Wednesday, June 1, 2011

Acacia Research ( Nasdaq - ACTG ) -- Deal Flow Accelerating

Acacia Research (ACTG $38.00) appears to be on track to produce excellent Q2 results.  The company is the leading supplier of patent enforcement services.  It primarily teams up with patent holders to generate royalties from organizations that need those technologies.  Acacia also purchases patents for its own account, in which case it retains all the proceeds.  On average the company keeps 40% of the money it collects.  Patent attorneys that the company hires generally get 20%.  The original patent holders receive the remaining 40%.  Every specific deal is unique.  Starting in 2010 Acacia began licensing all of the intellectual property it controls to large companies in exchange for substantial lump sum payments.  Those deals are believed to last for three years, at which point another lump sum payment could be negotiated.  To date the company has signed those kind of "structured" deals with Oracle, Microsoft, and Samsung.  The latter transaction occurred in Q1, propelling income sharply higher.

The company hopes to sign two more large deals in 2011.  If one of those doesn't occur in Q2 income will surely decline on a sequential basis (compared to the March period).  Acacia doesn't offer discount settlements to make a particular set of numbers each quarter, either.  It maximizes each deal's value.  While the company's deal flow is strong and growing, revenues can vary from period to period due to timing.  Still, the outlook is bright for another robust performance in 2011.  We estimate income will rise 29% to $1.10 a share (fully taxed) despite the dilution created by a recent stock offering.  Next year $1.40 a share (+27%) is a realistic target.  The industry is expanding rapidly so a stronger showing is possible.  It usually takes two years for a patent portfolio to start becoming monetized, though.  So the surge in activity that's occurring now probably won't affect the income statement before 2013.  (Click on the "labels" button below to bring up all the reports on file about the company.)

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