Wednesday, April 20, 2011

Acacia Research ( Nasdaq - ACTG ) -- Follow-up Report

Acacia Research reported excellent on target Q1 results.  Revenues jumped 54% to $61.1 million.  That included a $45.0 million payment from Samsung for a three year license to use all of the patents currently in Acacia's portfolio (over 170 families).  In the year ago period the company was paid $25.0 million by Oracle under a similar arrangement.  Excluding those "structured" transactions, revenues increased 9% year to year.  Margins declined primarily because of higher royalty payments to original inventors.  Acacia takes ownership of the technology when those partnerships are formed but is required to split the winnings under whatever formula is negotiated.  Last year Acacia signed a huge deal with one of the five largest semiconductor manufacturers encompassing more than 40,000 patents.  The royalty rate on that arrangement is secret but probably is higher than normal.  Earnings were essentially flat at $.39 a share despite the rise in revenue due to those payments and a rise in general business expenses geared to sustaining growth at a fast pace in upcoming periods.  The company also raised equity ($175 million) in the quarter, which also added to overhead expenses.

Acacia plans to invest up to $200 million to purchase patents for its own account.  Several large corporations have approached the company either to represent them in pursuing infringers of their technology, or to take non-core patents off their hands for cash.  Last year Acacia formed a hedge fund to invest directly in patents.  That operation is designed to employ capital supplied by outside investors, augmented by a small amount of Acacia's own money.  The new investment program will be conducted outside the fund.  Partners might be lined up for particular patent acquisitions.  But most of the action will be for the company's own account.

Two more large "structured" deals are likely to be completed in 2011.  Those transactions could be similar in size to the Samsung transaction, perhaps higher if Acacia can bring more intellectual property into its portfolio before the deals are signed.  We are raising our 2011 revenue estimate by 7.5% to $215 million to reflect the accelerating deal momentum.  Our non-GAAP earnings estimate (see "Accounting Notes") is unchanged at $1.15 a share due to the uncertain royalty rate outlook. 

Growth could remain explosive in 2012.  Acacia hopes to consummate four structured transactions next year.  The volume of regular business promises to keep expanding.  And the payoff from the company's direct patent investments could yield further leverage.  Non-GAAP share earnings have the potential to advance into the $1.50-$1.75 range.  Growth could be maintained at above average levels beyond as Acacia reinvests its burgeoning cash flow at superior rates of return.

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