Acacia's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Acacia Research (ACTG)

Acacia Research Corporation (NASDAQ:ACTG)

Q3 2013 Results Earnings Call

October 17, 2013 4:30 PM ET


Matthew Vella - President and CEO

Clayton Haynes - Chief Financial Officer

Ed Treska - General Counsel


Mark Argento - Lake Street Capital Markets

Paul Coster - JP Morgan

Bryan Prohm - Cowen and Company

Tim Quillin - Stephens Banking


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

I will now turn the conference over to Mr. Matthew Vella. Please go ahead, sir.

Matthew Vella

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

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

With us today are Clayton Haynes, our Chief Financial Officer; and Ed Treska, our General Counsel.

Today, I will first give you an overview of our patent licensing business this past quarter. I will secondly address some of the patent reform initiatives currently underway in Washington D.C. and I will then close by outlining the changes we have been making since I first became CEO a couple of months ago. After I speak, Clayton Haynes will provide you with an analysis of our financial results. Finally, we will open the call for questions.

Acacia empowers patent owners and awards invention by providing a path the patent monetization for the people and companies who have contributed valuable patented inventions to an industry but who are still not getting paid for those inventions. We call these people the patented enfranchised.

In the face of unprecedented pressures being generated by those who seek to distract, dishearten and dissuade the patented enfranchised. Acacia remains confident that it has and will continue to obtain the high quality portfolios, best-in-class professionals and capital required to profitably serve this underserved and very deserving constituency. In the face of these unprecedented pressures, Acacia is also adapting.

After the CEO transition of last quarter, we instituted a comprehensive review of all of Acacia’s practices and implemented changes where we saw opportunities for improvement. I will highlight some of those changes later this afternoon.

As we have been implementing these changes, however, I must say that we had a slow and disappointing quarter from both the revenue and portfolio rights acquisition perspective and this is where I want to start my remarks today.

Specifically on the revenue side, Acacia generated $15,520,000 in revenues in the third quarter from 24 new revenue agreements which covered 24 different licensing programs, including five new licensing programs generating initial revenue.

Trailing 12-month revenues at the end of the third quarter were $181,755,000 as compared to $205,258,000 as of the end of the prior year quarter. And Acacia’s cash and investment position was $285,301,000 at the end of this past quarter.

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

Nonetheless, make no mistake about it. Our job is to close deals at the right price points, preferably in a timely manner and management is disappointed that we could not close more deals at the desired price points in this most recent quarter.

As was the case with the previous quarter, a lot of perspective licensees tested our result, our own price discipline at the end of this past quarter. Though agreements with many of these perspective licensees could have been reached that would have resulted in far better revenue numbers for the quarter. In some cases, some of those agreements due to terms and conditions would have impaired our ability to acquire rights and portfolios going forward.

In some other cases, executing some of those agreements would have placed such as pricing that is below we consider reasonable based on comparable rates with similar portfolios have been licensed.

This in turn would have directly impacted our shareholders returns under invested capital and it would have impacted our partner’s returns under intellectual capital, their patents. In such cases, we believe the right move for this past quarter to be simply continuing with associated patent litigation until we get better pricing. Consequently, we postponed the consummation of those agreements until future quarters at the expense of this quarter.

Having said that, our revenue performance this past quarter has not entirely attributable to the attitudes and actions of the perspective licensees with whom we are dealing. There are things we could have done better in some of our license negotiations during the past few quarters that we will now from on -- from now onwards do better.

As we undertook the comprehensive review of our company this past quarter, we did come to realize, for example, that we are being too optimistic about medical technology company’s willingness to pay reasonable license fees about having to resort to intense patent litigation.

As a result of this misplaced optimism, which was initially triggered by some early licenses that were achieved in this space without litigation, we decided to modify these past nine months, our usual playbook of remaining aggressive on the litigation front as we attempted to negotiate medical technology patent licenses.

But we did not get rewarded for this kinder, gentler approach in the medical technology space. Instead, we had two to three quarters of underproductive discussions that ultimately did not lead to the early license agreements we hope to close. We have now returned to our more characteristically aggressive litigation posture even as we continue to pursue licenses in the medical technology space.

So to recap, while we attribute much of this quarter disappointing revenue performance, the stubborn pricing positions of perspective licensees, we are taking steps to adapt this stubbornness and we think our current revenue performance will be compensated for in future quarters.

A final point in regards to our future revenue prospects needs to be made, it is one I have made before and which hold as true as ever. Our agreements are inherently more complex to negotiate than past license agreements and thus require more time because they typically involve more money and they involve more marquee portfolios.

Four or five marquee portfolios at times, meeting our single perspective licensee at any one time, take a lot longer to license to one company then just one marquee portfolio, which for us was almost always the [sponsors] portfolio.

As a drawback of having so many marquee portfolios, but having all those portfolios also means more revenue, higher returns and investment, and less overall risk and ultimately collecting that revenue, all of which we expect to start significantly materializing in 2014.

Turning to our portfolio intake, I think, we, as a company temporarily loss focus on our portfolio intake deal flow this past quarter. As we have been implementing the changes, the adaptations, I mentioned at the start of this call. And as we added several new people to our business development teams.

As a result, we had a slow and disappointing quarter from a portfolio intake perspective especially when compared to the previous six to eight quarters which collectively resulted in the accumulation of our present fleet of marquee portfolios.

Specifically, during this past quarter, we invested a total of $5 million in upfront advances and future guaranteed payments, to enter into partnering agreements covering the following six new patented technologies.

Fluorescence Microscopy technology was of key relevant to the life sciences because it enables two dimensional imaging of cellular constituents with unrivalled specificity, Professional and Social Media Networking technology, it is relevant to key features of the product and service offerings of several major social networking companies, Multiple Coordinated Video Viewing Devices technology, it is becoming increasingly important as smartphone and tablet apps become integrated with TV viewing, Intelligent Beverage Dispensing technology that are starting to become more and more prevalent at theaters and other public entertainment venues, Power Managed Security System technology using high-end electronic locks and Semiconductor Testing technology used by designers to test wafers.

And while we are delighted with each of the portfolios and partners, we’ve picked up this quarter, taken an aggregate. We are disappointed with the number of portfolios we brought in this quarter.

With the changes we will discuss largely behind us, however, and with our best-in-industry business development executives now settled into their respective teams, we think from a portfolio intake perspective that this past quarter was an aberration that is being reversed. Put another way, we remain confident about the number of high quality portfolios that are being presented to us, that we expect to pick up in the coming quarters.

The next topic I want to briefly touch upon is the government and its activities relating to path reform. These activities are certainly examples of the pressures I referenced at the start of my remarks.

As I mentioned in previous public remarks, we think that many of the draft bills circulating around Congress that unduly target patent plaintiffs or non-practicing entities at the expense of patent defendants or practicing entities, we did not think that any of these draft bills will pass into law. Accordingly, I will not address any of them today.

The draft bill that we understand might pass into law, the one that is sponsored by Congressman Goodlatte focuses on abusive patent litigation behavior without unduly impacting the rights of plaintiffs or non-practicing entities. This bill is not about discriminating against one class of patent holders versus another. It’s about abusive practices.

As a result, there is currently nothing in Congressman Goodlatte draft legislation which we think will be materially detrimental to our business. In fact, we expect the bill for it to become law drive marginal and unscrupulous players out of our industry which will be of benefit to us.

Moreover, because the fee shifting in other provisions inside this draft bill will make it riskier for a smaller patent disenfranchised plaintiff to assert it’s patents. We expect the bill should become law to drive new business our way.

As we have seen with virtually all patent reform legislation enacted into law over the past five years. The riskier and more complex patent assertion becomes for the patented enfranchised the more they shall turn to Acacia to help them monetize their IP. It is no coincidence that our company has experienced record growth since the first time significant patent reform rumblings began to be felt about five years ago.

Well on the topic of patent reform, many of you have also heard that the Federal Trade Commission is set to launch a formal inquiry into 25 wireless communications patent assertion entities. We have not yet been contacted by the FTC but we expect to be.

The FTC study will be a long-term multiyear information gathering process, ultimately leading to a set of suggestions to be presented the Congress for potential additional legislation several years out. We look forward to actively participating in the study by confidently explaining our business and its benefits to the patented enfranchised in the innovation economy all of us value and cherish.

And in doing so, we also look forward to raising issues that are currently not being emphasized in the FTC study, including the holdups being committed not just by unscrupulous patent holders but by recalcitrant patent infringers that engaging scorched earth litigation even in the face of valid infringed and reasonably priced patents.

Our final point about these government reform initiatives, if we sound relatively calm and confident about them, it is because we have done lot of work to understand them. For the first time in our company’s history, we have created a dedicated function in charge of government relations. We’ve been very actively reaching out to Washington D.C. insiders, politicians and similarly situated companies like ours that also champion the interest of the patented enfranchised.

Finally, I would like to turn to the comprehensive company-wide review that I have been referencing and specifically, to the changes, the adaptations that this review respond these past two months.

First off, let me say that management expects the changes to be largely complete within next four to five weeks. I do not expect to be talking to you about changes during our next quarterly call.

Secondly, I want to briefly touch on the impieties for the changes, when we started our review nearly three months ago. We thought that the processes we had in place might be improved to, one, better absorb the affirmation pressures being applied to the patent monetization industry and two, to take into account the growing sophistication of our company.

Specifically, as the amounts of capital deployed by the company have increased this past two years, as the quality of its people and portfolios have increased, as the stakes of its litigation and licensing activities has increased and as the environment in which the company operates has become more complex, with the benefit of hindsight we thought we might find several opportunities for improvement. We turned out to be right. As a result we instituted the following changes.

First, we have added increase discipline to our process of pricing patent licenses. As mentioned above, we will be more patience to get the right price. We will do this because we think at least the better returns of investment, better future patent intake opportunities and ultimately, smoother and higher earnings for our shareholders.

Second, we shall continue to shift our focus at our point of patent intake from quantity or quality. Because in conducting our comprehensive review we confirm the higher correlation between patent quality as opposed to quantity on one hand and profits on the other.

Third, we created larger licensing and portfolio intake teams characterized by more specialized divisions of labor. We will no longer be asking largely solitary executives to single handedly bring in or manage eight and nine-figure patent portfolios. We underwent a significant reorganization to do this.

Fourth, we decided to make higher levels of operating expense investments into portfolios we already have under management. Litigation, including international litigation, we are now prosecuting six oversees lawsuits and expect to add more and continuing patent prosecution are being ramped up.

We have also start to very selectively turn to the International Trade Commission for especially strong cases that amount to serious trade disputes involving U.S. companies whose patents we control, which is also more costly way to enforce patents. We have done all of these because we believe so strongly and our portfolio is currently under management.

Fifth, as we have increased our investments in patent portfolios, we have also added more risk and cost controls by enhancing our financial tracking and budgeting processes.

Sixth, we are making an increase investment in Information Technology to enable us do a better job, leveraging the rich patent licensing data we have gathered in the past decade and to do a better job, tracking our progress, acquiring and licensing rights in patent portfolios.

Seven, we’re also paying closer attention to what is happening in Washington DC as I mentioned before but for the first time creating a dedicated government relations function in our company. Eight, we have revamped our website in branding.

The first fruits of this effort can be seen at our new website which can be reached at which serves as a vital step in educating all of our constituencies, our shareholders, our perspective patent partners, our existing patent partners, folks in Washington DC and the patent licensing community at large, about who we are and what we do.

Ninth, we are providing more information to our shareholders about our portfolios by exposing some of the facts associated with our major licensing opportunities. You can see all of this at We’ll continue to build upon this initial effort.

For example, we’ll add information leading to our automotive licensing opportunities in the coming weeks. And we’ll also add more portfolios to some of the already listed opportunities such as smartphones. I will further discuss this change at the end of my remarks.

Finally and this change perceives the CEO transition that just occurred. As some of you might have noticed, we are making additions to the metrics we used to judge our own performance.

Before, we used to talk about trailing 12 month’s revenue, portfolios under management and portfolio growth. Now we are adding a few more metrics. We’re still talking about trailing 12 months revenue, portfolios under management and portfolio growth.

We’ll also talk about portfolios under management that are at a yield or pre-yield stage. We will talk about deployed capital and then returns on investment we earn on it. And finally, we’ll talk about so-called quality metric.

The quality metric cannot easily be quantified but it is embodied by the data we put up on the licensing opportunities webpage I just mentioned at And with this, the metric management is most closely tracking going forward.

All these changes build upon the strong foundations of our company. As the market leader, Acacia continues to see an acceleration in opportunities for partnering with a patented franchised and the technology, energy and medtech sectors. Our partnering opportunities and our revenue sharing opportunities are still as good as ever.

We continue to partner with patent owners on approximately 90% of new assets under management. On some portfolios, we’re providing upfront advances to the patent owner which will recapture from the initial licensing revenues we generate and our strong balance sheet is giving us the ability to utilize these upfront advances to acquire control of higher value, lower risk patents.

As we gain more and more control of these higher value, lower risk patents, as we repeatedly and predictably help the patented franchised get paid for their infringed on patents, we expect to be at the forefront of the emerging market of patent assets by providing a clearing house function that will match up within franchise patent holders with those that need rights under their patents using a minimal amount of cost and litigation.

But again to get there, we must be patient. Management believes that if it is patient, our shareholder shall be rewarded. Going back to our licensing opportunities webpage and focusing for example, on the smart phone entry, management thinks that the foundation for this belief is there for all to see, lots of portfolios, lots of patents, high coverage unit counts, lots of exposed revenue, lots of geographies, lots of losses driving negotiating deadlines and most of all the high quality patent portfolios entrusted to us might have patented enfranchised.

These are there for all to see. We think the quality can be discerned and the patents themselves and their associated litigation dockets which can also be reached from this place in our website. These portfolios includes the Rambus LED backlighting portfolio which originated from an Ohio company that took their technology for backlighting blankets for jaundiced babies and applied it to the backlighting mobile phones many, many years ago.

The ADAPTIX portfolio which originated from the Texas startup headed up by University of Washington professor that was building 4G technology implementations more than a decade before widespread 4G rollout. The portfolios include the Silicon Image portfolio, which originated from Silicon Valley pioneer in high-speed network interconnection technology, technology that more than a decade after its invention is not migrating to high-speed chip interconnections.

They also included Nokia-Siemens portfolio which came from one of the very most significant pioneers in the communication industry. And of course, those high-quality smartphone portfolios include the palm pilot softer portfolio.

We are working on for access codes which covers critical building blocks after the smart phones. Based on the information we have, these and other marquee portfolios do not deserve and will not suffer under our management, a quick and discounted license fee outcome leashed in the interests of serving short-term experiencies.

If we are patient, we will get as our reward the right prices for each member of this formidable and widely infringed coalition of patent portfolios, the right return on our capital, more profits for Acacia and ultimately higher share price for our shareholders.

I’d like to conclude with this most emphatic statement, notwithstanding the pressures that are weighing down on the patented franchised, I remain unbowed in my enthusiasm for our business and strategy, my confidence in the quality and technical skill of our professional staff and the strength of our patent assets.

We have never been better positioned for high caliber, long-term performance. And I’m determined to lead Acacia and realizing that opportunity. Thank you for joining us today and thank you for your support.

With that, I would like to turn the call over to Clayton Haynes.

Clayton Haynes

Thank you, Matt and thank you to everyone joining us for today's quarterly earnings conference call. On a consolidated basis, revenues in the third quarter of 2013 totaled $15.5 million as compared to $34.9 million in the comparable prior year quarter. Third quarter 2013 revenues included license fees from 24 new licensing agreements covering 24 of our technology licensing programs as compared to 33 new licensing agreements covering 31 of our technology licensing programs in the comparable prior year quarter.

For more details, please refer to today's earnings press release for a summary of technology licensing programs contributing to revenues during the quarter. Consolidated trailing 12 month revenues totaled $181.8 million as of September 30, 2013 as compared to $205.3 million as of the end of the comparable prior year quarter.

License fee revenues continue to be uneven from period-to-period based on the various factors discussed by Matt earlier on this call and on previous earnings conference calls and in our periodic filings with the SEC. For the third quarter of 2013, we reported a GAAP net loss of $15.7 million or $0.33 per share, versus a GAAP net loss of $6.6 million or $0.14 per share for the comparable prior year quarter.

Please note that earnings and loss per share amounts included in the release today are preliminary and were estimated using the two class method of computing EPS pursuant to ASC 260 accounting guidance. Management will finalize EPS calculations for the periods presented in accordance with the applicable guidance in connection with the preparation, review and filing of the company's quarterly report on form 10-Q for the third quarter of 2013.

The GAAP net loss for the current quarter included the impact of non-cash stock compensation charges of $9.4 million versus $6.3 million in the prior year quarter and non-cash patent amortization charges of $12.6 million versus $10.4 million in the prior year quarter.

Third quarter 2013 non-GAAP net income, which excludes the impact of non-cash patient amortization, stock compensation and excess benefit related non-cash tax benefits was $5.1 million as compared to $6.8 million for the comparable prior year quarter. Please refer to our disclosures regarding the presentation of non-GAAP financial measures in today's earnings release and 8-K filed with the SEC.

Our average margin, defined as total revenues, less inventor royalties and contingent legal fees for the portfolios generating revenues during the period was approximately 68% for the third quarter of 2013 as compared to 60% for the comparable prior year quarter.

Average margins continued to fluctuate period-to-period, based on the mix of patent portfolios with varying economic terms, conditions and characteristics that generate revenues each period and specifically, based on the related economics associated with the underlying patent acquisition agreements and contingent legal fee arrangements, if any.

The change in average margins in the third quarter of 2013 as compared to the third quarter of 2012 was due, primarily to a higher percentage of revenues generated in the third quarter of 2013 on average having lower contingent legal fee rates, as compared to the revenues generated in the third quarter of 2012. Inventor royalties expense decreased 53%, relatively consistent with the decrease in revenues quarter-to-quarter.

Third quarter 2013 non-cash patent amortization charges increased due primarily to an increase in amortization expense related to patent portfolios acquired since the end of the prior year period, totaling $4.4 million. The increase was partially offset by a decrease in accelerated patent amortization related to patent portfolio dispositions, totaling $2.2 million.

MG&A expenses, including non-cash stock compensation charges increased $6.3 million or 53%, due primarily to a non-cash stock compensation charge related to acceleration of vesting of shares of restricted stock, totaling $1.8 million and cash severance totaling 850,000 incurred in connection with the Board approved retirement package for Paul Ryan as previously announced.

The increase in MG&A also reflects a net increase in licensing, business development and engineering personnel since the end of the prior year quarter, an increase in other employees severance related costs associated with certain internal structural changes during the current quarter, and a net increase in corporate legal facilities costs related to the expansion of our Newport Beach and Texas facilities and other general and administrative costs.

Approximately, 70% of the increase in MG&A quarter-to-quarter relates to one-time non-recurring expenses incurred in third quarter of 2013. Other operating expenses incurred in the third quarter of 2013, included a one-time non-recurring charge related to the resolution of a dispute concerning legal fees associated with the prior matter totaling $3.5 million.

Litigation and licensing expenses in the third quarter 2013 increased $4.4 million over the prior year quarter to $10.4 million due primarily to an increase in our investment in international enforcement costs as described earlier by Matt, and an increase in strategic patent portfolio prosecution costs associated with certain of our ongoing licensing enforcement program.

We expect to continue to incur increased costs related to our international enforcement and patent prosecution over the next several fiscal quarters, as we continue to ramp up international litigation in both domestic and international patent prosecution. From a tax standpoint, the tax benefit for the third quarter of 2013 and 2012 reflects the application of an estimated annual effective tax rate to the GAAP pretax net loss reported for the periods.

The effective tax rate for the third quarter of 2013 is higher than the blended federal and state tax rates due primarily to certain nondeductible permanent items associated with Section 162(m) of the Code. The tax rate for the prior year reflects the impact of the release of the valuation allowance in 2012 as previously discussed.

As of the end of the third quarter of 2013, we estimate that we have approximately $20 million of net operating loss carry forwards and approximately $23 million of foreign tax credits available for use in future periods. From a cash flow perspective, we ended the third quarter of 2013 with $285.3 million of cash and investments versus $311.3 million as of December 31, 2012.

Net cash outflows from operations for the third quarter of 2013 totaled $22.9 million, primarily reflecting the decreasing revenues in the current quarter and payments to our patent partners and contingent law firms related to Q1 and Q2 revenues during Q3 2013 versus net cash inflows of $6.8 million for the third quarter of 2012.

Third quarter 2013 patent related acquisition costs paid totaled $4.2 million as compared to $24.5 million in the prior year quarter. On a year-to-date basis, we have paid quarterly dividends to shareholders totaling $12.4 million. And as stated in today's earnings release, the Board has approved a third dividend payment in the amount of $0.125 per share, which will be paid on November 29, 2013 to shareholders of record at the close of business on November 1, 2013.

Looking forward for fiscal -- for the remainder of fiscal 2013, we expect MG&A excluding non-cash stock compensation charges for fiscal 2013 to be in the range of $30 million to $31 million. For fiscal 2013, we expect patent related litigation and licensing expenses to be in the range of $35 million to $36 million depending on net patent portfolio litigation, including increased costs associated with international enforcement and strategic patent prosecution activity occurring throughout the remainder of the fiscal year as discussed earlier.

Based on current outstanding grants of restricted stock, we expect scheduled non-cash stock compensation charges for fiscal 2013 to be approximately $27.4 million, excluding any Q4 2013 patent portfolio acquisitions. Scheduled fiscal year 2013 patent amortization expense is expected to be approximately $48.1 million.

At this time, I would like to turn the call back over to Matt Vella for the Q&A session.

Matthew Vella

Tella, could you please open up the call for questions?

Question-and-Answer Session


Thank you, sir. (Operator Instructions) Our first question comes from Mark Argento with Lake Street Capital Markets. Please state your question.

Mark Argento - Lake Street Capital Markets

Hi. Good afternoon.

Matthew Vella

Hi, Mark.

Mark Argento - Lake Street Capital Markets

Hi. Just wanted to touch base on -- it sounds like you guys have reevaluated little bit of your go-to-market strategy with some of the medtech portfolios and I know you guys originally had thought about, become more of a comprehensive model where you would work kind of on a broader basis with a potential licensee and not only settle lot, maybe existing infringement activities but also kind of a go forward piece. And then you guys kind of moved away from that over the last year or so.

When you relook at kind of the whole go-to-market strategy and licensing strategy, is that something that we could start to see some more of and then kind of dovetailing onto that. I know you had a couple of these type of deals that you had out there, two, three, four years ago that potentially would be up for renewal maybe you could touch on your ability to renew and use your strategy going forward?

Matthew Vella

Sure. On the medtech question and the answers about these questions, Mark, are going to be similar. When you end up pushing a large portfolio and getting a license on it and you are not paying a lot of money for that portfolio, people want some period of tranquility to be coupled with the fact that you no longer are suing them under the major portfolio at issue.

And so, we have seen on many, many occasions, not always but on many occasions some notion of that protection built into our larger agreements and that hasn’t change and that will not change. I think if anything has changed, it’s the idea of what’s the tail and what’s the dog so to speak, right. The -- what’s driving everything ultimately is the patent matter before the prospective licensee.

The go-forward protection which varies quiet a bit from company to company, some don’t even want it, and determines vary quite a bit, that’s the tail. And so, turning to the second part, the part about renewals again, these deals are a function of the portfolio you have in five of those companies at that point in time.

If you look very closely at our docket, our litigation docket and if you go to the webpage I just described Mark, you will notice for example a flurry of lawsuits occasionally filed and all at once. And when you see that, that might tell you something about what happens as a result of a negotiation, that was occurring. So overall, again just s recap, the go-forward piece that’s the tail, the dog so to speak that -- those are the large portfolio -- the marquee portfolios often that we’re bring into bear in front of prospective licensees.

And our approach consistently has been, let’s get the right price for the portfolios in front of the perspective licensing. And then if we are going to talk about go-forward protection, we see all manner, all variety of protections that are bargained for by the parties.

Mark Argento - Lake Street Capital Markets

All right. And then in terms of, I know, you mentioned the ITC, you talked a little bit about, when you talk about using the ITC, I know historically it hadn’t been of any -- you had a spent a lot of time in just given the business model that you have and maybe talk a little bit about where you see the opportunity to use the ITC?

Matthew Vella

Well, I talk about the opportunity we have in front of us now. I think it exemplifies how we would use it and we have some pioneering 4G patterns from ADAPTIX. And we think that these patents are critical to the 4G roll out that’s occurring right now. And it’s a rollout that just starting.

If you really think about it, your smartphone only began seeing 4G about a year ago. So, if you were to just pursue those -- that very significant portfolio in this record, the typical focus of one of those actions is on past damages and on the roads where you can get on past damage. Then you asked as a go-forward piece to cover future sales.

But usually when we are going into district court, there is a lot of past damages involved. Well in this case we are getting to a resolution quite quickly. There will not be a lot of past damages because this technology is just starting to be deployed. It’s going to be around for years and years and years, and using the ITC for that reason, right, the ITC is not about past damages. It’s about essentially validating patents showing their infringed and then letting the parties go sort out what the license should be going forward, that’s very appealing to us.

Now I can also talk about a number of things the thing the ADAPTIX patent involved in the ITC a number of things, it is not because that also is going to be a good guideline for how we plan using the ITC going forward. We want to be very selective when we go to the ITC. We don’t want the ITC to be a default enforcement mechanism and we don’t want to raise the spector of non-practicing entities continuously going back to the ITC and flooding that very important body with non-practicing entity litigation.

And the ADAPTIX portfolio, those patents including the one in the ITC was never subject to a standards friend obligation. Right. It was never -- the onus of that patent were never invited, and never participated in standards essential negotiations, their technology was just taken by the folks in the standards body. So that sort of a guideline that we plan following.

We do not plan on bringing a lot of standards essential patents, any in fact to the ITC. We’re also like the quality of the invention and frankly we like the circumstances very much. We think it’s just the kind of thing the ITC should be looking at. Just to recap ADAPTIX was a technology start-up founded by a University of Washington professor and the start-up raised about $40 million in venture capital and was out there with a box that exhibited a lot of the features that are currently being rolled out in 4G networks and that box was about 10 years too early.

There was nothing for it to plug into. Fast forward and we are suddenly seeing the technologies in that box being disseminated through a number of standards like the 4G standard and we are seeing a number of companies making a lot of money and gearing up to make even more money essentially using that technology. The $40 million in venture capital money now went away, the box has never got sold.

We came along, we cashed out the venture capitalist and now we have got the portfolio. And we think it’s important that we are able to get our day in quote so to speak, that we are able to vindicate these American patent rights because next time someone comes along with a terrific technology product that just might be a little bit too early. I think we want the venture capitalist that did pump the $40 million into ADAPTIX to make the same decision.

No one full well that if things don’t work out because the technology is just too early or some other things happen, independent of the value of the technology that prevents that company from making a lot of money. There will be companies like us around. There will be a secondary market of patents around and will be around to essentially reward these folks for taking a risk and great technology.

For all of that to be there, we need to be able to take advantage of bodies like the ITC. So, that’s how we plan on using the ITC going forward in a nutshell.

Mark Argento - Lake Street Capital Markets

Last question in terms of the buybacks, stocks in bank that will be in bid tomorrow. You guys have been acted with the buyback, any thoughts on reactivating that or potentially returning some capital shareholders here. Some point in time I have to assume instead of buying other guys IP or call in other IP it just makes sense to invest in your own IP that you already have, I know if you have any thoughts or comments on that yet?

Matthew Vella

Well, yeah, the board is constantly considering how to best allocate the company’s capital, right, including via stock buybacks, dividend payouts and off course the portfolio investments you just referenced. At present it’s just inclined to engage in buybacks but there is better capital allocation opportunities elsewhere but circumstances change. So, we will see what happens.

Mark Argento - Lake Street Capital Markets

All right. Thank you.

Matthew Vella

Thank you.


And we will take our next question from Paul Coster with JP Morgan.

Paul Coster - JP Morgan

Hi, Matt. Thanks for taking the question. First off, the -- your some of your counterparties decided to test your results this quarter. What changed and never refer to you saw really explaining your situation and with stock down, why wouldn’t you make test your resolve this quarter as well?

Matthew Vella

In terms of what changed, we can only speculate and I’d rather not do that. Meaning, it’s not like, this guy send a note saying, hey, sorry, we couldn’t do the deal. Here are the five reasons we did not cut the deal, right.

In terms of why we don’t think this is going to keep going on and on and on, there is court dates, and there is trial dates and there is Markman dates. So ultimately that’s the ultimate backstop. And we’ve put our lawsuits up on our web page. Everyone can see when those are coming along and in most cases that is the ultimate backstop.

Now, as we keep walking away from substandard license offers. There is also psychology playing on the other side. At some point, someone is going to take a deal at a reasonable price and when they do, we’ll cut that deal and we’ll ensure the competitors that are making us taking more risk and spend more time, pay more.

And so, we’re going to count on the ultimate backstop of trial events. And we are going to count on the promise that if someone test our resolve, a competitor is liable to come along, pick up the portfolio at a price point that’s going to be better than what the folks are going to keep testing our resolve are going to pay.

Paul Coster - JP Morgan

Okay. There is a couple of things in your strategic review. It’s just a little slide -- it didn’t quite resonate. But the first one was that, you going back and so you feel like some more discipline needs to be applied on this deployment of capital and well you haven’t -- I mean, there is one really big deployment which was Adaptix. Do you think you over paid? Is this an expression that surprised you most?

Matthew Vella

No. And in fact, I’m sorry, Paul, there is a verb in your sentence that was muffled. Can you repeat just a very first part of that question?

Paul Coster - JP Morgan

Yeah. I don’t know if I forget the words. You are actually right. In your strategic review, you talked of going back and sort of applying some more discipline in your processing depends and of course the most visible deployment of capital was on Adaptix is this buyers remorse with the other player…

Matthew Vella

No. No. And couple of things, one, I was talking about pricing packing licenses. Having said that, we’ve always exhibited discipline about how we price and take and we’ve always used the metrics we’ve been talking about this past 20 months. The 3x and capital backing 18 to 24 months, so that hasn’t changed and that’s not going to change. In terms of Adaptix, no, I don’t think we overpaid and I think over the time, we will see that we haven’t overpaid.

Paul Coster - JP Morgan

You talked about you are disappointed with the intake, but I think also on a strategic review, I kind of got big modeled up on whether it was what comes to your quality that mattered. How do I reconcile that? It sounds like it’s a quantity issue that may be is also quality issue?

Matthew Vella

It’s a bit of both. I mean, again, we’ve got especially in the past 20 months, higher thresholds that need to be crossed before we pull something in. And those thresholds are around the issues of infringement enforceability and worthy. And now once you get beyond that point, the big differentiator is market size.

So obviously markets on microscope are not as large as markets on smartphones. So when I talk about disappointment and the intake, I’m still delighted with each of the portfolios we pulled in. We still think that taking an isolation, they are wonderful. They just don’t always happen to cover widely used markets or features to the same extent to say smartphones. And so that’s what I’m referencing.

Paul Coster - JP Morgan

This quarter, you’ve acknowledged that maybe we are sort of being a little bit too friendly with potential licensees in the medtech space. And so what it implies to me is that we do have a little bit of control over your destinies. It’s not all outside of your control. It may context them. Can you commit to us on this call now that you will post sequential growth this quarter with the more aggressive assertion that you are now planning.

Matthew Vella

Commit what, what do you mean by the post sequential growth?

Paul Coster - JP Morgan

Sequential revenue growth in 4Q ‘13.

Matthew Vella

No. I mean because if someone comes along and they want to start a large check on us for taking, for example our entire smartphone opportunity away and let just say our sequential quarterly revenue growth. At the expense of what we have is a far higher amount of revenues going forward, we will cut that deal. So, no, I can’t commit. It’s hypothetical.

Paul Coster - JP Morgan

But you can’t commit to driving revenue growth this quarter by more aggressive stance with your portfolios?

Matthew Vella

Well, if we had taken…

Paul Coster - JP Morgan

-- may be $15.5 million seems to me like its rock bottom surely. You can’t commit to growing from this level this current quarter.

Matthew Vella

It all depends, right and it all depends. So, one thing I’m not going to do though, Paul, is I’m not going to pull myself in anymore of a corner than I’ve already done already, right because essentially -- I mean that’s self exceeding prophecy.

Paul Coster - JP Morgan

No. I think it’s -- so, I just was testing it out to see if you have got any control here that I think….

Matthew Vella

We do lose control.

Paul Coster - JP Morgan

But you may choose not to exercise it and that maybe rights businesses.

Matthew Vella

Yeah. Yeah.

Paul Coster - JP Morgan

Fairly get it. But obviously well scrutinize by the public markets, this business model is not in the multiple it probably deserves. And I mean this is all obvious -- the new metrics that you plan on disclosing will help it but not much.

Well, last question really is more so benign in nature and well, at least, on [Clayton] question, but maybe trying to just go back to Clayton’s comments on expenses. I just kind of miss the little bit on the below line expenses that you do. You are in a position to predict. Can you just reiterate, what is $35 billion to $36 billion this year? And in that context by the way, you said, I think 70% of the increase from 2Q to 3Q is one time in nature and yet the guidance that you issued only calls for something like a 15% or a 10% decline in MG&A sequentially, so I’m kind of bit surprised there is not a more precipitous decline this quarter?

Matthew Vella

Sure, Paul. So, yeah, the reference to 70% was just an estimate of how much of the increase in the current quarter versus the prior year quarter related to those one-time non-recurring charges. For example, the non-cash stock compensation charges associated with Paul Ryan’s severance package and other types of one-time cost that we don’t expect to incur in future quarters. But the reference to the $35 to $36 million.

Paul Coster - JP Morgan

Yeah. But you would expect the sequence decline in MG&A including FAS 123 to be more than 10%. You said there is $68 million. MG&A was $30 million, $31 million and FAS was $27.4 million. So it’s sort of $57 million. Yeah. Okay, I beg your pardon. I’m wrong. I’m wrong.

Matthew Vella

Okay. And then just the first part of your question, the reference of $35 million to $36 million was an reference to an estimate of what we think the full year litigation and licensing expenses would be as if at the end of the year, just based upon the ramp up in both international enforcement costs as well as the strategic pattern portfolio prosecution cost.

Paul Coster - JP Morgan

Okay. Thanks. Good luck with everything.

Matthew Vella

Thank you.


We’ll take our next question from Bryan Prohm with Cowen and Company.

Bryan Prohm - Cowen and Company

Hey. Good afternoon, gentlemen. Thanks for taking my questions.

Matthew Vella

Hi Bryan.

Bryan Prohm - Cowen and Company

Hey. A couple of quick things. First, help me clarify your commentary on pricing result amongst prospective licensees. It was unclear to me if that was a general statement or more specific to medtech?

Clayton Haynes

Pricing result was more general and it applies to medtech as well but was more general.

Bryan Prohm - Cowen and Company

Okay. So that gets segue into our next question. So is the lessening space in general so contentious now that the company may actually need to record many of the litigation wins to build more credibility and unlock the qui tam in some of these portfolios long term. I mean, I guess my thought here is, is the space today such where you can get more from active compelling with sticks versus persuasion with carrots for lack of a better analogy?

Matthew Vella

That’s a great question. And the answers that depends on the prospective licensee. I think there are some of that where you need sticks. There are some we need carrots and there are some where you do in transition. People come and go in these organizations and as a result of -- and circumstances change in these organizations. And so you do see some flux.

Now, speaking generally, I think we’re going to find out a lot next year. We’ve got this interesting and very strong set of patents. And for example in the smartphone space, we have a number of trial dates, for example, in Japan or in Germany or in the ITC, right that are going to be triggers for activity. And if we start seeing that folks are only paying us the money we think we are to be getting when those dates approach and when those dates pass, the answer to your question generally would be yes.

If we’re able to generate revenue without those dates and deadline looming, which I am not ruling out by the way, then I think the more newest answer I started out with is the one we’re going to go with.

Bryan Prohm - Cowen and Company

Okay. Last question on intake, how do you use the key portfolios that you already have and your relative success in licensing them to inform your longer term strategy in decision making about future intake. I mean, maybe specifically talk to smartphones in 4G because that’s -- there is a meaningful component of patent portfolios and revenue from that space?

Matthew Vella

Sure. If you’re dealing with a prospective patent partner, you really have to get two points across in the smartphone space given where we are right now which is we have a very compelling suite of portfolio is that read on virtually every smartphone -- well every smartphone out there.

And one, you obviously have to run them through fiduciary obligations that you will respect and let them know that we’re going to get the right price for their portfolio. And two, you can tell them that we have a number of matters that are going to essentially force licenses and that your time to money, if you’ve just come to the fleet so to speak at this point in time is likely to be accelerated based on past history because we’re going to have in some sense an event guard ride a bunch of forerunners that are reading on the prospective licensee that we both are seeking to grab.

So it’s a little bit of those two elements and that’s what informs. That’s how -- what's going on in the licensing hemisphere and forms that’s going on in the patent acquisition hemisphere, for example, with smartphones.

Bryan Prohm - Cowen and Company

Got it. All right. Thanks for the -- thanks for the time gentlemen. Good luck. And I’ll talk to you soon.

Matthew Vella

Thank you.


And we’ll take our next question from Tim Quillin with Stephens Banking.

Tim Quillin - Stephens Banking

Hi. Good afternoon.

Matthew Vella

Hi Tim.

Tim Quillin - Stephens Banking

I guess, one of the most common questions I get on Acacia is why is this company public? And it does seem like the business model does not blend itself well to consistent quarterly earnings that public investors like to see. And I am wondering if you thought about setting up targets and maybe even tying your compensation to more long term goals setting your three year out goal in terms of where you can get to in terms of earnings leaving your self, give enough time to achieve that goal, maybe having intermediate targets and kind of lying your interest with investors around that long-term target in some ways, that -- is that a consideration?

Matthew Vella

Well, first off thanks. Those are two thoughtful questions. On the second one, on the alignment that’s an interesting suggestion, it’s one I am going to definitely think about. I think again, a lot depends on what happens in the next year. If we see that the past couple of quarters have been more of a blip or bump and that we can get the revenue back on track which is our current thinking then I don’t think there is going to be a need for that kind of change but if it turns out that it is going to take trial dates to get the numbers we are talking about then that’s certainly an interesting suggestion, we will definitely think about it.

Going back to the public and private piece, actually another point on your question, bear in mind right that comp right now, temporarily I guess, there might be a question right about, whether we have absolute full allocation but fundamentally there is full allocation, right because everyone is bonused off of P&L. Right. Everyone is bonused off of profit.

And so I did think it was important to make that point. Coming back to the public private question, I think we are the one of the only -- I guess one or two major public companies out there and maybe we are the only one that partners with so many different patent partners. So we have Bellwether and -- but we are also an isolated data point.

And so, looking at us right in isolation, you might draw a bunch of conclusions about whether or not we should be public. We already though is if you look at all patent assertion and all patent licensing companies out there, including some that have gone private very recently, and they have just been, it hadn’t been like those companies re doing spectacularly well.

So, I think, we have to be careful about drawing a direct correlation between what’s going on now to the fact that we are public as opposed to private. But let me reiterate why we are public. When we get into these dry patches, there is a lot of transparency, we tell you, right. And we just don’t tell you, we tell the public.

Our patent partners know, right. And potential investors know. And so that transparency has served us well and we think it will serve us well going forward. Now I have given you all the other stock responses about why we are public and not private, but I think it’s at times like these when it is important for us to be public.

Tim Quillin - Stephens Banking

Okay. And I know I tend to ask this question each quarter and I know you don’t like it exactly. But if you take out the top three licensees, you get to $2.5 million this quarter which is low as I think it has ever been in terms of that remainder. And I think if you dial it back a couple of years, it just felt like there was more breadth in terms of your licensing.

And I think just in sheer number of portfolios that you have licensed in the quarter there seemingly wasn’t the breadth. And so to a certain extent you become a little bit more bit game hunters but -- are those two goals countered? Do you have to abandon the smaller patent portfolios with the more consistent revenue base in order to be a big game hunter?

Matthew Vella

No. I think first of all we are hunting for more big game that is a lot of what’s going on. Can the two co-exist? Yes. Do we want to co-exist in the same ratios as before? As I said in my prepared remarks, my answer is no. I mean, what we are really talking about is the long-term profitability, right.

When we look back in hindsight and we look at what our portfolios have done, it’s clear what has put us on the map and it’s clear what has made us the company we want to be. And in my mind it’s clear, what’s going to make us the company we aspire to be and it’s going to be more of a tilt, not so much to big game per se but just the bigger portfolios.

Now, bear in mind and I didn’t quite catch the details of the statistics you called out. But we are cutting agreements. For example, where we’ve -- we’ve actually amalgamated a number of portfolios into one transaction and they are showing up separate amounts, right. I’m talking about RPX. So, I think we got to bear that in mind. But again, the basic answer to your question is as I said in my prepared remarks, we are shifting, we are tilting, right. We are still going to go after the -- I guess I’m calling the smaller portfolios but we are definitely tilting because financial history tells us we should.

The other thing to bear in mind is circumstances are changing, right. And in fact one reason I’m not that stressed about, what’s going on with the government is because we've been acting like it’s going to happen, is by it I mean a crackdown on -- what we are putting, it is a crackdown on patent licensing programs where your price points fall short of your litigation cost. We've been acting like that’s going to be coming for a while. We’ve been getting away from that business for a while, so that’s also part of the reason you are seeing the tilt.

Tim Quillin - Stephens Banking

And I’m a little -- I guess I’m a little bit confused in terms of the philosophy in terms of using capital to drive higher-quality patent portfolios. So you are up until 2012. I think you’ve laid a little bit more towards peer partnerships or relatively light in terms of capital. And I think that seems to be back where you are in 2013. In 2012, you put $325 million in capital to work. And I think kind of explains that maybe you needed to put capital to work to get the higher-quality patent portfolios and now you don't. I'm just -- I'm little confused about the change.

Matthew Vella

Yes. We looked at that. I mean I think there is a couple of things happening. One is, as I said candidly in this call, I think we could have been doing a better job on the business development front and part of that better job would've resulted in more capital being allocated. So in a nutshell, no, we have not changed our philosophy, 2012 to 2013. And by the way, we expect that we've addressed. We think some of the reason for that is the churn and some of the changes we’ve put in place in the last quarter. We expect to -- we maintained our philosophy. So that's one big part.

The second big part is, I think we've been successful. And I've been pleasantly surprised at the success. One good thing about this year, when we look back in hindsight, I’m quite sure about this. We’ve gotten some steals. Okay, the partnering deals. At the end of the day, our partner is going to make out but we've gotten some portfolios where we haven’t had to put the capital down and we are very happy about that.

Tim Quillin - Stephens Banking

Okay. In terms of Microsoft, do you know offhand when the first scheduled trial is, that might be a forcing factor and getting some kind of multiple portfolio deal done there? You got your first opportunity I guess to get a multiple portfolio licensing deal done there.

Matthew Vella

Well, on Microsoft, right. All I can really say about that, we filed seven lawsuits I think it was around that number against on October 1. So we don’t have trial dates, right. There's a bunch of matters under Nokia handset business reps are kind of see how that plays out, right. So those might be forcing functions. But ultimately there is another forcing function. Microsoft is a savvy company and they are price sensitive and they know, right. And I guess I’m saying is that the longer they wait, the more they will pay. That’s a forcing function.

Tim Quillin - Stephens Banking

Okay. Were there any notable new patent portfolios or once that you would consider marquee or stead portfolios or pedigree portfolios that you brought on in 3Q?

Matthew Vella

No. Again, as I mentioned, the market sizes right, because that's what really distinguishes them. I wouldn't say that any of those are marquees just based on the market sizes. We certainly think they are terrific patents. We think they will get good rates. We think people will make good money of them including our patent partners. But none of them will really cover big markets at least right now. There is a couple that could become very large markets. But as of now, those are nascent markets.

Tim Quillin - Stephens Banking

Okay. And then just last question on the other expense, the $3.5 million, I was unclear what exactly that consisted of? Thank you.

Matthew Vella

There was a, I guess and I’m looking at our General Counsel here. There was a dispute and with a one of our law firms resolved it.

Tim Quillin - Stephens Banking

In terms of…

Matthew Vella

A dispute in terms of their fee, yes.

Tim Quillin - Stephens Banking

Okay. Okay. Does it related to some pass period where you didn't?

Matthew Vella

Yes. It relates to a period from our distant past where we’ve basically changed law firms.

Tim Quillin - Stephens Banking

Okay. Okay. Thank you.


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

Matthew Vella

Well. Again, thank you for attending this call today. I’m going to repeat that last statement I made. Notwithstanding pressures that are weighing down on the patent disenfranchised, we do remain unbogged by our enthusiasm for our business and we have every confidence in the quality and technical skill of our staff.

We have great confidence in the strength of our patent portfolios under management and we think -- I think we’ve never been better positioned for high-caliber long-term performance. And I’m determined to lead Acacia in realizing that opportunity. Thanks for joining us and thank you for your support.


Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-203-1112 or 719-457-0820 with the confirmation code 1100393. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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