Good afternoon, and welcome ladies and gentlemen to the Acacia Research Fourth Quarter and Year End Earnings Release Conference Call. At this time, I’d like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I will now turn the conference over to Mr. Matthew Vella. Please go ahead.

Thank you for being with us today. Today’s call may involve what the SEC considers to be forward-looking statements. Please refer to our 8-K, which was filed with the SEC today, for our forward-looking statement disclaimer. In today’s call, the terms we, us, and our, refer to Acacia Research Corporation and it’s wholly and majority owned operating subsidiaries. All patent rights acquisitions, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation’s wholly and majority owned operating subsidiaries. With me today is Clayton Haynes, our Chief Financial Officer. Today, Clayton will start our call by taking you through the numbers for this past quarter and year. Clayton?

Thank you, Matt and thank you to those joining us for, today’s fourth quarter and year end 2014 conference call. As detailed in our earnings release today, Q4 2014 revenues totaled $31 million as compared to $15.1 million in the comparable prior year quarter. Q4 2014 revenues were comprised primarily of 33 new license agreements executed in the quarter as compared to 24 new license agreements executed in the comparable prior year quarter. As we have discussed on previous conference calls, license fee revenues continue to be uneven from period to period. For the fourth quarter of 2014, we reported a GAAP net loss of $16.2 million or $0.34 per share, versus a GAAP net loss of $33.3 million or $0.69 per share for the comparable prior year quarter. On a non-GAAP or pro forma basis, we reported net income of $1.6 million or $0.03 per share as compared to a non-GAAP net loss of $10.6 million or $0.22 per share for the comparable prior year quarter. As discussed on previous conference calls, the non-GAAP or pro forma net income or loss excludes the impact of certain non-cash charges and the impact of certain non-cash tax benefits. 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. On a combined basis, inventor royalties and contingent legal fees expense increased 80%, primarily due to the 106% increase in relative revenues quarter-to-quarter and on average a higher percentage of revenues generated in the fourth quarter of 2014 having no inventor royalty obligations and lower overall average inventor royalty rates for the portfolios generating revenues in the fourth quarter of 2014 as compared to the prior year quarter. As a result, average margins for the fourth quarter of 2014 were 62%…

Thanks Clayton. This year Acacia continued executing on its mission. Teaming with patent donors and charting for them a path to financial returns for the unauthorized use of their technologies. These patented owners are our customers. And to date, we have received nearly $665 million licensing dollars by teaming with Acacia. Over the last year, management has made a concerted effort to consistently communicate to all our stakeholders, our evolving strategy and business model as Acacia hones in on fewer but ultimately more financially rewarding Marquee patent portfolios. We feel strongly that these portfolios with highly defensible claims reading on high revenue markets will be significantly more rewarding for our customers as well as for Acacia and our shareholders. While we are in no way satisfied with our recent revenue levels, we are pleased with our improved operating consistency over the last three quarters, along with the improved trend of modestly higher top-line revenue when compared with the prior year. As we stated last quarter, while we are not claiming to be out of our recent revenue trough, we think we are emerging from it. And we remain steadfast in our belief that Marquee portfolios are the preferred path to scaling revenue and producing a superior return on invested capital. As we have made changes to our strategy and business model, two things have remained unchanged. First, we continue to hear growing need for our service, which has kept our Marquee portfolio intake pipeline strong. Second, we continue to populate our calendar with Marquee portfolio trial dates, which in turn is making our revenue pipeline more resilient. Regarding our pipeline of incoming Marquee portfolios, we see no down-tick in the pipeline. The opportunity to source additional portfolios remains excellent. In fact, Acacia added another new Marquee portfolio in the fourth…

[Operator Instructions]. Our first question comes from Mark Argento with Lake Street Capital Markets.

Good afternoon guys.

Hi Mark.

Maybe if we could spend a little bit of time talking about the cost of doing business in this sector here, in particular. Have you seen any changes in regards to your some of your legal relationships in terms of law-firms willing to go on contingency? We’ve heard some grumblings from some other people that it seems like the law-firms are a little bit, being a little bit more conservative in terms of what they’re willing to take on contingency, kind of given the environment we’re in right now. And maybe kind of juxtapose that relative to some of the relationships that you have right now?

We’ve seen no change. Generally speaking, when we bring a matter to a law-firm or to law-firms they want to take it on contingency. And we don’t see that changing, I think it’s because we’re dealing with higher quality assets. And to the extent the situation has become more complex and risky for plaintiffs, the higher quality of our due diligence, of our intake of ultimately our assets have sort of offset those effects. So, short answer, no, no impact. What you’ll see actually is, I think you’ll also see us if anything, increase the quality of the attorneys who are working with us as well. So, again, I think there will be a flight to quality. As a result, we can still get these portfolios done on contingency basis. We’ll I think see higher quality lawyer is working for us. And to the extent we decide to stray a little bit away from contingency and move to fixed fee, that will be coming from us more than a law-firm because we think that in some cases, there is enough revenue and profit where we want to cut back the contingency aspect a little bit. And pocket more of the upside.

All right, that’s helpful. So you feel that given the quality of the portfolios that you guys are somewhat insulated from any of those trends right now going on?

Yes.

All right. And when you’re looking at the overall expense structure of the firm at this point, and Clayton provided some guidance for 2015. Overall, I’m assuming your headcount is down year-over-year. And in terms of the expense structure, have you taken some - obviously some costs have come out. Clayton, could you maybe quantify on a fixed cost basis the year-over-year impact, some of the changes that you made to the personnel or any other types of cost takeouts?

Sure, sure. So, with respect to some of the initiatives that we talked about at the Investor Day in New York, for example with respect to the reduction in headcount that occurred earlier in 2014. For full fiscal year 2014 results, including the impact on non-cash stock compensation that saves us about a net of roughly $5 million in 2014, about $1.1 million of that being of the actual salaries and benefits associated with that reduction in the headcount.

If we add up, so you kind of walk through MG&A, $28 million to $30 million, patent litigation expense $35 million to $37 million and stock comp in the patent amortization we won’t count those because they’re non-cash. But on a hard dollars basis, is your cost structure kind of flat, up or down compared to what the guidance that you provided us?

Well, for example with respect to the guidance side provided in my prepared remarks, that’s sort of guidance included sort of a base level estimate of variable performance based costs and other types of variable cost. Just looking at some of the fixed MG&A component of the cost structure, we’re looking at roughly $25 million to $26 million which would reflect a portion of the savings that we are realizing with respect to the reduction in headcount.

All right. So, if I take the $30 million in the high-end of the range for mass, $30 million in MG&A and the stock comp of $13 million, that’s $43 million. Is that a good apples-to-apples relative to make the $48 million and change that you reported in the - for the full year fiscal 2014? So, kind of is that $5 million-ish type delta?

And the $48 million being just the addition of the same components?

Yes, it’s marketing, reported MG&A which obviously includes your stock comp, so.

Yes, yes, that is a bit, yes, that is a good apples-to-apples.

And Mark, go ahead.

I was going to say, so just at a high level, just looking at it simple, very simplistically because there is kind of $5 million in kind of costs that have been taken out at least how you’re thinking about it for fiscal ‘15 versus ‘14?

Correct. And that includes the non-cash stock compensation component.

All right.

And Mark, the way we think about it, we have a very scalable business model. The costs will fluctuate a little bit to the kind of cost we said, but we think we can look while we see the chance to bring them down, we’ll bring them down. But we’re also investing in some other areas, so what’s not reflected in just doing that bottom line analysis is the fact that we probably cut more as an absolute in the $5 million but we’ve also been making investments. We’ve got the engineering resources to become more provision at certain technology areas. And we’ve also increased our investment in Japan because we see that as a good place to pick up more business. So, there is some fluidity there that goes beyond the numbers. I think it’s important for people to recognize it. The main takeaway though is that the fixed costs I think are going to be relatively static in the big picture. And we think we’re positioned to really take advantage of the leverage of our model. And as we expect to see revenue go up, certainly I hope we see revenue go up, we certainly expect that fixed cost levels remain flat.

Great. Well, I appreciate your kind of peeling the onion there. Congrats to a decent finish to the year.

Thanks.

And we’ll take our next question from Brian Prohm with Cowen & Company.

Hi, good afternoon guys, how are you?

Good Brian, how are you?

Hi, I’m well, thanks. Lots to know but I’m dug-out. Couple of questions just to clarify on Q4, what’s in and what’s out, 33 NAEs [ph], if I look at the license agreements that would mean up through the Microsoft agreement in early January probably comes in, in Q4, do I have that math right?

The Microsoft agreement was a Q4 deal.

Okay, but announced in January?

Yes.

Okay, second question on Q4. You have Adaptix deals in the quarter, noticed well on this portfolio because it is I agree all about scale and about adding more Marquee portfolios. But have you reached 1x ROI in this portfolio or is that within reach. What’s sort of the visibility there?

Yes. Well, we haven’t yet but it definitely is in reach. We think we’re going to hit it. And we’re actually excited about all the Adaptix trial dates coming up in the next couple of quarters. So, I think there has been lot of attention on that Apple, I’ve been calling it a set-back but that’s really just one trial, that’s really one licensee, we currently see it’s two. There is a lot that’s going to go forward, we expect in the next couple of quarters. And we definitely had very minimum expect to be 1x, absolutely.

All right. So, let’s talk about ‘15 more generally then in your plan for Marquee intake that will get you to from 12 to 15, 16, 17 Marquee portfolios. Do you have a sense of what those portfolios are and what they might cost?

We have a pretty good sense of - we have a pool of opportunities. And we have a pretty good sense that about half to two thirds are going to come out of that pool. There is always a little bit of the unknown and our pipeline in some cases, our deal pipeline extends out over more than a year. And sometimes what you’ll see happening is opportunities being accelerated and some being decelerated. But I’d say overall, if we look at getting to those target numbers, we probably have a pool of, actually we definitely have a pool of portfolios in mind from which at least half to two thirds will be drawn.

Okay. And so, that’s essentially why you’re keeping your balance sheet at this sort of level to be able to acquire those when they become available at the right price, right time kind of scenario?

Absolutely, yes.

Okay. Because it sounds like you, if the Goodlatte Bill is in, what comes back through of Republican led Congress, I think we had this conversation before, it feels like you sounded pretty clear that it’s not something that you are, I would say overly concerned with as being anything other than neutral to slightly positive for the company?

Yes. It’s going to do two things. It’s going to increase the quality of intake that we’re seeing and it will have to result in a slight shift in terms of our capital allocations to make sure that we’re responsive to some of the fee shifting that might be put in there. Even though again by and large as long as the fee shifting cuts both ways, we expect to benefit from that.

Okay, last question then. Relative to the scale that you’re moving towards and having 15, 16, 17 up to your portfolios, what sort of a revenue range is reasonable with that type of portfolio count on an annualized basis?

Well, our first objective is going to be to get back to our peak, right. And that was kind of that 200 to 250 level. So we’re going to sort of cut this up into two parts. And we think we can get there with what we’ve got right. And then, if you’re throwing IP on top of that, if you’re throwing patents on top of that baseline, we’ll obviously expect to be able to get well past those peaks, right. So, the absolute number is going to be a function of what we pull in. And since we don’t quite know exactly what we’ve pulled in, we can’t model that [indiscernible] obviously but we’re certainly looking to step one, get back to our peak, step two, go right by.

All right. Maybe I should follow-up and say or ask can you get back to that peak with the current portfolios, the current Marquees that you have?

Yes.

Okay. That’s it. I’ve taken up a lot of questions. I’ll pass it on to the next guys. Thanks guys.

Thanks.

Thank you. We’ll take our next question from Mike Latimore with Northland Capital Markets.

Hi guys, this is Jim Fitzgerald filling in for Mike Latimore.

Hi Jim.

My first question here, how would you guys compare the overall legal activity and negotiation levels in the first quarter relative to the fourth quarter? Has it been kind of similar maybe a little bit more, little bit less what do you guys see in there?

I’d say it kind of depends on which part of the quarter. But look, overall, we’re seeing an upward trend. For us to take a snapshot and say one quarter to the next, I guess I’ve got, I’m so coast with, I’m so in at the tree-level as opposed to the forest level that I see peaks and valleys in every quarter. But the overall trend unequivocally is upwards. We’re seeing more activity, we’re seeing more of that so to speak and we’re very excited by that.

Okay, great. And then has there been any recent case law applicable to your Adaptix cases, I guess Ericsson and Alcatel?

Not against those two. Obviously I spoke at some length on 21, January about unexpected case law that impacted us on Apple. But in terms of those licensees no, we haven’t seen any.

Okay, great. That’s it from me. Thanks.

Thanks.

We’ll go next to Darren Taylor with Barclays.

Hi, this is James Berkley for Darren. Thanks for taking my question.

Hi James.

Just real quick, somebody was touching on this earlier, but just a follow-up. If you could just provide a little bit more detail what do you think is driving the strength of your current pipeline versus the past? And then your thoughts regarding the sustainability of that going forward, while tying in most importantly the timing of how we should think about the expenses tied to these different portfolios versus the revenue realization that you comment, as you guys try to work out of the bottoming in the revenue?

So, I think it’s strong because two things are happening. One, the environment is getting trickier out there for novices. And two, and it’s going to sound little bit corny but I’m really excited to see the benefit of this. Our team is gelling. And we just seem to be a lot more efficient in moving through, large, large volumes of opportunity. I mean, the number one challenge that we have is cutting down what we’re focusing on and putting a lot of focus on that cut down piece, right, that subset that we focus on because we are really making a massive commitment prior to pulling anything in and making sure that it does hit a Marquee level. If we’re going to go out and say that it doesn’t factor Marquee. So the reason for the strength, one, we’re seeing more demand because of the increased complexity and risk of the environment generally speaking. Two, our teams are becoming better at filtering through those opportunities. You’re also asking about the, how we see the stability of that intake? Well, as long as folks keep trying to make things more complex which definitely seems to be the trend on patent holders, we expect increased stability I guess if that makes any sense. We expect more and more demand certainly. And I think that as we start to again in my expectation put up better numbers and show that our performance is something that we can objectively point to as the success. We’ll also see more demand coming in and that will also increase demand for our service. Final part of your question was relating to expenses. The expenses, there is always going to be a certain lag right between what we invest, when we invest and what we’re pulling out, when we pull it out. And the distance of or the time between when we’re making the investment and when we’re pulling money out is something that has fluctuated for us over the years. My expectation is that as we again return back to the levels that we’ve enjoyed near our peak, we’ll see that gap shrink again. I think there is something to the adage in licensing circles that licensing is a momentum business. And that one part of the business doing well can in some sense pull up other parts of the business. So I would hope we can pull that timing in between when we’re making the investments and when we’re pulling revenue out. Because certainly the last couple of years, it’s been stretched compared to where we were, when we were peaking. So again, with increased success, with increased density if you will of portfolios we’re pulling in, we expect and we certainly hope that that gap’s going to shrink, that timing gap.

Are you able to quantify that gap like where you’d like to be versus where you were or where you are now, like to put some…?

Yes, I mean, just historically right. And again in my mind I think we’ve seen the gap get down to as low as 18 months, right. Sometime in very limited cases, it’s been a month at times, right. And so, we’ve seen it really time to be short. And the times like with Adaptix, it’s obviously been longer than it can get out to two or three years. Now on Adaptix, mind you, we recovered about two thirds of our capital roughly right. So, it hasn’t been like, we haven’t been doing anything the last two or three years, but we certainly haven’t gotten back to 1x and we certainly thought it would be there by this time. So, those to me seem to be the two extremes. And I certainly want to push things more towards the former than the latter.

Okay. That makes sense, I appreciate the color. Just turning to capital allocation really quick, I know on the January 21, Adaptix call, I believe given the drop in the share price you guys said that you could potentially be open to buybacks going forward. Just trying to think about the balance sheet, there was a time back in, first quarter ‘12 where you had cash equivalent to short-term investments of around $450 million, that since come down to about $200 million or so. What do you think is like the optimal, like modern cash that you want to hold on to, how are you thinking about potential buybacks going forward, do you want to wait and see on the Marquee strategy, and how that plays out before you really commit to anything or do you feel pretty strongly about that given where the share price is now? Just how should we think about that I guess with all those moving parts?

Well, one, there’s lots of moving parts. And we’ve always revisiting them. The board and myself are always looking. And we stand ready to take action on relatively short order, if and when we think the conditions demand action. The second thing is, as you alluded to in the very question you’ve asked, there is a certain amount of, I’m not going to say uncertainty but there is a certain amount of the unknown about what’s going to happen on the legislative front, especially with the fee ship thing. So obviously we can’t commit to a capital structure until we know some basic cost and what they’re going to look like. Again, we don’t think it impacts our business at the end of the day, but it certainly impacts what we think about capital because if you have more stringent, let’s call it plaintiff unfriendly legislation coming through, that will certainly mean that we don’t have to allocate as much capital towards patent acquisitions but it will also mean that we have to have a bit more of a cushion because of things like fee ship things for example. Whereas if the Congress holds true, then your capital structure has to change and you have to have a reversal over the sorts of allocated changes I’ve just hinted at, right. The final thing is, we have enough cash to run our business. We’re happy with our cash levels. We’re happy with the prospects of acquisitions out there. And when we think of our cash vis-à-vis those prospects, we don’t see any issues. So overall, lot of it is wait and see, wait and see what’s happening on the legislative front, wait and see what’s happening on certain transactions that we’re contemplating. But most of all wait and see, and I think in this case it’s we’re certainly expecting this to happen. We expect to generate a heck of a lot more cash from our licensing operations. And that will certainly have an impact on how we look at this as well.

Okay, great. Thank you very much. I’ll turn it over. I appreciate it.

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

Well, again thanks for your interest. Thanks for supporting the company. And thanks for listening to the call today. We stand on the cusp of some very interesting events. And we look forward to touching base with you again in about three months’ time. So, thank you very much.