Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Acacia Research Corp (NASDAQ:ACTG)

Q2 2013 Results - Earnings Call Transcript

July 18, 2013 4:30 PM ET

Executives

Paul Ryan - Chief Executive Officer

Matt Vella - President of Acacia

Clayton Haynes - Chief Financial Officer

Ed Treska - General Counsel

Analysts

Tim Quillin - Stephens Inc.

Matthew Hoffman - Cowen

Mark Argento - Lake Street Capital

Nicholas Rodelli - CFRA Research

Operator

Good afternoon and welcome ladies and gentlemen to the Acacia Research second 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 8K which was filed with the SEC today for our forward-looking statement disclaimer. In today's call the terms we, us and our, refer to Acacia Research Corporation and its wholly and majority-owned operating subsidiaries. All intellectual property acquisitions, developments, licensing, and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority-owned operating subsidiaries.

With us today are 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 business in the second quarter then Matt Vella will provide his thoughts on the business going forward, 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 $23.1 million in revenues in the second quarter from 43 new revenue agreements which covered 28 different licensing programs, including three new licensing programs, generating initial revenue.

Trailing 12 month revenues at the end of the second quarter were $201 million as compared to $233 million as of the end of the prior year quarter. We always remind investors that management does not attempt to manage for slow sequential quarterly growth of revenue and therefore quarterly results can be very uneven. Unlike most companies, revenues not generated in the current quarter are not lost but in many cases are pushed in to subsequent quarters. Our focus is on getting paid the right price for the licensing of our patents.

Revenues for the six months were $100 million compared to $150 million in the prior year while the company has acquired control of a number of the highest revenue potential licensing programs in our history over the past 12 months to 18 months. Whether we can meet our expectations of annual revenue growth will depend on the number of licenses we can complete on some of these portfolios during the second half of the year.

During the quarter, we acquired control of seven new patent portfolios on the energy, automotive and technology sectors. We invested a total of $10.8 million in upfront advances and future guaranteed payments. We acquired patents related to energy efficiency in the commercial residential building markets.

Patents relating to automatic illuminations in the automotive market, patents in the technology sectors relating to inkjet printings, high speed circuit interconnect and display control panels, patents relating to content security and consumer electronics, PCs and mobile devices, patents relating to printer technologies and we also partnered with a major technology company for patents relating to microprocessor and memory technology.

As a market leader, Acacia continues to see acceleration on opportunities for partnering with companies in the technology and medical technology sectors for the licensing of their patented technologies and we're at an early stage of entering into the energy sector.

We continue to partner with patent owners 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 a revenue share.

On some portfolios, we are using our working capital to provide an upfront advance to the patent owner, which we recapture from initial licensing revenues we generate. Our strong balance sheet is giving us the ability to utilize these upfront advances to acquire control on higher value lower risk assets.

Acacia's cash and investment position was $320 million at the end of the quarter. During the second quarter, we added two leading IP Executives to the Acacia team; Charlotte Rutherford joined Acacia as the Senior Vice President.

Charlotte was most recently Deputy General Counsel, Intellectual Property for Schlumberger, was previously Vice President Associate General Counsel for Colgate-Palmolive and Chief Intellectual Property Counsel for Conoco. Charlotte will be leading our new initiatives in the energy sector.

Jaime Siegel also joined Acacia as Senior Vice President. Jaime was most recently Vice President and Senior Intellectual Property Counsel for Sony Corporation of America, where he worked for the past 15 years. Jaime has extensive experience in international IP monetization enforcement and strategic acquisitions.

Acacia continues to attract the best in class IP executives from industry. As we previously reported, I will be retiring at the end of July and Matt Vella; our President will also become our Chief Executive Officer on August 1st.

Our Executive Chairman, Chip Harris, myself and all other members of our board of directors have every confidence that Matt has the leadership skills and expertise to assume this new role.

We started working on this succession plan over 18 months ago and following my 68th birthday I decided to commutate the process. Matt has resume up through the management rank. So with the past seven years and has earned the respect of everyone at Acacia. Matt has the good fortune as of I to be surrounded by a very deep and talented executive team that is well seasoned. I congratulate Matt on a very well deserve promotion and now he will do a great job.

Before turning the call over to Matt, I'd like to take this opportunity to thank our shareholders, our Board of Directors and all the companies and inventors who have been trusted us with the licensing of their patents. Most of all, I want to thank the very talented and dedicated employees of Acacia who have been responsible for generating the exceptional growth in assets and revenues for our company over the past few years.

With that I would like to turn the call over to Matt.

Matt Vella

Thanks Paul. I want to start by acknowledging your role as a pioneer in the patent licensing industry and as a CEO in a measurable contribution to Acacia shareholders, employees and patent partners. On behalf of everyone at Acacia, I also want to thank you for all you have bought us by word and deed over the past decade. You have made all of us better professionals and better people.

While we would like to have concluded more revenue agreement this quarter, management is confident in the strength of the company's portfolios. Litigations for all our major portfolios are progressing well and we see no adverse impact in their valuations. We want everyone to know that we shall continue to run this company during the same key Acacia principles developed Paul and Chip specifically.

One, we are in the licensing business, not the trial business, where possible, we will continue to reasonably price licenses under our portfolios, with first design license fees with a minimal amount of litigation. Two, we seek to partner with patent owners and law firms that help give us their investments. Shareholders should know that we are still in the patent partnering business. For example, in most cases where we deploy capital to acquire portfolios, we are simply advancing to our patent partner what we estimate to be a small percentage of the revenue to be generated under the partnership.

As the revenue starts to come in, we generally get our advanced dollars back before paying the partner traditional proceeds and then after recovering most all of our advance then we do share revenue with the partner. Under this model, we look at advance dollars as working capital because we can keep using the same dollars over and over to bring a more and more high quality portfolios.

Another key Acacia principal that we will add here too, we are technology agnostic. We shall remain involved in any technology sector where there is a lack of patent equilibrium that is any sector where the company is making the money selling products and services are not the same as the companies or people that own many, many of the patents underlying those products and services.

We are not just about wireless or products or display or drilling. We can scale and vector our model into any sector that has such a lack of pattern equilibrium. We think our model is able to scale into new sectors by adding relatively small numbers of highly confident, highly motivated and highly experienced professionals.

We have been scaling in this manner into new sectors such as energy and medical technology and we expect to keep scaling out into other sectors in the coming years. Another key Acacia principal, we want Acacia to be the destination of choice for all top class patent licensing executives. And to that end, we have brought in terrific new talent in the past couple of years, including the two professionals Charlotte and Jaime, as Paul mentioned, a few minutes ago. We shall also be making similarly significant additions that we expect in the coming days and weeks. All these very accomplished patent executives have left big prestigious companies to join Acacia because they see the same trends and the same opportunities that we see. In addition, we expect that they will be driving big new growth areas for us, such as energy and internationally sourced patents.

Besides the Acacia principles I just enunciated, there are additional Acacia principles that I want to particularly emphasize because we are going to particularly focus on those principles in the coming months. My goal, as CEO, will be to continue to add, in fact accelerate the addition of high quality, high revenue potential portfolios. We seek to achieve scale and diversity in our portfolios and the revenue they generate, such scale and diversity results in more quality assets under management which diversifies our patent portfolios and their licensing addressable markets.

Also we reaffirm our commitment to getting the light price reach of our portfolios, time and risk adjusted. As a result, do not expect us to manage for smooth sequential quarterly revenue growth. We will also more actively participate in the patent reform debate presently taking place. To be sure, as we have said before, our view of patent reform can be characterized by the following two observations. Firstly, we have gone on record, as a matter of fact I was quoted in the Wall Street Journal a few weeks ago as either supporting or feeling neutrally of most of the pending reform initiatives that have any chance of passing in to law. If these bills, once turned in to law, help get rid of bad behavior being exhibited in our industry, behavior which only gives all players in our industry a bad name, then we are all for it.

The second observation that characterizes our view on patent reform, we continue to see evidence that the harder, the more expensive, the more complicated patent licensing becomes, whether real or whether perceived, the more companies we see going to use an independent and professional outsource partner like Acacia. Recall that over the past four years, we have generated record revenue profit and portfolio growth even as patent reform initiatives and debates have progressed.

Notwithstanding these two observations however, when it comes to patent reforms which shall now play a more active role, because we have become important enough to the patent ecosystem to make a positive contribution to the debate and most of all because we believe thoughtful, reasonably packaged and well voiced pro-patents and pro-invention opinions are good for technology and invention driven economy such as ours, they are good for patent owners, such as our customers and therefore they are ultimately good for our shareholders.

That concludes my remarks and our remarks collectively. Before turning the call over to Clayton, we want to remind all our shareholders that we will be presenting an in-depth review of our business as opportunities and our Acacia team at an Analyst and Investor Day to be held next week. 12 of our senior executives shall be presenting that day, including our Executive Chairman, Chip Harris and myself. The logistics of our Analyst and Investor Day are as follows. It will be held on Wednesday, July 24, 2013, that's next week at the New York Palace Hotel located 455 Madison Avenue, New York. Between 8:00 and 9:00 PM, there will be breakfast and registration. Between 9:00 AM and 12:15 PM we will be making our presentations, and we will have a Q&A and lunch session between 12:15 and 1:30 PM. For invitations please urge VP Rob Stewart at 949-480-8311 or you can use email at rs@acaciares.com.

With that, I will turn the call over to Clayton.

Clayton Haynes

Thank you, Matt, and thank you to everyone joining us for today's quarterly earnings conference call. On a consolidated basis revenues in the second quarter of 2013 totaled $23.1 million as compared to $50.5 million in the comparable prior year quarter. Second quarter 2013 revenues included license fee from 43 new licensing agreements covering 28 of our technology licensing programs as compared to 38 new licensing agreements covering 27 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 $201.2 million as of June 30, 2013, as compared to $233.4 million as of the end of the comparable prior year quarter. Currently to-date on a consolidated basis, our operating subsidiaries have generated revenues from 157 of our technology licensing programs, as compared to 125 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 second quarter of 2013, we reported a GAAP net loss of $12.5 million or $0.26 per share versus GAAP net income of $6.3 million or $0.13 per share for the comparable prior year quarter. Second 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 $6.5 million or $0.13 per share as compared to $21 million or $0.43 per share for the comparable prior year quarter. Please refer to our disclosures regarding the presentation of non-GAAP financial measures in today's earnings release and 8-K filed with the SEC.

Our average margin, defined as total revenues, less inventor royalties and contingent legal fees for the portfolios generating revenues during the period was approximately 58% for the second quarter of 2013 as compared to 68% 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 fluctuation in average margins in the second quarter of 2013 as compared to the second quarter of 2012 was primarily due to a higher percentage of revenues generated in the second quarter of 2012, having lower or no contingent legal fee obligations, as compared to the revenues generated in the second quarter of 2013. Inventor royalties expense decreased 41% relatively consistent with the decrease in revenues quarter-to-quarter. Contingent legal fees decreased 39% reflecting the overall decrease in revenues quarter-to-quarter and the higher percentage of revenues generated in the second quarter of 2012 have been lower or no contingent legal fee obligations as compared to the revenues generated in the second quarter of 2013.

Second quarter 2013 non-cash patent amortization charges increased due primarily to an increase in amortization expense related to new patent portfolios acquired since the end of the prior year period, totaling $3.9 million and an increase in scheduled patent amortization of related two patent portfolios acquired in the latter portion of the prior year comparable quarter, totaling $2.1 million.

Marketing, general and administrative expenses increased $1.3 million or a 11% due primarily to a net increase in licensing, business development and engineering personnel costs, including recruiting and severance costs associated with the net increase in personnel since the end of the prior year quarter and minor increases in non-cash stock compensation expense, facilities costs related to the expansion of our Newport Beach and Texas facilities and corporate, general and administrative cost.

Litigation and licensing expenses in the second quarter of 2013 increased $4.7 million over the prior year quarter to $9.9 million due primarily to higher net levels of strategic patent portfolio prosecution, international enforcement costs and higher net levels of litigation support and third party technical consulting expenses associated with our continued investment and 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 fluctuate period to period in connection with our current and future patent acquisition, development, licensing and enforcement activities. Our estimated annual effective tax rate was approximately 40% for the second quarter of 2013 as compared to an effective tax rate of 35% for the comparable prior year quarter. As of the end of the second quarter of 2013, we estimate that we have approximately $20 million of net operating loss carried forward and approximately $23 million of foreign tax credits available for use in future periods.

From a cash flow perspective, net cash inflow firm operations for the second quarter of 2013 totaled $1.3 million versus net cash inflows of $14.5 million for the second quarter of 2012. Second quarter 2013 patent related acquisition costs paid and accrued for future payments totaled $10.8 million as compared to $48.5 million in the prior year quarter. We ended the second quarter of 2013 with $320.1 million of cash in investments, up from $311.3 million as of December 31, 2012.

Looking forward for fiscal 2013, we expect MD&A excluding non-cash stock compensation charges to be in the range of $29 million to $30 million. For fiscal 2013 we expect patent related litigation and licensing expenses to be in the range of $26 million to $27 million, depending on net patent portfolio litigation and strategic patent prosecution activity occurring throughout the remainder of the fiscal year.

Based on current outstanding grants of restricted stock, we expect scheduled non-cash stock compensation charges for fiscal 2013 to be approximately $26.9 million or approximately $6.7 million per quarter. Excluding future patent portfolio acquisitions scheduled, excluding future patent portfolio acquisitions scheduled amortization for fiscal 2013 is expected to be approximately $47.9 million or $11.9 million per quarter.

Lastly, I would like to echo Matt's sentiment with respect to Paul Ryan's years of top notch leadership and wish him all the best going forward. At this time, it is my sincere pleasure to turn the call back over to Mr. Paul Ryan.

Paul Ryan

Thank you, Clayton and operator we can now open the call for questions please.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will begin. (Operator Instructions) Your first question comes from Tim Quillin of Stephens Inc.

Tim Quillin - Stephens Inc.

Hey, good afternoon. One specific question on the quarter is that in your press release, I didn't see any mention of licensing smartphone patents to LG and I thought on the most recent earnings conference call, you had mentioned that that was a deal that you completed early in the second quarter and should have impacted 2Q.

Paul Ryan

Yeah, the LG transaction, we had an LG transaction in the second quarter which you're saying is in the detailed press release. It wasn't mentioned in one of the portfolios.

Tim Quillin - Stephens Inc.

I didn't see it.

Matt Vella

That's been, Tim, it's written there.

Tim Quillin - Stephens Inc.

Okay. So it was, and would have that been one of the 10% licensees in the quarter?

Paul Ryan

Well, we can't comment on that but there was a transaction done with LG in the second quarter.

Tim Quillin - Stephens Inc.

Okay, and then excluding 10% customers I always like to look at the remainder in terms of revenue and in the quarter it was about $6.25 million and only about a $156,000 per agreement, and I know there was a lot of fairly broad campaigns that you licensed during the quarter, but it just seems to be going the wrong way and in terms of the goal to get to a higher quality patent portfolio with larger licensing deals per patent.

So it is -- you just have to claim some things up before you get to the promise land or why are we saying things kind of go backwards in terms of revenue per licensing agreement?

Paul Ryan

I will start that and Matt can finish it up. A couple of things probably aside from the top 10% license fee, the balance for that would be considered normal licensing transactions, so I wouldn't take the second and third ones out because those are, would normally will be considered normal activity.

We also do have two licensing programs that just happened to lend themselves as you know we have to enforce installing printers it's unfair to enforce against certain companies using your technology and not enforce against their competitors. And we do happen to have a couple of programs where there are very large number of fairly small revenue transactions.

The good news is most of those are coming in with virtually no litigation and are being paid out but they're skewing the numbers dramatically. This quarter and probably in the next quarter a little bit on a per license fee dollar revenue, but it's really two programs where there's unusually small amounts but I know the appropriate amounts for those technologies.

As regarding the promised land I'll turn that over to Matt.

Matt Vella

I mean, I've mentioned this in previous quarterly calls, the notion of core business, I mean the one you have is different than the one we have. I mean if core businesses is lying up a bunch of deals of the certain size and saying it's our base revenue, right? I mean the core business for us should be you get high quality portfolios and you get them in nice concentrations and when you've got a lot of high quality portfolios against a company, right they'll tend to be licensed in clubs. And so what you're going to see is bigger by sizes in our revenue right and you're going to see clubs, because that's what happens when you aggregate quality portfolios.

And it's a reflection of the environment we're operating in and it's a reflection of the promised land and the promised land just so we're all on the same page, there's going to be a point in time right and we're already starting to hit it and we're going to start hitting it more and more, where we're going to show up as and NPE with 5,6,7,8,9,10,11,12 more high quality portfolios. So, that we run a company and as we're negotiating around those portfolios and see over 3 months, 6 months, one year, might pull in another 5, 6 or 7 portfolios that are high quality. And what's going to happen when we hit the promised land right, it depends on what your anticipation will be the company's response to that situation.

I'm not worried about any kind of government response to that situation, because they are legitimate portfolios from reputable companies that cover patent infringements. And so what I do know with that when we hit that promised land right, the bite sizes of the revenue are going to be different. And so we have to start rethinking as I've mentioned before what core business means, Tim.

Tim Quillin - Stephens Inc.

So trailing 12 months revenue was $201 million down as you mentioned and I am just wondering kind of in that context is that a disappointment to have that decline and not to have the revenue start to increase based on the aggregation or patent portfolios when you're walking in the door and having those conversations or what would you attribute, if it is a disappointment what would you, to what would you attribute the disappointment?

Matt Vella

Well, we want to be in the promised land here and now and we want that promised land, we want revenues and profits to reflect it here and now right, but the disappointment would be, we went in and started giving away deals to hit quarters, right when we could be essentially waiting for the right price, time and risk adjusted and getting the better deal next quarter or the quarter after or the quarter after that right. So what we're not going to do is kind of artificially constrain ourselves to pretend we're doing something, we're not doing, which is managing for smooth sequential quarterly growth, we just don't do it.

And what we need to do is scale, diversify and get the right price time and risk adjust it, bearing in mind we're not in the litigation game, we're in licensing gain, but that doesn't mean it's a fire sale every quarter, we've never done that and we never will and for that reason, we've always talked about lumpy quarters, and that was happening. So the disappointment is when you get stuff away and it's forever gone, right?

Tim Quillin - Stephens Inc.

Right, and so just one last question and I'll hop back in the line, but Matt I think at one point you talked about the goal or hope of getting another $50 million plus in licensing revenue from ADAPTIX patent to essentially get your $450 million capital outlay back, do you still think that could happen within the calendar year? Thanks.

Paul Ryan

I think I would let Matt to finish this but I think we are probably in discussions with companies that represent well over 50% of the additional revenue potential at the current time and now when and if those deals got completed, you know, it is unknown but certainly we are in discussions with a significant portion of that market.

As you know, we recaptured basically two-thirds of the capital we invested a year and a half ago and so certainly it's a goal of ours to certainly get in the money on that portfolio by the end of the year if possible.

Matt Vella

What Paul said in addition, we are seeing I can call them cracks I guess, you know, people suddenly showing up and realizing we need to talk in a very meaningful way not just in a kind of silly way right or in a kind of meaningless way and you know, whether you know, we are not going to sit here and tell you it's 50 this year, its self-defeating, right?

But we are in discussions with a massive, massive chunk of that market and the facts are on our side and what we are going to do is we are going to wait to get the right deal time and risk adjusted and if we look at what's happening in the litigation we like to way that the risk is looking.

Operator

Our next question comes from the line of Matthew Hoffman of Cowen & Company.

Matthew Hoffman - Cowen

First of all, best wishes to you Paul on retirement.

Paul Ryan

Thanks, Matt.

Matthew Hoffman - Cowen

Sure. So Matt, let's look at the, we have to bring this back to a model at some point and I think your points on the quarter and especially the middle quarter, essentially are valid but are we, as you take a more aggressive line with trying to maximize ROI here on the patents, are we looking at quarters or years in terms of how we should build out the models?

Matt Vella

You know, the answer is going to come, it's coming now, it's going to come in the next few quarters, right? I mean, why honestly, knew that I would say it, but the reality is that, again all I can tell you is the facts are on our side, the risks are on our side.

We're building out the models and remember it's not just a matter of taking a portfolio and monetizing longer natural lifecycle. When you got multiple, meaningful portfolios in play, there is a synergy between it right and they start to impact timing and especially when you are pulling more stuff in, as you are negotiating, right, and we're in unchartered territory, not for Acacia, for the industry.

Right now, I could tell you, it's annual and I could be dead wrong. And I could tell you its quarterly and that could be dead wrong, right? The reality is we're finding out and we're excited to find out but we're not going to do is find out the wrong way by discounting to the point where we kill off the business case.

Matthew Hoffman - Cowen

Alright. So if I live into a wider discussion, maybe you will discuss it at the Analyst Day, but as you think about being a publicly traded company and you benefit from having a lower cost of capital, or maybe access to capital that other entities and technology licensing space don't have. On the other hand, maybe having guidance and talking to public investors can hamstring you or reduce your negotiating leverage, talk through how do you see the model and being a public company and the puts and takes on that?

Paul Ryan

Well, I'll start. This is Paul with our perspective of course; there has been tremendous benefit not only in terms of recruiting people, but in terms of getting licensing deals done. Our counterparties now are financial strength, they know our history, we are public, it's been fabulous for us on the business development.

You can imagine if you are a company like Rambus anyone who partner with somebody, want to partner with the leader in the industry and we are proven leader and we've got the capital and we've got the public track record.

So we have founded it has been a fabulous tool to build the business from a business development standpoint, because people realize they are dealing with best in class and well capitalized company.

For licensing, we think our financial strength helps us get better pricing than if had known or could normally get as well. Certainly from recruiting employees it is a huge plus and obviously on the capital market.

So, the only fly in the ointment is that we understand that new analysts have to do quarterly projections and we are not a quarterly driven revenue company. And so that's the disconnect, so what we need our shareholders who are willing to look beyond the 13 week periods and we have got well under 50 million shares and our goal is to try to find the right shareholders who see this factor, see the next three years to five years, see the people joining our company, see the fact that we've got the capital base to be the leader in the field.

And know that this is an emerging market and want to profit in the long-term. And we think those shareholders could be very well served and anyone who got [constraint] from 13 week periods or if they think that the 13 week period numbers are going to lead to too much volatility in their portfolio, they should not own our stock.

Matt Vella

I will add something else to that which is the end objective. We discussed it 5, 10 minutes ago right. And the end objective is to be the principle player and a smoothly functioning secondary market in patents, then the market has to smoothly function and the way market smoothly function is through public disclosure.

And so we don't have public disclosure of price points right, the people can discern then the markets are not going to smoothly function. And so I have a hard time seeing personally, how the dominant player in the space, whoever it's going to be, it's going to be packaging any vehicle other than the publicly traded company in the interim period.

Paul Ryan

And we emphasize look the analyst have done a fabulous job for us, I think telling our basic story, given the basic metrics and we understand the unfortunate situation is that you are forced to tell the analyst to put out quarterly numbers.

And we don't know what our quarterly numbers are. So certainly it's very difficult for an analyst to judge which particular quarter is money is going to come in at. So we appreciate the fact that we have the analyst coverage we do, given the fact that we're not a 13 week revenue driven company and many of the analysts I think have done a very good job explaining to institutional shareholders that very point and enable them to attract shareholders who can right through these uneven quarters.

Matt Vella

And then the focus at the Analyst and Investor Day next week is to have a candid discussion about that very point right. I mean, that's the challenge we have and we look forward to embracing it, because we think that if we get pass that fly in the ointment as Paul called, look it's a problem and we're going to work to solve it.

And once we're pass that we really like where we are, we like where these market is going, we like the competitive landscape and we love the position of our portfolios, we like where this is all going. We got to find a way to get you guys some help on the modeling, but at the same time we can't manage for sequential quarterly growth.

Paul Ryan

We also see the evidence that we have got more people coming to quality; these are the top licensing IT people in the industry that are joining our company. So certainly the company is out there, and the only issue is that we are now the 13 week revenue driven company.

Matthew Hoffman - Cowen

Congratulations on bringing Charlotte and Jamie in. So the open question is that I should say, just an observation you have even in the quarter like this you had solid operating cash flow, generated cash, in times like this Acacia with steady buyback, the best shareholder or the best buyer of the shares, the guy, the entity that steps in and says this is a [four] we are confident in our outlook?

Paul Ryan

Well, first our board and management have very complex decision. We raise the capital to grow the company and we now see unbelievably, we have less competition than before. We have a huge market opportunity and our capital has a significant advantage to grow this company.

And so the question becomes do you try to affect which never works support a share price with stock buybacks. We understand eventually the assets we do have in-house eventually payoff at a higher EPS with the smaller share count and that's the balance we look at and our board and management has been very thoughtful about that.

During the second quarter, we continue to see some of these new people that are joining our company, some of them are coming with strong industry contacts and likely opportunities for major acquisitions and we think to drive future revenue significantly and we have got to balance that.

So the question is we have an authorization that remains in place until mid-August right now. And obviously it's not in our shareholders' best interest for us to telegraph any specific intention, but the board looks at that and will make judgments and make the decision of capital allocation based on that, but it is in light of the fact that we do have a lot of great opportunities to grow this business with capital and that's an issue for us actually to deal with.

Operator

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

Mark Argento - Lake Street Capital

First off, I'll just want to say congrats on a great run, truly a pioneer in the space and you would be great legacy, so that's in your retirement. When you look Matt going forward in terms of (inaudible) business, maybe talk a little bit about as the business bring more portfolios than in the assets, the complexity of managing all those relationships. Do you see during, I know there's a concept in this you know can more of these comprehensive deals will multiple IT components or portfolios in cross-licensing, you see it shine away from that if we are able to just more you know kind of worn and done but specific on a particular patent or a portfolio and how does the business or the complexion of the business change as you know bring more and more larger portfolios and end use you know in these various segments involved with?

Matt Vella

You know I have spent a better part of the last three, four years thinking about that great problem, it has our management team in general because that's where we've been driving the company and that's where, that's the state regime to closer to closer right so called nirvana. And you know things we look at, we look at for example what happens in the copyright industry right. You've got a lot of restaurants and bars out there playing copyrighted intellectually property protected content and you see kind of collection mechanism that's formed around that, right, where there is a periodic kind of structural payment. So that could be a model that we go after right in.

The reason you see a lot of those models eventually emerged is because, again as we're negotiating around 5, 10, 12, 15 portfolios, we're picking up another 4, 5. So it's a moving target, right. When we have a moving target, in terms of what you are paying for, you have to come up with reasonable structured arrangements to handle that dynamic nature. It's not like we're going to sell you a house. We don't have to buy another house for another 20 years. So that's one pool that we kind of look at, right.

The other pool makes this space different. These portfolios, especially as they become more capital intensive, especially they become more relevant to the perspective licensees with whom we're negotiating, they each have different valuations. So you can't just go in there and say we're going to license you at $1 a patent. That's also not going to work, right. So we're going to have to find a transactional mechanism that blends both those pools, right.

On one hand, because it's a dynamic situation, we want to be the clearing house, remain clearing house for patents in the world and because to do that, we have to continually collect and because we're continuously collecting, we have in some sense get continuously paid, right. What you are seeing in the past with such economic models, our transactions start to have a more periodic regularity to them, right. And we're not going to have kind of bookmark transaction where a check flies across the table and that's the end of the story right. So that's one thing, but on the other hand, they all have different valuations and so that's the intellectual property Acacia has.

We started off lot with relatively simple so called structured agreements right and we also started off on successfully negotiate construction agreements. We have a lot of intellectual property around the complexity of what happens when you try and marry up a bunch of patent holders that have unfinished patents really with the bunch of companies that are infringing those patents.

And so we are seeking models and transaction, I think you can see that our structured deals are revolving as well. And it's my opinion that we are on a steady evolutionary patent in terms of what those agreements look like. And so I guess I am answering your question by saying, we are not going to I think in my opinion engage in a bunch of single separated deals with respect to one another with the given company.

Some companies might choose to do things that way and there might be companies, where we're showing up frequently enough where they might want to do things that way, but a lot of companies it's going to be a different story because we are sourcing a lot of very high quality IP that reads on them.

Mark Argento - Lake Street Capital

Just a follow-up and last question for me in terms of kind of tons of money, I know you brought some portfolios in. It seems like, as you bring these portfolios and it's kind of like the ton of money and the activity levels are almost like barbell, where you have a lot of maybe some initial activity right up-front, where you have some party that are run settle at economic that make sense and then maybe just kind of to time where activity levels are smaller and then kind of bigger event. Is that kind of consistent, you know something I have been seen, I think I see a little bit in your business, is that a fair way to think about kind of how you are seeing some of the activity levels from these [younger] portfolios?

Paul Ryan

Well, the only data points we really have since we started deploying capital 18 months ago is in our first portfolio where we put out working capital, we've got two-thirds of the money back in 18 months. And another portfolio, we've gotten back 74% of our money in 12 months. And quite frankly some of the other transactions were either very late last year or very early this year. So they're really around the six month window.

So to have any meaningful data, I think you got to kind of get out a year and our two main data points on those. We are pretty much close, you have one or two, 74% and 67% out in average [claim] 12 and 18 months. We've been fairly consistent in the first two deployments of capital. We've had some smaller deployments of capital, where we've got some pretty good returns, not all of them are and I think one of them numbers has been is because we did the one large transaction with a debt desk where we put out more money than we put out collectively on every other working capital events.

Most of our advances are in the $2 million to $5 million to $10 million area, where we think there is a very strong opportunity, we can get that money back and it's very low risk and we use that capital. And those are the prototype transactions we're doing, the exact same business models we've been doing except by having working capital, you get access to higher quality, higher revenue, much risky patent portfolios by simply advancing some money generally from 12 months to 18 months in a 1% interest rate environment.

So we think it's a fabulous thing to have this working capital. And by doing it we're becoming deep dominant player in the patent space, it's a remarkable opportunity given 4 or 5 years ago, when it was in question, who would be the leader in this field, the capital we have right now and our ability to deploy this strategy where we can advance the patent owner, some money and have scale in the game I think is giving us the ability to capture the quality portfolios. That's the limit, you call it as a limit, it is getting paid for all this, I call for the new patent portfolios as we continue to aggregate.

But it's a high quality issue for us because if you compare the quality of the assets that we have now with where we were five to seven years ago, there is just absolutely no comparison and the pipeline similarly. So it's again the capital is the huge advantage and we think using the working capital model to access higher revenue portfolios is fabulous for our shareholders long term.

Matt Vella

And just to pick up on what Paul saying, if you have a significant portfolio even not a too significant portfolio in isolation and if you look at the various points in time at which folks get paid, I think by and large you do see patents right. Our mark men are on trials but that is not what was going on with our company. Because remember we almost we really put them our key portfolios or talking to someone in isolation above one portfolio. You've got to think about this where this portfolio after portfolio layered upon one another time wise, right.

And so we are kind of pushing it into our pipeline and that in some sense mark which have recruit the barbell or whatever model have look at the chance to look at details of your question, whoever model you are assuming right, that is an isolated portfolio model. When you are doing multi significant portfolio assertions and licensing negotiations, you've got sort of layer all those models on top of one other and it's not a linear layer and you are not just adding them up. So that's a really critical thing. And again we look forward to discussing the dilemma which we know exists for the model what we are doing next week.

Mark Argento - Lake Street Capital

Thanks, Matt, congrats on the promotion and Paul, good luck.

Matt Vella

Thank you.

Paul Ryan

Okay.

Operator

Our next question comes from Nicholas Rodelli of CFRA Research.

Nicholas Rodelli - CFRA Research

Thanks. First a quick one with respect to the Northern District of California ADAPTIX case with Apple and others that you have in front of [magistrate's rule], do you have an estimated trial date for that for the initial trial and would that question, would that first trial also include Apple? Thank you.

Matt Vella

Just so I make sure I understand the question, you're talking about the ADAPTIX case that's recently been transferred to Northern District of California that involves Apple and you want to know the trial date for it basically?

Nicholas Rodelli - CFRA Research

Yeah.

Matt Vella

I'm not sure there's been one, I don't think they have ruled 26th conference yet so I don't think there's going to be a date established yet but there is it's public, you can look it up in the records, but I'm not aware of.

Nicholas Rodelli - CFRA Research

Okay. And then I have a broader question, Matt you mentioned in your remarks a shift towards stepped up engagement on the policy and legislation front, my question is how large of a factor has this recent step up in the NPE policy debate had in terms of slowing or stalling discussions on large licensing deals, in other words isolating for the policy debate factor versus garden variety lumpiness that is associated with the business, thanks.

Matt Vella

Truthfully on the major portfolios none, I mean, again the only legislation we see coming down the pike, so to speak, is going to really impact lower dollar [nuisance] kind of deals and our business just isn't there right now. And so we're not seeing an impact in terms of the portfolios we are monetizing. They look nothing like the portfolios people have in mind when they think of patent reforms. At least the realistic bills that have a chance of passing. And so we're not seeing the impact, the impact really to the extent, they are filling one, again the factors that Paul and I have been speaking to on the call, like what happens in the case where you've got five, six, seven, eight, 12 ,13 portfolios, in play all high-quality, right? And as you're negotiating, you're bringing on more. That's the lumpiness.

Nicholas Rodelli - CFRA Research

Okay, thanks.

Paul Ryan

Thank you.

Operator

Our next question comes from Fed (inaudible).

Paul Ryan

Hello, I think we lost him. Operator, I think we may have lost him.

Operator

Our next question comes from Tim Quillin of Stephens Inc.

Tim Quillin - Stephens Inc.

Thank you, for taking my follow-up and Paul I forgot to tell you how great you were.

Paul Ryan

Oh, it would have been a nice there to have a higher revenue quarter, that's for sure, but thank you.

Tim Quillin - Stephens Inc.

And that would have made it a happier time to go, but enjoy your retirement, so on patent intake, I know that it's quality a lot of times, not quantity but so far this year, 16 new patent portfolios coming in the door, that lower than any two quarter period for couple of years and maybe three years. So the numbers are not high, but what can you tell me maybe about the quality of the patent instead of come in the store there are any [inspection] of quarter, were there any marquee patent portfolio that you think can do $100 million plus in revenue and if so, can you describe them a little bit more?

Matt Vella

Answer is yes, in terms of marquee portfolios, in terms of describing them, we always have this issue about describing stuff in detail before we file a lawsuit on it, because it's not public and we don't want to have anyone jump the gun litigation wise and file a [regulatory judgement] action in case the patent go or that were partnering with that previously put people on notice.

So during Analyst and Investor Day, we'll certainly give you looks and we will able to give you looks instead of a controlled way, bearing in mind the risk I just mentioned okay. But the answer to your question is absolutely yes, higher quality, higher quality by the way with some capital advances takes more time and care to bring in, right? So got might explain the numbers game.

And look this is not just a numbers game right, obviously it's also a quality game, and again Paul and I have never been happier with the intake, I mean, we think of where we were and where we are now and we can cover very important platforms like the smartphone with several, several very high quality portfolios.

And again coming back to what we've pulled in this quarter and we think we've got several that are very high quality and they come in different shapes and forms in terms of how the money is going to be coming in, from where it's going to be collected. But the one common denominator in terms of what we're pulling in is that a far higher ratio of portfolio that we're bringing each quarter are what I would call very high quality.

Tim Quillin - Stephens Inc.

And what portfolio sourced during the quarter from pulled in by your new hires.

Paul Ryan

Well, they have just joined the company, there's no --

Matt Vella

I'm kind of whistling, I think one of them took a real shot. But you'll start seeing activity, we're very happy with the energy and creativity and urgency they brought to the company, they have both fit right in.

Paul Ryan

And also if you think about it, we eventually will be the beneficiary of the depth and quality of this patent portfolios, historically if you look back plus five years ago, when we had portfolios with 2 or 3 patents, from 3 or 4 claims, it's just a natural inclination of there's any money and significant money to be challenged. But if you look at some of the portfolios, we've brought in, like the (Inaudible), like the Nokia Siemens, like the ADAPTIX portfolios that are that deep, it leads companies into substantive negotiations around reasonable pricing absence they litigation or a trial of that. And as we aggregate we'll be the beneficiary of that.

Tim Quillin - Stephens Inc.

Right. And my last question, or maybe I'll have two, but one question is regarding the capital outlay strategy. And so I understand that there is no cookie cutter formula on your partnerships and you use capital where you feel like it can help you get higher quality patents and grace the wheels of progress, but in 2012 even excluding ADAPTIX $175 million in capital outlays and we got used to a certain capital intense to the business and expected some revenue to start shooting out maybe more in 2014. The capital intensity this year is much, much lower, so I am just wondering what has been the difference this year versus last year?

Matt Vella

There's a less of competition, I mean we -- and I think the perception is that's it's hard to the license and frankly again the patent reform media blitz, I think it helped that, and so we are again, I think we've got some terrific portfolio is coming, we got revenue shares on them, and I just think that the competition the competitive landscape is a little different now.

Tim Quillin - Stephens Inc.

Okay, and then my last question is --

Matt Vella

I do want to say one more thing, Quillin.

Tim Quillin - Stephens Inc.

Yeah, put it.

Matt Vella

I think which is we haven't deployed a much capital this year as last year and it doesn't mean we're not working on deals like that and those deals take time again the more capital, you're thinking of deploying and more [trifle] you have to be, and the more time you need to take.

Tim Quillin - Stephens Inc.

Right, okay, fair. And then when I think about capital deployment in a simplistic way. I like to think that over the five to seven year period, if you put out $100 million in capital that you should get 3x plus that back in terms of licensing revenue with some kind of lag. And I would like to know how you think about that in the context with 2012 and again maybe even that you take ADAPTIX off the table but $175 million in capital outlays, you know, what kind of revenue theoretically should you be generating in 2014 in order to meet your return on investment targets.

Matt Vella

We aim for what we said we are aiming for which is capital back in 18 months and a 3X including original money within three years and so far with the portfolios we've had under play for a sufficient amount of time, we appear to be pretty much on track to do that but it's still you know, it's still very early, we've only got a couple of them that we really had for 12 months to 18 months.

Tim Quillin - Stephens Inc.

And in 2014 the right way to think about starting to get higher level of monetization from your 2012 outlays kind of given that time to that lagged revenue?

Matt Vella

Yeah, but I mean don't (inaudible) 2013.

Paul Ryan

Well after this quarter. Remember its only 13 weeks.

Operator

Ladies and gentlemen, we've reached the allotted time for questions today. I would now like to turn the call back over to Mr. Ryan for any closing remarks.

Paul Ryan

Okay, thank you operator and I thank you all for being on the call with us and look forward to the next call. Matt will be leading the call with the senior management team and if you have any questions in the meantime please feel free to give Matt or I a call or Rob Stewart. Thank you.

And again, we encourage everybody who is on the call in the East Coast if they can make it to Analyst Day we think that would be a day very well spent. Thank you.

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 confirmation code 70387697. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Acacia Research Corp (ACTG) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts