Acacia Research Corp (NASDAQ:ACTG)
July 24, 2013 09:00 AM ET
Robert Harris - Executive President
Matthew Vella - President
Clayton Haynes - CFO
Jon Taub - VP, Acacia Technologies Group
Bob Rauker - SVP
Alfredo Lezama - VP, Business Development
David Rosmann - SVP
Charlotte Rutherford - SVP
Hiro Seki - SVP and Chief IP Officer
Marc Booth - EVP and GM, Engineering
Curt Dodd - VP
Marvin Key - SVP
Jaime Siegel - SVP
Tisha Stender - SVP, Licensing
Good morning everyone, I think we are going to go ahead and get started.
Welcome, thank you for joining us for our first investor day, and I think the company has overdone. Paul Ryan who obviously is retiring at the end of this month, and I started this company, at least restarted this company in the early 2000s with an idea that we could develop outsource licensing company.
I can remember talking to some of our early shareholders, and it was more of a dream or a wish than a reality. And I think that most of these tables out here have one of the professionals from our Company and I think is a reflection of what we have been able to accomplish.
I would encourage all the investors at those tables to really dig in with the people they are sitting with to understand the depth and the talent that Paul and I were able to put together so many years ago. That's not going on inside of my head. Anyway, I don't really have any preplanned remarks. I think this day is really more for introduction to the management team we've put together.
I encourage you to engage with them, discuss with them, anything you would like and talk to them about what we see on the horizon for this company and for these people. I think we are going to have some few remarks from Matt and then Clayton and then I think we are going to a Q&A and I would encourage this to be as interactive as possible.
We thank you. We know the summer in New York is not always the most convenient time, but we thank you for coming out and look forward to discussing any questions, concerns, or comments you have. Thank you.
Good morning. Thanks Chip, and thanks for the platform and I think, I say that on behalf of all the employees of Acacia. Today, normally when we speak with you folks, it’s really about a lot of big picture things. And there is going to be a big picture component to what we are going to tell you guys now.
And then what I’d encourage you to do, after we finish talking about where we think our company is today, the challenges that it is facing and what we want the company to look like tomorrow. After we get through all that big picture stuff, what I’d encourage you to do is listen to all the talented people you’re going to be seeing here for the rest of the day and focus on the details of what they are saying and focus on the passion with which they say it. You are not going to see a lot of fancy models and graphics.
What you are going to see is a lot of very, very detailed orientated professionalism. Now let’s see if you’ve got this working. Here we go, well, I will, you guys read that, obviously and that was out of the slide to our presentation. First of all I think it is important that we just get around to talking about what we do and clarifying that once and for all. Because I think if you would just look at the headline which is about our company and stop reading, after you get through the headline risk.
The beautiful simplicity about what this company does is lost some people. And in a nutshell we provide a service that addresses a very important unmet need. And it is an important unmet need for our economy. What you typically find whenever you grab a phone, a car, whenever you grab a medical device for example, anything that has technology inside of it; is that very often there is patent disequilibrium.
And when we talk about patent disequilibrium, we are talking about the folks that actually have the patents that underpin that product, being different from the companies that make money selling that product. And the reason why this disequilibrium exists, it is pretty quite at least in many of our minds, you’ve got this incredible ability to share information, primarily through the internet.
You’ve got this incredible pressure on people to roll products and services out at an ever quicker and quicker pace. And you’ve got this globalization of manufacturing and what’s happened is the innovation has become, and the invention has started becoming increasingly disaggregated from the production. So when you do grab that medical device, and when you do grab that smartphone, and when you drive that car, the patents inside of it and increasing percentage of those patents were not created by the folks smacking their trademark on the car, the phone, the medical device.
And so in a nutshell, what we do is, we are as Chip said; we outsource licensing company that helps the patentees and franchise get paid. And I think it is important to talk about why this is such an important function for the economy. You know I was having breakfast with one of our analysts this morning and he really phrased it nicely.
He said that, in order for people to get paid, in other words, in order for people to make investments on the front end of the business, they need to know that there is going to be a payout on the backend regardless of what happens and there is a couple of patterns that we see repeatedly with our patentees and franchise customers that give true to this very nice simple way of describing the need we need.
Most of our inventor partners, our inventor customers, they fall into one of two patterns. The either are just too early with a wonderful technology. A good example is the ADAPTIC investment we made where we actually have inventors and patent owners that were rolling up products that look like 4G products ten years before 4G rolled out.
They were just too ahead of the party and people need to know that when they’re making an investment in the great technology and do not quite sure whether or not it’s going to cash out in terms of pricing services, there was a way for that business to be cash out in terms of patents. So that’s one function we provide.
We make sure that that happens, so that the next time a brilliant inventor comes along with the 5G technology, people know they can put money in with safety and they know that if they put 40 million in they might just pull 200 million out even if the products and services failed because there’re just too early to the market.
There other kind of patent we see in our inventor customers is one where they just don’t have the capital to play in this space. You can have a terrific invention on a semiconductor but you don’t have $10 billion to build a fab and build marketing channels and roll products out. To do really want to be in the economy where that person can’t get paid and again what our company does is we makes sure that that person does get pay and the reason we exist and the reason our services so necessary is because patent licensing is not easy.
Patent licensing is not easy primarily, well there are two reasons, primarily there is this very expensive and very unpredictable litigation system that is used to essentially crystallize what the patent lines are and its very risk, it’s very costly and people just don’t have the experience and the capital to play with it.
And the second reason is because the companies that are making all the money from using other people’s patents, they want to pay and they got probably lots of money and they’re going to make it as difficult as possible for this wonderful invention pipeline that deliveries great inventions at very low prices often free to keep moving. And so on the face of all of those issues and hurdles, a company like Acacia is very necessary for the inventors that are disenfranchised.
Now, what I’m going to talk about for the next few minutes is what Acacia is about at its core. And these are principals that Paul and Chip and the rest of our Acacia family have developed really over the last 10 years and the principals that you know have a great connection to our history where we came from, the first thing is the partnering model, we still fundamentally are partnering company.
I can still remember you know when Paul Ryan and myself went to the FTC and when we talked to some folks over there because they’re wondering about our business model and they’ve really thought that what we did was we went in, we took these vulnerable patents donors, the patent disenfranchised, cut them a check for a 100,000 bucks when away and made 10 million bucks at their expense just doesn’t happen.
I mean we’ve only, we bet we almost always 90% to 95% of the time partner with the paten owner 50-50 profits that’s our base model so that’s very important to know and we don’t just do it because we want to be altruistic towards the patent owners because we do it de-risks the asset and we don’t have to, basically, instead putting capital upfront at a time when the gap between the value the patent could have if a litigation turns out one the value could have, if it doesn’t turn out well that’s a big gap, so instead of negotiating over the gap 50-50 partnerships split it’s absolutely integral to our DNA as a company.
The other entities that we partner with are our litigation counsel. And again we partner with them because litigation is expense and we want to de-risk litigation, so that if litigation gets completely out of hand we’re not sitting there we’re looking at a $30 million expense item. Another critical thing about our company attention to detail, you know. When Paul and Chip started this company they had much capital and they couldn’t afford to go buy entire haystacks of patents. They had to find the needle and the haystack and if they didn’t do a good job finding it the company is out of business.
And so really for the last 10 to 10 years we’ve developed a team that finds needles and if you actually look inside our company you’re going to get a perspective of this today. You’re going to find a bunch of highly, highly dedicated professional people that are needle finders.
Not only are they needle finders but once they find the needle they try and extract every last penny of value from that property and so you’ll see that as you talk to people like David Rosmann, Marc Booth, Tisha Stender they will give an insight today about just the incredible attention to detail it takes to make money in this space. Another principal about Acacia, we’re technology agnostic. Again, Paul and Chip and the rest of the founders of Acacia did not come from a technology background like memory or medical devices.
They were effectively asset management experts and so where the packing covers a medical device, a hammer, a computer, a piece of software, as long as it was a patent disequilibrium situation, as long as the high quality patent in a good probability to get return on investment they’re interested. And what that’s really done for us is we never really got into the trap of focusing on just one space we’re always open-minded and as a result of that we’re able to diversify and scale our business much more readily than when we think just about anybody in this space.
Another critical characteristic of our company, we’re in the licensing business not the trial business. Now let’s break that down very closely of course the enforce patents but we enforce patents because if we don’t enforce them by litigating the secondary marketing patents doesn’t function doesn’t function because people are going to cut you a check knowing that there is this litigation standing between you and the enforceable patent and what typically happens with the majority of companies to this day is you have to in some sense initiative the litigation.
So of course it’s going to be enforcement aspect and of course the other thing litigation does it crystallizes the value of the patent, there usually are questions about what the constructions of the patents should be whether or not it’s valid whether or not its infringed, a litigation is the crucible through which you run these properties in order to crystallize answer to these questions but of course it doesn’t mean that we are going to just be a lawsuit factory, right what it mean is that we have to initiate litigation often, not always, and we have had quarters where we have been able to at time for goal litigation for up to 50% of our revenue and we hope that trend increases by the way.
But at the end of the day, we are negotiating and the reason the litigation simply as a way of crystallizing to answer these questions as a way of getting to a time limit of the negotiation at the end of the day a trial on the judgments a judgment and you can’t truly keep delaying it so puts a temporal constraint on the length of our negotiations. And at the end of the day though we would rather licensed in then pushed into a jury and of course the reason we have mindset is because we have seen a lot of companies out there that have build businesses on trial outcomes at the end of the day fail, it’s just too risky, so again although we understand the important role of enforcement, we also a primarily a licensing company not a litigation company.
In terms of what we do, it’s pretty simple. We find IP that belongs to patents and franchised we have tried price that is best we can and then we transacted along their pricing model through licenses or sales back into the secondary market and again instead of really delivering the point we will simply give you guys access to our best people today and you can find out of the details of how they carry out those three things.
Final point that’s absolutely integral to our DNA, we really-really to avoid strategic entanglements. Again, our background as a company are asset managers not as active participants in the technology space that one form alliances with one company or another company. Of course there are companies that we do business with, very smoothly without litigation and we do love and cherish those relationships but we are really not out to help people gain market share or help people achieve strategic business objectives that can frankly carry price tags that go well beyond the value of the assets, we are just trying to monetize.
Some quick reviews slides, most of you in this room are familiar with our basic business model but when we talk about partnering we are really talking about this 50/50 split, right. And when we have the 50/50 split in effect what happens is we end up paying about 20% of OPEX that’s how we see the law firm expense and we end up giving the 40/40 split between the owner and ourselves.
And I am going to kind of rush through the slide we can take Q&A on it, if you wish, because I know some of you are not familiar with our story but I also know a lot of you who recognize a lot of the faces in here so just wanted to put a reminder. Also, that slide sets up this next slide, this hybrid model right and with the hybrid partnership we are basically just adding upfront capital that we will pull out very rapid to this basic 50/50 partner model that we build our company on.
Clayton will give you some more details on the mechanics and the numbers and benefits of this hybrid model but I will say that in a typical deal what’s going to happen, you know for example see a revenue opportunity on a patent of $100 million we are able to essentially advance 5%, 6%, 7% up to 10% at times of that opportunity to the patent owner and if we have a 100% preferred rate of return on that capital so the first dollar is back in, come right back to us so we can reinvest it again. A couple of things happen that are really spectacular for our model.
First we really shake off the lot of the competition to acquire that asset, which there are lot of companies out there that are offering the partnership split and some non-refundable cash that goes into the pockets of the patent partner. Second, because we are able to pull the cash upgrade quickly under this kind of model, remember we have this 100% pref, usually a very high pref on the investment we have made as the money comes back in, this working capital and we are able to cycle that money over and over and over again into more and more portfolios which less our aggregation model scale and as I will mention a little bit later in this presentation scale and diversity is absolutely critical to our business.
There are a number of questions about our company and I thought we kind of take them on right now. When you hear people talk about our company and you hear critiques, if you will, of our company and these are more traditional critiques, I think a lot of the critics have realized that may be this criticism in particular is not correct.
The thing I use to hear about Acacia before I joined can they keep reloading, can they keep bringing more and more patents and if you look at a lot of the other players in this space, they have a portfolio, they cherish it, they nourish it for five to ten years, they milk every last penny out of it, and they are not really paying much attention to brining more and more portfolios in. We pay as much attention on brining portfolios in as we do on cashing them out, it’s absolutely integral, we are an aggregator first and foremost.
And so when we were asked and we continually reload, all I tell people as we have been reloading for the last five, six, seven years and in the last year the quality of our reloads and the financial efficacy of our reloads has increased dramatically, again primarily thanks to that hybrid model.
Also, it’s important to know why we can reload from a macro perspective. There's always, always, always patent disenfranchised people out there. Their identity changes year to year but the fact that those folks who are out there something that we have just never seen any kind of variance from there, they are always out there. I will give some examples and our business development team John Walker, Jon Taub, Alfredo, they are going to run you through examples in medical, in tech and auto for example. Charlotte will run you through some examples in the energy space.
And Jiro Seiki, our latest hirer who we’re happy to announce yesterday, we’ll run you through some of the opportunities in Japan.
The cash of the patent disenfranchised changes but their existence doesn’t. And again the reason it doesn’t is because of the basic thing I talked about the start of this talk. There is a disaggregation in the global economy between the folks that invent and the folks that are able to make products and services that embody those inventions.
Another question that we’re often asked is there life for us after Access and Palm. And that’s been a great portfolio for us; it continues to be a good portfolio for us. There is still lot of licensing left on it but in short when I look at the position we have on smartphones, this is the palm pilot portfolio we’re running. When I look at our position on smartphones and I think of the position we had a year when I compare it to now.
By any metric, whether it was the number of smartphones covered, whether it’s the number of patents we have reading on those phones, whether it’s the quality of the patents, whether it is the breadth of the patent, the geography of the patents, there is just no comparison. We have more coverage, more geography, more depth, more fail-proof portfolios reading on these things. It’s not even a close analysis and we hope to give you a bit of insight into why there is such a dramatic increase in our position on that one market alone.
So in answer to that question, yes, there is going to be a lot of life, plenty of it after Palm, even after Palm goes away, which again is not going to happen for the couple of years.
And of course that’s just in tech. We are not even talking about the verticals in energy, med tech and another vertical, which we, auto and another vertical who probably announced in about four or five months. So, even if you just put those other verticals aside, there is a lot of life for us in tech, and Jon Taub will be the primary person that will run you through that analysis.
Future legislation or current legislative initiatives will they harm us. And I’ve spoken publicly I was quoted in The Wall Street Journal. We’re actually for, almost all the provisions that are being brought as legislation in the house that have a realistic chance of passing. And let me get into that little bit because this is something that we’ve said publicly and we’ll continue to say is really when you think about it three things happening with these legislative initiatives.
The one thing that’s happening and where there might be some traction in legislation when actually get passed. People want to end sham litigation. And sham litigation simply is any situation where the inherent value of a patent is exceeded by the value one might extract through clever tactical litigation maneuvering, okay. We don’t do that. None of our portfolios in play right now do that and the people want to pass those laws frankly we think there are some very dangerous side effects to passing those laws on patent disenfranchised people that want to bring their own matters without the help of a big company like Acacia.
We think it’s very difficult to stop sham litigation while protecting the interest of those people. But to be perfectly honest, that kind of legislative initiative has historically brought us more customers, the harder licensing perceived to be the more customers we get. And it actually will probably help our business as it has in the past, so again neutral or positive on most of the legislation that can pass.
Now you do see on the hill a second category of legislation that is basically aimed at discriminating between patent owners that don’t make products and services and patent owners that make the products and services covered by the patents they are asserting. And obviously if that legislation ever got anywhere, would be very problematic for our business. We’d have to effectively start making products and services that would essentially embody the patents we’re asserting.
We’re not really worried though about that legislation passing because if it did pass would sweep in the, what we think are perfectly legitimate licensing activities, not just of ourselves but of some very, very iconic American companies like Microsoft, General Electric, Qualcomm. So we just don’t see that legislation having much of a shot going through. We certainly track it, we’re certainly aware of it. We don’t think it’s going to pass.
The third category of legislation we see going through is more of a 20 year issue that a one year issue or two year issue. There is arguably generation gap that exists in this country and in most of the world frankly where people that tended to grow up with Napster, for example, they like free stuff, they like free music, free literature, free everything. And so there definitely is a category of company and Google and Facebook and these Internet information aggregators are leading the charge they want to see the patent in general get devalued.
And again those companies don’t have the cloud to devalue patents in general. And by the way those are companies. They tend to not won value patents because their intellectual property is trade secret protectable, not patent protectable.
So what we found with other companies in the past that have had trade secret intellectual properties, once their business shifts and they start making and selling products and services that can be copied and therefore they have to rely on patent to protect those things. Their position will usually change on this issue.
So again we don’t see it as an immediate threat, something again we’re watching and it’s something that’s historically the patents that has space before and has stared down successfully. So in event on the legislative initiatives we don’t see an issue.
And then one last question about our company is what I call the $64,000 question, so to speak. One half is when an entity like ourselves shows up actually it’s not just one entity, it’s going to end up being 5, 10, 15 one into the portfolio and we show up at the door of a very, very big company that’s using inventions to make products and services, inventions from the patents that’s been franchised and we show up not just with that number of portfolios because that's happened before, but we show up with that number of portfolios, all of our high quality, all in litigation, all with contingent law firms, or at least a contingent aspect to the law firm representation, but most importantly all with a patent owner, patent disenfranchised patent owner in tow, to whom we owe fiduciary obligations. We're not going to start cutting deals and playing roulette and playing cards with these things. We're going to have to get the right valuation.
And then on top of all of those things as we're negotiating the transaction on those five 10, 15 portfolios, let's say it takes three months, six months, nine months in that space of time we'll put another five in. And if it goes another year we put another five in. The question is what does that look like, and what's the outcome of that negotiation. We have already started some of these negotiations. And we don't know the exact answer, but here is what we know about the answer. We don't think the government is going to shut it down, because if you are getting legitimate inventions usually from American companies but not always, but even from Japanese companies from wherever, if you get legitimate inventions from people that were either just too early for the show, or they just don't have the capital to play in those markets. And if you would assert these inventions against those markets, we don't think it's wrong, and we don't think the government is going to want to shut that down, because again if you can't show people that you can cash these things out on the back end, people aren't going to make that venture capital investment on the front end.
We also know the negotiations are not going to be delayed till the 10th of never, because there are trial dates. And at the end of the day there is going to be judgments. So we don't think that's going to be an outcome, I mean that could take a while, it takes to get to a judgment. But we don't think it's going to take forever, we don't think it's going to take five years. And the other thing that's not going to happen is we're not going to cut corners and start giving this stuff away. One this I was up on this slide, I just realized I forgot to mention in my prepared remarks today, besides in the hybrid model making the investments, the metrics we go, we try to get the capital back in 18 months, and we try to make it 3x return again Clayton will run you through the details on what that means.
But when we say that we mean it, we're going to goal, that's our objective. And so we're going to have pressure on us to cut deals because, we've got lumpy quarters; our response is going to be that's the transaction we're looking, that's the valuation we have on this thing. And unless the portfolio gets wounded in litigation, that's what we're going to ask you guys to pay.
Couple of last words before I seek the floor to, I think more interesting speakers to be perfectly honest, and there is lots of them coming today. What will this company look like tomorrow? Well, the way I visualize it, I start at what happens to patent portfolio that has become disaggregated from its owner's business. So good example is you are an Indonesian widget maker, you have got the fundamental packing on widgets and at some point in time whether it's because you can't get the margins you want, or you got Chinese competition coming in and taking away your business. Whatever the reason, you can't make widgets anymore, you don't want to make widgets, and so you got these patents that cover widgets and lots of people making lots of money from the widgets, what happens?
Well we see that portfolio much like a piece of real estate and big office building and lots of units inside. We think that some of those units will get presold up front, so when the widget maker brings the portfolio on to market, we think we will be able to find some folks that will want to just buy these things. We think some of those units will get pre-licensed without any litigation and we've really seen examples of that in our own personal lives as a company, where we've negotiated these kinds of deals. And we think there is going to be a stub piece left over at least in the foreseeable future, and that stub piece unit, no one is going to want to pre-buy, no one is going to want to pre-license them, it's going to be forced tenant insertion, right. They are infringing the patents, they are free-riding off that intellectual property and they should pay. And so that stub piece that's where enforcements come in. So that's what we visualize happening.
And we think it's vital to an innovation economy that this process works well, and we seek to be a clearing house in the market. We seek to be the place that the Indonesian widget maker will go when they want to basically cash out their widgets. Final thing I will talk about skill and diversity, which I have mentioned a couple of times. Because there is this potential gap between the actual inherent value of a patent and the litigated outcome of that patent, but the litigation system is not perfect, and it's fraught with risk, it's fraught with caprice at times, and sometimes just playing on luck.
If you take any patent in isolation and you say with certainty it's going to get this valuation out of the litigation process, anywhere in the world, not just America and Germany or wherever, just don't know. And so you basically try going with scaling diversity and I am going to run through these bullets, you have heard this from me before, but I am just going to summarize it. You go with scale and diversity, so basically you smooth out all those risks, and you can have a real negotiation with someone about the inherent merits, the inherent valuations of the portfolios you have.
And so for each portfolio we do look for multiple patents, we do look for orthogonal failure points between the patents. That’s diversity right? And we do look for many, so it's not just one. That's the clean and simple reality of it. I am done for now, but I mean before I leave again I do encourage you to pay attention to the detail, pay attention to the passion, and I hope you enjoy the upcoming presentations. At the end of this session as Chip mentioned we will provide an opportunity for some Q&A. We'll also provide some perspectives of our company and talk about how we can help all of you, the shareholding public better track record our performance. So that will be an aspect, I'll have some prepared remarks about that as well. With that I am going to turn the call floor over to Clayton.
Thank you, Matt. Again my name is Clayton Haynes, I'm the Chief Financial Officer of Acacia Research Corporation and I wanted to just speak to you today regarding couple of financial topics. The first topic being just a quick summary of our balance sheet and how we feel about our balance sheet, and the second topic surrounding how we think about the deployment of capital in the form of upfront advances in the partnering model. So just real briefly a couple of thoughts about Acacia Research Corporation's balance sheet, we do believe that we have a strong balance sheet and a relatively straightforward balance sheet.
As of June 30, 2013 we had 320 million of cash and investments, short term receivables totaled approximately 70 million as of the end of the second quarter of 2013, and one of the unique aspects of our accounts receivable balances are typically to the extent you see an account receivable balance it generally relates to agreements that were done in the latter portions of a particular quarter and most of our payment terms with respect to our license agreements are relatively short, ranging from five to ten to 15 to 30 days. And so at any point in time that you see a receivable balance as of the end of a particular quarter that cash is typically collected soon after the end of that particular quarter.
Working capital as of June 30 totaled approximately 303 million and other one of the cleared strong point of our balance sheet is that we have no debt on our balance sheet. We certainly believe that having a strong balance sheet is an important aspect of our business; it certainly sends signals with respect to a lot of the parties that we deal with that we have the capital, that we have the staying power. Certainly a strong balance sheet benefits a number of the different aspects of our licensing and enforcement business. Moving on to the next topic is just a discussion about how we think about the deployment of capital in terms of upfront advances in the partnering model.
First topic our point I wanted to emphasize is that we have historically been extremely conservative and we certainly continue to believe that we will continue that trend with respect to that conservatism, anytime we are considering the deployment of capital in the form of upfront advances in the partnering model. As Matt indicated, a typical form of that advance is to the extent we're looking at a particular patent portfolio, we will seek to advance what we believe is a small portion of the total revenue potential associated with that patent portfolio to our patent partner. Another aspect of the agreement would be that we would receive a preferred return until we received that upfront advance with respect to licensing revenues earned with respect to that patent portfolio and only after we receive the return of that advance will we then being to revenue share with our patent partner.
We get questioned sometimes with respect to whether this approach to the partnering model is a new model and to that we reply, no, it is the exact same partnering model that is our primary business except that in certain situations we are willing to advance upfront capital to our patent partner that to the extent the licensing program is successful, we would have owed our patent partner on the back end in any event. So it's definitely the partnering model, it's just that we use our capital that we have available to advance to our partner and get that advance back from first dollars over the life of the program. Some of the benefits of deploying upfront capital up that right that we see I think Matt alluded to some of these in his presentation, we believe that it provides a competitive advantage for the acquisition of patent opportunities to the extent that we are being considered by a patent owner with respect to partnering.
We believe that to the extent that we have the ability and the wherewithal to offer upfront capital, we believe it provides us a competitive advantage with respect to others who may not have the ability to do so. We also believe that it provides opportunities for increased deal flow, often times to the extent you're dealing with more established technology companies or universities that have more mature, higher quality with higher revenue potential patent portfolios, often times they aren't willing to transact with potential partners that don't have the availability to provide upfront capital, and so to the extent that we have the balance sheet and the wherewithal to do so we believe that, that can contribute to increased deal flow down the line. And lastly to the extent we have the ability to deploy capital in the form of upfront advances, we believe, I had demonstrated in the past that in certain situations we're able to negotiate better backend economics with respect to the partnership arrangement.
So how do we think about returns with respect to the advancing of upfront payments to our patent partners? Put simply, we would advance amounts to our partners for portfolios that we believe that there is a business case and a portfolio that we believe has the characteristics that will provide for the recovery of that advance within the first 18 months as well as provide for a 3X return including recovery of the initial advance over a three to five year period on a time and risk adjusted basis. And so I thought it would be helpful just to walk through a quick example of how that metric with that objective would be employed. So far example let’s say we were taking a look at a patent acquisition opportunity that we believe had $100 million revenue potential. Let’s say that based on this hypothetical in our analysis we were going to put up 10% as an upfront advance to our potential patent partner. And let’s say with respect to the example the cost structure is 20% including contingent legal fees and all other costs associated with the licensing and enforcement of that patent portfolio.
That would yield net proceeds of approximately 80 million and let’s say for example purposes that the revenue share in the agreement is 50-50. And so the preliminary split with our partner would be 40 million to our partner 40 million to us. However, in that agreement there is a preferred return, whereby we receive our upfront advance from first dollars received which would translate into our patent partner getting $30 million and us receiving $50 million in this particular example.
On a pre-tax basis, that would translate into a 4x return or a simple annualized average return of 80% over a five year period and on a post-tax basis that would generate a 2.25x return or a simple average of 45% on a post-tax basis. And so that sort of how the metric would be employed with respect to a particular example. Now, I think one of the key points with respect to the employment of this objective is that the objective is flexible and to the extent that facts and circumstances changed, to the extent that our analysis on yields differing situations the model is flexible to account for that, we kind of think of it as sort of a balloon filled with air and to the extent that you push on one side of the balloon, the balloon is able to adapt and be flexible to incorporate that push on that side. For example, to the extent we change or modify our thoughts about the revenue potential, we can obviously modify what percentage of the overall opportunity we believe that we would make to our patent partner. So, it’s a flexible objective and metric with respect to returns that we would anticipate.
And of course given the complexity of the licensing and enforcement business it would be unrealistic to think that every opportunity that we end up investing in would necessarily perform to this metric. However, one of the keys of the metric is that again we only believe we are advancing to our partner, a very small percentage of the total revenue potential. And so to the extent that in a particular situation our analysis turned out to be wrong, we would have to be wrong by orders of magnitude to the jeopardy of not recovering our initial upfront advance, and so from that standpoint we believe the application of this particular metric is a conservative way of approaching the advance of capital in these situations.
Another key with respect to the way that we think about returns when we’re using upfront capital to make advances to partners is that, during a period of time which we are commencing the licensing and enforcement program to the extent we are recovering those dollars advance within that 18 month period and to the extent that we’re able to continue to grow the portfolio of patent portfolios that we have, if you think about it we continue to receive those first dollars back every 18 months in which case we are creating a pool of working capital that we can then reinvest into the business. And to the extent there has been a historical correlation between the growth and patent assets and revenue growth, you can see how that kind of creates a waterfall affect of higher quality, higher revenue potential patent portfolios, the return of working capital over a period of time that you can then reinvest into the business, accelerating the growth of patent portfolios which generally trends towards an increase in revenue growth over a period of time.
So, what kind of track-record has Acacia had with respect to deploying capital in the form of upfront advances, to ascertain this we took a look at portfolios that we made upfront advances for from 2005 through 2010 timeframe. Albeit at a lower level of upfront advances I think during that timeframe we invested approximately 35 million. But over a broad number of patent portfolios during that time period, we were able to realize average annualized returns of approximately 44%. And so we believe that we’ve demonstrated the ability to affectively deploy capital, we believe that we continually are getting better at deploying capital with respect to upfront payments and we think that we can continue to do so in a manner that will drive revenues and drive increased shareholder value.
So in summary, how do we think about the benefits of the objective that we employ with respect to of deploying capital, we believe that it provides a basis for quantifying how much working capital we are willing to put up with respect to any potential patent portfolio that we’re taking a look at. And again we believe that we are only advancing a very small percentage of the overall total revenue opportunity with respect to these particular opportunities. It certainly establishes a floor with respect to the types of portfolios that we would consider advancing capital to our patent partner. We also believe that it facilitates our shift and focus from lower revenue high risk assets to higher revenue potential lower risk assets. Again, to the extent that because we have the balance sheet and the ability to advance capital to the extent that we are getting an opportunity to be at the table with respect to certain patent opportunities that if we didn’t have the capital we wouldn’t have the opportunity to take part in, we believe that it will accelerate this shift and focus.
In addition, it ensures that resources including shareholder capital as well as the company’s employee resources are allocating their time to licensing opportunities and patent portfolios that will drive revenues and drive shareholder value. And we also believe that again hearing to these types of objectives and metrics will drive us toward our ultimate goal which has Matt indicated was the acceleration of the acquisition of multiple high quality portfolios with higher revenue potential pattern portfolios performing at or in line with the stated metric and historically we demonstrated that has been high correlation between the growth finances and the growth of our revenues.
And lastly and I think equally as important to the extend internally we are hearing to this metric and to the extent that we are communicating this metric to the investment community, it certainly provides our shareholders with insight and to how we think about the deployment of capital and situations where we are advancing upfront payments to our pattern partners and it also gives shareholders insight with respect to the potential returns that we expect to return when we are utilizing shareholder capital with respect upfront advances.
So, that’s what I wanted to cover today I think with that I will turn it over to Jon Taub.
It’s a pleasure to be here and I will apologize in advance if the bags under my eyes indicate otherwise. I just got in from Asia yesterday. So, have a bit of jet lag and I guess for me the main culprit is my wife and I had a baby a few months ago so it feels like I haven’t slept for probably four months now.
So, what I’m going to do, as you can see here I think high level. I want to categorize my remarks maybe in two categories. I want to tell you a bit about the IP markets. And then number two Acacia’s place there in. And you’ve probably heard from Paul and Chip and Matt, Clayton for some time we’ve been saying the patents are an emerging asset class, and I think very clearly now, they’ve emerged. It is a vibrant asset class and we’re going to tell you a bit about that.
I want to also spend a bit of time telling you that being an early player and leader in this space really has several advantages and we’ll talk a bit about that in a minute. First, I guess little bit about my background. So, I came to Acacia little over six years ago. And I came to Acacia from Microsoft. I did various things for Microsoft over the years including relevant to our business, licensing, IP through an NPE and then also helping us respond to NPE claims against those. NPE’s called the non-practicing entity which is what some people call us responding to those claims for money against Microsoft. And from being on both sides of the table of this NPE model, this outsource patent licensing model I really saw the value proposition in this model, I thought it was incredibly compelling. And so years ago I thought that this model would become prevalent, I thought this model would actually boom.
And I thought actually I have done correctly that someone could really build the a billion dollar company out of this and at the same time fill a real market need as Matt described in this remarks. So, when I looked at the landscape, when I was at Microsoft thinking about okay I want to be part of this, I want to help make this happen, I look carefully and really I would say thanks to Chip and Paul Ryan the foundation that they laid, I thought that Acacia really was the best place to make this happen. And I guess I voted with my feet, and here I am.
So, when we look about this, why this market? This asset class is taking off. I think one factor is the fact that because of the shift to a knowledge economy, not just in the U.S. but in Europe and actually increasingly in Asia as some of our new colleagues Jaime Siegel and Hiro Seki will tell you in a minute. Because of this shift, frankly speaking there is just many more patent assets available and that has been a big boom to our business. And we believe this trend is going to continue. And again that’s going to propel the market; it will help propel our business. And that’s the take away for you all and that’s what you all care about. What’s the take away for Acacia? The take away for Acacia is that we have more and more patent assets available to us, we have virtually unlimited supply.
It’s not just about the number of assets, this shift to knowledge economy has also I think reflected in the increased proceed value of patents and other intangible assets. What’s happening now is the Boards senior management of pattern holders worldwide, they are all increasingly looking at patents as any other corporate asset and they’re saying, hey we should exploit this.
Take away for Acacia, we’re having more and more patent holders come to us and say, hey can you monetize my patents. So, in other wind in our sail, we expect this trend to continue out propel the market, out propel our business.
Now, this next slide actually takes a little bit closer look at this IT monetization is licensing market itself and you can see the numbers here, obviously it’s a huge market and the market really took off let say in the late 80s or early 90s. And I think it’s fair to say it boomed in the 2000s. And I think there are several reasons for this, beyond what I’ve mentioned already, I think this business technology and also legal reasons for this boom. And I will touch upon the first two. On the business side Healthcare companies; and Bob Rauker will talk a little bit about this in his remarks. Healthcare companies had been licensing their patents for money for many-many years. I think it was only really into the late 80s that hi-tech companies started doing the same. Before that hi-tech companies typically thought patents is like barter trade. I have patents, you have patents, let’s do a cross license, and then we go out and have a beer together. That was kind of it.
And then what happened was in the late 80s, you had a few pioneering companies that had rich patent portfolios. We had companies like Philips; we had companies like Sony, TI, Motorola. These companies changed the mindset. They said, hey, I would also like to get money from my patents. And then in the early 90s you had few other players come along like QUALCOMM, like IBM and they did the same. And they actually were very successful. And I think what happened was, after 10 years of this data, by the time the 2000s rolled around, you had a lot of other companies with patents, thinking, hey, if you look at this patent licensing; not only is it viable, but it is actually a very lucrative business on both the high end topline basis, but also to very high margin business, very profitable.
Technology wise I think what happened was, certainly in the 2000s, you had the roll out of many products and services, multi-featured, multi-function products and services, actually I will hold up my smartphone as an example. This is certainly a paradigm of that, right? This is, if you think of that, it’s my telephone, it’s my GPS NAV device, it’s my media player, it’s my camera, it’s a computer, and I think what happened was patent holders, they were early in these spaces, a little bit like Matt described in his remarks. I think what they said was, you know, great that’s fantastic, that this new type of Swiss Army knife device is proliferating, but I would like to get my money from my IP that’s embodied in these devices. And that’s indeed what they did. And so again I think that partially explains why this market has boomed. All of these trends, once again we think are going to continue. And it’s going to help drive the market. It’s going to help drive our business.
I mentioned some of these pioneers here; you can see some of them listed along with the numbers that they are generating, obviously lots of money. These are some of the most patent savvy companies in the world. And one thing besides just the money, that I want to point out here is, that these companies generally, almost overwhelmingly, if not exclusively get their money from licensing their patents. These companies generally don’t sell patents. And that leads me to, I guess the next slide. And I think at this point, let me pause, where we have come from, and just to remark so far, if you were a patent holder, you essentially have a decision tree. The first question is, do I monetize my patents? And as we’ve said increasingly, overwhelmingly, the answer is yes.
The next note in your decision tree is, how do I just do so; do I sell or do I license my patent? And as we talk about briefly, most companies say yes, and actually let’s drill into the reasons why? If you’re talking about patents that are being widely used in the market already, you will always do better having those patents licensed to all those players rather than selling to any one, almost without exception. So that’s one reason why patent holders generally prefer to have their patents licensed, the types of patents we are talking about. You own the finance space, one of the second reason, you know there is accounting benefits too. If you sell patents, that’s treated as an asset sale. That’s like a one-time drug benefit to the balance sheet, evaluation goes up a little bit and then, comes right back down.
If instead that money is coming in his license royalty revenue, that comes in on your P&L. That’s what leads to a long term growth in your company’s evaluation. And so for both these reasons patent holders typically prefer to have their patents licensed. And as Matt said we at Acacia offer actually an interesting hybrid option. This is typically companies would say, yes, get it, I like the licensing, that’s what I want to have done. But for various reasons, company may have a, the next few quarters are going to be weak. Whatever the case maybe, we really would like to have some of that money advanced upfront; or maybe over quarters, and no problem. If the numbers add up as Matt and Clayton described, no problem. We will do those deals all the time.
The next thing that we should talk about, I think, a place to actually whether you’re trying to license patents or you’re interested in selling patents. There is an interesting trend that’s been happening which is that parties are increasingly congregating together, likely deal parties. It used to be that a patent holder typically doesn’t know a whole lot about the value of his patents. He doesn’t know who the likely counter parties are. The patent holder would, kind of shock and blast his patents out to the world and say, hey, here are my patents, what can you do for me. And that model makes a lot of sense, again I think if a patent holder really doesn’t have a good sense of what he wants to do with his patents. What a reasonable value is. What if the patent holder doesn’t really know who the likely parties are?
As we’ve said this asset classes matured and I think both of these conditions increasingly don’t exist, or are they pretty rare. And really what’s happening in a patent deal space is we are moving to a new model. I would say it’s actually more like corporate M&A, or corporate business development which is you kind of know who the likely or some of the likely counter parties are and a patent holder is dealing one-to-one with that party or may a few a limited parties and they’re conveying, the patent holders conveying what they expect what they want to do with the patents.
There’s few reasons for this I am not going to go in all the reasons but one of them is that in any of these deals a patent holder has to convey a lot of sensitive information; things like you know the existing licensees to my patents the terms of those licenses. Just the fact that I’m trying monetize my patents that’s all sensitive information most patent holders want to constrain the dissemination of that information, so that’s one reason. Another reason is just in terms of speed and discretion. You really can impair the value of your patents or just kind of putting them up in the market and if you don’t get your deals terms the patents just kind of sit up there. It’s a little bit like a house market, if you’re a homeowner you put your home on the market and they just kind of sits there for months and months and months, potential acquires if you’re trying to rent the house, people start thinking and there must be something wrong with this house and you can really impair the value.
One example that some experts’ give of this is the Kodak monetization, what happened that was a bankruptcy process but you know those patents sat up on the market for a long, long time they had been appraised at actually $2 billion ultimately earlier this year, the Kodak only got 525 million, roughly a quarter of what the patents were appraised at. So again having those patents sit up on the markets for long time is not good so that’s one reason why patent holders like to deal with a known party a known trusted counterparty like Acacia. And so this helps our business. You know, we always said and I think we’ve actually reached the point that we want to be you know like the finance business let’s say a Carlyle Group or a Silver Lake, or outside of private equity, say a Berkshire Hathaway, right, we want to be the first place that patent holders turn to for premier portfolios and we want to have the first look at deals and I think we’re getting there.
So let’s come back to that decision tree, so we talked about if you’re a patent holder, the first question is do I want to monetize my patents since we said the answers resounding maybe these days seem to be yes then do you sell, do you license, we said licensing is the way most companies want to go, the next questions, how do I best licenses, do I do know my own you know with a law firm without a law firm or some of their agents but it’s on the party or do I do so at least in part, by outsourcing those patents to an expert partner like an Acacia. And again the trend is increasingly yes, I want to outsource to a partner and there is reason and there is reasons for that. Matt alluded a little bit to this in his remarks you know if you’re a small to midsize company and if you’re at a university or research institute you actually own 60% of all the patents you’re only getting 1% of the patent revenue out there that’s a pretty damning statistic it's not good and some people would say it’s not fair.
So this is one reason why certainly these types of entities were turning to folks to like Acacia, you know, big successful expert partners they can go do the licensing. But the question how do we level the playing field, let’s break that down a little bit and I’ve put some reasons on this slide and it’s actually not just small folks it’s actually large companies that we’re working with and as you know companies like Renesas, Rambus, lots of other companies. The reasons were all these same I think the wading of these reasons varies from patent holder to patent holder but basically I’ll start with number one on this list. Many patent holders are afraid to license their patents because they’re afraid of disruptions to their business, right, patent licensing is now described, this can be tough, these discussions can be tough there can be protracted negotiations and most patent holders they want their money but they don’t want to be disrupted they want to focus on their core businesses.
And so the ideas if I outsourced these patents to Acacia a real separate arm’s length standalone third-party, they go take care of the licensing and we keep the patent holder out of it. And essentially the patent holder becomes like a passive shareholder, they’re getting a nice stream of dividend checks from us and it’s very profitable for them. So that’s one reason. And the second reason is that we fund all cost, the money only goes one way from us to them. The second reason high level is that, we arguably can get better upside for a patent holder than they can do in any other and that’s major book in terms of the amount of money and also time to money. Reason why? Well, we arguably have greater scale we have more bandwidth more resources, skill set, expertise, and experience regarding monetizing IP, we have various assets including people, we have about 65 fulltime employee and we have actually about 200 other members extended family members of Acacia they’re not only on our balance sheet but these are mainly technology experts and attorneys that we can bring in and we do bring in for particular portfolios depending on technology.
So that’s powerful that’s over 265 people that we can bring to bear and that we do bring the bear. And (2C) I will talk about in the next slide but this is really important you know because we do this so much we really have a track record with licensees and then in some cases I think it’s fair to say relationships very powerful and I think there is very few patent holders even some of the most successful licensing companies that have this asset that we do. The final point here is that if you’re a patent holder with a large patent portfolio even if you would have to surmount all of the challenges that I am talking about so far, arguably you might get full value some of your patents but chances are you’re not going to get full value for all of your patents and the reason for that is diminishing returns. Someone may pay you for value, typically they are not going to pay you full value for everything that you own. So the idea is that these patent-holders are spinning some of their patents out to us because arguably we can capture full value for those extra patents in a way that they cannot. So, I mentioned some of our licensees and I think this is a very-very powerful asset that Acacia has. As you can see here we have licensed to many, many, many companies certainly in the tech space and increasingly in other spaces as well and you will hear my colleagues talk about that in a second. But the point here is that we’ve licensed to these companies not often multiple times, even if you are on the opposite side of the table as someone, we need to business with someone multiple times, it helps, right that helps get deals done. And really what we have done I think in other words is I think we have built trust and respect over the time and that’s one of our great assets, that’s one of barriers to entry. I think we have a reputation for being firm but fair and again that trust and respected did really takes time to build up that’s one of our key assets.
This next slide really just kind of shows a visualization, I think what you have heard from me and the other speaker so far, as you can see here being one of the successful pioneers in this space, what we have really done as we created a licensing platform and IP clearinghouse, as Matt said and this is something that both the patent-holders and licensees are benefiting from and using. And I think really what you can see in this animation is really, it’s a network effect what happens as we do more and more successful licensing we attract more and more patent holders, more and more blue-chip portfolios. If we keep doing our job well, we are going to keep getting access to these blue-chip portfolios. And on the other side, if you look at the bottom of the slide, from the licensee prospective, I think we are increasingly perceived as a reliable source of fairly priced and needed IP and I will use a bit of a metaphor. I think I've heard someone use this description, remember those complex products and service offerings that I described those are embodied in an IP stack and I think the way most companies think about it is that within that IP stack, there is a certain amount of IP that they can provide themselves organically through engineering and R&D that they do.
And there is a certain amount of additional IP that they can obtain through things like M&A inorganically but there still is going to be a gap, there is going to be some IP that they need licensing and I think that’s a very powerful opportunity that we have to fill and I think increasingly we are doing so again because of the trust and the respect that we’ve built up, we actually have some licensees and they are telling us if they would happily license from us in a non-adversarial way, they are telling us and these types of patents covering particular technologies with these characteristics and again that’s a very powerful asset, I think very few people in IP space have that. And the bottom line again for this slide is that helps get deals done, that knowledge helps get deals done and that in turn attracts new patent holder. So with that let me wrap up.
Really what you are seeing here, I think in summary is that we believe that our business has a wide moat, besides the network effect that I talked about, we actually have very fairly sticky relationships with patent-holders and licensees and we talked about some of the reasons why. We think also, you know to scale up as Matt described in his remarks both for any one technology area but certainly when you talk about expanding their other areas, you really need critical mass. What happens as you know once you develop the skills to succeed and you have the results to show for it, those skills and that market perception carries over to these new areas? And so we don’t have to reinvent that, we don’t have to build up our business from scratch in these new areas whether the geographies or tech areas we can do so at relatively little cause and I think our result show so far in these new areas are proving that.
Finally, let me say we believe that there is really synergies from being in these different spaces we think that there is real benefits, a lot of these technology is carry over across industries so as you will hear from Bob Rauker and I believe Alfredo Lezama in his remarks, if you think of high-tech in communications, lot of the technology is there pervade in the healthcare space and vice-versa and the same thing with the automotive space. So being able to be in these different areas is something if you can only enjoy once you r each critical mass and scale, and we are. The final thing I’ll say and then put it up on my slide, one of our biggest assets and one of the components of our moat is our people. What you all may not realizes that the patent licensing space, its actually, it’s a fairly small number of people, it’s a small club if you will, of people and the A team there in is even smaller and I know we are all delighted that we become really the destination, I think job-wise for the A-Team. And so with that, let me turn it over to my colleagues, thank you very much.
Good morning. I am Bob Rauker, Senior Vice President of the Medical Device Diagnostics and Life Sciences Group we call it the Medical Group for short.
My slides are going to be pretty basic they’re not going to be animated or so. But, and I want to apologize ahead of time we’re going to jump it around a little bit because this is an exciting field. I came here 2.5 years ago after talking with Chip and Paul and Matt and having contemplated such an opportunity over the last few years. But this is just a tremendous growth opportunity for the company. A little bit before I jump into it, little bit background on me have Bachelor of Science in the Chemical Engineering, an MBA and a Law Degree admitted in Pennsylvania, Massachusetts, Texas pending. I live in the Dallas area and work out of the headquarters.
I have 19 years for experience in the medical device and life sciences industry. I was in, the last major position was the Chief Patent Counsel, Global Chief Patent Counsel at Synthes, which is now DePuy Synthes and if you recall about two years ago it was the largest acquisition by J&J of $21 billion that was in the orthopedic sector, prior to that I was with Boston Scientific, Chief of their endoscopy. And throughout the years of Boston, I was also in the cardiology, the emerging technologies, oncology went through the whole things also in the federal affairs group.
As a side note from patent standpoint, I am also an inventor to help one commercial product that’s sold over in Europe in the spine area. And so very familiar with patents and the medical device, life sciences and work with the number of pharmaceutical companies too in the past when I was in private practice, it’s in trial work before I came into Boston Scientific, have appeared in several district courts and in federal circuit. Registered patent attorney and the last note down here is actually on the next slide but that was my fault. Just to kind of tell you how exciting this has been and I thought there is just a little bit of renovation around.
In the 14 months that I’ve been here we’ve already generated over $30 million in revenue with the medical device and if you listen to Clayton our hope is in 18 months to start doing something. We’ve been so successful. We’ve already generated over 30 million. And that includes also recurring revenue, which I know is a big important thing that people ask about.
One thing with the medical device industry is we are seeing the opportunity for recurring revenue and that’s because of the nature. You talk with the tech folks and you’ll hear about the energy. Medical device, each one of these sectors is very different. And that’s why our expertise plays out very well in this industry where there is a lot of royalties paid it is common to have recurring royalties.
To give you an idea of what the opportunity is pulled some data for you here. The medical devices, is a $120 billion year market, roughly about 30% of that is imported products. The diagnostics, and this depends on what you define diagnostics I think it’s actually larger. This is probably just the device sales I mean the apparatus capital equipment about 50 billion. And then obviously life sciences you get research tools of 37 pharmaceuticals of 359, biotech of 101 billion and just in the U.S. obviously we have a very large seed biotech area of 30 billion.
Altogether, you have a market vector, as we call it, that’s about $600 billion a year in revenue. So it’s a very large sector that we’ve entered into tons and tons of patents, well over 250,000 patents a year are filed just on these viz over 1 million issued patents in this area. Some key factors that we find in this industry make it exciting. There is a lot of broad range of patent claims. It’s not just device claims and we don’t have to get into real specifics on patents. But what makes it fun is that there are apparatus claims there is what method of use. There are methods of manufacture, composition, materials. Also because of that, it also requires expertise and that’s where the group that we’re working with, that I’ve hired had a lot of experience in this. And this is where you’re able to really find the nuggets and the value understanding how the products are made, how they’re sold, how they’re used. And that’s a key factor.
Obviously a major factor is royalty rates. The royalty rates in the medical device and pharmaceutical runs from 1% to 25%, very common to have 10% to 15% royalties. Every week we see Jury Verdicts, 10%, 15%, 18%. When I was at Boston Scientific and we lost several cases but the big one we have with stent wars if you remember those back in the early 2000 we were tagged with 24.5%, 25.5% royalties, it’s very common. Surgeons are paid 1%, 3%, 4%, 5% royalties. So it’s an industry that from a licensing standpoint people pay royalties, it’s a very common practice and so it’s a very easy thing to discuss with people licensing.
The other key factor about this industry, it’s an industry where you have whole range of inventors. You’ve got the large companies, the Boston Scientifics, the Medtronic, the Johnson & Johnsons, the AstraZeneca, the GlaxoSmithKline, but you also have leading universities, then you have a ton of surgeon, inventors and scientists. So there is a tremendous area for us to pull patents from, and we have already started pulling patents from the major corporations like Boston Scientific, which I think was our largest patent acquisition so far of over 1,000 patents to Dr. Bonutti and Dr. Bonutti is a solo inventor but has over 250 patents. What makes it easy with the royalties is that we're talking very high gross margins. My experience in the industry is we wouldn't ever do a product that didn't have at least a 75% gross margin. Most of it ran 80%, 90%.
And with that it allows us to do that high margin stuff that we have a wide range of opportunities on hybrid model as Clayton explained, some of its direct acquisition a lot of its partnering, and so gives us a lot of flexibility. Some unique aspects of the industry that we're dealing with are patents and treatments methods are used, a lot of the stuff that's interesting about this is that a lot of the inventions and especially the medical devices space and obviously the pharmaceutical and nutraceutical space is that the stuff is already known, people used to joke when we were at medical at Boston Scientific that you have the plumbing department that was urology and endoscopy, you had the orthopedic side was the hardware side with nails and screws. But what makes it nice for us is that when we're licensing and litigating stuff a lot of the technology is very basic to a jury, people understand that patent claims are very easier to understand, it makes licensing a lot easier. Obviously, when you shift over to the biotech it's more confusing and more difficult, but that's why we have specialists that we work with, and key outside lock rooms that they will talk about that as key with our licensing is to have, outside lock rooms they understand the technology.
And other factor that comes into play with us is the FDA plays a big role on the licensing stuff. PMA versus 510(k) clinical trials, we also have unique situation of OUS sales outside the U.S., there is a lot of manufactures here who make stuff here don't sell in the U.S. but outside because they don't have clinical approval, we can still license with them, we still litigate with them and that's another opportunity that's kind of unique to the FDA approved products.
Another angle that comes to play and this is actually the department of justice. We have to deal with justice. We have to deal with anti-kickback and Sunshine laws. A lot of surgeon and inventors like to come to us because we can license and they don't have to worry so much about anti-kickback laws. One of their concern is always especially with medical device and pharmaceuticals as when you license a product to them you are always concerned that will the DOJ see that as a kickback or something. We have become an intermediary, a third party. So it's a nice opportunity for us that we're the impartial party that's doing the licensing.
As I told you we have surgeon better start ups, VC and the tremendous high margins and royalty rates. Another thing that I didn't put on the slide that's having an actually strangely enough positive impact on us, is the affordable care act as many of you may not know there was a 2.3% tax out on medical devices under the affordable care act. And that's tax on revenue, not on profits. And with one company you are talking to that does a $100 million in revenue, they do about $8 million in profit; they are getting $2.3 million tax on that, roughly 30% of their profit is being tax. So they are coming to us for ways to how can we generate revenue some revenues? And so they are taking back. Companies that probably wouldn't have thought about selling their patents or partnering with us are now saying how do we come up with this to make up this tax?
And we have a lot of people calling us now, it's an interesting angle that we never thought would be a value to us, but it is helping us. It's a big hit when you get into the Boston or the Medtronics or the Strykers, it's a giant hit. It amounts to an average about 10% to 15% of the profits, it's a big hit. So they are looking at ways to cut budgets legal departments and other things. And they are coming to us for solutions.
So the Acacia opportunity. What I like about this is that having worked in the industry; we've seen so much opportunity with patents from the Bonuttis to Boston, they are just huge partnering opportunities. We have tons of stuff right now sitting on the plate that we're going through. From large corporations to surgeon inventors, and there is a wide, wide range of technologies. If you look at it it's not just a few major players, there is an orthopedic industry, there is the cardiology, there is the diagnostics, every one of those have unique large players and small players which give us an opportunity to continue to grow the business. We just made an offer to an individual who has considerable experience in the supplements, and the managed industry, that's another area that 'we're pushing into in this area.
The markets are obviously rapidly growing, medical device in these key U.S. markets and OUS outside the United States too. Within my team alone I think it's probably bigger than that, now its couple higher, it's probably about 70 to 80 years of experience in the medical device and life sciences. We have people from the pharmaceutical; we have VCs of R&Ds from some of the medical device companies are outside litigation counsel, because we have identified larger portfolios we have much larger firms such as Dechert & Strunk are now working with us and continues to, they wouldn’t take these cases unless they were sizeable cases and opportunities and with that we take on these larger firms, that just brings more people coming to us and say, 'wow, they've got these big firms working with them'. They've got these large, as John said, we pulled in these larger portfolios and now just as more and more people come, hey what about this, what about that and of course as Clayton said we have capital and the reputation. And one of the things I should add that hasn’t really been talked about yet is that we’ve turned down some deals and one of the things that was early on when I met with Chip and Paul which I really appreciated before I came on board here was, we have a very transparent process, we tell people this is where we think there's infringement or there's a licensing opportunity, hey we don't think there is something here. And we're very honest, straight forward, this is where we bring the value, it's a partnering model, we tell people we think it’s worth this. They may, if we can't come to some reasonable agreement on what that value is, we're not going to do the deal. And people appreciate that. And I just had somebody that we couldn’t do a deal with, we just couldn't reach an agreement on it, and lo and behold about a week later I got a referral, he had referred somebody over. Says, hey, we couldn't reach an agreement but I liked all these guys, we're very transparent, they told me what is was and ours is more of a validity issue with them but they appreciate that we're straight up, honest and that to me is a big key difference I see with Acacia is that, and as John when we litigate with people we're straight forward, we're transparent, we're honest with what we think is the right royalty rate. That's one of the reasons why Boston turned around and did, they were actually a company that we had several lawsuits with. And in the end they turned around and wanted to sell us a very large, since they sell partner with us on a large portfolio. And that's because we're straight forward and transparent and I think that's a big, big, plus that this company has going forward. Sorry, just forgot my notes.
And I think another one that's interesting that i said I'll put it on here is the recurring revenue, we actually with some of our licenses right now we do have some recurring revenue, another thing that's going on with us is we have; for example Dr. Bonutti is one of the cases we have refiled, 17 lawsuits now between the Boston Scientific and the Bonutti portfolios alone, we have other patents the one we are focusing on, the unique thing is for example with Dr. Bonutti which has been a big plus driving value for the company is that we needed this partnership model, one of the things that Dr. Bonutti wanted to do, and if you're not familiar with Dr. Bonutti, he's one of the leading knee surgeons for Stryker, does over a 1000 procedures a year, he's on their medical advisory board, invented over 250 patents. He had licensed a few companies but wasn't being very successful, we ended up partnering with him, what that's enabled him to do and I see this as we continue going forward, if some of the hybrid, we did a hybrid model with him, what that allowed us to do was to fund new technologies that he's developing and he's now developing some suture anchor technology, some orthotic technology and there's a license with that, so there's a revenue generating with that, there's also some ongoing licenses we have right now with Biomed and Arthrocare and some other medical device companies. So you are seeing with this group, you're starting to see the recurring revenue, you're seeing us investing in technology so we're not necessarily a manufacturer but we are funding new technology, new development and that's creating new markets for us, because these thought leaders come to us when they want to continue their projects and it’s a great opportunity for them, we’re not taking equity, we’re providing them the capital to start with their new industries and they'll create a market and we'll have the patents to it, so it's a nice recurring revenue projection for us and that's pretty much what I have in place I don’t know if there's any questions or anything, I don’t know what the timeline is on this.
We'll take Q&A at the end
We’ll take Q&A at the end then, so then that's pretty much it, thanks.
Good morning, my name is Alfredo Lezama, I'm Vice President of Business Development with Acacia, and very pleased to present to you our focus on automotive and what we'll try to answer is why automotive and why will Acacia be successful, I'm joined by David Rosmann, and I’ll let David introduce himself.
Hi, I'm David Rosmann, I joined Acacia, I guess I'm sort of one of the newer members I've joined going on two years now, my background is I have undergraduate degree in applied physics, biomedical engineering and I got a masters in electrical engineering, I have a JD and then I ended up working for outside law firm and I was 10 years of head of litigation at Broadcom and during the course of that we engaged in literally 100s of licensing activities dozens of trials and culminated in a $1.2 billion settlement from probably the largest IP player in the world QUALCOMM.
So, a little bit of my background I joined in 2011 and my background as much more from a technology perspective I have electrical engineering degree, a masters in business administration and masters in science of information technology. And I spent 15 plus years working for semiconductor companies and mobile communication companies including TI, Marvel Semiconductors, NextWave Wireless and LG MobileComm. So, in the arc of my career what I have always tried to do is participate in the ramp-up of new technologies in the late 90s it was CDMA and the early 2000s it was the deployment of application processors into mobile phones in the mid-90s it was a 3G deployment towards the end of the decade it was 4G and the early part of the second decade it was the ramp up of smartphones specifically android smartphones with LG.
But really the opportunity of participating in the steep ramp up of IP monetization is what brought me to Acacia much more of a pure hunter if you will and to kind of reference the point that Matt made I am pretty passionate about trying to find those needles in the haystacks and so that’s what brought me here to Acacia.
So in the automotive space it’s probably one of those haystacks that’s now becoming an incredibly compelling. The auto industry has recovered. It’s vibrant it’s growing again and it’s largely because where it’s experiencing a paradigm shift where new technology is being infused from the very high end vehicles to the very low end vehicles so couple of supportive bullet points here. A high end luxury car today has over 67 microprocessors that are doing a variety of different data processing has over 200 sensors now that’s a lot of new technology but that technology is proliferating into the lower end of the market as well. And so there are tremendous opportunities and we are seeing these dramatic changes in the auto industry something that we have not seen in over 50 years and so it really represents a tremendous opportunity.
And David jump in with any color like you have here along the way. So what’s fueling this new innovation into the automotive industry is largely led by what we call connected cars there is essentially three types and what we are seeing is an explosive growth in connected cars certainly recently but in the next five years and in the next 10 years you are going to see a very steep ramp up of penetration of connected cars. About 83% of those vehicles will have what’s called embedded connectivity. So things like the GM OnStar system, where both the connectivity and the intelligence of that connectivity are integrated into the car. About 10% is what’s called tethered and that’s things like the Mercedes Command is an example of that and that’s where the intelligence or the processing is embedded in the vehicle but the actual connectivity comes via someone’s smartphone or mobile device. And about 7% of the market will be what’s called smartphone integrated systems where both the intelligence and the connectivity is largely going to rely on the mobile device that the consumer brings. But the important piece is what this connectivity enables and that’s a new plethora of services around things like safety and security, crash notification, emergency response, theft alert, infotainment, of course having your news your weather, your social networking, variety of other applications streaming music navigation and traffic which is pretty prevalent now and remote diagnostic and maintenance systems. One of the threads that you will see that connects all of this is the necessity to do a tremendous amount of data processing and when there is data processing, there is processors and so that really opens up an infusion of new technology that’s not coming from the traditional automotive suppliers which means the intellectual property is not aggregated just in a few auto makers. It’s coming from a variety and a very vibrant outside ecosystem of companies that are supplying that IP.
Yeah just to build on what Alfredo was saying for 50 years the car companies have typically made fairly incremental advances in the technologies that they are applying in a car. Drive train technologies there has been a lot of criticism of cars is why don’t you make those more secure you could save many, many lives if you applied new technologies you could make car theft a thing of the past there is no reason that a car should be able to be broken into if new technologies are applied and this is just something that the car companies have decided traditionally not to engage in so they have been very resistant to incorporate new technologies. Secondly it’s been a vary because of that slow moving incremental technology there has been a very, very crowded arc field that’s developed in the car technology. So if one wanted to go bring new technologies to bear in the drive train space. You were dealing with 20 years of history of patenting in that area. That is absolutely changed with just within the last three years, we have seen all of these technologies not come from the car companies but come from outside the car companies in the field of sensors, in the field of microprocessors and areas of driver assistance and as Alfredo pointed out and in the incorporation of hundreds and hundreds of microprocessors and sensors that have been put into these cars. Did this come from the car companies, were these organic, absolutely not? These are coming from outside sources and which the car companies simply don’t have their own IP and so the way to analogize this and I will go back to my QUALCOMM experience is QUALCOMM was an expert in developing voice cellular air interfaces. They were the bully on the block. They were clearly the number one cellular holder of IP for voice communications in cell phones.
And so when they entered into the smartphone space, all of certain their phase with having incorporate technologies that related to multimedia technologies to web surfing, to voice which was their strong point but also into Bluetooth technologies and the Wi-Fi technologies and the video streaming and the audio streaming and the application or in the incorporation of different applications and so they took a very broad leap into areas in which they simply did not have a strong technology space and so that led them from being a company that was historically 100% a net importer of royalties into a situation where they ended up paying my company not just the rights for their entire portfolio but $1.2 billion on top of that simply because they were taking this lead from their traditional technologies into the new technologies, that’s what’s happening with the car space.
Unidentified Company Representative
So, we went through a few examples of this type of new technology and then we’ll talk a little bit about Acacia’s position to capitalize on that today and in the future. One good example is car to car and car to infrastructure communications, there is a U.S. Department of Transportation funded research project that’s going on in Ann Arbor, Michigan and this is a great example of the necessity of connectivity of sensors and real time data analysis to merge so that in this system where the cars are talking to each other and they’re talking to sensors and the infrastructure and the date is been analyzed in real time and fed back into the vehicles, fed back into the infrastructure it helps to optimize the safety of traffic, it helps to optimize the traffic patterns themselves and it helps to optimize the fuel efficiency of the vehicles. And so this is a great example of those three components coming into play into the real world and its happening today and Ann Arbor Michigan.
We talked a little bit about the amount of sensors that are loaded into the vehicles and the more and more sensors a vehicle has the more necessity it has to actually process the data of those sensors, this is just a very small subset otherwise the graphic it’s little bit unruly but other sensor plus data processing elements that are pretty common in vehicles now and that are making their way down to the mid-tier and low tier so the volume of these vehicles in the space is growing or things like electronic stability, electronic traction, active suspension, adaptive dampening, direct-steer systems, adaptive braking, braking assist, multistage airbags, radar base, pre safe-breaking, tire pressure monitoring systems, rain sensors for break adjustments and wiper adjustments and why do I’ll probably going through all that list and again abbreviating the list, I could go on for another five minutes just listing out systems that are using sensors plus data processing, it’s because each one of those elements there is IP that is being created for how to utilize the sensor. The design of the sensor and the data processing that’s required to make something useful and to provide something useful to the n user from what the sensor is sensing and what the processing of that data is yielding.
Good example for that, for example the driver assist systems in vehicles. So, today you have vehicles that have 360 degree views when you activate the camera system of the car, you can actually get a 360 degree view , you’re infuse with sensors around the cars, they’re going to tell you everything from how to go ahead and park. So, now parking assist will actually measure the space of the parking space and calculate how you need to steer the vehicle to actually effectively park. Obviously they’re working on ways for automobiles to automatically park themselves but today you can buy vehicles that have these parking assist capabilities and another very compelling one in addition to what’s listed here in this diagram is night view which allows for pedestrian and object detecting at night up to 500 feet way and that’s very compelling, it uses infrared beams and the cameras to form an image of what’s happening 500 feet ahead of you. And those are real life examples.
Where some of these are coming into play in the future are now going to include biometric capabilities. So they are starting to come in, things that will measure the attentiveness of a driver, and give him different queues or potentially even slow down or stop the vehicle. If the driver is fatigued, it can measure a variety of different driver conditions and give the appropriate levels of alert. So that’s kind of the next wave.
And other safety in driver assist technologies that are very prevalent in today’s vehicles. Already we have the stability control which applies different torque vector into individual wheels so that it can help correct under-steer or over-steer. We have adaptive lighting technology. So it swivels the headlights as you’re turning, it dynamically adjust the shape of the beam of light that’s coming out. Your anti-lock brake systems, of course those have been around for a while and that’s a great example of a technology that started out on high-end vehicles. It is now prevalent all the way down the low-end vehicles.
And then of course pre-crash sensing which is something that’s going to save a tremendous amount of lives with the vehicle literally senses in the seconds leading up to an accident, that it’s going to be involved in an accident and it does variety of different things to the vehicle to prepare the vehicle and the occupant for that accident. Things like tightening the seatbelts, adjusting the seats and the headrest, closing the windows, unlocking the doors and of course what’s listed here where the car actually starts to react to the crash before the crash happens. So again just a few examples of how this new paradigm of infusion of new technology and as David mentioned, this technology not coming from the traditional auto manufacturers, which means the opportunity for IP and the disenfranchise IP is therefore occasion for the taken. I think we will transition a little bit…
Unidentified Company Representative
Just to add on what Alfredo was saying, I worked at the Space Communication Group of Hughes when General Motors bought them in the 80s. And at that time that that transaction happened there was a great sense that General Motors was going to take all these advanced space craft technologies, forward looking radars, night vision, heads up display and different techniques that had been developed for the defense and incorporate them in the cars and make them available to make these smart cars. It just did not happen. There was only, the tremendous inertia in the car industry, resulted and that was pretty much a complete value and let the divestiture of the Space Communication Group of Hughes from General Motors, and I think it belongs to Boeing right now.
When we brought in this portfolio that we are going to talk about right now, we have looked at it a couple of times back in 2010, and that was developed by a scientist who had spent 30 or 40 years in the automotive industry, David Breed was an MIT in Columbia educated scientist, who would work within the car community to try to get his technologies developed. And this is a typical scenario. We see it’s not a guy sitting around in his kitchen with an idea. He as a seasoned professional who had devoted his life to car technologies and manufactures, a very-very forward looking man, who spent 20 years working with the car companies to try to get them to adopt these technologies and then participate in the benefits of that.
And as we see over and over and over, the car companies would engage, work for a year and a half; make a decision that now we are going to develop this in-house, but thank you for your time. And long behold two or three years, four years later, his technologies will be imported into these car companies. So Dr. Breed transitioned from that model into, we will also just go monetize on my own. I have, that it wasn’t a small portfolio, you have two business going with 300 patents and a range of technologies, and he lost on his own litigation campaign, underfunded, under expertise, he go to small IT firms, try to wage battle against the General Motors and Chryslers of the world and with predictable results. He was crushed. So after struggling with that for about seven or eight years he came to us. And we took notice of all the different technologies, at least 14 different technologies and says these are great, but is anybody really going to be doing this in the timeframe that we are going to be interested in. And I think that was probably 2010-2011.
The 2012 model years came out and it was shocking to see how rapidly these new technologies were being incorporated into the cars. Cars would actually drive themselves, would warn as you make a lane change as there is someone there. The car would actually takeover partially control. Sophisticated navigation systems that would not only tell you where you are supposed to go, but would give you additional information as you are traveling your routes. This has all happened within the just past two or three years. And it’s happening across the industry because the companies are now using these functions to differentiate their cars. We are seeing something on the order of $5,000 of the bills of materials of new cars are based not on the traditional core technologies of the auto companies, but on technologies that have come from outside the auto industry. the auto companies simply do not have strong IT positions, so this traditional incremental step of moving into technologies of the very proud and prior art field, the auto companies have now jumped in to sea of IT in which they simply did not develop it and they don’t have control and that’s presents tremendous opportunities for us,
So all of these far up technologies that we saw in 2010, 2011 we’re now seeing deploying everywhere some of those are as Alfredo has mentioned, active accident avoidance the car will actually now prevent you from getting in to an accident whether there is a line change or backing up or even noticing ahead whether or not you’re going too fast to come around the turn and it will take active steps to do that, sophisticated airbag deployment technologies which will sense a car collision coming up not just wait until the collision was happened but will actually take active steps to tightening your seatbelt to bring your headrest forward to brace your car for an impending collision or to possibly avoid it.
I think we have several of them listed, listed right there, these are all areas within Dr. Breed’s 300 patent portfolio and 25 to 30 pending applications which we’re actively pursuing right now and launching against both the automotive companies and the suppliers and interesting dynamic in automotive companies is they don’t have a history of paying for patent licenses simply because it’s such a crowded field and its traditional technologies they develop. That is changing. That is changing because they recognize now that they simply don’t control these areas and so we’re seeing tremendous interest not only among the auto suppliers but auto manufactures but their suppliers, remember the car companies have a captive group of suppliers, and they’re typically very, very aggressive and pushing down their liabilities to the suppliers. That has opened up a whole dialogue that we have all of the auto suppliers to say hey, can we do something here to allow our manufacturers freedom to operate? The manufacturers typically are integrators. So the real benefit that we’re seeing immediately right now is the auto suppliers stepping forward and saying yes we would like to clear our customers so they can incorporate these technologies.
A broad portfolio one other aspect of what we’re doing with Dr. Breed’s portfolio with American Vehicular Sciences is he simply didn’t have the resources to effectively continue to prosecute his existing portfolio. Very limited resources so practitioners haven’t prosecutor, we’re able to bring him into now a very, very sophisticated group of patent prosecutors to further mind his portfolio and then he’s taking the revenues that we’re generating for him to continue his invention, so this is an guide that sat around his kitchen table and had a few good ideas, this is a man who devoted his life and his carrier to developing far reaching far looking IP that he is simply unable to monetize that is being used across the board and working with us he’s able to now finally and he is in his late 70s right now finally realized the benefits of all the technologies that he’s brought there, he couldn’t do it through developing he couldn’t do it through monetizing on his own but he is doing it by working cooperatively with us to really realize a benefit and finally realize a return on this.
And we have a couple other portfolios that we’re going to mention Rambus portfolio which regards LED lighting of different displays these are being incorporated and external to the car taillights, displays on the car, and heads up the slides and we believe all the cars are incorporating these technologies as well. These are core auto portfolios but what we’re also seeing is some of our other portfolios within Acacia like the cellular technology almost all the cars right now are beginning to incorporate cellular technologies to report accidents to report on maintenance diagnostics back to the repair shops and it’s becoming again a differentiating feature particularly far for the high end cars. We’re stepped in that technology so this is an area where the diversity of our portfolios that we have in another space that’s now coming to play in automotive space is going to be a secondary source of revenue because the car companies are simply not going to be able to avoid the responsibility for paying for the IP for these new technologies.
Unidentified Company Representative
So just to wrap up I think hopefully we answered the question why automotive because it’s a growing market it’s been infused with new technologies and why is Acacia is going to be successful because we have the right portfolios in house today to take advantage of that opportunity and we have the right focus and emphasis to continue to bring in additional portfolios that will give the automotive segment within Acacia many years of growth, thanks you.
Unidentified Company Representative
I think we should take a break. Hi guys, we are going get back on track and on schedule. We are going to get going now and we are going to introduce Charlotte Rutherford, who was the Chief IP Counsel at Schlumberger. Charlotte is going to talk to you about our newest sector, our energy sector.
Well I am very pleased to be here today to talk to you about a very exciting opportunity at Acacia. It concerns the equation of the energy sector. By way of background, I have a couple of degrees, bachelors and masters in engineering both in civil and chemical, specializing in those areas as well as MBA through an executive program with the concentration in finance and also a law degree.
Formally, as Chief IP Counsel at Schlumberger, most of you know Schlumberger is the largest oilfield service company in the world also Chief IP Counsel at Conoco and Colgate-Palmolive. I also was senior Counsel at Shell Oil, Honeywell, Amerada Hess, and a spinoff of Pfizer. I have experience in oil patch for over 30 years and all areas of the value chain. So that includes as an R&D engineer, in exploration and production, also as a process engineer, so I have a lot of experience with downstream, as well as the patent attorney, I am registered before the US Patent & Trademark office; happen to be the licensed in eight jurisdictions and also a lot of experience as a patent litigator. I also have a proven track record in terms of taking patents in the energy space and turning those into money through monetization. Couple of specific examples, I was responsible for a win last year with Schlumberger, we had four patents and we turned that into $106 million in the seismic space. Also when I was at Honeywell, I was a General Counsel for division responsible for power management and advanced magnetics. I made more money licensing the patents in Asia than they did on making the product.
Why did I join Acacia? Well, I am on day 56, I jointed Acacia on May 31st, and I am very pleased to be here. I saw this as an opportunity to monetize IP and energy sector. As I mentioned, I have got a track record of successful doing that and so I saw Acacia as an opportunity where that is the business model to be able to work with a group of very talented individuals, whose model and focus it is to monetize patents. I have a long time in the energy sector. I think the time is right from monetization in oil patch. I was hired into Schlumberger in 2006 by way of background, the reason Schlumberger hired me was because they wanted to set up a monetization an enforcement program, they had never monetized patents in the energy sector. I was responsible for one of the largest IP patent departments in the world at Schlumberger with one of the largest portfolios. I was successful in doing that and I was promoted to Chief IP Counsel after doing that.
Also, another reason for joining Acacia is a the C suite, especially Matt and Chip and Paul as well as the other talented people here in this room and in Acacia family, they very much impressed me as being part of the organization where it’s all about monetizing the IP. And then finally the reputation of Acacia, so I quite frankly didn't have a lot of experience with Acacia, having spent so much time in the energy sector, so what did was I went on to my network, network of blue chip law firms and blue chip companies and I asked them as part of my due-diligence what do you think about Acacia, what has been your experience and I was surprised that unanimously I heard the same story from every one of them and it was the reputation, it was the professionalism and their force to be recon with, that’s what I needed to hear.
So, energy team, we are going to be in the energy capital of the world, surprise, surprise, Houston, Texas. We are going to be opening an office right after Labor Day in the Houston Galleria area. My close energy team is going to include a VP licensing executive Gary Fishman. Gary has more than two decades experience in the energy area, working with blue-chip law firms like Winston & Harry, doing IP monetization, enforcement and licensing. Gary also has an MBA, so that’s great we are going to be able to provide a business prospective to this monetization program. We are also going to have an August joining us a VP of business development. This gentleman is coming from the private equity side, he has energy experience, computer science background and of course an MBA, and we are excited to have him join us. We will be adding VP of engineering hopefully to join us in August, and then we picked up paralegal from Weil, Gotshal, who most of you know as another firm.
So this is the team that will start in Huston. Of course we’ll have the opportunity of leverage of the talent and the resources that -- provide. But this is the team that will be in Huston starting now. So what do we see as opportunities for energy as it relates to Acacia, both in terms of the opportunities and the drivers. We see three key areas that we’re going to focus on initially; oil and gas, alternative energy and smart energy, in the oil and gas base, two areas that we’re going to focus on in the digital oilfield arena or seismic and also real-time information. In real-time information we’re talking about the real-time gathering, processing, analysis interpretation of information. As it relates to the oilfield industry, in particular reservoir characterization and production is that by applying these technologies and the innovation to the oil and gas space in the area of digital oilfield that the opportunity to increase the NPD on our oil and gas assets could be as much as 25% that is significant.
In the alternative energy space, on unconventional gas plays much of it is in oil and gas, don’t think of that as an alternative energy but it’s often reported as that. So we’re looking for opportunities also for plays in unconventional gas space but also not to rule out the possibility of wind, solar and bio-fuels.
And then the third area that we see an opportunity is in the smart energy space. This is in an energy management and more efficiency with regards to the energy that we do handle and we do produce. In the smart energy space a recent survey of CEOs in the energy arena said that they were going to invest up to 14% on their capital investment in the next couple of years just focusing on energy management and smart energy plays. We see this as an opportunity for Acacia to be evolved. The drivers that we see are shown here including automation efficiency production and finally environmental.
A recent survey in 2013 of senior energy executives said that ideally what they want to use is automation to improve the process efficiency, so as to achieve greater production and efficiency in energy management. We think that’s a ripe opportunity for Acacia and it also give us a chance to leverage on some of the other expertise in portfolios that you’ve already heard about today. And then finally in environmental front, we all know that energy companies need to focus on environmental they have, they spend on that. It is the technology differentiator.
So in the area of environmental, we’re talking about environmental protection, environmental containment and environmental remediation. So we see those opportunities for Acacia as well. So we see it as an exciting opportunity. We ask that you stay tuned for further development. But we think we have an exciting place to be. We think that we can leverage all Acacia’s portfolios and also Acacia’s expertise. It’s a right time for monetization of IP and energy sector and Acacia is in the right place at right time to do that. Thank you.
Unidentified Company Representative
I was going to tell you about international opportunities but I think based on this morning’s experience I think we’re going to open a new vertical in construction and power tool.
So I joined Acacia like Charlotte just about two months ago after 15 plus year stint at Sony Corporation of America right over here in New Jersey. And Chip and Paul tried to hire me about six years ago and it wasn’t the right time. And now this year Matt came to me and looked at Acacia and where they were now and saw a great opportunity both for Acacia and myself and I saw the transition that was taking place to really position Acacia to take advantage of its strong financials. And the market is right in the international sector, particular for opening up some really nice portfolios as industry becomes more accustom to monetization of IT.
So at Sony, I was Vice President and Senior IP Counsel and we represented Sony to the country in Taiwan, we had an office in Taiwan. And we stepped that up and we did that so we could be right on site to monetize IP to the companies that were making technology.
Sony was one of the most litigated companies in IP space over the last 15 years when I was there. When I started we had one patent litigation two years ago we had 86 current pending litigations in the IP space. Apple was the only company to exceed our patent litigations, and we do that with a team of four people. So I have managed more patent litigations than more patent lawyers will see in their entire career over the past 15 years, never with a bad result.
During my time I was Chairman of the Board of MPEG LA for those of you who don't know who MPEG LA is they are the largest patent pool administrator in the standardized patent licensing space. And while I was Chairman MPEG LA collected well over $1 billion in revenue while I was Chairman. But behalf of many patent holders around the world there the peak was 600 some patents and 26 companies that are license, Sony was one of the owners, that's how I was the Chairman. Prior to my joining Sony I spent seven years doing patent litigation at couple of big patent firms in New York City, Fish & Neave, and Kenyon & Kenyon and I got a lot of exposure in court room on some big cases starting out with a couple of cases against Intel, back for a company called Cyrus, that's no longer around. And I was an engineer before I went off to be a lawyer.
So Hiro will tell us something about himself.
First of all this is a great honor to attend this important conference. And then I just joined Acacia this July, so I am very, very fresh person here but, I got this great opportunity to talking to important people, I appreciate the team of Acacia management as well. My background is pretty boring in terms of the careers, because Japanese company employees usually don't move the companies, but I had a very exciting experience in 30 years of business in life and dedicated to the whole IP operation. I started the IP operations businesses in Hitachi back in.1984, and then I spent almost 20 years for a variety of IP-related work, a variety of scope of technology field and also then I joined Renesas after Hitachi; then 10 years I spent there for overseeing all the IP-related work, Renesas (inaudible) so I have done a lot litigations, licensing and also IP asset management evaluation as well.
I am also registered patent attorney in Japan; I got a Physics background as you see from the sheet. And then the most importantly the reason why I moved, decided to move the company the case is that last few years at Renesas I had a very pleasant certain experiences with all the excellent people at Acacia. We had a very good relationship between two companies and that basically benefited, brought a tremendous benefit to Renesas. So that was a great motivation for me to join Acacia so that I can bring the similar benefit to all the possible grants in the future, both here and in Japan. So that is my background.
Unidentified Company Representative
And let me just add because I think even than numbers the message we really want to send today is how excited we are those who have recently joined, the opportunity that we have here at Acacia, because none of us would have walked away from the position that we had, unless we saw the opportunity here to really grow this business, both with the team that they are building at Acacia and with the global IP space. And it really is just starting in terms of opportunities. So on international, you could see that there was a real transition in 2008, which was the first time a foreign originated patent in United States exceeded the number of US-origin patents. And the trends continued all the way up to today. And the expectation is that that will continue to grow. If you see, this is just; we tried to pick out the first top 10 or 12 countries. Japan has 902,000 patents issued in the United States since 2005. That's a lot of patents.
So I heard some questions earlier about what was in the market dried off. How are you guys going to get more patents? Well in Japan alone which is really an untapped market, almost a million patents just in the last seven years. Germany is another big target, 360,000 patents. As my experience in Sony I have though we were some of the leaders in global IP enforcement both on offensively in forcing patents and defensively defending against patent claims and we have a number of global patent wars and understanding the global markets in terms of what the tools are to enforce patents over in Europe and over China is really a skill set that we have here at Acacia that not many other people out there have, it's really a small community.
From here I would like to focus really on the Japan situations. This is the top maybe 14, 15 Japanese companies who gets granted the U.S. patents in year 2012, '11. As you see the big name hi-tech companies listed and those are waiting for us for the monetizing to their balance, for information number 26, from the third from the bottom, that is my ex-employer and listed at about a 1,000 balance, and we of course had a great opportunity thanks to Acacia to monetize part of those balance.
Unidentified company representative
Sony's number four, used to be, strive to be in the top five for many years, Sony was really a leader in IP enforcement in Asia, not many companies in Japan had anything close to the monetization team that we had at Sony, but many companies in Japan looked enviously at us and wanted to be able to do that, the closest most of them can come would be to join a patent pool often that Sony helped to organize and they were able to generate revenue in that way, but since I left, people have been reaching out to me and my former colleagues from Japan from other companies who were now very interested in finding out how they can monetize their IP by partnering with me in Acacia.
Thank you, Jamie. And this is the opportunity we see in Japanese market. so number one, Japanese companies are exploring all of (inaudible) new revenues, the economy is still weak in Japan and that's going to push all the management people to think about that, why don’t we include some cash flows situations, conditions, so the patents, the one with the most useful co-product's that's monetized bring the monies for them so this is the current trend. and number two, Japan is moving further away from (inaudible) and more to a (inaudible) based company as we saw in the state a long time ago, Japan is also following, I believe it's following a way that used to be changed, and as you see even for the semiconductor business sector the manufacturing facilities moved away from out of the Japan and then mostly done in Asian countries, so Japan is now focusing on so called the fabless business model which we don't have any manufacturing rights but instead we focus on the functionality of chips, design of chips and so forth, so that is the trend and in that case we believe that Japanese companies are more conscious for the IP licensing arena. So that is also another reason that we see the weak opportunities in Japan.
And number three, Japanese companies have recognized the value of the non-core IP available to monetize, so this is somehow relating to the number one reason, because the competition is getting hotter, so management people identifying which is core business which is non-core business for each companies, so we have a great opportunity to see all the patents, IPs coming out of those non-core business field getting into the IP market.
Unidentified Company Representative
And for those of you that aren't familiar with Asian culture in Japan it’s very commonplace that if you're not a first tier company, the work week is longer than five days and second tier companies will often work Saturdays as part of a six day work week because they have to try a little harder to get up to be that top tier company and that's why there's going to be a big opportunity as other Japanese companies look to emulate the models that the successful Japanese IP players are doing, they're going to try a little harder, they don’t have the tools to do it internally so they're going to be turning to us as a good option.
Yes, and lastly number four, most Japanese patent holders generally have done a (inaudible) related IP license and demonetizations, so this is the culture oriented I think result but this is the reason why we can have valued patents for licensing of course.
Unidentified Company Representative
Offensive licensing was not something that's generally culturally okay in Japan, at Sony I brought the first offensive licensing litigations that they'd ever brought about seven or eight years ago against Vizio and Westinghouse enforcing our TV portfolio, and that really showed our management in Sony that you could effectively use litigation as a tool of business and over time we were able to prove out that we were able to transition to non-litigation licensing by making investment into litigation to establish reputation among the targets.
Okay this is our last slide and this is the reason why we see great opportunities for Acacia.
number one, recognition in Japan, Acacia success as a patent holders and licensees, this is something I don't to de-phrase, Acacia established that very super spread its status in licensing sectors and the people, all of Japan companies are recognizing that.
Number two, Japanese culture is less inclined to litigate (inaudible). This is, Jay just touched on, but this is true and then now but because of the reason I mentioned in terms of the earlier slide, management people are really under the pressure to monetize those IPs so this is the reason why we think that those are benefiting Acacia as well.
Number three, they prefer lot of presence in the long term relationships, I'm going to set up and open the Tokyo office representing the Acacia operations so that I can day to day communicate with all the clients and the future clients to promote our businesses. Japanese as you may know that Jay may know very well very-relationship based society and even in IT community in Japan legal settlements of either competitors or no competitors still we have a close relationship day to day communications, and we value that. So, I will be there to communicate, getting that communication or I am still already in there but so further strengthen the communication with those people there. And the number five Acacia is possibly doesn’t experienced the international IP license company this is what other people already mentioned so I don't have to spend any time on this.
Unidentified Company Representative
So in closing let me just point at Japan that Hiro and I together just have spent 15 years at Sony I was very much an insider my first trip to Japan for Acacia last month was about my 120th trip to Japan and that’s because I early in my tenure at Sony I recognized the importance of building relationships and as a result of those relationships I was able to function as chairman among a bunch of Japanese companies I represented multiple Japanese companies and standards efforts in China also. But number two is kind of interesting point because just as in Japan the cultural issue of reluctance to litigate really translates to a global issue in the U.S. and elsewhere and it’s about why would companies use Acacia and it’s because often times and apart from the non-core assets often time there is business relationships or strategic relationships it just make it very difficult for companies to go out and force themselves.
And it’s far more speedian for them to work through us to be able to extract the value and lastly I just want to mention that I will be opening an office in Woodcliff lake, New Jersey up in Bergen County that I will be building a team there focused on tech to complement the team out in Newport Beach on tech and we should have that office open by around Labor Day this year. So I look forward to seeing you some of you out in that office in New Jersey.
Unidentified Company Representative
Okay thank you Jamie thank you all for listening thank you.
Unidentified Company Representative
Next up, a guy that checks all these patents before they come in for infringement, Marc Booth, leader of our engineering group.
Just a little bit of a tag team effort here so, so I am going to talk about how e underwrite the IP the how we get the patents out essentially before we except them. and let me just start by giving a quick intro, I came to Acacia in 2006 I have been a developer design engineer for probably almost 30 years started life with Hughes Aircraft then Sony actually knew Jamie from Sony and then a stint of smaller startups which unfortunately never really made it including a very short stint with former Broadcom cofounder Henry Nicholas and when I got the opportunity to come to Acacia I wasn’t quite sure because been design engineer all my life I really didn’t know what patent monetization was all about. But after the first two or three weeks of actually doing the job I said hey this is exciting we get to review technologies and all kinds of varied technology across the board from wireless to semiconductor and so forth, so I stayed and certainly glad I did.
So this is a very simplified diagram of our process and the thing to note here is at each stage of this process from the intake of the patents through the entire bedding of them and to the close you will see these reject arrows coming down. And it’s kind of interesting because what we try to do is you try to filter out I guess somebody made analogy of a needle in the haystack we try to filter out the hay as early as we can so you don’t spend a lot of time dealing with that. So as we bring these things in it’s a heavy filter on the beginning and we probably lose 95% of the patents just in this first initial review filter I would say probably less than 10% of the option stage which is where we contract and then in the diligence phase which is where we do the really heavy duty analysis I think we are currently running about 50% filter there.
So it has varied in the past, it’s been heavier than that and but we try to strike a balance between doing more work upfront before we have a deal in place and doing the work on the backend and then having it fail. So it’s this kind of balancing act that we've come to I think pretty well optimized but we're always trying to improve the process.
So, on the frontend when we look at new opportunities they come from a variety of sources that can come from patent owners themselves, they are as unsolicited emails calls to us and so forth. We get broker deals we look for patents in strategic areas ourselves. so we do a lot more of that than when we did when I initially started and whatever the source is, we basically do a quick bedding upfront and it’s not shown here but there is in this find bubble was really a very cursory vetting. There is some patents in subject areas we obviously are not interested in where there is very small market for example.
So, when something makes it to the next stage which is this initial review typically we've got at least a notion of deal term in mind. So that we’ll think that looking at this with something in mind, in other words, it’s a partnership or we’re going to put x amount of money upfront or whatever the nature of the deal might be and that’s kind of the lands that we can look after review through.
And typically what happens because we’ve got these vertical teams now setup, medical and semiconductor and automobile as you saw, the engineers that are assigned to these verticals are the same guys that are reviewing this over and over. So, they are working hand in hand with the BD guys who are also working with the licensing executive and so we have these little mini teams. These guys work together and they’ve seen patents in the in the space over and over, the licensing guys can bring the knowledge of what they’ve done in the licensing part of the process that to the BD part so that we can get a better idea of how to look at this new opportunity. But these things are assigned out and we’re basically or constantly prioritizing the opportunities in terms of where should we be spending our time.
And so, when it makes it through the initial review then it goes to contract assuming that the case can be made that this thing is something that we should take a serious look at and due diligence on it goes to contracts. Some of them fall out the stage just due to business terms that both sides can't come to full agreement on but like I said that’s usually less than 10%.
Then we entered the, what we call due diligence phase which is really the heavy duty vetting with the patents and here whatever we saw in the patents upfront and hope we would survive our scrutiny in terms of how widespread is the infringement, how bulletproof visit the prior art, is it going to be easy to prove the infringement, what we call the detachability. So, we’re going to have to spend a lot of money to reverse engineer of product to prove the infringement or is it going to be something fairly simple where we can go to data sheets and see that in fact the patents are being infringed.
And then if it survives that deep diligence than we’ll close on the deal and the closed part is pretty much a formality of transferring titled patents assuming the rights kind of dotting the I’s and crossing the T’s. But one thing that I did want to point out is some of my collogues have talked about how many patents are out there, hundreds or thousands, millions and so forth. Not all patents are created equal obviously just because of the U.S. patent office granted you a patent doesn’t mean it’s good.
So, if it was as easy just picking up all patents that are out there and taking whichever one is available our job would be easy. But unfortunately there is a lot of scrutiny that goes into the determining which ones of these are really valuable and how can we in turn use then licensing.
So, in terms of identifying the opportunities as you’ve seen we’ve got a number of technologies that we build verticals around and each one of those verticals has a specialized, the people that staff the vertical have specialized knowledge. so Bob Rauker comes from medical background, be real hard to run a medical vertical, if you didn’t had that knowledge, same thing with Charlotte. It's hard to put somebody into the energy sector that’s never been around energy. So, they have the experience that says, here is what the licensing are, these are kind of rates and damages we could expect and so we are looking at patents we can get them very quickly by saying, okay this subject area is of no interest, this in a niche market. There is two licensees they are both really big, not sure you really want to take on this particular portfolio, this is not low-hanging fruit.
And then the patents themselves in terms of the quality of the patent, how good are the claims, when are they cover, what’s remaining patent term life and the deductibility infringement like I mentioned how easy or hard it’s going to be to find, how much money we have to spend to do it. And then there is risk involved too because sometimes the technology becomes obsolete within a couple of years. We can't foresee all of the disruptive technology that’s going to occur so you do run the risk that at some point whatever technology or licensing will displaced by something else or somebody will be able to design around it. So, typically the kind of patents we’re monetizing are pretty fundamental in the sense that you don’t anticipate easy design arounds, if it was easy to design around that’s what we call kind of thin invention and we don’t typically relay on those kind of patents for licensing.
And then there is changes in patent loss. So, one of the best examples probably business metric patents, they’re not in favor now a days so there is not much point in spending time on those, not that we have a lot of those to begin with but there are certain changes like that in the law that has the occur, you just learn okay, well that's something we’re just going to avoid no point in going there.
Then the last point is there is no multiple listing service for patents. So, if you have known entity like we are we see virtually every opportunity that comes along. Some of the smaller NPEs that were familiar with our competitors they mean it get put on the list of people that the inventors or these small companies are going to offer the patents to you simply because they don’t know who they are.
Unidentified Company Representative
Yes, I actually was going to talk about that later. First of all I know that we have done the deep diligence on over 500 portfolios because we have the accept reject numbers there. We didn’t keep your numbers early on when I started on how many opportunities we started, what we looked out from the very first stage to the final stage here. But I am estimating based on the ones that we did start tracking, that we probably looked at 10,000 portfolio, for at least over the course of the last six or seven years. So like I said lot of it drops out at the very early stage. Some of them don’t take very long at all to just look at and say, no, not going to make it.
My name is Curt Dodd. I am a Senior Vice President and Licensing Executive of Acacia as well. Like most of you here, I have an engineering background and a law degree, registered patent agent. I started my career as a litigator briefly and I joined Nortel Networks, where I first met Matthew Vella. The most notable achievement I think with Nortel was managing the 4G wireless portfolio that ended up selling for $4.5 billion which ended up being more than each other piece of Nortel combined. They sold entire business units for a few hundred million dollars and those patches happening in the right place at the right time and ended up becoming extremely strategic. From there I went to WiLAN, became WiLAN’s top patent executive, which is a company that was (inaudible) for $5 million at one point and ended up generating over $500 million in licensing revenue including from David’s former company Broadcomm, quite proud of that.
But then the opportunity came up to join Acacia and jumped at that. So I don’t want to reiterate everything that’s been said today, but I will rip off a couple of things that you’ve already heard today. In particular with identifying the opportunities, from a wireless space, this is almost a perfect storm because you have a big market, with a lot of players, the IT landscape is very fragmented as we heard earlier today, I think from John Tobb and even Matt, that it’s very difficult if you come up with an invention in the automotive space to start building cars. And that’s very true in the wireless space as well.
Most inventions actually come from smaller startup companies, universities, those sorts of people, but the market is dominated by just a few players. That presents an opportunity for us, because those are the people that typically use our services the most.
From a detectability standpoint, then I saying what wireless is, you have all this interconnectability and all these standards. So people have to tell you what they’re doing and how they are doing it, which is a big hurdle, many other spaces that is taking care of their to a lot of extent. It’s also largely scalable because of that and if you have a patent that reads on one industry standard that basically applies across the board to all products. So we don’t have to sit and reverse engineer every single chip, everybody is basically doing it the same.
And it’s also a fair bit of information out there regarding what licenses are worth in this space which ties in nicely to the next slide here, which is entering into the agreement. As Mark noted there is no equivalent to an MLS if we are buying property, for example houses. In our space you have to have an industry knowledge, and so coming from Nortel and having been there on the ground, while those inventions were coming out, and then going to WiLAN and litigating their patents which were in a very similar space, you get a great feel for what came before and where this new technology fits in, which makes us more agile.
So when the ADAPTICS opportunity came up, we could start from the beginning and try and find a technical expert, try and find all the people to assess this stuff, but given my past experience we had a technical person from QUALCOMM, we are working with, we were very quickly able to see what this stuff was, what came before us, we knew it was valid and what kind of price that that would command based on again experiences with Nortel and what have you.
Well we label this point, Mark talked about it a bit, but we’re getting in at this point, we’ve done initial assessment it looks like it’s a portfolio worth considering. We tried to strike a deal, well that be a 50-50 or whatever with our partners. Sometimes it falls apart at that point. But the real fun begins on the diligence side.
So I would say that this is tantamount to the home inspection if you are buying house. This is where you really roll up our sleeves and you do diligence. Now it is not perfect diligence. So we have to be careful of what we call analysis paralysis. We can't litigate these things. When you want, as Matt was saying, when they crystallizes, that’s when you are seeing all the documentary discovery. You had all the expert opine, you’ve seen all of the prior arch, it’s at that point you know whether you have a patent. But we don’t get to go to that level when we are acquiring. So it’s really skill to figure out what are the fatalities. No patents are perfect. They are all going to have problems. But are these problems, as I said a fatality or is it something that we just going to have to deal with that. We assess the risk, and we won.
As Matt was saying, one of the strengths of Acacia is this idea of diversity and synergies, so we can take on and bid more risk on a portfolio knowing that we have other portfolios reading on the exact same products and the more diversity in a given portfolio the better for us and by that I mean more foreign coverage to have pending application can you control your own future and rewrite the patterns to your own needs, also by having those additional portfolios you have as Matt referred to more orthogonal failure points, so maybe in one country there is a climate where you can’t get injunction but the damage is might be higher when in another country the damage is might be not as high but you can get injunction or they will treat RAND differently from country to country. The more diversity you have the less risk there is for us.
As we know here just a simple thing like checking for liens and security interests, let’s just give you one example there is many things that can go wrong unlike English law U.S. inventors are owners don’t have to account to each other and so what can happen is this is just one of the esoteric question we have to ask is, does the owner have ex-wife and does that person have rights to that property because if that notwithstanding what it says in the patent and I would say he had a patent went to discuss and he had signed it over Acacia, that person has a property insurance these companies can go find that person strike a license with them for may be $100,000 when we’re looking for several million and we’re out of luck. So there is just one of the many of the pitfalls we have to watch out for.
And before I turn over the floor in addition to the talent people we have at Acacia and the technical resources we have, I think one of our biggest strength is the network of consultants and counsel we’ve developed overtime. You know, it's one thing to work in Nortel and have fleets of lawyers and technical people on staff. The problem is once you leave Nortel, those people can't work for you anymore. They are all conflicted and they’re all employed somewhere else. anybody who knows anything wireless as a lawyer is already conflicted, so we basically have to find our own people and train them up and build up that relationships so that they trust us, we’re not to bring them bad patents, we’re not going to force them to go to court and fight over a loser but that we’ve done our homework and that’s a big investment and again that allows us move more quickly when the right portfolio comes up.
Unidentified Company Representative
Okay, so the last part of the process is the closing, sometimes although not very often, there will be adjustments made to the deal. If we decide that this is something we would like to take but the initial deal terms don’t really make sense, this is analogous you go buy house and then you buy find there is something dramatically different about it than you originally thought. We will approach the potential partner, and maybe offer different deal terms but that's not a very common occurrence; however, if there are problems with the deal itself as Curt mentioned, some aspects of the prior art or whatever then, then the deal will be called off entirely. And as I mentioned the final closing is pretty much formality transferring the title, money changing hands.
So really in summary Acacia’s advantage in this whole process of underwriting the IP is that we’ve been doing this for a long time, we’ve vetted out hundreds of patents, hundreds of portfolios I should say, thousands and thousands of patents and we’ve also transacted so many times in licensing settlements that in turn gets fed back into the process and factored in as well.
We have a huge contingent of outsource experts and consults. We can rely on a huge database of reverse engineering that we can draw from so we’re not reinventing the wheel every time we go through and vet out the portfolios in a given area and we accept a very small percentage of what we take in as I mentioned in the earlier slides and lastly we have a very experienced team of people that really make it a lot easier to do this then it would have been if you just took anybody from any walk of life and put them in this position and expect them to perform, so I think those are all the things that really give us a huge advantage in this area.
Unidentified Company Representative
Good morning everyone, my name is Tisha Stender, I am Senior Vice President of Licensing at Acacia and together with David we’re going to talk about what I personally is the most interesting part of today’s presentation which is how Acacia gets paid, let’s start. So I am one of the Acacia dinosaurs I guess, I know, it’s not plight for woman to talk about her age but I have been at Acacia for over eight years and Acacia has been doing this business for about 10 years, so our presentation is about a decade of systematic conscious rational patent licensing this is not none of this is happened by accident and I’ve watched this all unfold over the last 8 years and I have been very lucky to see Acacia’s evolution, My first deal I did at Acacia was for $50,000 it was a long time ago and then I’ve been on the team that did all of the smartphones, Palm licensing deals, and we are obviously very proud of that portfolio.
Before I came to Acacia, I unlike most of my other colleagues, I was not an engineer, I was in the tech bubble in Southern California and we were licensing, and I was licensing everything and my patent aha moment is when a client of my, when I was at Pillsbury Winthrop hired me to go negotiate for the purchase of a rotating round hairbrush for $5 million and a split in the backend and I thought, it was late 90s and early 2000 and everyone was doing everything but really a rotating and round hairbrush for millions of dollars and we did the deal and the client was very happy to get in and that I call that my hairbrush moment because I thought if we can make money out of the hairbrush imagine what we can do making money off of the energy field or the international field or smartphones field or any of the automotives fields or the other fields you have heard today.
So, like I said this is a decade of a very precise, orchestrated process as much as you could in a growing market, so 10 years ago I think Paul and Chip as the founders recognized that there was this opportunity and my colleagues have already spoken about this opportunity, it was an entire asset class that was unprofitable and only the largest companies could do anything about it and it was a huge upside considered to be the potentials in the billions, so we adopted a mission and the mission that I saw Paul and Chip adopts ten years ago is still the mission that I think we have today. I think we have got better doing it, I think we have got more efficiently doing it but I don’t think we have veered off course. So we are in the business of licensing patents, we take assets and turn them into money and that means we are not a litigation company of course we are all tee up all the portfolios as if they are going to go to litigation, we take it very seriously, we do a lot of great legal work upfront what we try to do for our shareholders is bring money into the table or into doors as quickly as possible at the right time and for the right rate.
We don’t focus on a better business kind of model and brining it all the way down the road and waiting for the $1 billion, $10 billion, gazillion dollar payday. So what that means what David and I do and the rest of our licensing colleagues as we try to accelerate the time to money and we take that very useful data that Curt and Marc talked to you about, about the right portfolio and the right race and the expectations for portfolio and we try and bring that money in as soon as possible without compromising quality. So that’s my last point on this slide that we see reasonable license rates based on hard data, timing and proven experience and the one thing that I will say that Matt has really brought to the table at his tenure at Acacia is really being focused on data, data, data, what are the patents worth, how do we know they are worth at and what rate should we would be able to try and get. So this is the little bit of the introduction, and now David is going to…
Over the past 10 years and particularly over the past probably even three or four years, we have seen an exponential growth in the number of assets that we bring in and Marc did mention that if we bring in one out of the 20 opportunities we see, I think that would probably be a high side. We are very, very, very picky and as we talk about the difficulties of the small, IP monetization or the new sort of the adhoc IP monetization scheme that we are going to see I that we don’t have to take things that are marginal and more and more what we are doing we are taking in large portfolios and more and more of what we are doing is we are bringing in portfolios in partnership with companies, companies that understand that they can themselves monetize the portfolios and I saw that first hand.
I spend 10 years with the largest fabless semiconductor company in the world that had something like that had something like 5,000 to 6,000 patents and eventually when you spend tens of millions of dollars year on developing patents in a large company, the CEO and other say why aren’t we getting value, we are engaging a lot’s of litigation, we are spending millions on legal fees and we end up in a cross license after three or four years of spending those millions, why can’t we bring in value, let’s go monetize and there is some real structural problem associated with large companies in monetizing notwithstanding the five or six that we saw those would be expectations for every one of those company who has been successfully in independently monetizing their patents, there are 20 companies that have tried to go into that area, developed large internal licensing teams and absolutely failed.
And some of the reasons of that is that first of all there is a no culture among those large companies for monetizing, they don’t have the infrastructure, they have an IP group that does litigation, they do licensing but that’s not their core task and so it’s not within their culture to go do that but one of the most important aspects that prevents them from doing that is that their product companies that are selling in some cases hundreds of products and so when they go out and seek licenses from another company, the first thing that they are going to see are assertions coming back at them against their own products which invariably results from three or four years of protracted litigation, tens of millions of dollars are to law firm that are supporting them. And then eventually, those companies sue for peace and say, let's be done with this because this is not effective, this is not meeting my management’s goal, so trying to extract some of the value that I have made from my huge investment in patents, so alternative is, let's go sell patents. These are one-time events that don't go to the bottom line that earned count of this revenue but at least getting in some money to offset my investment and prosecuting patents. So I am getting a little off of what we’re talking about on the achievement side here. But, the achievements that we’re able to obtain here is that the result in large part to the companies and ability, the large operating companies to directly monetize themselves, and so that come to us. And that allows an expediential growth in the number of assets and revenue. Particularly, over the last two or four years, it’s not just the number of portfolios, but it’s a size and the quality of those portfolios. Companies with 5,000, 6,000, 10,000 patents are absolutely unable to extract value for the most part and now we’re selling the few that we’ve talked about.
The diversity that we bring into these 250 portfolios across 150 different technologies, we don’t need to hit a homerun with any of these portfolios. Attempting to hit a homerun with the portfolio, which you see with an investment fund and that’s a lot of money two or three patent portfolios or even a law firm and that decides take of the portfolio. They have to hit a homerun to make that worth of value. We don’t have to hit a homerun. We have enough diversity but we don’t have that many resources devoted to any single project. And so the campaign that’s going to take six months to two years is going to be offset by the campaign where we raise firmly and quickly enter into license agreements with typically repeat players. They know us, we know them. We’ve seen their agreements before. They know we’re going to be reasonable and they know we’re serious. They know we’re bringing patents for their value. We’re not out there for cost of litigation deals. The 1,200 plus licenses reflect that.
Many times when we go in to these negotiations I think in most cases I’ve probably hired every single law firm that I see on the other side. So they know me. They know I am serious. They know I am not going for a cost of litigation settlement. And they also know that this is (inaudible) case company that I am presenting. I am not going and acting for extreme value to take my nest egg and be done. They are repeat players. It facilitates early time to money because you don’t have to go through that fast. Typically, you assert patents or you bring patents to somebody’s attention and they spend six to nine months telling you why your patents are not good and then you tell them why your patents are good and then you go to litigation and let’s go to Markman hearing. And in many cases, they want to test your staying ability. We can bypass all of that. So we can talk immediately from the time that we contact them about what is a deal going to be, what’s the fair deal going to be and how we going to strike a deal that’s going to be a business arrangement and so it’s going to be beneficial to you.
Coming from an in-house position for 10 years where I spend half of my career fighting patent associations and then half of my career asserting patents I understand how decisions are made with companies and I understand that in order to have a successful deal with a company I have to make them look good. I have to convince them that this is a reasonable and positive business decision with the decision makers with the company are going to get through those with it, because I’ve done through that. I know the dynamic. It’s not simply really the hammer over somebody’s head and saying you take this or else. And so it allows us to bypass a lot of the part of the expression foreplay that goes on in many, many patent litigations. We cut to the chase. Where 1,200 licenses that allows us also to have a very good database and you can feel like what you have done before. What we have done before, but what you have done before. We know where you can go. We know what the value of this is to you. We know the players. We can talk to them because we’ve talked to them before and we’ve developed a level of trust. And so we can bypass all the posturing that is typically going to go on with many of these patent portfolios.
We’re on the verge of probably hitting $1 billion, I’m not sure if that’s going to happen this year likely but that number, that revenue is increasing. And more and more of that revenue is coming from friendly licensing. It’s coming from partners that we’ve entered into agreements before where we’re not going to have to go slight it out. They know that we’re going to be reasonable. They know the IT assets that we bring to there are going to be valid. There is never ever going to be cost of litigations in this country. And also those companies know that we’re not going to go anywhere. They’re not going to be able to engage in a protracted war of attrition where they’ll spend this out. That’s one of the real problems with some of the small, the independents the adhocs run. As an in-house counsel, the very first thing I would look at is how we’ll finance to their? What type of law firm are they using? Are they really prepared to take this to the Markman hearing and reexamination and we go to trial. And if they weren’t I would say okay and let’s let this play out because sooner or later they’re going cry uncle, that’s not going to happen with us. And it’s not going to happen with us because of our funding and our resources but also because they’ve dealt with us before and they know that the things that we’ve going to devote our time and energy too are going to be real, solid IT assets and also they’re going to know that we don’t have to hit a homerun with every suit that we bring and every portfolio and we’re serving, whether it’s friendly or through litigation. We’re looking for reasonable returns. We’re looking for them to get a benefit. And we’re looking for them internally to be able to say to their management we’ve made a good business decision because we know how those decisions are made internally because we’ve all come from those internal organizations.
The cash is a great benefit for us. One can look and say is, is it’s a company that’s going to hold. Do we have the means to investment in really valuable portfolios? Do we have the means to sustain a long process if we need to? What that means is we don't necessarily have to do that because they understand that we do have those means, we do have that sticking power and we're serious, and we're professionals and we're ready to deal on a professional basis. And so while we don't have to spend the cash, the cash sends a very strong signal that we're there to stay, and we're not going to one of those players where they just decide, let's not even talk to them for two or three years, let's put them through the ring. We can bypass that foreplay.
We've licensed many of the world's major companies, what that means is when we have a portfolio, we can call the player up on the other side. We've executed two or three different licenses with them. We know how their decision making process, we know what they need to do to be able to get their approval from their management to execute these licenses. And that's very, very helpful, and outside the fact that we've licensed some of the world's major companies, many of us have worked with the world's major companies. So we know what the decision making process is, we know what the levers that we need to pull in order to get them to make a decision that's going to be a good business decision for them and for us. We're never looking for a situation where we go we have a license. We're in a deal, we're in litigation, we're looking for cooperative business relationships that's good for them and good for us, and that's our mindset.
And to the extent that we can convince them, they are making a business a positive business for themselves that facilitates the process. That results in early time for money, that results and able to resolve litigations before we get deep into it and we can limit the expenditures that we're putting on law firms, because typically we have clear instructions of law firms, early settlements, early time money means our margins are greater.
The seasoned professionals and the pros to the team I think is probably for me, the thing that brought me into Acacia. I spent 10 years and I had a lot of success and I realized the vast potential of this IP asset that was for the most part absolutely going unexploded but that was available to do. But coming from a large company both with Broadcom and prior to that, I wanted to be with a group that was disciplined, that was well funded, that operated with a level of professionalism, and operated with a level of approach towards the companies that we're dealing with that was on a high professional level. Because it's always been my experience that that's going to lead to the best and the quickest business resolution. And from my perspective, there was simply no one else. There are a lot of small adhoc groups; there are groups who advocating large amounts of money to go buy a portfolio here and there. But they don't have a history, they don't have a track record, they don't have experience in dealing with these sometimes very complex deals that we're able to put together. And I think the people that we have here and their experience in house and outside was to me the greatest draw to come into the company. It also, I believe is going to lead to much, much easier deals.
The sustainable business model for this super substantial growth I think is reflected in the diversity of our portfolios and the willingness to go and move into different areas. Move into the medical areas, move into the automobile area, not put all of our eggs in one basket. Having a diversity that allows us to smooth out the revenue streams that we're able to get across a whole number of technologies. And also to take advantage of these new emerging technologies, which is tremendous opportunity for us. We're not locked in for one certain technology; we're expanding to the sense that we can make money in many, many different way. And as technologies are changing as we talked about with automobile industry, we're positioned to go in and really monetize a $500 billion a year area that has just not been monetized from the past. And we're able to do that because we have the resources to bring in the really good portfolios, to engage these people in business terms and I think that's a very positive aspect as well.
And firmly rooted in the patent monetization system clearly, we're the oldest I believe, 15 years. We have a history with these people, we know who to call, they know who to call and we can very quickly get down to talking brass tacks.
I have touched on some of these issues before, but why do we did this better than the rest? The independence, when I was with a large company, the fact that I had a huge target to shoot out when I am trying to monetize my portfolio completely stifled my ability to get meaningful value. So I have some great patents. I have 5,000 patents in my company. But I also have $20 billion worth of products, and so the second that I call a company, then I say listen you have exposure to this seminal technology. They'd say, fine. Well you have exposure to this other seminal technology. And that would result in over and over and over we would run into situations where we're engaged in three and four year patent litigations that would result in cross licenses, no revenue and money primarily to the lawyers.
We're scalable; we outsource almost all of our work. We outsource our law firms, we outsource our experts. When we have a surge of opportunity we can expand resources as necessary and we can also swing to match what our needs are. Diversified we have talked about that, data driven Mark talked about that but we have thousands and thousands of licenses that we've generated Acacia, we know what people are able to do, we know what types of deals they’ve done, and from our corporate background prior to coming over to Acacia, we know how companies make those decisions. We’re experienced as you can see from the group of people that have been talking up here and I think we're trusted in the industry, we don't have to hit home runs, we're going to go strike reasonable deals, that's our game and they know that when we go around, and we're focusing on licensing growth in terms of money, again we want to get in, we want to a good deal, we want to do a reasonable deal that benefits both sides.
Unidentified Company Representative
Just to sum up because I think David did talk about most of these things already if not all of them, this is probably the summary of everything that you've heard from this morning, we take fabless engineering team or our business development people, whether it's energy or automotive or high tech or what have you, bring in everything that we can and we put it through the system and then when it gets in the licensing team's hands these are the six things that I think allow us to close the deal and bring the money in better than anyone else out there. First we leverage our cash, David talked about that, we use that to get the experts or the law firms, or the things or the people we need to get the job done right, we leverage our total patent assets, so what that means is often I'll talk to a company and I'll say that I have four portfolios that read on you, it’s time to start talking, they won’t talk, now I have five, now I have six, now I have seven portfolios that read, we did that recently and we were able to get all of them licensed, on unique different economic terms but it allowed us to break through the door and get there quicker than if we would have been only a one trick pony.
We leverage our relationships, David talked about that, that we’re very interconnected within the system so we know the aggregators, we know the patent council, we know the litigation team, we're very interconnected in the ecosystem so that often we can have turn an adversarial relationship into a collaborative relationship, and then we leverage our reputation, David talked about that, probably everyone else who spoke before also spoke to that, because that's the reason why they came to Acacia, because of Acacia's reputation, and that's the reason why I stayed, we leverage our experience about the players in the system and we leverage our creativity.
And I guess this is probably one of the only points that hasn't been discussed today, because we have so much experience in the field what we're able to do is come up with creative ways to not only get the money in the door but also help protect our IP partners, so if an IP owner has a question or a concern that if they came to us that they would be the subject of retaliation suit, we can and have been able to implement defensive termination provisions into license agreements that will protect that IP owner's or prevent that IP owner from doing a deal with us and then wind up being retaliated against in the industry. So we have a lot of creativity which is based on our years of experience in this field to not only bring the money in but protect our IP partners along the way. So I guess that's basically it for us, I think we've tried to show you that everything we talked about earlier today, that's what David and I do and the rest of our licensing people use to bring in the revenue on the best rates at the best timing, so thank you very much.
Hi, I'm Marvin Key, I'm the CEO of Acacia Research Group, the Dallas based licensing company, and this has been helpful for me, I hope it has been for you, the reason being that I along with Matt and Rob Stuart seem to be doing most of the presenting to the investor world, so it's not all smoke and mirrors as you can see there actually is something behind the curtain with our company and I'm glad you've had the chance to meet these folks, the bad news for me is everything's already been said already by everyone else, so they've completely stolen my thunder with I'm not at all happy with, so next go around I want to go first, it’s going to make me seem hopefully a little bit more informed, I have to talk about the legislative environment, that's my responsibility at the company and as you're all over we want to know what that means for Acacia and our business. This is some data from the World Bank, it’s the global IP balance of payments for the United States, in case you're wondering I wouldn't show you this otherwise, we're the one on top, we dominate the world in terms of intellectual property, we’ve got an enormous competitive advantage, many say it's out only competitive advantage left, we dominate the world. So if we're doing so many things right, why do we need new legislation, why do we need new laws in place, what is the problem.
Well I think the issue is that for the very first time in a long-long time maybe ever as these experts talked about, the bill has come due for the serial infringers of the world, for the very first time the patent disfranchised, the term that Matt used, those that are patent rich and cash poor they have an opportunity to get paid, and the big companies the serial infringers don't like paying the bill, and so what they've done is to create an enormous disinformation and smear campaign that is financing operating ed pieces in the New York Times they are putting articles in the Economist, they are influencing and paying the lobbyers who are swarming Capitol Hill and it’s influencing the law makers and even the President himself the dialog is so one sided and so slanted and frankly inaccurate. But despite that the media is buying that pitch hook line and sinker they are not even questioning whether there is another side to it. So the critics, the big companies are claiming that in one respect that there are too many patents out there. We have already heard our guys say yes there is more and more patents every year, are there too many of them.
Here is a historical GDP chart for 40 years up into the right as you would expect let me overlay on that patent applications that’s measured on the right hand side tracking pretty closely here is a number of patents issued, well it’s true that there are more patents out there than there ever have been before but too many I mean what’s the context. I would argue that applications patents issued and GDP are all tracking and they are all correlated so it doesn’t seem to me based on this that there is any big crisis. The other thing they are talking about is if there is too much patent litigation going on there is patent abuse and that is abusive litigation techniques where do we stand on that well the overlay of this data suggests that yes along with all the other metrics that patent litigation is climbing with the number of patents issued.
But to be fare and this is what all the credits are talking about within the circle starting in last couple of years there has been a significant ramp in the curve of patent litigation and I am not a patent attorney but I am going to say something about the America Invents Act which was signed in the law two years ago by President Obama and one of the thing one of the purposes of this legislation was to bring our patent system into the 21st century to iron out all the problems that we have and make us more competitive with the rest of the world. The world we already dominate from the IP side.
One of the things that changed in this legislation was something called the Joinder Rules which means that prior to the passage of this law if you owned a patent and you want it to monetize or enforce this patent you could file one law suit that covered all the defendants all the infringers. One law suit against 10 infringers after this legislation you have to file a separate law suit against every single infringer so one case becomes 10 so just numerically as a result of the new legislation that was put in place to solve all the problems we now have to put in new legislation to correct the problem that the last law created. That’s what’s causing or at least contributing to the large increase in the patent litigation currently.
There is another way of looking at the same data the red line is patent law suites as a percentage of applications filed the green line at the top is patent law suites as a percent of patents issued then relatively sideways for 40 years they have as a percentage of all federal law suites they have gone up and tripled over the last 40 years but as you can see the big spike has come in the last two years and it’s still only 1.4% of total federal law suites it’s a pretty modest number so if -- it doesn’t look to me like there is any huge spike in litigation huge spike in the number of patents so I would argue that we are operating from a false premise if none of those if either of those cases exist false premise can lead to bad policy bad laws and the laws of unintended consequences which is what we saw with the America Invents Act.
So, I think right now the current media frenzy and political fallout seems to be influencing Washington in just a couple of areas one is NPEs non-practicing entities in our abusive business practices they are hurting this company hurting this country and hurting job growth and the economy and as well as the explosion of abusive litigation practices small anecdote about six weeks ago I was at a conference called the Intellectual Property Business Congress in Boston it’s a bunch of patent people licensing guys manufacturing guys and I went to a panel with structured as a debate on the one hand one side was to argue we need more legislation to solve all these problems the other side said no we have the laws in place the judges in the courts can solve the problems themselves.
The we need more legislation side was chaired by and argued by the Chief Intellectual Property Officer at Cisco and his pitch was our company we can’t do our jobs we can’t create new products we can’t innovate anything new we can’t hire people our returns are being hurt and it’s hurting the United States and the reason was because they were being sued in 50 separate patent litigations and all their employees were spending all their time in Tyler, Texas in courtrooms. The implication of course was that all of these patents were frivolous, all these cases were unjustified, and they were the recipients of shakedown artist in other words a patent owner who has the legal and constitutional right to enforce the legal use of this patent to technology is bad for the economy and is bad for the United States. So, good or bad, large or small, good patent, bad patent everyone gets thrown together under this pejorative term of troll. And so this disinformation champagne that is affectively slandering, half of the innovators in this country is very far reaching.
So, I need to talk to you for a moment about the actual proposals in Washington DC. And what impact we think they’re going to have on our company and our business. We put reform in there and Matt told me to take that out, it didn’t come out of the slide and little sarcastic.
But about 30 days ago President Obama made some pejorative inflammatory comments about NPEs and patent trolls and how we’re hurting the world. Some legislative priorities he pointed out, some executive actions just going to concentrate on couple of them. Real party and interest; the White House doesn’t want NPEs to be able to hide behind share companies. They want that the actual owner in the control of that suit to be readily available and apparent. The other issue is empowering downstream users. If you’re buying a product it BestBuy, you shouldn’t sued for it. It should go to the manufacturing company, that’s what the White House seems to be focusing on.
Representative, Congressmen Goodlatte. This is one you should all pay attention to in kind of monitoring what’s going on in the pattern world. The reason is that Congressmen Goodlatte is the Chairman of the house judiciary committee. So, anything that ultimately happens in the House and goes to the Senate he controls it.
Now, Congressmen Goodlatte has to get immigration through the judiciary comet first, patent legislation is supposed to happen in July, it’s not going to happen, then we have the recess in August, maybe it happens in September, it keeps getting pushed out but right now he doesn’t even have a bill under his name but it is a draft, but he is talking about some fee shifting issues, once again the n user do the White House focused on and some discovery issues meaning that whoever request excessive discovery has to bear the cost of that. That’s what the house is focusing on now. But this is the flavor of the day. These are all the bills out there. Senator Schumer, Senator Cornyn, Representatives Chabot and DeFazio and Deutch and Jeffries and Farenthold. In fact, this is already out of date because Congressmen Darrell Issa on Monday put out his own bill.
So, it’s the flavor of the day as very politically expedient. None of these matters. All that matters is what’s going on with Chairman Goodlatte on the house judiciary committee. So, even the FTC, the ITC and the justice department of all lay down. I think the so question you want to know is and Matt summarized it very early on is there anything in here that’s going to impact our business and cases specifically.
Reduced abusive litigation cost in time. We agree with that. One more short anecdote before I wrap up. At another conference about three weeks ago in Chicago another patent conference I listen to our presentation by the CEO of RPX Corp., John Amster and he made a very solid speech about kind of the whole patent landscape and talking about NPEs and specifically about abusive litigation. He sided a statistics that 63% of the revenues that the NPE industry generates, 63% collectively is generated by companies that have revenues of less than $100 million annually. 63% of revenues by NPE is generated from companies that generate less than $100 million annually, in other words its abusive litigation because the NPE industry is targeting the smallest companies in the ecosystem, the companies that have the least stability to fight and have the least money to recover.
And so, this is new information that no one who has touched on today. In the history of our company, 95% of the revenues that Acacia has generated comes from companies that generate more than $100 million. So, while the industry is focusing on the little guys, our business focuses on the big guys. So, 2% from the little tiny companies, 80% of our business comes from companies that generate more than $1 billion annually.
Reform number two, mandatory disclosure of patent holdings, we agree with that. Core discovery expenses bond by each party, we agree with that. Protect the n users, we agree with that, proposed reform loser pays only if it’s mutual, both sides, not NPEs pay only. So that is the caveat on proposed reform number 5. But this is the synopsis of all those bills in the major issues, so we are publicly acknowledging, we’ve got not part, we’ve got no problem with any of them.
So in the last seven or eight years, we’ve had, I think three major Supreme Court decisions that revolved around patents, all of them the legal experts generally perceived to be to weaken the position of the patent holder, and to side on the side of the strong incumbent manufacturing company or technology company.
We’ve had new legislation two years ago that most people generally believe made it more difficult for the patent holder to enforce or protect his IP. And over that time Acacia discontinues to grind its way through. So perception versus reality is Supreme Court cases, new legislation, what’s it going to do to Acacia; we continue to deliver the goods and put up the numbers.
So I am going to wrap up with this last comment. It’s never been Acacia’s business practice to engage in Washington DC. Our attitude has always been, let’s hire smart people, get good portfolios, put up the numbers and everything will take care of itself. Our patent partners will be happy and our shareholders will be happy, and leaves the hub knobbing capitol hill to others.
Well that’s changed. The discourse has become so slanted, so negative, so inaccurate, so dishonest that we are proactively engaging with other likeminded licensing companies in an aggressive effort to kind of level the playing field and eliminate some of the inaccurate dialogue which is dominating and we've clearly got enough of battle.
We are a founding member of a newly created patent and industry trade group called the Intellectual Property Rights Council, the IPRC. We are on the board. We are going to be working proactively to have a very pro-patent and pro-patent protection message. We are going to finance research. We are going to begin to educate the public the media to balance the rhetoric. Ultimately we hope to have some positive influence on the law makers.
Our effort is to legitimize our strategy and our business and prove our cause. We have no interest in being an obstacle to progress. If there are problems in the system, we want to be part of the solution, and we feel constructive about our business and we are tired of being on our heels.
And with that I will wrap up. Thanks.
One more comments worth making, I love this slide because when I actually run through this and, great design here. Oh yes, there he is. Clayton, when we look at this, just look at these reforms, if they are enacted, I think our margins go up; one, two, well two doesn’t matter, three, four doesn’t matter, and five. I think all of those things will actually, the way we perceive it, we think the other side, at least when they engage with us, engage in abusive litigation. So, I thought just make that final comment before getting into the conclusion.
Okay at this point, I am going to sort of stop the parade and we are going to talk about the hard realities of our stock price, because we love our business. We love where we stand. We love the opportunity, right? But the reality is, we don’t think the stock price is necessarily reflective of what we are seeing and what we showed you today.
And so what's primarily going on, and I said this on the earnings call, we have accumulated a lot of very high quality assets. We have hired a lot of very high quality individuals to manage the assets. We’ve brought very impressive lawsuits and we’re asking for much larger checks than we ever had before. And the last time we did this was 2007 – 2008 when Tisha and I were around making the leap from $500,000 deals to $5 million, $10 million, $15 million deals and we kind of ran into a similar situation and it just takes a while for people to get used to dealing with the new paradigm and the people of course I am talking about are the folks, the serial infringers, right?
And so undoubtedly, this is a fact that’s weighing on our stock and what we are not going to do to solve the problem is start discounting to make quarters. We have been very consistent in telling everybody in this room and publicly that this is a lumpy revenue type; forget Acacia business, industry. If you actually look at the licensing revenues in any in-house company, even the successful ones, right, it’s lumpy.
And so it’s going to be a rocky road, but just like, at the end of the day we think trailing 12 we are going to grow. We don’t see any reason to change that. We are more bullish than ever on the assets we have and the negotiations we’re having and so the issue is okay, until you deliver the goods, how can I as a shareholder maintain the faith and stay in the stock.
And what I want to talk about today is in some sense us helping you help us because obviously we rely on you guys and the analyst the shareholder base. We obviously strive for great relationships with all of you. The reality is we can’t always deliver though the revenue on the snap of the finger. This is not a same store sales business.
And so what we can do in the meantime is events like these, where we give you guys some visibility into the people we have and the activities we’re undertaking and the opportunities we see. And what we’re also looking into is essentially taking all this public information that we think is out there and that we think supports a very good valuation for our company and collecting it so that you can see it and you can make judgments yourself.
Now examples, we can certainly point you to the litigation, we can point you to the patents and we can encourage you to grab the patents and take a look at them and for those of who that have been speaking with me privately for the last couple of years, I’ve always encouraged you to do that. I’ve always pretty much dared everyone in this room and everywhere to take the Pepsi challenge, look at the patents, judge for yourselves.
We can point to dockets, you can look into rulings and see what’s going on. I know that some of the more astute investors that brought into our stock back in to 2007, ‘08 when we’re trading at a $1 or $2 and the exact same process was happening, they grabbed the dockets, they looked inside, they saw some very, very interesting looking developments on litigation front and they brought the stock and they were handsomely rewarded, even at the valuation of the stock today.
And the other thing we can do is we can start increasing that thing giving new unit counts. In other words factually the patents cover these units, they cover these markets. Now what we’re not going to do, I was asked maybe about two hours ago, give us a probability of collection or give us a probability you’re going to get these earnings, right.
We can’t do that. The moment we cross the line from facts into opinion we’re essentially waving privilege and more importantly we’re basically undermining our negotiating position. And remember these are negotiated revenues. It's not like I’m selling you a cup of coffee because you need a caffeine hit, right? You want to pay as little as you can and I want you to pay as much as can. And so there is a negotiation happening and in some ways it’s a zero sum negotiation.
We try and change that with the creativity that the team that you see it brings to bear but ultimately to zero sum game in many ways. And so the moment we cross from public information to legal opinion, we prejudice not only ourselves on this game; we prejudice all of you that own our company. And of course, we can’t give you any confidential information as well.
So having said that with these facts look like, what can we tell you about our company and what are the ways of viewing our company, and what I want to do over the next two minutes is announce the start of a dialogue. I've been having it in fits and starts with various analysts but I kind of want to formally start it across the board now and the dialogue really is okay, we are saying we’ve got this incredible opportunity, this incredible business, this incredible team and you’re saying well your results for example last quarter aren’t showing it, and what we want to do is explore ways in which we inform the shareholding public the same thing that’s happening now is what happened in ’07 sell at your peril, right. We think this thing is going to do very well.
And one example, one perspective is this whole idea that somehow we’re out of the Smartphone space and that the show is over, the music stopped, time to grab a share and Acacia is going to be left out. Well, if you take any Smartphone out there right now, we have a standards read that’s 2, 3, 4, 5, 6, 7, 8 patents deep on, actually in some cases 10 or 11 patents deep and Curt has the details on 3G and 4G. And so we can cover that wireless interface.
And we’re not just talking about bit shuffling patents. We’re talking about fundamental inventions, patents, the guy that got to market 10 years early on 4G for example. We can cover that in more geographies. We are in just Germany, Japan, Western Europe, China, Mexico, Canada. We’re not going to go up there and go home. And so we’ve got just more geographical coverage, more depth, more quality.
The backlighting unit, the backlighting unit is 25% of the build materials cost in the Smartphone now and we think we’ve got that covered with the Rambus portfolio 10 ways to Sunday, lots of patents lots of inventions.
The fundamental way of baseband processor, that’s what actually pick up the radio waves out of air; the fundamental wave, that part of the phone talks to the application processor, that’s the computer that runs your apps, okay. We have a fundamental technique on how data moves across that bus. We have a fundamental technique on how USB3 works. That’s what we’ve picked up last quarter when we filed a lawsuit. We’ll tell you what it is and again we’ll invite you to look at the patents.
And by way on the first two, the lawsuits are out. You can go look at them, and you can run prior art searches as we have, you can check the merits out as the rulings come out. We encourage you to follow them, right. And look, if all of these things become mortally wounded, then you’re right, we’re not showing you the money and we’re not going to show you the money and our stock is just fake, but that’s not what we think is going to happen.
What does all that cover, and there is more in the pipeline by the way; conservatively over 3 billion smartphones that are going to be sold between now 2021. And I'm not talking about, automatically say we are going to get a massive royalty in every phone in China, we cut that out.
I am telling you that in jurisdictions where people tend to collect dollars for infringing products. There's 3 billion of these things and they are covered by those portfolios. So that’s the kind of dialogue that maybe we can start having with the general shareholding public.
Another prospective, Bob is an excessively modest guy and I think he was up here, he had the shortest presentation, really focused on point. What Bob has done, he has come in here and in the space of two years among other things, he grabbed us two unbelievable portfolios. He talked about Bonutti, and he was polite enough and modest enough to, and Bob why don’t you come on up here, we can talk about this in some depth, Boston Scientific.
So Boston Scientific okay, let’s understand what happened when Boston Scientific came in. Boston Scientific comes in okay. Bob consolidated that portfolio with a number of other ones from these other partners and what resulted is the largest collection of issued U.S. patents on stent grafts. That's a fact, comprehensive worldwide coverage. It's actual. Bob, you can have to run me through those algorithms again, because I know what the inventions cover, but all that jargon, can you translate that?
Well AAA is Aortic Aneurisms. Might pass out. I'm kind of not good with blood. AA, AAA, we call it AAA and then TAA but that’s basically the market of what we call arterial stent grafts in peripheral vascular. Most people familiar with the cardiac stents but this is the second largest market of stents and it is little over, it’s several billion in the market. Boston Scientific used to have a position in it but they had recalls and they go out of it. And so we approached them and now we cover basically not only the devices but we cover the way that they're delivered, the material that’s involved in it, how you actually remove it, how you anchor it. In one case alone we have 18 patents asserted and I don’t know what is, 50 or 60 claims.
And it is not just running up numbers. Its orthogonal patents, orthogonal failure points. And to kind of tell you where that goes, and I'm not going to get the acronyms right. So if we actually made this stuff, we would have the largest portfolio. So what does that can tell you about what can happen?
Now, it’s an interesting perspective. We can give you the data, you should look at the lawsuit because we can sit here and all the day along but ultimately the proof will be in the pudding, right. You can get lawyers to review the lawsuit.
And so the question is okay, we will give you this data right and now you know why sometimes we are going to come back with the quarter just we came back on because we could cut deals on this portfolio alone and could have made our quarter, we could have hit all of the, I never quite understand how the analyst get the numbers. It’s a tough job so I am not teasing them, I am saying it is tough but we could have hit those numbers. But if you hit those numbers what are you doing. It’s a big market, what are the royalty rates like in this field?
In the most recent case, 16%.
16% and what’ the top line?
Of sales? No. I'm sorry. I thought you were talking growth rate, it’s about 10 to 15 billion.
So and that's a year, okay? So you have to multiply it by the years. So that’s the conundrum we have right and the way we solve the conundrum, ultimately we deliver the results as I think we have the last five years, if you look back over the arc of the company’s history. We don’t do it by making quarters, only to come back and have to explain years later while we are not doing 3X, although we have essentially taken the royalty rates in the field and deflated them from 16% to 0.5%, which is not our intent because obviously then our customers, right, at the end of the day this all comes down to the inventor, we are not going to be a worthy custodian of their inventions, of their patents.
And so what we do in the meantime until between now and then is we try to give you as much information, facts as we can but no opinions okay. And so over the next really, the announcement on Paul’s departure which I still find very sad, that happened three weeks ago and the last couple of weeks I have reaching out and starting a dialogue with our main analysts and shareholders about okay what can we do data-wise?
We will continue that dialogue; what is the kind of data, the kind of facts that we want to put out? We are not going to get into the realm of opinion. We're not going to get into confidential information. And then once you have the data and we encourage you, get a lawyer, look at it. Once we have the data, sit back and I think we are going to what we did in ’07 timeframe, knock on wood, you never know because there is obviously a litigation involved and there is some caprice to that process and there is bunch of other risk in the business but I am feeling great about the company and I encourage you to read up, learn the cases and make up your own minds based on the same facts that we are seeing.
This is what you saw today. I’m not going to go through the bullets one by one. But we think we’re going to be the leading outsourced patent licensing company. We think we’ve got the people, the capital, the assets, the ongoing negotiations and the opportunity to do it. And we thank you for your continuing support.
And with that we’re really low on time. Are we going to get kicked out of here? We are? Okay, why don’t you go grab your lunches and we'll do a quick Q&A once you've got your food in front of you. There is boxed lunched outside. Thanks.
Management team come up for the Q&A, so we can start that session. That would be fantastic. Can we have Acacia’s management team come to the podium please?
So I think we’re going to start the Q&A session. We have two microphones, so they’re going to be circulating the room. If the people holding the microphones just raise their hands, Alicia and Emma. Would anyone like to get started, the question?
Two questions. So they use a farmer analogy, you got a big farm, lots of things are planted. You have people, you have assets, lots of seasonal ground. Now that you’re taking over, what’s your two or three biggest priorities to start to a yield harvest over the foreseeable future?
In order and obviously I wake up every morning and think about this, along with the rest of the management team, one proof that we can not only return the capital but make the multiple on the capital we’ve deployed the last couple of years, so that’s obviously the licensing function. David, Tisha, Jamie, that's number one. We got this definitely, how do you get that cash back, how you make the multiple and how you do as fast as possible. So that’s priority one.
Priority two is to maintain discipline and at the same time maintain boldness on the intake. In other words there is a lot of opportunities out there. In some ways it is acquirers market, especially when we bring the hybrid structures in.
Well, having said that, just because we’re getting great looks at these portfolios and just because they are coming in, we start to have price discipline to make sure that going forward we can shoehorn those investments into the metrics we've set out for ourselves very publicly.
And the third piece really is you can see we have terrific people and lots of them. And it’s kind of like having a basketball team where you’ve got a lot of great players and you have to make sure everybody gets their minutes and everybody gets their shots.
So from my perspective, balancing out and getting the best out of each person is probably priority three. Now Clayton, he'll typically poke his head into my office two, three times a day and kind of remind me about margins and about costs and about more vertical metrics, but to me, if we get those three things right a lot will care of itself.
And related to your scale and the people and kind of knowing how to make the other side look good, is there anything about your scale that helps move the other side to a licensing agreement or is that always going to be kind of a…
That’s a great question Jeff, as usual. When I was at Nortel, it was always easier cutting a check to IBM or Qualcomm than it was cutting a check to a smaller company that had less track record. So on one hand we hope to get to that state at some point where the size actually helps us. But when IBM got going and I remember quite vividly because my mentor at Nortel was an IBM guy, Verney Tegerman, and he was sort of in the trenches when they made that shift in the early 90s. They didn’t really hit their stride on the patent front for both eight,-nine years. Now they hit their strides selling semiconductor process technology and they kind of lump it into licensing.
But in terms of the patent licensing, it took them a while to hit to sort of hit their stride. So at some point it became okay to cut checks to an entity that big with that vast a portfolio and so I think at some point, I think the switch will flip and we'll get the benefit of that scale.
Quick one for Clayton. You just reiterated OpEx in the Q2 call. So we heard a lot about the new people and their new activities. So are you comfortable that’s all baked into that 2013 OpEx number?
With respect to the guidance with the rest of the year?
Yes we're comfortable that that guidance is still comfortable in the OpEx. Correct.
Questions. Have you seen any trends at all in the end? I know we're a litigation company, but with jury awards overall and what's happening in that process that would potentially empower defendants to not settle as quickly as would have in the past. In other words what's happening at the end results with the trend of jury awards and if that were to actually be falling for example, then that could have powered dependents to push things off to the end and not settle. Is there any trend at all that you guys see?
Simply no, and I can tell you we don't see enough of a trend to pay much attention to it. Vanerix (ph) went a lot of money and then we got taken down. Unilock went a lot of money and then they got taken down. Some folks want money and it's stuck. I know two things about the system, and I think the rest of our team would agree, by the way anybody on the occasional licensing agrees, hype up or want to amplify what I'm saying. But one is you can get some pretty big awards and two they can go pretty easily.
And what I draw to that is why show up with one patent when you can show up with an armada. And then once you do that, you take things out of the planned theatrics where you have got these crazy high beta events in litigation and you're playing it real where its probability. We've got 15 shots at you. So let's just start talking about the value of this thing, and let's not talk about what could happen in the play and theatrics, which is a trial.
I guess this question is for Clayton but maybe Matt will want to jump in there. So Clayton, you really highlighted across the hybrid model in your presentation. You talked about the hybrid model having a greater than 50% split in favor of Acacia when you are deploying upfront capital. That was a point of emphasis I hadn't really seen before. Is there any sort of guidance you can give us or disclosure on how many of the new deals you are bringing in, maybe by year that tell us?
Well I think what you said and correct me if I am wrong, but when you put up front capital, you sometimes can't go beyond 50% share for us, right. And we will typically insist on being the points when the 3x is not met. And so that's the balloon, I think someone else was pointing, it's really the balloon. Let's talk about that a little bit. Look, if I think we can get back half of our money in a day, then that's a great return on capital and we'll do it and we'll see if we get 3x, 50% back in a day. And likewise, if the return is not going to get to 3x on 50% then we'll get 70% or whatever the case is.
So in terms of publishing metrics, in terms of what the percentage have been historically, we haven't done that. We got to be careful doing that quarter by quarter because there is only so many marquee portfolios we're pulling in. It's typically one or two quarter, and so we published that data where we're kind of this confidentiality issues but I don't know if you want to add to that. We haven't published that.
I guess the pieces say that on the hybrid model you have higher gross margins necessarily.
Actually no. Perhaps, but when we have the pie chart the way it was, like if you noticed, and I am not enough of a good job emphasizing this. We had the partners slide with a pie chart that had 40, 40, 20. Then we had a hybrid and we were saying nothing has changed, 40, 40, 20. We can always have great deals where the margins are higher and some places the margins are lower. But the basic idea of the hybrid model is not to get run over on the inventory it's really to say, we're going to advance you the capital, we think we have the safe patent to getting back. Fundamentally it's a 50-50 deal
I mean just taking advantage of your balance sheet and their desire to get (inaudible). So moving on to ADAPTIX, it wasn't really a point of emphasis, but I know a lot of investors really drilling down on the (inaudible), what's going in the portfolio. You did talk about the smartphone and the patents reading on smartphones moving forward. Can you update us on the standard and where you see release 09, release 10, and release 11? Because the standards have come out for LTE, LTE Advance. Do you think that the patent portfolio has...?
Curt you want to come on here or maybe we can get Curt a mic? Curt gives me updates on this every day practically.
I am not so sure it's an issue of release 08 versus release 09 or release 10. It's really that the network comes first. So Alcatel's and the Ericsson's and what have you that have the big sales now, the handset sales are just starting. BlackBerry just released its first LTE device, Sony just released its first LTE device. So the handset sales will be 5X bigger than the infrastructure sales but they come a bit later. Europe's been a little slower in the roll out, Japan's been a little quicker than we thought. That answer your question?
But baked into all the releases. The mode 3.0 for example, the mode 300 to 4.0 transition on family 2?
So they start with the simplest release 8 version is what they call the infrastructure guides and all the handsets will be able to support that. But then release 9 comes, no in fact what you'll see is more patents will apply because they'll get fancier pieces.
When you said that I chuckled. No, no, it's going to increase trust me on that.
I'm Alan Conset (ph). I'm a shareholder who's been building a position with Acacia. Two questions, you mentioned how much cash you have, and you mentioned but I haven’t heard how much of cash you've advanced for this program you've been talking about, that's my first question.
Okay we, what’s the number exactly. Well, hand on, which program. We can tell you how much cash we advanced in aggregate the last two years.
Well, how much cash is out right now? From a balance sheet standpoint, how much cash is out there for this advanced program of…?
Going forward, yes. I'm trying to get a sense for that's a balance sheet issue. That's my first question,
Well first of all, we have ways of perhaps raising cash if the right opportunity comes up but that aside, we don’t think for the sort of bread and butter deals we’re doing that there's going to be a net drain of cash in the long run, because we expect to pull that stuff back around 18 months. So in terms of what we have earmarked I mean, I personally always wanted to a $100 million sitting around just for messaging frankly, that we’re not away. David Rosmann spoke at length and quite eloquently about this idea that you've got staying power and people know that the first thing we assess. So I think that's kind of a good base, and as we get bigger, and as the portfolios we're engaged in are bigger and the litigation is bigger, that's going to have to grow but we'll get more cash.
The context I was asking you is if you've got $320 million roughly in cash, do you also have another $50 million that's been advanced to, I'm just trying to understand how much?
For example the…
Or is that part of the 320, that's what I don't know?
It’s not a component of the current cash sitting on the balance sheet. For example in 2012 viewing ADAPTIX as an outlier, advances that we made with respect to other portfolios acquired total approximately $178 million. Through Q2 of 2013 we have advanced approximately $14 million with these type of hybrid models. A portion that is accrued for future payment. But in general through Q2 2013 the amount is roughly about $14 million.
320… there is no…
My second question is when I was listening to the conference call, not the last one but the one before and the question of distributions came up and I believe in that one, the question was will you be starting distribution soon and the response was we have no immediate plan. I don’t remember exactly what was said. And then distributions really started or announced about a month later, if I have that right, you started your 2% distribution.
I am pretty sure and Paul would have answered that question I’m pretty sure he answered that.
No, it was accurate at that time, I understand that but then about a month later they did decide to make distributions. What would be the criteria for increasing the distribution in the future? What’s the thinking…
This issue between retaining cash for new deals in distributions is a balance you're always trying to find. So I was asking in the net context of how do you make that…
It’s a function of the profit and the opportunity. I don’t have the crystal ball and I can't give you like a second order equation, XY. It's going to be a function of the opportunity and the profitability…
And also buying your own stock that was the third piece…
Right, there is a function of that too.
We looked at stock buyback as well as a dividend and we thought that the best way to go about returning capital to shareholders was through the dividend program, rewarding the shareholders to stay around and not buying shares of the shareholders who want to get out. So we thought that of the two, the idea of the dividend, and our goal is to increase the dividend as we go along. It’s not a onetime stop gap issue.
We have a lot of cash. We have very high margins. We’ve got some huge opportunities coming. We think we’re going to generate significant additional cash. So to have a consistent dividend policy that has some growth along with it, we think makes a lot more sense than just some sporadic forays into the marketplace with a stock buyback.
We do have one that we initially put in place about three quarters ago. We have bought about 1.2 million shares. But I think going forward the most efficient and the best reward for our shareholders is through a dividend rather than just the direct share buyback.
My question is on the legislative and regulatory PR front. Just wondering where is everyone or anyone else who might agree with your point of view in the PR? Is there anybody out there? Why aren’t they speaking?
Did you say NPR?
In terms of PR yes.
In the PR side I thought you meant public radio not there.
Not NPR. Although the PR has been like NPR lately. They are friends with the Traveler Association. It’s been incredibly silent as you pointed out. I am just wondering where in the world the other side is.
And Marvin can speak to it as well I will give a very quick answer. I think that there is a lot of people on the right cyclical of the issue that we have seen some horror story patent law suits out there, the guy that is suing every time you scan a photo copy or you take a photo copy scan right and they are kind of running away from that abuse right. And the other side has been kind of figuring out a way to get the points out without attaching themselves to that entity right or suing coffee shops because they have Wi-Fi right.
So I think that’s kind of muted a bit of the response and the trial lawyers. They have seen this before with tort reform. So to the extent they are part of this photo copy scam thing going on, I think my perspective is they resigned to that happening and they only care that much about the secondary market otherwise right and I think the rest of it, honestly look let’s face it, the inventor community and the patent owner community, this is not exactly even at its best.
It’s not exactly the best political constituency out there right now. They are small in number, esoteric. Most people don’t even know what a patent is and I ask just about everybody I encounter, when they ask me what I do; my question is what’s a patent? I'd say over half the people don’t have a really good grip on that right.
And so the challenge really is designing PR that appeals to people and telling people that this is important because the inventions that go in a smartphone need to keep coming. When the counter argument is well your smartphone prices went up $5 because of the patents right, so you are asking the public to be patient in some sense with the way that equation is going to come out. That's a tough part, we get it.
Matt's right. There is a lot of support on I will say our side of the issue but I think it’s extremely fragmented and there is no question that we are losing the war of words right now and no one has been able at this point to put kind of a collaborative cohesive voice around the whole thing. There is plenty of positive research that supports our argument. The George Mason University is doing some great work but it hasn’t all been together in the right way.
And so while we are behind the eight ball and we have been caught flat footed, we are taking an aggressive but kind of constructive approach to this whole thing and banding together with the right companies. So we are hoping, we have got an uphill fight but we are doing it the right way we think and ultimately we hope to have made an impact and you will notice a difference, hopefully 12 to 18 months out.
One more quick point from me and then I think Jamie wants to add something but you have to realize that the anti-patent battle, it starts in Academia and in academic articles that were slanted versus first published in the mid-90s. So these guys have had a 20 year head start.
And the way you counter it is by winning the normative debate right, which we have kind of laid out over here but normative debate we laid out. It has to be backed up by academic studies and so George Mason for example is starting this process but it’s not going to be a one year fix. It’s going to take five years 10 years before it’s evened out because you have to have the academic underpinnings before you launch a PR campaign. Jamie?
Yes, one of the problems that I noticed is, remember that chart we put up about the number of foreign patent entities which was I think 22 out of the top 24. It’s a very sensitive issue for foreign companies that are the major patent players in the U.S. to step up and take a voice in U.S. legislative process. So I think historically you will take a look and you won’t see the dozen Japanese companies, they are not inserting themselves into the U.S. legislative process, which even though they really are going to be the most hurt by any negative issues on how you can monetize that IP.
David want to say (inaudible).
Yes I just wanted to point over the last, maybe just recently or about the last six weeks to a month, you have seen a transition from the patent legislation and most of the comments away from this notion of discriminated against who the patent holder is, what are your rights dependent upon who you are and I think that’s such a distasteful position to take fundamentally in our country that the dialog is slowly but certainly shifting towards the quality of the patents, bringing bad suits, trying to resolve issues earlier on to reduce the cost of litigation.
All that dialog which is happening and it's subtle but it’s growing is absolutely within what we are interested in as well. We cheer those efforts, eliminate the cases with bad patents, cost of litigation suites, let’s get some early resolution and we applaud all those efforts. And that’s the direction that slowly but surely the dialog is moving.
And that’s happening notwithstanding the obvious imbalance in PR. So that’s good to know that the right things are being done more or less. Next question? We have got a whole bunch of folks. Why don’t you pick someone out Melisa?
Hi Matt Justin (inaudible) from Kruger (ph). Just two questions one on the handset stuff. So you guys are pretty much licensed whether it’s Access or ADAPTIX, all the big OEMs.
Hang on. We did not license ADAPTIX, almost accept Samsung.
You've done a few I guess. You've pretty much hit,
Of two of them the two of them you have pretty much hit most of the OEMs whether just for one or the other
No license, or sue?
I believe license.
No, we have not licenses ADAPTIX.
I mean, Access or ADAPTIX, one or the other.
Okay, but mostly Access.
Right, mostly Access. I’m just curious, you listed up there a bunch of different patents that you think you – I guess potentially have exposure to. How have the OEMs that you’ve gone back now second time after you are licensed in one program, just any of the reactions that you’ve done, it took a while to do the first license.
Tisha or Curt or David, any one of you. I mean you can mostly hear it from the mouth of the force. I can answer that, but you should hear it from the people in the front lines.
So, generally speaking, when we used to go back to companies many years ago, they weren’t happy to see us and as time has progressed my experience is been as we go back to companies again on new portfolios, we actually have a more open door. So, no one is ever happy to be sued, right. No one is ever happy, oh Tisha, I’m so glad you called to tell me that we’ve just been sued.
It’s never been happy and it never will. But my experience is, what we’ve really done a good job is being professional and rational and reasonable and so now the doors are open and it’s making the resolution of these complicated portfolios easier, certainly not easy. So, I think it’s a shift in how we’re perceived. Of course the portfolios we’re acquiring are more complex. So it’s still takes a lot of time to work through it.
But I mean one thing I can tell you normatively, we can always say with accuracy -- and this does resonate -- that, look, if we don't get it, someone else will. And the company that will get this property from the patent, the franchise might be a whack job, who might want $1 trillion. So, look, we are coming at you, we want a lot of money, but we’re not crazy. So you are better off dealing with us than the other guy.
Okay. And then just one question for Clayton. I know I have asked you, Matt, this before. But just in terms of the cash, the policy of paying upfront for patents, which you started I guess back in the ’12 and you talked about it before 100, I think it 78 or something you spend last year. You spent 100 this year. Do you have just going forward, is there a number because your operating cash flow for the last couple of years has been up and to the right, , it’s been very good.
The problem is your free cash flow net of these acquisition costs has not been in the last couple of quarter and at least as an investor, I guess that’s one issue I think that’s been affecting the stock. It’s just purely, if you look at it, it’s cash on the door and cash in and it seems just optically the last few quarters you are not bringing in cash despite these revenues that you guys are generating. I’m just curious going forward if there is any balance between the cash out and cash in and how are you kind of think of that?
We have 300, 320 and there is a bunch of cash sinks and bunch of cash sources, right. And we have to assess them for what they are individually. Now we happen to have a whole bunch of cash sources lined up as we have very successfully when Tisha was running the table on Palm in ’11 and ’12, great and everyone is happy. But there is going to be times when you are lumpy on revenue, when the acquisitions are there and the revenue side isn’t and that’s why you have the cash, it’s going to fluctuate a little bit. But fundamentally we are not going drain this sucker down. We are going to see some bumps as the ratio between the quality of the cash sinks in the quality of the cash sources vary, it’s engineering terms. So I hope that is clear.
The cash outflows tend precede the income, right because you’re putting out, you’re waiting 18 months to come back. So you can't match those probably it’s going to be in arrears. And if you really look at the way we’re advancing it, we or patent partner, that money in arrears and now we're just giving some of it in advance, same capital just from arrears to advance.
And is the webcast – what’s the situation with the webcast? I have got 2 O’clock but…
No. We’re going to take one more question, sorry everyone. We also are available if you want to email us and we can get the management on the phone for you, if there is further questions.
I’m just curious. I mean clearly in your business you recognize the time value of money in monetizing the intellectual property. On the other side, I know you mentioned about paying careful attention to the quality of the litigation. How do you draw the line internally and in messaging externally that you are not going to prioritize speed of resolution over quality of resolution?
The reason that 18 months 3X, there’s a reason we’ve said it, there is a reason we’ve thought about it, right. And there is a reason behind those numbers and by the way, one other thing to note is that’s something that we talk about on the advances, when we have advance situation because we’re advancing 5%, 6%, 7%, 10% of the money. That’s kind of the line that we aim for. Are we always going to get it right? No. But that's probably the simplest answer to your question. I can go on for five minutes and give you, we look at this and look at that. But all of those things will boil down to that very simple 3X 18 months.
Obviously we can stray from that. If the facts dictate time to money, we might have a faster time than money, we might have a faster return with companies that never ever want to pay. So, we have obviously modify but really that’s the objective, that’s how we try to draw the line.
Okay. Thanks very much for visiting with us and it is an open door, reach out to Rob, reach out to Brandy, schedule some time. And I do want to start this dialog about what metrics we can put out there, that are factual, not opinion based to help at terms like these. Thanks very much.
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