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

Acacia Research Corporation (NASDAQ:ACTG)

Q2 2012 Earnings Call

July 19, 2012 4:30 p.m. ET

Executives

Paul Ryan – Chief Executive Officer and President

Clayton J. Haynes – Chief Financial Officer

Matthew Vella – Executive Vice President

Analysts

Timothy Quillin – Stephens Inc.

Mark Argento – Craig-Hallum Capital Group LLC

Paul Coster – JPMorgan Securities LLC

Jonathon Skeels – Davenport & Company LLC

Doug Thomas of JET Investment Research

Operator

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

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

Paul Ryan

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

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

With me today are Chief Financial Officer, Clayton Haynes; General Counsel, Ed Treska; and Executive Vice Presidents, Dooyong Lee and Matt Vella.

Today, I will give you an overview of the progress we are making in building the business and Clayton Haynes will provide you with an analysis of our financial results. We will then open the call for your questions.

Acacia continues to build its leadership position in patent licensing. Acacia generated second quarter revenues of $50.5 million, an increase of 27% over last year’s second quarter revenues of $39.7 million. Acacia grew its key performance metric of trailing 12-month revenues to a new record $233 million and completed the quarter with $431 million in cash and investments.

We generated the $50.5 million in second quarter revenues from 38 new revenue agreements including new licensing agreements with American Express, Cisco, Freescale, Fujitsu, Fuji Film, IBM, Hewlett Packard, Panasonic, and Regions Bank. The 38 new revenue agreements covered 27 different licensing programs including 7 new licensing programs generating initial revenue. Acacia has now generated revenues from 125 different licensing programs.

Acacia invested $48.3 million in new patent portfolios during the quarter bringing our total investments and patents over the first six months of this year to $200.4 million. During the second quarter, Acacia acquired control of a record 27 new patent portfolios. These new portfolios included patents originally issued to Polaroid, six prominent patent portfolios of 68 patent covering a wide range of software technologies, five patent portfolios with 156 patents from a major semiconductor company, four patent portfolios with 48 patents from a major technology company, and seven Medtech patent portfolios with over 150 patents and pending applications relating to medical devices, biologics, and diagnostics techniques.

We continue to increase future shareholder value by acquiring control of significant patent portfolios and now control 238 different patent portfolios. We continue to see an acceleration and opportunities for both partnering and acquisition of new patent portfolios. Acacia has built its business by partnering with patent owners, taking control of licensing activities, and splitting the net licensing revenues 50-50.

Our successful track record in generating revenues for patent owners is accelerating new business opportunities. We are fortunate to have built a market leadership position in patent licensing at a time when patents are rapidly becoming a new asset class. There are two major market trends, which are accelerating our business. The first trend is the growing number of companies worldwide who are deciding to generate revenues from their patent portfolios.

There is rapidly increasing awareness in boardrooms across the world that their managements need to generate returns on investment from shareholder capital that has been invested in research and development. The recent sale of AOL's patent portfolio to Microsoft for a billion and last year's sale of the Nortel patent portfolio for $4.5 billion and Google's subsequent $12.5 billion acquisition of Motorola Mobility has served as wake-up calls to all companies and is accelerating this new trend.

We are also observing the large companies are becoming focused on their IP balance of payments and realized they need to generate financial returns on their own R&D investments to offset their growing IP payment obligations to other companies. As a result of this trend, we are seeing a significant increase in partnering opportunities with large companies.

Acacia's partnering business model is very attractive to companies who want to generate financial returns from their patent without having to create a distraction for their core business, become involved in litigation, or have to make additional investments of capital and human resources to earn those returns. Our corporate partners recognize that we have built a highly specialized company for patent licensing and have built a proven track record in generating revenues.

The second major trend which is accelerating our business is the growing complexity and cost that is required for small entities such as individual inventors, research centers, universities, and small companies to be able to license and assert patents on their own. As a result of a number of recent court rulings and the recently passed patent legislation, we are seeing increased partnering opportunities with these small entities who need an expert partner to generate licensing revenues from their patents.

We have delivered great results for many of the small entities over the past few years and our reputation for generating revenues, even after their own efforts were often unsuccessful, has repeatedly demonstrated our value to these partners. As a result of these two trends, Acacia's pipeline of potential patent portfolio acquisitions is continuing to accelerate.

We are very fortunate to have built a market leadership position in patent licensing at a time when more and more companies are seeking to monetize their patent assets. Our extensive history of patent due diligence in all the major technologies sectors has become a great asset in evaluating new opportunities and our experience in negotiating over 1,100 licensing transactions with major companies gives us great insight into the likelihood of being successful on completing transactions at projected price points within realistic time frames.

These skill sets give our management team a unique perspective in valuing intellectual property. We are also aggressively expanding our business platform into additional markets and have already begun to build a significant base of patents in medical technology and the automotive market.

Our quarterly revenues will continue to be uneven and we are very appreciative of the work the investment analysts covering Acacia have done in giving the investment community the appropriate perspective for measuring our Company's performance. The analysts have focused investors of the fact that our quarterly revenues can be very uneven given the timing of certain licensing transactions and at the more meaningful measurements, our 12-month trailing revenues and projected annual revenue growth.

With that, I will turn the call over to our Chief Financial Officer, Clayton Haynes.

Clayton J. Haynes

Thank you, Paul, and thank you to everyone joining us for today’s second quarter 2012 earnings conference call. As indicated in today’s earnings press release on a consolidated basis, revenues in the second quarter of 2012 increased $10.7 million or 27% to $50.5 million as compared to $39.7 million in the comparable prior year quarter.

Second quarter 2012 revenues included license fees from 38 new licensing agreements covering 27 of our technology licensing programs as compared to 29 new licensing agreements covering 24 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.

We continued our trend of strong trailing 12-month revenue growth with consolidated trailing 12-month revenues increasing 31% to $233.6 million as of June 30, 2012, as compared to $177.9 million as of the comparable prior year quarter. Currently, to date on a consolidated basis, our operating subsidiaries have generated revenues from 125 of our technology licensing programs, as compared 104 technology licensing programs as of the end of the comparable prior year quarter.

License fee revenues continue to fluctuate from period-to-period based on the various factors discussed on previous earnings conference calls and in our periodic filings with the SEC.

For the second quarter of 2012, Acacia Research reported GAAP net income of $6.3 million or $0.13 per fully diluted share versus GAAP net income of $2.1 million or $0.05 per fully diluted share for the comparable prior year quarter.

Second quarter 2012 non-GAAP net income, which excludes the impact of non-cash patent amortization charges, non-cash stock compensation charges and the excess benefit related to non-cash tax expense was $21 million or $0.43 per fully diluted share as compared to $8.2 million or $0.19 per diluted share for the 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 gross license fees less inventor royalties and contingent legal fees for the portfolios generating revenues during the period was approximately 68% for the second quarter of 2012 as compared to 46% for the comparable prior year quarter. Average margins continue to fluctuate period-to-period based on the mix of patent portfolios that generate revenues each period, the terms and conditions of license agreements executed each period, and the related economics associated with the underlying inventor agreements and contingent legal fee arrangements if any.

Inventor royalties expense for the second quarter of 2012 versus the prior year quarter increased 11% to $9.6 million. Contingent legal fees for the second quarter of 2012 versus the prior year quarter decreased 49% to $6.6 million. The fluctuation in inventor royalties and contingent legal fees in relation to the 27% increase in revenues for the second quarter of 2012 versus the second quarter of 2011 is due primarily to a portion of a second quarter 2012 revenues recognized having no inventor royalty or contingent legal fee obligations and hence no corresponding inventor royalty or contingent legal fee expenses in the period.

Net results for the second quarter of 2012 as compared to the second quarter of 2011 also included the impact of a 44% or $3.7 million increase in other marketing, general and administrative expenses due primarily to a $2.6 million increase in non-cash stock-based compensation charges resulting from an increase in the average grant date fair value of restricted shares expensed in the second quarter of 2012 versus the prior year quarter, a net increase in licensing, business development, engineering and other personnel since the end of the comparable prior year quarter, and an increase in variable performance-based compensation costs.

Tax expense for the second quarter of 2012 totaling $3.5 million as compared to $306,000 for the comparable prior year quarter included the impact of calculating tax expense for financial reporting purposes without the excess tax benefit related to exercise investing of equity-based incentive rewards as discussed on previous conference calls. The non-cash tax expense calculated without the excess benefit totaling approximately $3.2 million in the second quarter of 2012 was credited to additional paid in capital not taxes payable.

As of June 30, 2012, taxes paid or payable totaled approximately $12.4 million primarily comprised of foreign withholding taxes withheld in the first quarter of 2012 as described on last quarter's conference call and other state related taxes payable.

Looking forward for fiscal 2012, we expect MG&A, excluding non-cash stock compensation charges, to be in the range of $25 million to $26.5 million. We expect non-cash stock compensation charges to average approximately $5.9 million per quarter and non-cash patent amortization charges to average approximately $7 million per quarter.

For fiscal 2012, we estimate patent related litigation and licensing expenses to be between $14 million and $15 million. From a balance sheet perspective, cash and cash equivalents and investments totaled $430.9 million as of June 30, 2012, as compared to $323.3 million as of December 31, 2011.

Working capital increased to $404.2 million as of June 30, 2012, compared to $295 million as of December 31, 2011.

Net cash inflows from operations for the second quarter of 2012 totaled $14.5 million versus net cash inflows of $11.3 million for the second quarter of 2011. Year-to-date, net cash inflows from operations as of June 30, 2012 totaled $63.4 million versus year-to-date net cash inflows from operations of $25.1 million as of the end of the prior year quarter.

In the second quarter of 2012, we acquired 27 additional patent portfolios as compared to 9 new patent portfolios in the comparable prior year quarter. Second quarter 2012 patent related acquisition costs totaled $48.3 million, as compared to $1.1 million in the prior year quarter.

Again, thank you for joining us for today’s conference call. And I will now turn it back over to Paul.

Paul Ryan

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

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will begin. (Operator instructions) Please standby for your first question.

Our first question comes from the line of Tim Quillin of Stephens Inc. Please go ahead.

Timothy Quillin - Stephens Inc.

Hey, good afternoon. I just wanted to clarify with regards to the acquisitions cost, it just looked in the cash flow statement that is was $38.3 million and I think you said $48.3 a couple times on the conference call.

Clayton Haynes

Correct. We have an additional amount of accrued patent acquisition costs payable on the balance as of June 30, 2012.

Timothy Quillin - Stephens Inc.

Accrued patent acquisition costs payable-

Clayton Haynes

Which are scheduled to be paid in the third quarter.

Timothy Quillin - Stephens Inc.

Oh, okay. 10-4. Of that $48 million capital outlay, how is that applied across the 27 patent portfolios that you acquired? Is it related to one specific patent, or group of patents that you bought from a company, or is it divided amongst several?

Paul Ryan

It's primarily two of the portfolios, of the larger portfolios we bought with multiple licensing programs, accounted for substantially 99% of all the acquisition cost. One was an outright acquisition and one was a buy-in to a portfolio where we get first dollars back until we recover all of our investment.

Timothy Quillin - Stephens Inc.

Okay. And can you talk about how you think about capital outlays, or how you'd think about portfolios that you partner on versus acquire or get skin in the game, like, in the second example you gave? How the sellers think about or the partners think about it and how you think about it. Then, how you think about the return metrics on the back end when you do put capital in the game?

Paul Ryan

Absolutely. One of the great things we have right now going for us is with our solid treasury. We can work with patent owners across the entire spectrum. Many patent owners want as big a share a possible of the back-end and we'll do that with 50/50s. There are some times where a patent owner wants a liquidity event as in the first quarter with Baker Capital at ADAPTIX and we got the treasury to buy it out 100%.

I think we are also going to probably see a lot of transactions where we do something in-between. Where there is some earn-in in the front end that gives companies confidence in our attitude that we're going to generate money for that.

And so, one of them was an outright acquisition this quarter, again, where the seller simply wanted the liquidity of that and one of the other large ones was one where they want to stay in on a partnering event. But that portfolio already has a lot of early licensing activities which we have already been in on that we are very confident of, and so, we advanced the money and we get first dollars back.

We have a great deal of flexibility in working with patent owners which we are finding probably is going to work very well for us in terms of capturing deals. And we are very flexible. Look, it all comes down to the numbers.

We can put it on a grid and we're basically, just an objective decision. So, where it falls on the matrix really doesn't make a difference to us as long as we think we can earn the returns, which leads to your first question.

Obviously, we're going to stay extremely disciplined. There's a lot of IP coming to the market for sale, a lot of it has very unrealistic asking prices based on some of the publicity around the well-known sales. We are seeing already, if we stay disciplined -

As you know, we've had a couple of transactions we've been looking at. No one else has closed on those transactions. We are going to be very disciplined. If deals come in at the price points where we can earn great returns, we're a buyer.

And if not, we're not going to chase anything. And if we see increasing deal flow which is to our advantage and we think - The default decision for most companies is going to be to try to sell the asset first and hope they get a premium price.

A lot of people who want the business will try to promote them and tell them they're going to get a huge premium price and then the reality sets in. And so, a lot of assets are getting put into motion and we think very few of them will actually capture buyers and that will open up even more partnering opportunities.

So we are at a real good spot here, I think, with a strong treasury and a great due diligence team to be able to pick and choose for our shareholders the right investment and structure them in the right way for the patent owners.

Timothy Quillin - Stephens Inc.

Right. And one last question, I know you don't like to commit to any specific timelines because it might hinder your ability to negotiate. But with ADAPTIX where you put upfront capital or the patent acquisition in the second quarter, should investors have some kind of expectation? At least in the initial return of the upfront capital within, let's say a year? Or, is there any kind of timeframe where we should expect the licensing revenue to come in, in such a way that you get back that initial upfront outlay? Thanks.

Paul Ryan

I'll let Matt Vella answer the substance of that because Matt is in charge of the licensing program to generate those revenues. As you saw in ADAPTIX, certainly one of our focuses as a corporate culture here is return of capital and that's a key focus for us, and that will be in all the transactions we do. But to the larger question, why don't I have Matt address that.

Matt Vella

When we do the analysis and when we acquired the ADAPTIX portfolio, we had a lot of pathways to return of capital and then beyond that, a lot of pathways to a return on capital. And those pathways, a number of them are basically being implemented as we speak. We are in negotiations with over half of the respective licensees right now. And we are confident that we are going to be able to get a return of capital along the timelines that we originally had in mind.

Paul Ryan

We can't get in the position of putting an exact timeline because we don't control that. But the concept is, we are very mindful of that. As you know, our culture, we've built our company on a very frugal partnering model and now that we're deploying serious amounts of shareholder capital, believe me, we are extremely disciplined and we want to be quite sure of the returns we can generate. And we are always going to opt for doing early licenses to get return of capital so we get our shareholders, basically, in the money on these portfolios and then enjoy the returns after that. That's the mindset.

Hope that answers your question.

Timothy Quillin - Stephens Inc.

Yes, thank you.

Operator

Our next question comes from the line of Mark Argento with Craig-Hallum Capital. Please go ahead.

Mark Argento - Craig Hallum Capital Group, LLC.

Hi. Good afternoon, guys.

Paul Ryan

Hi, Mark.

Mark Argento - Craig-Hallum Capital Group, LLC.

In the quarter I know you had a couple of high profile deals. I believe you signed Cisco along with some other guys and I know you guys have various structures of course, across the deal spectrum but one had been more of a comprehensive or structured deal.

Clearly with the margins being a lot higher in the quarter, I'm guessing one of the deals in this quarter was probably a structured deal.

You guys haven't done those in, I think, well over a year. Just trying to understand kind of the mindset around that, is it purely just a pricing discipline, are you getting something alongside that, alongside the dollars that you compelled you to want to do those deals? And just lastly, a thought around given that you guys are brining in some much IP, are you getting better at pricing those types of deals?

It seems like given the IP intake valve is open big, you know the value of the future IP that you guys have coming in and an option on that seems to be increasing very rapidly.

Paul Ryan

Yes, sure. We are always interested in doing structured term deals, we're probably not going to do them with a large number but as we have indicated in the past, probably there are opportunities for 10 or 12 of those transactions. We've basically done four to-date. The primary thing is price. We are getting companies used to the fact that we are growing very rapidly in assets and the historical pricing that might have made sense to them has shifted dramatically. As companies come to confirm that, we'll get more of these transactions done.

The second key component is we like to do these transactions with companies where we think there is going to be an opportunity to work with them in the future to work with them in the future in terms of additional acquisitions, in terms of existing portfolios they have. So, yes, we are choosing it from both sides. We are trying to choose companies that we think in the long term are going to add a lot of value to Acacia and to its shareholders, both by having a structured term deal and an ongoing relationship.

As you probably have seen, a couple of the companies that we've done these transactions with have been early licensees in new programs even though under a structured term they'd already acquired certain rights. It doesn't necessarily limit revenue opportunities once we enter a structured deal. What it does is kind of open up opportunities as well.

So, yes, we are very actively in discussion with people regarding those types of deals and if we can get the right kind of pricing and we can think there is a good expectation of being able to work with them in the future in a mutually beneficial way, then we want to do more of those deals.

Mark Argento - Craig-Hallum Capital Group, LLC.

Great. And then, thinking a little bit more about the base partner model and kind of the singles and doubles licensing business that you guys originally built the business on and then juxtaposing that against some of the larger transaction, even bought IP. Do you see two can live in the partner model and you being a principle in the IP, those can live together nicely and grow? Or, do you think that one suffers because of the other as you're starting to own more IP?

Paul Ryan

IF anything, I think the so-called singles and doubles business benefits from us being in the major category because it generally moves the companies on the other side to want to move into licensing agreements with us. Even if they don't do a structured deal, if we're doing a transaction on a higher revenue potential portfolio, generally that will lead to discussions in terms of getting other ones done.

If anything, I think it's benefitting the small entities. Our scale and presence in the market is enabling them to get paid much faster than they would otherwise. So, that's a definite benefit for them and I think a lot of the small entities now realize that. And particularly as we have structured deals and eventually we get into renewals, it increases the odds of them getting paid and reduces the odds of putting their assets at risk in litigation.

Mark Argento - Craig-Hallum Capital Group, LLC.

Great. Last question. The bid/ask spread, even according to your comments, is a little out of whack on some of these IP portfolios, of course, more on the ask side. How quickly do you think that gets more inline here and does it take six months, a year? How long do they sit with the for sale sign upon some of this unrealistic expectations before they come back to the table and want to get something done?

Paul Ryan

I'll ask Matt to weigh-in on that a little bit as well. I mean, generally, once it's out there, three months the flower starts to fade a little bit. People realize there's not a huge number of strategic battling for the asset. And I'd say, four or five months, then people start getting a little more realistic and, yes, you're going to have to look at its strategic value versus licensing value, but Matt, why don't you –

Matt Vella

Yes, I think the answer to that question is highly dependent on the sector in which that portfolio falls. And it's highly dependent on fact occurring within those sectors that tend to fluctuate quite a bit month-to-month, so for example, on smartphones, right? A lot of the spread and it's sustainability and a lot of the appetite of a prospective seller to stay on the market with a very, very high asking price is going to be a function of a perception of how badly companies will need to buy portfolios to, for example, to fight with a strategic competitor, right?

There are other sectors where you have to look at what kinds of obligations they have, what kind of debt, what kind of cash. In my view, one general answer, it really is a sector-by-sector specific analysis.

Mark Argento - Craig-Hallum Capital Group, LLC.

Thanks, guys.

Paul Ryan

Okay. Thanks, Mark.

Operator

Our next question comes from the line of Paul Coster of JPMorgan. Please go ahead.

Paul Coster - JPMorgan Securities, LLC.

Yes, thanks for taking my question. So, the average size of the singles and doubles, is there any trend there? Can you comment on the size of those deals?

Paul Ryan

Not really, Paul. It's just depending on a given quarter. We take in a lot of portfolios. You know each transaction, of course, depends on the degree of infringement and the size and amount of sales of units that a company involve. I don't think anybody can draw any meaningful conclusions from that kind of data to begin with. I know we haven't. We've looked at it.

Some portfolios will have several large companies with big revenue events, but we're also responsible for enforcing throughout the entire market. It would be unfair to only enforce against the larger companies and not against others. So, it's a variety of deals but I don't think you can draw any meaningful conclusion from average deal size.

Paul Coster - JPMorgan Securities, LLC.

Okay. So , a round-a-bout way of trying to size the Cisco deal. I think you ended the quarter with account receivable of about $11 million. As far as I can tell that Cisco deal occurred near the end of the quarter. Are accounts receivable all attributable or mainly attributable to Cisco?

Paul Ryan

I wouldn't draw that conclusion. Generally, when we do transactions, we get paid for them. I mean, that's a very modest amount of payables to have at the end of a quarter. We do a lot of transactions in the last 30 days. I wouldn't draw that conclusion.

Paul Coster - JPMorgan Securities, LLC.

Is there anything you can say about the size and the last three deals were getting consecutively larger, the terms deals that is. This one sounds like it was smaller. But then it also sounds like it was a subset of your portfolios. Is that correct thinking?

Paul Ryan

Well, relative to the price for a company, we have to look at what their likely exposure would be, what the history has been, and it depends on the company so it's going to be priced on a basis that makes sense for that particular company. Obviously, we wouldn't be doing the transaction unless we thought we got kind of the new plateau pricing on a company specific basis.

Paul Coster - JPMorgan Securities, LLC.

Right, got it. What were the NOL's at the end of the quarter, please?

Clayton J. Haynes

The NOL's from a federal standpoint, approximately 40 million.

Paul Coster - JPMorgan Securities, LLC.

Okay. My last question is, obviously this is a very hot space and can you comment upon your ability to attract and retain your talent all the way up to the top?

Paul Ryan

We've been very fortunate. We haven't lost anybody that we wanted to retain. I think our incentive programs here, in terms of compensation that align the executives and... Well, all members of the team, everybody is in the bonus programs. Engineers, patent attorneys, licensing executives share on a portfolio by portfolio basis based on the P&L's of those portfolios.

So, one way to look at it is, our compensation here is uncapped, and it's a great place to work. We're a market leading company, and as a result, we've been able to retain great people because we want to create an environment where there's no place they could go that would be better than this.

Chip and I both want a lot of people here to make a lot more money than we do, and if that happens our shareholders are going to get very wealthy. I think our corporate culture is such that people's compensation is literally uncapped based on their performance, and that tends to retain really topflight people that want to work really hard.

Paul Coster - JPMorgan Securities, LLC.

Thank you very much.

Paul Ryan

You're welcome.

Operator

Our next question comes from the line of Jonathon Skeels of Davenport. Please go ahead.

Jonathon Skeels - Davenport & Company LLC

Hi. Thanks for taking the question. I've got, I think, three of them. First, in terms of the acceleration you saw on a number of acquisitions in the quarter, are these new companies that you're partnering with? Are they some existing partners that are turning over more portfolios?

Paul Ryan

The vast majority of them are new transactions with new companies.

Jonathon Skeels - Davenport & Company LLC

Okay, great. I guess the portfolios do seem to have more depth. You're announcing four or five different patent portfolios and certain transactions. What should our read be into that? Or are companies simply looking to, I guess, turn over more to you? Is this a trend that you're starting to see relative to maybe some partnerships that you did 12, 18 months ago?

Paul Ryan

Yeah, I think so. I think part of it is our licensing credibility and history now. In the beginning, a lot of companies wanted to give us one portfolio to see how we did, and now that we've established a track record, I think companies are more confident in turning over groups of portfolios. Or in some cases all of their portfolios to us. Hopefully that will be an increasing trend, because certainly we think there are efficiencies in licensing, giving the depth of portfolios.

Our experience has been companies tend to come to the table on the other side more quickly when you've got very deep portfolios that cover multiple technologies that read on them.

Jonathon Skeels - Davenport & Company LLC

Okay. Then, on the structured term licenses, to the extent you can talk about it, how should we think about renewals on those in 2013? I think the first two are up. Should we think about those as being entirely new negotiations? Are future terms similar to terms we've seen in the past? Can you comment at all on expectations there?

Paul Ryan

All I can say is we've got great relationships with everybody we've done transactions with. We think we're probably a bit likely to do a lot of business with those companies. I wouldn't look too specifically to a "renewal". Obviously, we've done a number of transactions already before any anticipated renewal with some of those companies, and we think that likely is to occur.

What we want to do is align ourselves with forward-looking companies who are very talented in the IT space, who see the benefit of working together with us, both from us being an intake source for them from a very efficient standpoint, and a great outsource licensing company strategically for them.

So, I wouldn't look for specific renewal events, as much as just continuing relationships with those companies on a variety of transactions, which could occur at any time.

Jonathan Skeels - Davenport & Company LLC

Okay. Then, maybe just lastly on ADAPTIX, you've now owned the portfolio for the last few months. What benefit, if any, has it had on maybe negotiations in the rest of your business? Then secondly, what have you learned about the portfolio since you've acquired it? Is it the fact that it's not subject to FRAND? Has that been meaningful in negotiations? I think there's an international component to the portfolio. Do you plan to take advantage of that?

Paul Ryan

Why don't I let Matt answer that question?

Matthew Vella

Yeah, and I might miss one of the sub-questions here, Jonathon, so feel free to draw my attention to that if it happens. I think when we brought on ADAPTIX, as you know and as the rest of the investment community knows, we were always very excited by the lack of a FRAND commitment. We were always very excited by the depth and the quality of the IP. I think, if we did learn anything the last couple of quarters, the extent of the international coverage has been, I think a good - I wouldn't say surprise, but we really dug into it to understand it better.

We've got a very good international strategy with these patents, and we're starting to get a good understanding of how that can positively impact our bottom line. The idea that with a global portfolio that you have a global strategy for, you can get multiples above and beyond what we as a company have been traditionally conditioned to expect being so U.S.-centric before.

Then, I think the other. Once again, not sudden surprise by learning has been the extent of our ability to shake the claims in prosecution. We're very happy with our progress on that front as well. So, did I miss any of the questions, Jonathon?

Jonathon Skeels - Davenport & Company LLC

No, that's it.

Matthew Vella

Okay.

Jonathon Skeels - Davenport & Company LLC

Thank you so much.

Paul Ryan

Okay, thanks Jonathon.

Operator

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

Timothy Quillin - Stephens Inc.

I just had a couple of quick follow-ups. One is, you've had some nice initial licensing revenue on the Renaissance portfolios. I'm just wondering how they are opening up to you in terms of letting you look at additional patent assets and carve out additional patent portfolios. How open is that relationship right now?

The second question I had, you had just a recent press release with regards to ACCESS/Smartphone Technologies expanding the licensing arrangement with HP, and HP had made some noise about licensing the Palm OS, and they didn't kind of fully own that. I'm just wondering, what that expanded licensing relationship with HP might mean.

Paul Ryan

I'll answer the Renaissance one and Matt can answer HP. Renaissance, the relationship is very open. We continued to work with our teams and I think we have a total of 11 portfolios we now have identified. We've started generating revenues from a handful of those, and they're very pleased with what we're doing.

We expect that relationship to continue to yield more portfolios for us. There's been no resistance or change since the attitude when we first became strategic partners. Matt, you want to comment on HP?

Matthew Vella

Yeah. On HP, PalmSource if you will, now obviously it's a confidential agreement, so I can't get into details, but I think the term you used was there was a lot of noise. I'd expect the noise to die down.

Paul Ryan

Will that answer your question?

Timothy Quillin - Stephens Inc.

I'm not sure it does, but thank you.

Paul Ryan

Well, that was a good answer, though. Okay. Thanks.

Operator

Our next question comes from the line of Doug Thomas of JET Investment Research. Please go ahead.

Doug Thomas - JET Investment Research

Good afternoon. Congratulations on a good quarter.

Paul Ryan

Hi, Doug, how are you doing?

Doug Thomas - JET Investment Research

I'm pretty good, Paul. How are you?

Paul Ryan

Great, while (inaudible) on the line, Doug was probably the first person to ever discover Acacia many years ago, and believed in our new concept of patent licensing. Right, Doug?

Doug Thomas - JET Investment Research

Oh, absolutely. Well, I'm telling people I still believe the best is yet to come, which leads me to my question of the day, which is clearly the technology industry has been the primary driver of the growth of the business and creating the awareness of the opportunity, I think, in a broader sense. I'm just wondering if you could kind of paint a picture in terms of automotive, industrial, and medical. Where are those industries in terms of adapting, adopting, understanding, their level of awareness and in terms of the opportunity?

Now, one of the interesting things is that I've been pointing out to people, I think, is that it's going to be very difficult for a lot of these industries to really put up any significant organic growth over the foreseeable future - that this is clearly an area where at least developers of technology have to be aware that this is a terrific revenue growth opportunity for them. I'm just wondering, what your view is of what inning we are in each of those particular areas.

Paul Ryan

Well, I think we're very early in... Historically, inventors have not had very much success in the automotive and we think we're hopefully going to change that. We think we have partnered on probably the premier automotive patent portfolio that exists, and we've got a great team behind that. We think that will kind of open that market for us.

Medical, we're getting very aggressive, and the portfolio we brought in this quarter with the seven Medtec portfolios, we thing - well, we're already seeing is acting as a catalyst to open the eyes of a number of companies, both small and large that Acacia is moving into this arena. We think it could be a very significant market for us.

So, there's no area that we don't want to apply. It's the same basic process that we use, and the teams we have internally. So, we want to be obviously first to these markets and develop the same reputation we have in technology. We see all of them as a major growth opportunity for us.

Doug Thomas - JET Investment Research

Would it be correct to say that we're seeing a significant amount of cross - I don't want to say breeding, but marketing of different technologies as we start to see, the automobile for example, become an extension of people's wireless networks for example. A lot of the core technology that's been developed just for technology users is going to be applicable to the automobile for example. Clearly Acacia's got a bead on some of those infotainment opportunities.

Paul Ryan

Absolutely. No question in automotive, and actually a lot of medical as well. There's inner use of patented technologies between the technology sector and the medical technology sector, so yes. You're absolutely right. There's a great deal of crossover there.

Doug Thomas - JET Investment Research

Okay, and just to be clear, because people ask about this all the time, but I don't think a lot of people read Proxy. You mentioned in response to an earlier question that you and Chip would be happy if a lot of guys at the firm wound up making a lot more money than you do.

But could you talk about you and Chip's philosophy with respect to the link between performance and compensation over time, and your growth as shareholders in the company and so forth? Because I think sometimes people miss the alignment issue that is so critical in my opinion, anyway, in trying to analyze what makes this company different.

Paul Ryan

Well, fortunately, as (inaudible) there's obviously the compensation. Until we reach profitability on certain portfolios, there was a little bit of qualitative comp, but now we're at the point of maturity where teams can see - they know what their comps going to be based on the P&L in their portfolio, so it makes them very cognizant when they're bringing in a portfolio.

The licensing group works very closely with the business development group, and it's highly incentivized to do so, and to control costs because it's all based on the bottom line. It's all based on the P&L the shareholders are going to enjoy. The leverage factor is not only the cash bonuses based on the profitability of their individual portfolios of the teams that have them, but their future stock grants are highly correlated with that as well. So, there's a multiplier effect.

The people who are really producing great returns for the shareholders not only get good bonuses, but they get the most respected stock going forward, and the biggest ownership in the company. As a program we think it's working very well and it also obviously - as an earlier caller mentioned - one of our biggest risks is people trying to poach our talent. That is, I think, our biggest risk.

So far, I think our compensation system has served us well. It also makes it a great place to work, where people know what kind of bonuses they're going to get. It's not who knows who. It's who produces the results.

Doug Thomas - JET Investment Research

All right. Okay. Listen, thank you very much, Paul. Appreciate it.

Paul Ryan

Okay, thanks Doug.

Operator

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

Paul Ryan

Okay, I want to thank you all for being on our 2nd Quarter call. If people have specific follow up questions, they can call myself or Rob Stewart. Or if it's a financial related from an analyst, can call Clayton, and look forward to speaking with you next quarter. Thank you.

Operator

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 800-585-8367 or 855-859-2056 with confirmation code 90771402. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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

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

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

Source: Acacia Research's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts