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Acacia Research Corporation (NASDAQ:ACTG)

Q1 2008 Earnings Call Transcript

April 24, 2008 4:30 pm ET

Executives

Paul Ryan – Chairman & CEO

Clayton Haynes – SVP & CFO

Chip Harris – President

Analysts

Bennett Notman – Davenport & Co.

Ken Freid – GLT

Sean O'Neill – Singular Research

Bob Ammann – RK Capital

Chris Tamino [ph] – Pfeiffer's Capital Group [ph]

Peter Martin [ph] – Mathis Capital

Daniel Katz – Apex

David Reese [ph] – Private Investor

Fred Mack – Mack & Co.

Operator

Good afternoon and welcome, ladies and gentlemen to the Acacia Research First Quarter Earnings Release Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants on 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. 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 comments. Please refer to our 8-K which was filed with the SEC today for our forward-looking statement disclaimer. With us today are Chip Harris, President of Acacia; Dooyong Lee, Executive Vice President; and Clayton Haynes, our Chief Financial Officer.

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

As we just reported, Acacia's first quarter revenues were $9 million compared to $25 million in the year ago period. In the first quarter, Acacia subsidiaries entered into 24 new licensing agreements covering 12 different licensing programs including initial revenues from four new licensing programs. Acacia also acquired control of 5 new patent portfolios for future licensing and we now have generated revenues from 32 different licensing programs and control 93 patent portfolios. As most of you are aware, we grew both revenues and the number of patent portfolios we control by over 50% last year and have stated that we expect continued growth in revenues, licensing programs and the acquisition of new patent portfolios this year. Our success to date in completing over 560 licensing agreements covering 32 different licensing programs is generating interest from technology companies, universities and research centers wanting us to partner with them and take over the licensing of their patented technologies.

Acacia is building momentum as the country's leading patent licensing company. We are meeting a huge unserved need in the market from small technology companies, research labs and inventors who do not have the scale, expertise, or experience to effectively execute patent licensing and enforcement programs. Currently these small companies, individual inventors, universities and research labs hold a majority of technology patents but only generate 1% of current patent licensing revenues. By partnering with Acacia, these entities now have the opportunity to generate significant revenues from their patented technologies. Acacia is at a very early stage in the growth of its business. Our recent licensing success is creating new business opportunities for us and given the current pipeline of patented technologies we are evaluating, we expect to significantly expand our business over the next year.

Acacia is also at a very early stage in generating revenues from its patent portfolios. We have only begun generating revenues from 32 of our 93 patented technologies and have realized only a small percentage of the potential revenues from a number of these 32 licensing programs. We will continue to be aggressive in adding new patent portfolios which increases shareholder value and expands our future revenue base. We continue to see a major business opportunity for Acacia as the leader in serving this unmet need in the marketplace. I will now turn the call over to our Chief Financial Officer, Clayton Haynes.

Clayton Haynes

Thank you, Paul. As indicated in today's earnings press release, first quarter 2008 licensing revenues totaled $9,048,000 as compared to $25,185,000 in the first quarter of 2007. First quarter 2008 license fee revenues included license fees from 12 of our technology licensing programs including initial license fee revenues from our electronic message advertising technology, remote management of imaging devices technology, high quality image processing technology and wireless traffic information technology.

First quarter 2008 license fee revenues also included fees from the licensing of our DMT technology, Portable Storage Devices with Links technology, Image Resolution Enhancement Technology, Pop-up Advertising technology, Rule-based monitoring technology, Electronic Address List Management technology, Audio Communications Fraud Detection technology and Telematics technology. The first quarter 2007 revenues included license fees from 22 new licensing agreements covering 11 of our technology licensing programs. To date our operating subsidiaries have generated revenues from 32 technology licensing programs.

License fee revenues continue to fluctuate from period to period based on fluctuations in – one, the dollar amount of individual agreements executed each period which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement or use associated with a specific license fee. Two, the specific terms and conditions of license agreements executed each period and the periods of infringement contemplated by the respective license fee payments and, lastly, fluctuations in the total number of agreements executed each period. We continue to measure and assess the performance and growth of our business based on total license fee revenues recognized across all of our licensing programs on a trailing 12 month basis.

Consolidated trailing 12 month license fee revenues were $36.5 million as of March 31, 2008 as compared to $52.6 million as of December 31, 2007 and $55.3 million as of March 31, 2007. The average margin defined as gross license fees, less inventor royalties' expense and contingent legal fees expense for the portfolios generating revenues during the period was approximately 48% for the first quarter of 2008 as compared to 44% for the first quarter of 2007. Quarterly average margins fluctuate period to period based on the mix of patent portfolios that generate revenues each period and the related economics associated with the underlying venture agreements and contingent legal fee arrangements if any.

For the first quarter of 2008, Acacia Research reported a GAAP net loss from continuing operations of $3.9 million or $0.14 a share versus net income from continuing operations of $4.4 million or $0.16 a share in the first quarter of 2007 as illustrated in our comparative income statements provided in today's press release and related 8-K filed with the SEC. Excluding the impact of noncash patent amortization charges of $1.3 million and noncash stock compensation charges of $1.8 million, the first quarter 2008 net loss was $785,000 as compared to net income excluding noncash charges of $6.5 million for the first quarter of 2007.

Operating expenses for the first quarter of 2008 and 2007 included inventor royalty expenses of $2.1 million and $5.5 million respectively and contingent legal fees expenses of $2.6 million and $8.6 million respectively. Inventor royalties and contingent legal fees expenses fluctuate period to period based on the amount of revenues recognized each period and the mix of specific patent portfolios with varying economic terms generating revenues each period. The first quarter 2008 decrease in inventor royalties' expense and contingent legal fees expense was primarily due to the decrease in license fee revenues recognized quarter to quarter as described earlier.

First quarter 2008 marketing, general and administrative expenses excluding noncash stock compensation charges increased $955,000 to $4.5 million versus $3.6 million in the comparable 2007 period. The net increase was due primarily to the addition of licensing, business development and engineering personnel since the end of the prior year quarter, an increase in business development and licensing related patent research and consulting expenses for new and ongoing programs, and an increase in corporate general and administrative costs, all of which are reflective of a continued growth and expansion of our operations and the operations of our subsidiaries. The increase was partially offset by a decrease in consulting expenses due to the expiration of a consulting agreement with the former CEO of Global Patent Holdings, LLC, in January 2007 and a decrease in severance related costs. Noncash stock compensation charges increased quarter to quarter by approximately $1 million. Due to the issuance of new equity based incentive awards to new and existing employees since the end of the prior year quarter. In addition, noncash stock compensation expense for the first quarter of 2007 included a credit of approximately $170,000 related to the reversal of certain noncash stock compensation charges in connection with certain employee separations occurring in the year ago quarter.

First quarter 2008 patent related legal expenses decreased to $1 million in the first quarter of 2008 versus $1.4 million in the first quarter of 2007. Patent related legal expenses include prosecution and enforcement costs incurred by outside patent attorneys engaged on an hourly basis and the out of pocket expenses incurred by law firms engaged on a contingent fee basis. Patent related legal expenses fluctuate from period to period based on patent enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. We expect patent related legal expenses to continue to fluctuate quarter to quarter based on the factors summarized above in connection with our current and future patent commercialization and enforcement programs.

Looking forward for fiscal 2008, estimated fixed costs are expected to be in the range of $13 million to $13.5 million. Fixed costs include employee salaries and benefits, facilities costs, corporate legal, accounting and other general and admin costs and are included in the marketing, general and admin expense line in our income statement. Estimated variable costs for fiscal 2008 excluding inventor royalties and contingent legal fees are expected to be in the range of $8 million to $8.5 million.

Variable costs include patent related legal expenses, patent related research, consulting and maintenance expenses and other patent related development and commercialization expenses. These costs fluctuate quarter to quarter based on business development, licensing, enforcement, research and prosecution activities each quarter. All variable costs excluding patent related legal costs are included in the marketing, general and admin expense line in our income statement. Variable costs included in MG&A for the first quarter of 2008 totaled approximately $1 million versus $322,000 in the first quarter of 2007. Total consolidated assets as of March 31, 2008 totaled $69.9 million compared to $65.4 million as of December 31, 2007. As of March 31, 2008, cash and investment balances totaled approximately $46.1 million versus $51.4 million December 31, 2007.

Net cash outflows from operations for the first quarter 2008 totaled approximately $3.9 million versus net cash inflows from operations of $7.4 million for the first quarter of 2007. Accounts receivable from licensees totaled $4.3 million at March 31, 2008 compared to $1.4 million as of December 31, 2007. The majority of receivables at March 31, 2008 are scheduled to be collected within 30 to 45 days of the execution of the related license agreement in accordance with the terms of the underlying agreement. Net cash outflows related to patent portfolio acquisitions for the first quarter of 2008 totaled $1.6 million versus $110,000 for the first quarter of 2007.

I will now turn the call back over to Paul Ryan to begin the Q&A portion of today's conference call.

Paul Ryan

Thanks, Clayton. Operator, you can now open up the call for questions and answers.

Question-and-Answer Session

Operator

Thank you, sir. The question and answer will begin. (Operator instructions) We will take our first question from Bennett Notman with Davenport.

Bennett Notman – Davenport & Co.

Good afternoon, guys. Paul, could you talk a little bit about sort of a trend in the average deal size? You guys seem to do a pretty good job of opening up some of the newer portfolios and getting first licensing deals done that I was thinking were going to sort of drive higher average deal sizes. And if you could just talk a little bit about maybe how that plays out over time or just what you are seeing on average deal size?

Paul Ryan

I think over time our average deal size will continue to go up. In the first quarter again there were a number of licenses from some legacy portfolios that have smaller revenue price points. But some of the newer technologies that we launched, the 4 new programs, some of those licensing deals were certainly at higher average price point. So, I think it's a trend that will continue. We do have, as you know, when we acquired Global Patents there were 27 patent portfolios and some of those are lower dollar value per deal, but certainly, and incrementally they add to our revenues and we want to fully license those markets. But once we are complete with those, I think you will see our average deal size come up appreciably.

Bennett Notman – Davenport & Co.

But it seemed that average deal size was down a bit this quarter even though you had a lot of contribution from the 4 newer ones. Is that just because they are first deals, they tend to be smaller and that they should ramp as the portfolios mature or how should we think about that?

Paul Ryan

Yes, that plays a role, definitely. Usually your first deals in a portfolio are the smaller and midsize licenses. Usually the larger licenses take a little longer and you have to gain some momentum in the licensing program. So that's the case with some of them, although you saw we did multiple licenses with two of the new portfolios with a major multinational company which were basically the first licenses for two new programs and it was with a larger company. So, there's going to be a mix. But I just think over time as we kind of complete the licensing programs from some of the earlier ones we acquired, you will see the average revenue per deal go up.

Bennett Notman – Davenport & Co.

Thanks. And then the legal expense in the quarter was at fairly low level. Is that something that can be maintained for the next couple of quarters or is that going to have to ramp up a bit due to any oncoming legal activity?

Paul Ryan

It's variable. It will depend. The second half of the year, we may have a little higher expenses as we potentially get to trials on some of our cases. It depends on certain motions that are pending but in the second half year. Probably this quarter, the current second quarter, we don't have any exceptionally large third party legal expenses. But it will depend in the third and fourth quarter on whether we get closer to trial dates, which is where those expenses usually go up.

Bennett Notman – Davenport & Co.

And the $1.6 million spent on patent acquisition; can you give us any color on that?

Paul Ryan

It was across a handful of portfolios. Some are new acquisitions and there was one portfolio actually that we bought out the remaining interest of a partner in which improves our economics, so we now have 100% of the economics in that portfolio. So it was a combination of some newer ones. I think over the last – over the last six months, we have invested a little over $3.5 million in a combination of new portfolios and buying down in interest from our partners in existing portfolios. And I think that's a trend that will continue wherever we can deploy capital accretively for our shareholders, we will continue to do that.

Bennett Notman – Davenport & Co.

So when you talk about buying down interest in existing portfolios, are these some of the ones that have already been delivering revenue therefore margins might be going up or are these new portfolios that have yet to deliver but –

Paul Ryan

No, the ones – well the one that we did in the first quarter is actually a portfolio that has begun generating revenues, yes.

Bennett Notman – Davenport & Co.

Okay. I will cede the floor for now. Thanks.

Paul Ryan

Okay.

Operator

Thank you. We will go next to Ken Freid [ph] with GLT [ph].

Ken Freid – GLT

Hey, guys. Could you first of all repeat what total SG&A is going to be for 2008?

Clayton Haynes

Sure. Certainly, total MG&A is expected to be between $13 million and $13.5 million for 2008.

Ken Freid – GLT

That's exclusive of stock comp obviously, right?

Clayton Haynes

That is exclusive of stock.

Ken Freid – GLT

What's the total stock compensation expense for the year?

Clayton Haynes

The total stock compensation expense for the year based upon current outstanding awards is going to be in the range of $6.5 million to $7 million total.

Ken Freid – GLT

Okay. Got you. So on a run rate, the SG&A, obviously, should fall over the rest of the year versus what it was in this quarter.

Clayton Haynes

I guess with respect to one the quarterly amounts –

Ken Freid – GLT

Because your SG&A this quarter at the stock comp was a little over $4 million and you are saying it's going to be a total of – $3 million to $3.5 million for the year.

Clayton Haynes

Yes, exactly. There are certain costs incurred in the current quarter that are included in the MG&A line that I guess are not necessarily going to be recurring in future quarters.

Ken Freid – GLT

Okay. Got you, perfect. And then, Paul, can you just talk about some of the portfolios going forward that you are most excited about?

Paul Ryan

That would take a long time we are most excited about –

Ken Freid – GLT

What's like the top five or so for the rest of the year? What do we have cooking that could result in significant new revenues from the kind of (inaudible)?

Paul Ryan

Well you can certainly look at some of the new licensing programs that commence in the first quarter and some of the ones that began in the fourth quarter of last year. We are expecting continued revenues from those portfolios. We did our first license from the high quality image processing during the quarter. We did our first license with a couple of major multinationals, Panasonic and Epson on the remote management of imaging devices. We are beginning to gain more momentum on the rule based monitoring program as well as the telematics, certainly. We have got a number of these newer medical portfolios that we expect to start generating revenues for us this year. We have a whole number of those covering medical monitoring and medical image stabilization as well as heated surgical blades. The document generation portfolio we expect to be a significant contributor during the course of the year. We have also got a number of late stage litigations that we are waiting for motions for summary judgment and if we survive those we can be going to trial. We have one on the computer cash coherency which would be to a trial date with Intel and Geo [ph] which, if that occurred would probably be late third quarter, early fourth quarter. We have got another one on the multidimensional bar codes that we are awaiting a final quote action which if we survive that we would probably go to trial somewhere three to five months from that decision date with (inaudible) on multidimensional bar codes. So we are expecting over the course of this year, obviously, there were a number of high revenue potential portfolios that we have acquired over the last 18 months. And as you are aware, we have brought in a number of additional licensing executive who now have had time to get those programs up and running. And they are in discussions with a number of potential lead licensees. So, obviously, we are pretty optimistic about a lot of these new licensing programs, many of which have very significant revenue potential.

Ken Freid – GLT

That's excellent. And then can you refresh me what's ever happened with CMC? I believe we appealed some of the earlier (inaudible).

Paul Ryan

Well we haven't really officially appealed. It's been a process in the Northern District Court and we are hoping that sometime by mid to late summer we will reach a final resolution on that process on the claims construction.

Ken Freid – GLT

Yep.

Paul Ryan

Which either will lead to final clarity on the claims construction. And if it doesn't potentially, it could lead to either one side or the other appealing that claims construction to the appellate court for further clarity prior to going to trial. So that is ongoing. It has taken quite an extensive period of time because of the number of defendants and the different classes of defendants. As you will remember, our litigation covers not only all the major cable companies, but also the major satellite companies as well as leading internet companies. And in a normal claims construction, it's usually the plaintiff and defendant arguing over the claims construction. Here we have really got three separate classes of defendants so that's added to the amount of time. But we are nearing the final phases of that at last.

Ken Freid – GLT

Okay. So have we heard anything lately at all?

Paul Ryan

There hasn't been anything of a material nature. Just the standard, there's been a certainly case conferences with the court looking at both sides. But we are working toward a final resolution on the claims construction.

Ken Freid – GLT

Okay, got you. And then so given the more backend loaded nature of your revenues for this year, particularly as you brought on a big bulge of portfolios in 2006 and 2007 which should start to come to fruition throughout the rest of the year. Is it reasonable to expect since maybe you did north of $50 million in 2007, is it reasonable to expect continued growth of that to the tune of at least 50% growth is kind of what you have been averaging in the last couple of years from most into '08?

Paul Ryan

Well I think in '06 we were up about 75% was the revenue growth rate and last year we were a little over 50%. We have never qualitatively defined it beyond saying that we expect continued growth. So we haven't put a percentage number on it. But, certainly both our year end financial release that we put out in February as well as today's is indicative that we think we certainly will have continued revenue growth year over year. But beyond that we are just not at a stage where we can define it or put a percentage on it.

Ken Freid – GLT

Perfect. Okay. Thanks, guys. I appreciate it.

Paul Ryan

Okay.

Ken Freid – GLT

Yep.

Operator

(Operator instructions) We will go next to Sean O'Neill with Singular Research.

Sean O'Neill – Singular Research

Yes, well I just have a quick question. Looking on a sequential basis from Q4 to Q1 and even in – there's you add revenue from 4 new portfolios and I am under the impression that most of the portfolios that generate revenue, generate for years and not quarters. I am just wondering why doesn't revenue sequentially increase if you continually add portfolios that are generating revenue quarter over quarter. Why is there a – like what causes a $3 million decline from fourth quarter to this quarter given that you are adding patent portfolios?

Paul Ryan

Sure. The revenues – it depends on each portfolio, the revenue potential obviously of each individual transaction. You are right in that a portfolio will generally produce revenues over a three to five year period once we commence the licensing program. But that portfolio may not generate revenues each and every quarter. The vast majority of our revenues continue to be paid up revenues. So a portfolio may generate 25 revenue events over 3 to 5 years but it may not be generating a revenue event, obviously, every quarter. So that's why you get the unevenness quarter to quarter. And then, within that it really depends on the appropriateness of the licensing rate in the use of the technology. So certainly individual licensing agreements can run in the range of a few hundred thousand to several million dollars. So there's a great deal of variability in each licensing agreement based on the use of the technology in the market as well as the importance of the technology to the licensee. So, that's when you get a great deal of variability. The direct answer is our deals don't have regular recurring revenue. The portfolios will generate revenue over time but they don't contribute every single quarter.

Sean O'Neill – Singular Research

So then even though if you exclude the 4 new portfolios that generated revenue in Q1 and you compare Q4 to Q1, the portfolios are vastly different as to which generated revenue from quarter to quarter. It's not like 18 or 24 – 20 of the 22 that generated in Q4, all generated in Q1. There's – it's just been a whole new mix of –

Paul Ryan

Exactly. There's a different mix every quarter. Well I think the takeaway, if you kind of look at the quarterly revenues and go back and look at the late 3 years, you will see that progressively our low quarter in a given year goes up significantly as you progress, '06, '07. And again our large quarter each year has gone up dramatically. So while there's unevenness quarter to quarter, certainly our lowest quarter in any given year has gone up significantly. And our largest producing quarter has gone up significantly as well as the overall trend. So in general, once these programs launch even though each individual patent portfolio doesn't contribute equally per quarter, you can see from our growth rate there's almost a direct correlation in terms of numbers of portfolios that have generated revenue and the revenue growth rate over the last couple years where we have grown 75% year over year in '06 and we have grown 50% year over year in '07.

Sean O'Neill – Singular Research

Okay. All right. Well, thank you.

Paul Ryan

Sure.

Operator

And we will take a follow up from Bennett Notman with Davenport.

Bennett Notman – Davenport & Co.

Yes, Paul, again just focusing on revenue growth for the rest of the year. I mean should we be thinking then that growth is going to come more from an increase in the deal size or just an increase in the number of deals per quarter as we ramp and more technology matures or are we looking for some bigger contributions maybe on the litigation side. I am just trying to get a feel of what mix of that we should be thinking about.

Paul Ryan

I think you are certainly going to get it on both as a percentage of mix, it's hard to totally predict but probably more on deal size than numbers of deals, I would guess.

Bennett Notman – Davenport & Co.

Yep. Thank you.

Paul Ryan

Okay.

Operator

And we will go next to Bob Ammann with RK Capital

Bob Ammann – RK Capital

Yes, Paul, that trend that you were just talking about where the smallest quarter in any given year tends to increase each year and the largest quarter in a year tends to increase each year. Would you expect that to continue to be the case this year?

Paul Ryan

We certainly hope so. Yes, we have got the potential this year with a number of new portfolios that are just beginning to produce as well as ones that we reasonably expect to produces revenue this year for that to continue.

Bob Ammann – RK Capital

Okay. So that would imply you are probably looking for a $25 million type quarter sometime this year?

Paul Ryan

And the deductive reasoning? You said it. Yes, exactly. Yes, certainly. And there's some potential of some very large licenses that we have been in discussions with some parties that obviously take time but certainly it's a reasonable expectation that we can get some of those larger deals done this year.

Bob Ammann – RK Capital

Okay. And then ending head count in the quarter?

Paul Ryan

This quarter we – in the first quarter I think it was, we increased 4 people to 53. We are pretty much absolutely complete. We may bring on 1 or 2 additional people but we are pretty much built out to grow out the company over the next year to 2 years. We have got the teams in place and probably will add 1 or 2 licensing executives maybe in the second half of the year. But, as you know, we have grown pretty rapidly on all fronts and you have to stay in front of the –all opportunities with talent when we can recruit them. So, we are pretty much complete. I think we can grow revenues significantly from here with the existing team with the existing overhead we have.

Bob Ammann – RK Capital

Okay. And then did you have any number of 10% customers in the quarter.

Clayton Haynes

Yes. In the quarter we have one licensee that accounted for 27% and three licensees that individually accounted for 10%.

Bob Ammann – RK Capital

Okay. Thank you.

Operator

And we will go next to Chris Tamino [ph] with Pfeiffer's Capital Group [ph].

Chris Tamino – Pfeiffer's Capital Group

Hi there, gentlemen. I have just a few quick questions. The first is can you give us any kind of a number over how many licenses you have that are currently active? I just see numbers here for the number that you brought online in Q1.

Paul Ryan

Well I would think of it more in terms as licensing programs than individual licenses. Again there are technologies where we have licensed as many as, I think 60 companies, for instance on credit card fraud technology. So there are many of these programs that will produce very large numbers of licensees over the life of the licensing program. But, again, the majority of deals are paid up licenses on an individual basis.

Chris Tamino – Pfeiffer's Capital Group

I see. And for the majority of these agreements, are payments received on a quarterly, biannual or an annual basis?

Paul Ryan

Well generally most of our deals we get paid within 30 to 60 days. On some of the recurring on DMT and a handful of the other portfolios, we are paid either on an annual basis and we then amortize those payments quarterly and in some cases, we are paid quarterly.

Chris Tamino – Pfeiffer's Capital Group

I see. And finally, is there any average rate that you have seen different licensing programs going offline quarter to quarter?

Paul Ryan

I am not quite clear on the question.

Chris Tamino – Pfeiffer's Capital Group

Well the life of a portfolio or a licensing program, do a certain number go offline or die each quarter or year. Do you have any expectations for that?

Paul Ryan

It should be fairly modest. Yes, over the last couple years, we have completed a couple of programs, we have finalized. And again, they were atypical in that when we purchased and merged and bought the 27 portfolios, there were some portfolios within that group that only had a handful of people to license which we have completed. So, but I would say out of that there's probably 3 or 4 portfolios out of the total that we have completed the licensing on. In the vast majority, if you look at the 32 licensing programs as they begin generating money, I would say that they probably only generated maybe 25% to 30% of the total potential revenue of all those portfolios of the ones that have started. So that we are still at a fairly early stage even on the existing programs.

Chris Tamino – Pfeiffer's Capital Group

Right. Okay. Well, thank you. Those are all the questions I have got.

Paul Ryan

Okay. Thank you.

Operator

(Operator instructions) We will go next to Peter Martin [ph] with Mathis Capital.

Peter Martin – Mathis Capital

Hey, Paul. Question on SG&A. In the last couple years when you look at the first quarter, you have got an outsized kind of marketing G&A number in the first quarter and then it drops in the second and third and then sometimes it picks up in the fourth. Is there a reason why the first quarter is a higher G&A number? Is it startup on portfolios? Is it deals closing and you are matching the deal to the G&A. If you could kind of give us some color on that?

Clayton Haynes

Well you mean the fixed MG&A?

Peter Martin – Mathis Capital

I am talking about the fixed number, yes. For the last couple years, your first quarter is an outsized G&A and then it drops and then sometimes it will pick up in the fourth quarter – maybe the third or the fourth. But the first quarter seems to be the largest quarter that it is booked.

Clayton Haynes

Well I think it's important to keep in mind that the MG&A line in our financial statements includes two components. One is a fixed component and that also includes a variable component which is comprised of various business development and licensing related patent, research and consulting costs. And so I think what you are seeing is the variability associated with those variable costs that we do include in the MG&A line.

Peter Martin – Mathis Capital

Well and again, I appreciate that but what I am trying to get to is in the variable component, there must be a reason that you are booking a large front part of the variable in the first quarter. Because your second quarter and third quarter except for in the instance – Yes, the second and the third quarter seem to drop except for last year where it was lower in the fourth quarter. But for some reason again it's – I am not sure if you are trying to be conservative and book it all up front for the year. But it seems to me that first quarter has a larger actual dollar number to it and I am just wondering if that's a pattern we should keep in mind for future years.

Clayton Haynes

No. I would say that the variable costs are fluctuating strictly based upon the activity occurring in that particular quarter. And it's not that we are able to time the actual recording of various expenses. It really is truly based upon the various types of business development, our licensing research and consulting activity happening in those quarters. I mean it's to the extent that that's a trend you are seeing, it's not anything that we are necessarily trying to manage. It really is just based upon when those expenses are incurred based upon the actual activity.

Peter Martin – Mathis Capital

Okay. I didn't think you were managing. I was just trying to get a feel for how it had occurred. So if we have a lot of signed deals in a quarter, then we should see the subsequent expenses related to getting those deals accomplished booked in that quarter?

Clayton Haynes

Yes. I think the words that you used as far as the trends that you are noticing is it's a coincidence that you are just seeing that in the first quarter of each year. But it's not anything that we can necessarily consider to be a trend that will absolutely happen when you are going forward. It really is just based upon actual activity.

Peter Martin – Mathis Capital

Okay. And then the final question is it's kind of the same trend line on revenue. You look at licensing revenues in your first quarter, for instance, '05 is – except for in the '07 year in the $25 million booking, is your lowest revenue quarter. Is that because, you are coming off the holidays or new years or during the quarter there's more holidays and legal people are not in a sense, that's not when deals are signed or booked so you expect the back half of every year to be a little bit bigger and keep things to get finished up and paid up? I am trying to understand the as you say the variability of the numbers and if we should always expect a lower revenue in the first quarter.

Paul Ryan

Peter, this is Paul. I don't think there's any seasonality. I think the amount of data you are looking at here over a handful of quarters is just simply happens to be the amount of deals that get done in a given quarter. And as you know, we have said, we are not trying to manage to the company for quarter over quarter revenues for every 13 weeks. We want to get deals done and licensing programs done at the appropriate licensing rates and sometimes they can move into the next quarter. So we are not trying to manage it quarter to quarter and I don't think there's any – there's certainly no seasonal trend in patent licensing and any of the data points that you have to date is just coincidental.

Peter Martin – Mathis Capital

And that's what I was trying to understand. I am looking more at nicks and patterns than I am. As you would appropriately identify seasonality versus any type of management, so, okay. Thanks, Paul.

Paul Ryan

Okay. Sure.

Operator

We will go next to Daniel Katz with Apex.

Daniel Katz – Apex

Hi.

Paul Ryan

Hi, Danny.

Daniel Katz – Apex

So a number of people have asked this question about the quarters and the rate of growth that you have seen. Now how come you haven't grown revenue at the same rate you have the number of patent portfolios under management?

Paul Ryan

Well there's a lag period, certainly over time there will be a correlation and we have given general guidance although it's not fast and hard guidance. But generally when we bring in a patent portfolio, you can reasonably expect if it's a type of portfolio where you are going to be probably licensing 15 or 20 companies and the revenues are spread over a wider number of companies and, therefore, lower dollar amounts per licensee. Those tend to get started earlier based on the price points and generally within 18 months, we should start producing revenue. I think we have done it in as short a period of time as 11 months. And then there are other portfolios that particularly if it's a handful of licensees for a very large licensing fees those typically will go deeper into the litigation process and could take three or four years before we generate revenue.

Daniel Katz – Apex

Is the time to monetize portfolios lengthened of late?

Paul Ryan

No. We don't see that as a trend. If anything I think as we continue to do multiple licenses with some of the same large companies and get familiar with their processes and they with ours, I think on average the time will come down a little bit.

Daniel Katz – Apex

Okay. So –

Chip Harris

Hey, Danny. This is Chip. I think to compare apples to apples. If you look back 18 to 24 months ago we were probably over that whatever fiscal year that was, we probably grew our portfolios by 50% and that's what we grew our revenues by last year. It is more correlated than you think.

Daniel Katz – Apex

I know it's correlated. That's what I am asking, Chip. So if going back to the third quarter of '05 – your quarters on the low side are 5, 6, 7 and on the high side since then are 12 to 14 and adjusting for Q1 last year for an unusual settlement. It is definitely up and what Paul said about having the smallest quarter each year be bigger is absolutely still true. But you had 27 portfolios there, then you added 45 prior to '07 and it's not kept up at the same rate so if the time to monetize hasn't changed and you have added plenty of high profile people.

Paul Ryan

I don't have it right here in front of me what was the delta between – what period did you pick, third quarter '05?

Daniel Katz – Apex

Just when you went over $3 million in revenues. I just started there.

Chip Harris

I think the question though was, your revenue is slowing down versus the amount of portfolios you are adding. I will bet if you looked back and said third quarter '04 to third quarter '05 and then took the two years later, the 24 months. I will bet our – because I have done it and I don't know the numbers right off the top of my head but I have done it. It's almost like a 96% correlation.

Daniel Katz – Apex

Okay. So that's –

Chip Harris

Other than in that time went up by the same amount as the number of portfolios.

Daniel Katz – Apex

So let me ask you differently. And other people have asked a similar kind of question. If you are adding as many qualified people as you have and you have been able to pick excellent portfolios because you don't have a lot of competition out there, then that correlation if not and you have your yearly basis is fine. But I think that the part people are having trouble putting together is then acquire what you need and it should show up. So if time goes by and that reams down still quarters at what point will people feel comfortable that you have not met your strategy?

Paul Ryan

Well, Danny, let me point out two things and Chip to make a comment. Anyone can go out on our website, acaciatechnoligies.com, and look at our basic presentation and if you look at slide 7, 8, and 9. Slide 7 in the quarterly growth in patent portfolios. Slide 8 is the quarterly growth in revenue producing licensing programs and slide 9 is trailing 12 month revenues. And if you overlay those three metrics which are our key performance metrics, I think you are going to see an incredibly high correlation of 90% plus of growth of patent portfolios and then you do it on a lagging basis of about 18 months, growth to like licensing programs and growth in revenues. So there's an extremely high correlation or there certainly has been over the last 3 years.

Chip Harris

And I think, this year, we will look back and see that big correlation.

Daniel Katz – Apex

Right. What do you plan to do with your cash and how much do you need to maintain from a credibility standpoint?

Paul Ryan

Well I think one of the things we are doing is – we think there's a wonderful opportunity to increase our margins by aggressively deploying some of this cash as we have talked about. It's a little tough to do it after you have already proved out a licensing program and then go back and tell them you want to buy out their interest. But you can see just in the difference, I think we are almost 48% this quarter. There's an opportunity for us with this cash flow, with this cash to go out and buy larger portions than our traditional which is about a 35% margin. So I think that's an area that's hugely accretive for our shareholders to use that and very frankly, we are kind of moving up to the types of portfolios that we are looking at where there are people in this economy that are not as enticed by what might happen two or three years down the road with opportunities on back ends and try to take advantage of this dislocation in the marketplace and take a larger percentage of those patents, the patent revenue and buy it for ourselves and share with our shareholders.

Daniel Katz – Apex

So you have spent more money recently but it's still in the low single digit millions, right?

Paul Ryan

Yes, it's still modest, absolutely.

Clayton Haynes

The last six months it's a little over $3.5 million.

Daniel Katz – Apex

So the second part of the question about how much do you need to maintain in order to be able to take people to court and know that you have got the backing to do that?

Chip Harris

Originally we always kind of had about a $25 million on there but a couple years ago we had maybe 10 or 15 lawsuits at any one time. I don't know what the latest number is but it's probably well over 40, 45. So you can see we are asserting aggressively more portfolios and there's probably some qualitative analysis that says if you are in X number of assertions you need to have more even though it may be a little bit less per lawsuit.

You know, I would say right now probably $35 million to $40 million. Okay?

Daniel Katz – Apex

And then lastly I remember hearing that based on the November court case that Acacia did not win, yet there was some signings that got maybe pushed out as people tried to bend your arm about your own situation. Did some of those fall in Q1?

Paul Ryan

We have been asked that question a million times obviously. It wasn't from the lack of our winning that case. I think it was more of a result of the shareholder pressure on the share price.

Chip Harris

That more than anything else. When you get a binary event and you are trying to close a deal and they say, boy, you guys have a $6.00 stock price. We came back and said, "Well hold it." In the 15 months ago, nobody knew about the potential data on the lawsuit with Microsoft and we had 50 portfolios and trailing 12 month revenue of $33 million. Now we have it a $52 million and 90 lawsuits, you assume that the share price would be higher. So I think if anything, we battle not only from a perception, trying to hire people. It's more expensive to hire people. You have to give them higher awards.

Paul Ryan

Now from a licensing standpoint or at least the negotiating pushback with some companies we were in negotiations with, Chip is right, it was more about our stock price than about whether we lost or won because they know it's 50/50 amongst large companies. But they were trying to use that to their advantage, the significant decline in the stock prices.

Chip Harris

I would much rather have won but the fact that we finally went through a final lawsuit made it clear to anybody out there we were going to aggressively defend and assert our and our partners patent rights.

Daniel Katz – Apex

And is your lower stock price currently impacting your business in any way?

Paul Ryan

Well it doesn't help. I mean I don't think that it's correlated to anything but Yes, I mean it's you have to manage your people more aggressively. People get frustrated when they have a lot of stock based compensation as we have tried to align ourselves with our shareholders and they get frustrated. You guys are money managers, you know what happens when you have a couple down months. You know the result of having the perception of not doing as well.

But we manage through it. I mean this is a fluid environment. And put it this way. We are more aggressive and more opportunistic and more excited about our portfolios and our opportunities than we ever have been. We still want to drive this to be the public market licensing company and see no reason why we can't have $1 billion in value for our shareholders.

Daniel Katz – Apex

Thank you, gentlemen.

Operator

Hold on next to David Reese [ph], a private investor.

David Reese

Yes. Good afternoon, Paul.

Paul Ryan

Hi, David.

David Reese

And to Chip too as well. I was just curious. I see where your cash dropped by about $6 million over the last quarter if I am correct.

Paul Ryan

Yes. Part of that – about $3 million of it was just we did a number of deals late in the quarter. So I think if you look at our financial, our balance sheet, you will see that our receivables were up a little over $3 million. And then we used about $1.5 million for patent acquisitions in the quarter.

David Reese

That's what I thought primarily was due to some portfolio acquisitions that you purchased.

Paul Ryan

No. It's more actually due to our receivables. We did a number of deals in the last 30 days of the quarter and we hadn't collected the cash yet.

David Reese

Oh, I got you. I got you.

Paul Ryan

It's basically just a route in receivables.

David Reese

I got you. I see. Okay. That explains it. Are you still considering any kind of joint ventures with other people who might put some money into this?

Paul Ryan

Yes. We are engaged in discussions with potential financial partners for portfolios, yes.

David Reese

Okay. Well those were two questions I had right now.

Paul Ryan

Okay.

David Reese

Well thanks very much.

Operator

We will go next to Fred Mack with the Mack & Company.

Fred Mack – Mack & Co.

Yes, hi, guys. I have been following your company now for about 2 years and I am starting to get a little worried that with your revenue run rate, you are going to run out of money before you can get to profitability. So, honestly, how long do you guys think it's going to take before your can see positive cash flow?

Paul Ryan

Actually if you look at our – we generated positive cash flow over the last year. So that's really not an issue. We have actually increased our cash. If you look back over the last couple of years, I think we have gone $38 million to around $50 million this quarter again because we had some payables or receivables out at the end of the quarter but Clayton can give you a definitive answer but I think certainly our cash balances have been going up during the last couple years.

Fred Mack – Mack & Co.

But those are balances, not operating income.

Clayton Haynes

Well I think was your question though we are going to run out of cash?

Fred Mack – Mack & Co.

Yes.

Clayton Haynes

Yes, well like I said we – last time –

Paul Ryan

We were in positive – significant cash flow positive so that would speak, fly directly in the face of your concern.

Fred Mack – Mack & Co.

Okay. How about this? When will revenues outpace expenses quarter by quarter.

Paul Ryan

Well on a consistent basis it's hard to predict, certainly we have already had quarters that have been profitable from a GAAP basis. As you know we have $10 million or $11 million in noncash charges. So we have had a number of quarters where basically on a GAAP basis we have shown a loss but on a cash operating basis we have generated cash. So again, back to your basic primary question, if you look back over the last couple years we have actually through operations without going out – we haven't gone out and sold any stock at the marketplace. Our cash has grown from like $38 million to $50 million so we don't anticipate that as being an issue.

Fred Mack – Mack & Co.

Well with your stock price being as low as it is and with no prospect of any kind of real appreciation, aren't you really looking at more difficult times in the next two quarters?

Paul Ryan

Not at all. Our business we are looking at very good times and the prospects for stocks we don't opine on but they go up and down as everybody knows.

Fred Mack – Mack & Co.

(inaudible) That's a bottom line situation that you guys have to address this. It's a fiduciary responsibility.

Chip Harris

Dave, we manage our business, we don't try to manage our stock price. And our business is better than it's ever been. There's probably a lot of experts on the call who can opine on as to why stocks move up and down but that's one area we know we don't know anything about.

Operator

We will take a follow up from Bennett Notman from Davenport.

Bennett Notman – Davenport & Co.

Yes, Clayton, could you just tell us a little bit about the option rate security position and how we should think about what we will hear on that?

Clayton Haynes

Sure. Sure. We have done about as of the end of the quarter about S6 million in option rate securities. As of today about $5.7 million with about 450,000 of those scheduled for redemption in the next 45 to 60 days. They are of two types. One of the types about half of it relates to closed end investment funds and the other half relates to option rate securities backed by student loan portfolios. All of which are AAA credit quality because of the current pressures in the credit market as we are all aware of but the options for those particular securities have broken down. We have seen some good traction since the issue began in mid February with respect to either sales of some of them or having those redeemed. We are currently working with our auditors to finalize our thoughts on the fair value of some of these option rate securities as of the end of the quarter. But we will continue to monitor the situation and work with our broker in an effort to try to get out from under these things as quickly as possible.

Bennett Notman – Davenport & Co.

And you continue to receive interest on them at this point?

Clayton Haynes

Yes. All our option rate securities continue to pay interest in accordance with the National Securities. From our standpoint it is a liquidity issue and not a credit worthiness or default issue.

Bennett Notman – Davenport & Co.

Thank you.

Operator

And due to time constraints, that concludes the question and answer session. I would like to turn things back to Mr. Ryan for any closing remarks.

Paul Ryan

Okay. Thank you, operator. I want to thank you all for being with us. Look forward to speaking with you next quarter and in the meantime if you have any specific questions, you can certainly either give me a call or Rob Stewart, who's our head of Investor Relations. And thank you for being on the call.

Operator

Thank you 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 confirmation code 4191671. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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Source: Acacia Research Corporation Q1 2008 Earnings Call Transcript
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