges for 2013 to be approximately $23.5 million or $6 million per quarter. Excluding future patent portfolio acquisitions, scheduled fiscal year 2013 patent amortization expense is expected to be approximately $46.2 million or $11.5 million per quarter.

Again, thank you for joining us for today's earnings conference call and I’ll turn the call back over to Paul.

Paul Ryan

Thank you, Clayton, and Operator, you can now open the call for questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Matthew Hoffman of Cowen. Please go ahead.

Matthew Hoffman - Cowen

All right. Thanks. And congrats on the quarter especially the revenue. Clayton it sounds like the $18 million to $20 million for litigation and licensing is still in play for the year despite having a big number here for the first quarter. Can you take us through what’s going on little bit more detail in terms of what puts and takes were for that number in the first quarter and is there any correlation between having lot of the litigation going so close to trial? Thanks.

Clayton Haynes

Sure. One of the elements were there was litigation costs prior to the settlements that we did on the smartphone. We had three companies scheduled to go to trial, so obviously there was a lot of activity and probably was helpful in getting those companies to make a decision to settle. So but this, so, yeah, that was one-time event that was in the first quarter.

Matthew Hoffman - Cowen

Okay. All right. So as you think about the excess portfolio, things like most of the non-Chinese OEMs, the big ones anyway are now licensed. As we look forward to some of the med-tech and auto portfolio, can they replace Access in terms of the size of the contribution to the topline?

Clayton Haynes

Well, we have far more than that, I mean, we have, if you just look in the 4G/LTE smartphone market, the Nokia Siemens, Samsung portfolio, the ADAPTIX portfolio, we have several in that category, not to say that the expansion in the med-tech and automotive and energy sectors won’t contribute to growth, but we feel we have exceptionally strong revenue opportunities in that same sector in the telecommunications right now.

And Access is one that there is, considerably we are now looking at foreign markets, there is coverage there and we will expand our licensing efforts in the foreign markets as well, and you correctly point out that both Huawei and ZTE are currently in litigation on that portfolio.

Matthew Hoffman - Cowen

Okay. And last question for me and then I’ll pass it on to the next guy. So it seems like there is a pretty good correlation between the closer you get the trial late and revenue, can you update us on trial activity from the 2Q and trial you may be thinking meaningful damages on, what’s going on, what are the trials we should be looking at here in 2Q? Thanks.

Clayton Haynes

Well, I don’t want to misguide because if you put in context, if you think about the licensing of the smartphone patent, the vast majority of the licensing occurred over the last two years far prior to litigation, there are only really three companies toward the end but obviously as you're aware larger companies like Microsoft and Samsung settled out quite some time ago.

So I wouldn’t draw that comparison or use that analysis. We consistently seem to be able to get the licenses done at price point. There is always seem to be companies that want to wait longer than other companies, but we don't think that's really going to impact the timing of our revenues.

Matthew Hoffman - Cowen

Yeah. So it comes down in portfolio growth for you?

Clayton Haynes

Well, we think it comes down with the strength of the portfolios, many of these new portfolios that have such debt of patent families and breath of coverage and obviously come from companies that are very well recognized as leaders in those field generally enable us to get in the licensing discussions much earlier, if you got, a portfolio with one or two patents and two or three plans, those tend to go through extended litigation you can get the settlement.

So one of the great benefits of us being able to move into what we think are much higher revenue low risk asset is also improves time to money because more companies are going to respond, they want to license on the portfolio that they certainly don’t want to take on in the litigation challenge.

Matthew Hoffman - Cowen

Thank you.

Operator

Our next question comes from the line of Mark Argento of Lake Street Capital.

Mark Argento - Lake Street Capital

Hi. Good afternoon, guys.

Paul Ryan

Hi, Mark.

Clayton Haynes

Hi, Mark.

Mark Argento - Lake Street Capital

Question about how quickly you are returning the capital that you deploy, I know early on last year big investment at ADAPTIX and clearly, you’ve done some license deals there. You talk a little bit about those some of the deals in which you put upfront capital kind of was a prepaid royalty? How quickly are you recouping a capital? Are you able to get hold, six months, three months? Is there any kind of metric better understand kind of return on your invested capital on some of these portfolios, any thoughts around that?

Clayton Haynes

Sure. I mean, we’ve got data obviously, at ADAPTIX we invested $350 million and we earn back roughly two-thirds of that in the first three licensees over a period of about 14 months, which is pretty much on target and hopefully we will be in the money on that portfolio this year and its one that has revenue opportunities going out for the next decade, so that’s how you earn exceptional ROIs that we have done historically with invested capital.

The orthopedic portfolio, we got back the vast majority of our money on the first license with one company. Other portfolios that we’ve acquired that were smaller significant with one we just did recently, we bought six portfolios and one transaction last summer and we earn half of our money back on one license for one of the portfolios.

We really, I mean, it’s a area that we get a lot of question on, obviously our ability to deploy capital, it’s probably makes more sense to go back and look at revenues that we’ve generated from portfolios that had time to be fully licensed and we’ve done that analysis to just give you an idea, we went back and look at our investments from 2005 to 2010 those are in portfolios that have the opportunity to get the majority of the licensing done and over a broad number of portfolios we have averaged annualized -- 44% annualized return.

So we think we are pretty good at deploying capital and we think we are getting actually better deploying capital than we were in the early days. And one of the great things now is as we can look at opportunities in multiple sectors. We are confined to making our decisions that were deploy capital in one sector and some of these other sectors we kind of the only player.

So we think we are getting a lot of great looks to deploy investor capital and we will continue to earn very high returns and certainly the early indications on the substantial investments we made in 2012 were very much on track and we were very pleased the way we are.

Mark Argento - Lake Street Capital

That’s very helpful. And in terms of the seasonality around capital deployment, I know you clearly deployed a lot of capital in ’12 and particularly in Q4 and you put up over $110 million or put out over a $110 million, $113 million I believe was the number. This quarter, it looks like $4 million went out. Is it kind of an ended year flush where guys are looking to get things off their balance and move forward deals or how should we think about kind of any seasonality around capital deployment?

Paul Ryan

Yeah. I would. There is no seasonality and the vast majority, and another misconception and the reason we understand, but a lot of people think we've moved from partnering Tobias is we did that one very large transaction with ADAPTIX. But that was unique and probably we wouldn’t be doing more deals like that those 15 patent families that are very major category where we had a very good indication. We could do early licensees and derisk the investment.

The balance of all the other investments, we have made substantially are all partnering deals, their advances. And basically we are advancing what we think is a very small amount of the revenue potential and we are in control of recapturing our advances by doing early licenses and then getting rights to own half the portfolio. If you think about what we’ve really done is translate a very good business model into an even better business model.

Early on, we were partnering with mostly different franchised patent owners who were willing to give us 50% of the net revenue split because they really didn't have an alternative. But those types of assets frequently were higher risk because they were more narrow portfolios with a handful of patents that could be challenged and generally didn't have as much coverage.

Portfolios like ADAPTIX, like Nokia Siemens, like some of our big medicals are very deep, are very broad and are unlikely, less likely to be challenged. And so if you think about that what we do is we sold some stock, we took a fairly modest dilution, build a huge balance sheet, which now enables us to basically use advances to have the same economics on portfolios with orders of magnitude higher revenue potential and with much lower risk and with shorter time to money.

So while some people perceive we moved into a higher risk business model, we think we’ve moved into a substantially lower risk business model that has much more growth attached to it. And then we can continue to grow this company at exceptional levels and dominate this area. So we think we are on the right strategy. We think the deployment of capital shouldn't be viewed as a negative. But when we get an opportunity to deploy capital and not based on seasonality or what everybody else wants the things to do is when we see a great opportunity for our shareholders, we will deploy capital and we think we will earn the returns from that.

Mark Argento - Lake Street Capital

That’s very helpful. And I think as you -- as the model continues to change or more for grow, as you guys are deploying more capital I do think it will sense to -- as the data is available to provide some metrics that. The question I get a lot from investors, some of those things you just answered as well. So, I think increased visibility there is a plus. I think you will go a long way, so appreciate the answers. Thank you.

Paul Ryan

Sure. Thanks, Mark.

Operator

Our next question comes from the line of Paul Coster of J.P. Morgan. Please go ahead.

Paul Coster - J.P. Morgan

Yeah. Thanks very much. So just focusing on Apple for a moment, there is flurry of announcements around quarter end. And I guess I would like to understand what was in the first quarter and what was not in the first quarter. Was everything in the first quarter relating to Apple or was it just the smartphone technologies settlement and the others that were announced, which seem to exclude ADAPTIX? Did they flow into 2Q?

Clayton Haynes

I will address that. The Apple transactions that we announced were all first quarter events, those licenses. We obviously did a number of licensees to them. There is a number of continuing litigations we have with them and other licensing programs. So we settled a portion of the matters outstanding, but the ones we announced were first quarter revenue events.

Matt Vella

And there was no ADAPTIX announcement. You just said that.

Paul Coster - J.P. Morgan

None of the Apple announcements built into 2Q.

Paul Ryan

No.

Paul Coster - J.P. Morgan

Okay. Your visibility in 2Q was actually quite good because you have had a number of settlements and so I think LG, HTC, Toshiba maybe Micron. Can you talk a little bit about the visibility you already have into 2Q?

Paul Ryan

Well, you are right that although one of the transactions, the HTC transaction was also a first quarter event. The other ones you correctly said are second-quarter revenue event but they represent. The ones we've done today represent a small portion of what we hope we will get done by the end of this quarter. But we are off to certainly a stronger and faster start than we were in the previous quarter.

Paul Coster - J.P. Morgan

Okay. You talked about international growth up next, can you explain how you're going to market there and what’s the probability if they get material this year?

Paul Ryan

Yeah. There are business development efforts we are expanding internationally. We think there are some very, very good opportunities in certain international markets. We don’t want to telegraph exactly to other people where are we going, but we've got people on the ground there on business relationships with our company. And we are probably going to add a little bit of headcount internationally to access potential partnering deals in those markets where people are local to those markets. Matt, do you have anything?

Matt Vella

Yeah. In addition for certain markets, like if you can look at the smartphone market you'll find there are countries like Japan where the market share were quite different than they do in the U.S. and in Western Europe. So if you basically can create a licensing presence in jurisdictions like that you can collect more revenue than we’ve previously collected on the same scope of IP. And so you will be seeing and you were in fact seeing increased presence in those sorts of markets.

Paul Ryan

Yeah. Matt is correct on both the licensing and enforcement side and the business development side. Yeah, we are dramatically expanding our enforcement activities into multiple markets, particularly with larger portfolios that often times generates a earlier dialogue with potential licenses.

Paul Coster - J.P. Morgan

And my last question is when do you have an upfront deal, how do you account for expenses then are monetized over a period or is there a one time expense?

Paul Ryan

Well, if it’s an outside investment it’s on a calendar amortization schedule.

Clayton Haynes

On a straight line basis.

Paul Ryan

On straight line, right.

Paul Coster - J.P. Morgan

Over what period?

Clayton Haynes

Over an estimated period that we can refer to as the economic useful life, basically our estimate of the period over which we expect to realize cash flows, which currently the weighted average useful life is roughly six to seven years.

Paul Coster - J.P. Morgan

Correct. Thank you very much.

Operator

(Operator Instructions) Our next question comes from the line of Tim Quillin of Stephens Inc. Please go ahead.

Tim Quillin - Stephens Inc.

Hi. Good afternoon.

Paul Ryan

Hi, Tim.

Tim Quillin - Stephens Inc.

I just wanted to talk to a little bit about the logic of settling with Apple, especially before the trial instead of taking what obviously would be a riskier strategy but potential higher payoff of going to trial and seeing how you could do there. And potentially having a nice jury award, especially in light of how we have seen Apple do relative to Samsung on some future patents. Even had to scale back award of $500 million or whatever it’s going to be, maybe it's worth taking a swing at a big opportunity like that. And so what was the thought process in settling there?

Paul Ryan

Well, we are going to have a lot of swings in the future. Our thought process is when someone is willing to pay us the price that we think is fair, we transact. We’re not in the business of trying to win flashy quarter words, which often times, as you now, don’t get paid at all and often times don’t get paid for years and years.

So if the -- we’re a licensing company. We’re going to be doing lots of transactions with all of these same companies, multiple times, and if they are not willing to pay, what we think it’s a fair and reasonable price then, of course, we have to take into account what we’ve licensed other companies for. And as you know, we ratchet our rates up, based on the strength of the patent as they go through the challenge in the court system, they’re more valuable. And therefore we raise our pricing. But if a counterparty is willing to pay us what we think is the reasonable price, we transact, we don’t litigate to see if we can win a larger award.

Matt Vella

And the Congress hold true. I mean, if these parties are not willing to pay us the reasonable price, factoring in the ratcheted up amount, then we will try. And, there is two, there is two audiences we are very sensitive about, besides obviously shareholders when we cut these deals. We want some sensitive thinking, one is, the folks should have taken early licenses. We want to make sure they’ve got better deals.

And the second is, the folks to whom we’re going to go back over and over and over again for subsequent licenses. And so, what we want to do is, create really a rational market in this space. And in the long run that’s going to serve us better. It’s going to mean less risky litigation, less litigation cost.

Where we have to litigate we will, to sort of enforce that discipline. But the end game is not litigation, right? The end game is to create a marketplace in this space, in the patent space. And we’re trying to -- we’re acting basically to promote that creation and promote a creation of a marketplace that’s profitable for us and our shareholder. And today, we’ve been doing that.

Tim Quillin - Stephens Inc.

And you did end up licensing several different patent portfolios to Apple, and as you mentioned, there is some that you didn’t and some are not even at the stage of litigation. So it makes sense that those be pushed forward.

But, I think that the litigation, you have initiated litigation on the ADAPTIX patents. I’m assuming there’re some kind of meaningful pushback from Apple to licensing those patents. And so do you think it’s still -- is that still a longer term issue or you’re going to have to be getting it closer to trial before you’re able to get to a settlement there?

Matt Vella

Well, I’m not going to comment about any individual negotiation. But generally speaking, as Paul mentioned about five minutes ago, the trial is not the only forcing function, right. Sometimes you show up with a portfolio and then you show up with another portfolio and you show up with another portfolio.

When all of a sudden there is enough critical math where the averages start to even out and people want to transact. And sometimes it’s foreign litigation that might be the trick. So, there really isn’t -- I think much to be read in terms of the timing of the trial date for a lot of our transaction.

In terms of, again, generally speaking, the response to the ADAPTIX portfolio, I can tell you it hasn’t been negative. And I can also tell you that, what really, it’s just a matter of the size and the scope. And I think at some point, and we’re expecting again, to be in the money this year on this portfolio. And we’re going to start seeing transaction and they’re not going necessarily be tied to U.S. litigation dates.

Tim Quillin - Stephens Inc.

Right. How should we think about the pipeline of structured licensing deals of this year and next year? And we talked about may be that, there isn’t a true renewal of these multiple portfolio structured licensing deals and may be matters more of what kind of critical math you have in terms of assertions against an operating company. But, should we expect renewals or how are -- we might want -- might want to phrase it or other structure deals this year?

Matt Vella

Well, as we mentioned in previous calls, the line between structured deals and other deals is increasing the blurring. And we’ve seen that trend continue even this quarter. There are one-off license deals and then there are licenses that have more -- they’re more in the one-off license you can write, where there is some kind of structure, if it multiple portfolios.

Now, we certainly expect, the structured deals. I put this in quotes to grow and we’ve seen it continue to grow. And relates to, for example, the number of one-off agreements we have, and that’s part of the evolution, the natural evolution of a licensing business. It gets bigger and more complex. When we cut deals with someone like Apple, you’re going to expect a number of things to be resolved that we want. You’re going to expect a number of things to get done with that transaction, as opposed to these when we had much smaller portfolios.

And, coming back directly to your question, again the structured deals are highly tailored, they’re highly individual. We’re going to see more of them. I’m not sure how much that information helps you, but essentially that’s just the reality. And as our business gets more complex, you’re going to have more complex images with these companies will be resolving more things at once. You only just surely resolve everything at once, so which is I think the definition people have about the structure, which is not necessarily correct.

In terms of renewals, just like the definition I think people have had in mind that our structure somehow involved everything we control, that definition is false. So the idea of renewal being necessarily something that’s part of the structured is also not true.

The deals again are highly customized. They vary and what you really want to be looking at, I think that is relevant, is the number of times when we transact with these big companies that we’re dealing with more than one matter at a time. I think that’s a good thing when we’re dealing with more than one matter at time, because just certain economies have scale realized. There is certain risk profiles we can adopt when we’re cutting those kinds of deal.

But again, there is no cookie cutters here. And so, to think along the lines of how many deals you’re doing, we’re licensing everything to a company or how many renewals we have. That’s really vocabulary. It doesn’t really measure what we’re actually doing.

Tim Quillin - Stephens Inc.

Okay. And I’ve got last question that’s three different questions, I think. So I apologize upfront. But if you exclude out your -- your customer concentration is always high, but if you exclude out your top three licensees in the quarter, I think there was $6 million in other licensing revenue. And like I said customers concentration is always high, but that’s a relatively low number.

I think it’s the lowest number you’re excluding your top 10% customers in three and half years. So, are you more focused on your marquee patent portfolios that the bigger ticket items. That’s question one.

Number two is, what’s your pipeline like of those marquee portfolios? And question three is, would you expect capital allocation to look more like this quarter or more like the first quarter or more like the fourth quarter 2012 and in terms of the amount of capital you put up to bring these marquee portfolios in the door? Thanks.

Paul Ryan

Sure. Well, the answer to your first question on other revenues, one of the concentration of revenues transaction involved multiple licenses of multiple portfolios. So you really got to move that into the other category that’s the one that was roughly $10 million. So it was really about $16 million. It was a license with an intermediary third party that covered multiple portfolios. So, if you split it out that way, it would really about 84% and 16%.

The answer is increasingly our business is going to be marquee portfolios. Again, we think there are much higher revenue opportunities with much less risk. And we’re, obviously, shifting the focus of our company more and more to those types of portfolios. They can take us to the next level from a shareholder valuation standpoint.

The capital deployment is strictly opportunity related. It’s not seasonal. We have no targeted dollar amount that we want to particularly have to invest. We’re just constantly looking at all of the opportunities in the market and where we can advance money and get control of and significant economics in very valuable portfolios that’s where we will deploy capital.

So it’s a little hard to predict. We’re looking at a lot of them right now. We think we’re very good at doing the due diligence and handicapping these and pricing this and being able to do in advance that on a risk adjusted basis, we think is very prudent for our shareholders.

So it’s hard to give guidance on that, Tim, because we -- it’s, just its opportunity related. But we think over the course of the year we’re certainly going to deploy a very substantial amount of money.

Tim Quillin - Stephens Inc.

And can I have a --

Paul Ryan

What we mean to do. Sorry, Tim, what we mean to do really is, is create an environment where we’re doing multiple and I think you call them high value or…

Matt Vella

Marquee.

Paul Ryan

Big dollar deals. So we’re trying to scale the business on that axis.

Tim Quillin - Stephens Inc.

And if I could just follow up, I’m sorry Paul, you had mentioned that you -- one of those deals was through an intermediary. I just want to qualify. So there was a press release on April 3rd that you had entered into a patent rights agreement with RPX, did that fall on the first quarter as well?

Paul Ryan

Yes. It did, yes.

Tim Quillin - Stephens Inc.

All right. Thank you.

Operator

Our next question comes from the line of [Jeff Hill from Lametry Capital].

Unidentified Analyst

Hi, everyone. Thanks. I was just curious that $327 million cash balance at the end of the quarter, you have been asked a lot about future outlays for -- in order to take control of portfolios. And it’s been consist -- you’ve been consistent in your answer that it’s opportunistic?

I’m just curious if you could see -- what would be a scenario where you think this business could support some type of ongoing dividend or intermediary cash return to shareholders? Do you need -- do you feel you need all of that cash on the balance sheet to effect your strategy or could you share, again in somewhat opportunistic way with shareholders some of your monetization success?

Clayton Haynes

Both those are possibilities. Mostly likely would be a regular dividend. We think we’re a little early for that. We would like to see free -- positive free cash flows after investing activity be strong before we start returning capital to shareholders, particularly when we’re in an environment here where we think we’ve got a great opportunity given our skill set and given our balance sheet. We don’t see a whole lot of competition for assets right now and we think it’s a great time to be acquiring assets for shareholders.

So, it’s a little early on the dividend side, but certainly, we understand, if we’re correct in our analysis of the kind of cash that can be generated from the investments we’re making, we’re going to have significant excess free cash flow after investing activities, hopefully and then not too distant future at that time it would be appropriate and most likely probably do a regular dividend.

Unidentified Analyst

Okay. And then just related to the comment of scaling the business with marquee portfolios. I mean obviously that has the promise of the company being much bigger in terms of revenues and cash flows? Matt, I was wondering if you could talk about the different risk, in terms of the -- on the monetization side, not on the brining, not on the patent acquiring side, but on the turning those patents into settlements and cash. How do the risk or the processes differ with marquee portfolios?

Matt Vella

What’s well, what’s interesting is, as Paul mentioned, the risk actually comes down and if you’re buying the right kinds of marquee portfolios and here is what I mean, if you are buying a single patent, that’s marquee. And you’re going to expect to make nine figures out of that single patent, that’s a very high risk profile, because ultimately a court jury, a tribunal is going to always have a opportunity to impact its valuation.

And when we bring in marquee portfolios, we’re not brining in one patent portfolio, we’re brining in multiple patent portfolios. And by multiple patent portfolios we mean, multiple patent families with orthogonal risk profiles, that is a prorogue reference magically pops up in one, it shouldn’t impact the other four, five, six, seven in that portfolio.

So, at the most elemental level, these portfolios get broken when they get damaged in court. And until they get damaged in court, as we say in our calls, and in some of our releases, when we -- our revenues are basically just shifted forwards or backwards in time, just a matter of when we’re going to collect, again, unless you are damaged in court, but it would buying portfolios that have multiple points of failure that all have to be traversed, before the portfolio is taken down and not in terms of the valuation, we see that as less risky.

The timing is also interesting. We used to think right that, we would start seeing some kind of relationship between how long it takes to license complex portfolios, lot of assets versus a single patent and that’s strong, in a single portfolio.

And again there what we’re finding is there is a bigger range of outcomes with the larger portfolios. We’re not seeing the same sort of cookie cutter approach as defendants take. Some defendants want to take out the big portfolios early and pay us the license fees early. Some others want to wait and see how the portfolio is doing and sort of look at the valuation on the edges before they commit to paying. So even on in terms of timing, we see less risk dealing with the marquee portfolios.

Here is a catch with the marquee portfolios. You need upfront capital deployed. Now again, the way we’re deploying upfront capital however, even there we think we’re risking it substantially because except for ADAPTIX, which is out layered that was driven by some very unique properties in that portfolio what we’re doing is we’re advancing money and as we’re advancing a certain amount of money, in our minds, because of the extensive experience we have and relationships we have with prospective licensees vis-à-vis that portfolio, we know we can recover that upfront capital.

So in some sense this is why we’re in such a sweet spot. We got the upfront capital to deploy. We’re able to deploy the upfront capital in amount where we think recovery is relatively say prospect.

And so, that’s a barrier to entry for a lot of companies that we don’t have. As a result we’re able to pull down these portfolios that have multiple patents, multiple families and once you have those portfolios in the collection risk is actually lower.

Unidentified Analyst

Thank you.

Paul Ryan

Does that answer your question?

Unidentified Analyst

Yes.

Operator

Our next question comes from the line of Larry Waldman of Private Investor.

Larry Waldman - Private Investor

Hi. Congratulation on a good quarter there. What my focus, I know the prior person I think asked some of these points, but emphasis, it looks like in the first quarter again, most of the volume was the Apple deal, one of your marquee deals. And I’m sort of curious how many more in that category of marquee deals do you still have in your portfolio and what are the -- what are the trial dates expectations on those, early schedule trials dates.

Paul Ryan

Well, we have got a lot of partners and lot of assets so we don’t want to -- there are certainly I think analyst view that portfolios like ADAPTIX, like Nokia Siemens, like the medical portfolios we have where we have 1900 vascular patents on the orthopedic portfolios and the automotive breed portfolios we have are all ones that are 9 figure type licensing opportunities.

We have other in-house, but we don’t want to separate out individual assets and identify them in any kind of packing order. But we think we’ve got a very substantial amount marquee asset at this stage. Access is one of them. We have been successful in generating probably the majority of the revenues to date on that one. We have got more revenues to go. And we expect over the course of this year we will be adding number of other marquee portfolios.

Matt Vella

I mean, put simply we have a number of marquee portfolios. And again, we don’t want to isolate them and pick them out and I think just treat as a consensus somewhat there but there is more than five. And each of these have a number of licensees that when you combine the marquee portfolio with the license you get a marquee deal, I guess you can them. We think its 10s at least.

Larry Waldman - Private Investor

Are there trial dates scheduled or this just -- have you filed suits already on these marquee deals?

Paul Ryan

It depends on the portfolios. Again, I mean there is we have dozens of litigations, so it would be too laborious to go through. And often times they shift in dates. Some courts set trial dates very early. Some don’t set them until after other processes. I don’t think you can really glean anything or learn anything by knowing that information.

And indeed what we are seeing now is on these deeper broader portfolios, there is much less of a correlation on settlements to litigation events. Companies are looking at their exposure. They are assessing it. It’s all about the appropriate pricing and transaction, and watching what other companies have done in transacting with us that leads more to their behavior then specific litigation outcomes.

Matt Vella

And part of it is again the density. I mean, let’s say you're selling a smartphone and you are dealing with us on one, two, three, four portfolios and probably three, four marquee ones right now even if you set aside access right, well. Well, I mean there is foreign litigation on these things, and in one or two cases there will be ITC proceedings, right and there is district court cases. And again, it’s scattered across two, three, four portfolios. So if you take all of that in totality, there's bound to be a date that’s coming up if you are a major smartphone vendor that we need to be talking about, right.

In addition, there is other, as we mentioned earlier in this call forcing functions and again with lots of portfolios and lots of perspective licensees. You are just going to have more forcing functions, more dates. And that’s why as Paul mentioned to an increasing extent, we don't focus that much on trial dates as much as we used to. I mean, we’ve got -- there is loads of litigations proceedings in many geographics across many portfolios and these negotiations are ongoing as a result of that.

Larry Waldman - Private Investor

Yeah. I’m bringing that up because the Apple trial is supposed to be April 7 or whatever. And settling a week before that appears to be one of the motivating impacts facts I’ve assumed for both sides. So my question is using that as an example. I know with Apple you probably have what four or five different claims against them. And what I understand that the settlement just involved one of them, are the ones that are continuing of the equal size to what you just settled in your fair valuation or --

Matt Vella

Yeah. The moment I mentioned that question directly, it's deposition of litigation form, right. Look, we have other marquee portfolios, right that are very, very meaningful and those are in play. And again just coming back to do observation you made about the trial being April 7. I mean, boy, if I had to go back to last four, five, six, seven, eight, nine, 10 quarters, we were able to deliver numbers without trial dates anywhere nearby.

Paul Ryan

The vast majority of the revenues that we’ve generated to date from the access portfolio came far in advance of any calendar of trial dates.

Matt Vella

In fact, I had a hard time remembering the last time we had trial dates driving a quarter.

Paul Ryan

So that's an aberration. I wouldn’t read it as something that you could use constructively.

Larry Waldman - Private Investor

Understood. But going back to the question that you -- there are multiple issues that you have with Apple and the one that was just settled is that of equal size to the once that continue or to my understanding you settled on one or two issues and there's five or six remaining, are those a much bigger than one was settled? I’m trying to get a size from a valuation standpoint.

Matt Vella

It’s the dilemma you are putting us in, okay. There is a number for Apple and if I say it’s higher or lower than that number, which is going to be evidenced is in play and I’m pitting myself, right.

Paul Ryan

We can’t publically comment on that because it would impact litigation.

Larry Waldman - Private Investor

Okay. I understand.

Matt Vella

Right. Now, again, we have a number of marquee portfolios for chump change, right. There were portfolios that make quarters when licensed and we have a lot of those.

Paul Ryan

Yeah. So we just can’t comment, can’t make a comment on relative value. Okay. It’s not in our shareholders’ best interest to comment on that.

Larry Waldman - Private Investor

All right. All right. Thank you.

Paul Ryan

Okay. Surely

Operator

This will conclude the question-and-answer session. I’ll now turn the call back to Mr. Ryan.

Paul Ryan

Okay. Thank you, Operator. Thank you all for being on the call. If you have any follow-up questions, we are available and look forward to speaking to you at the end of the second quarter. Thanks, again.

Operator

Ladies and Gentlemen, if you wish to access the replay for this call, you may do so by dialing 855-859-2056 or 404-537-3406 with the confirmation code 22540962. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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