Friday, July 22, 2011

Acacia Research (Nasdaq — ACTG) -- Can This Stock Get to $100 ?

Acacia Research (Nasdaq: ACTG $42.85) reported strong Q2 results. Revenues rose 165% to $39.7m from $15.0m in Q2 2010. Revenues are on pace to finish up 60% at $210m, compared with $131.8m the year before. Fully taxed earnings rose to $0.08 per share from $(0.04) in 2010. Earnings per share fell from $0.39 in Q1, but those earnings were boosted by a $45.0m agreement with Samsung; no such agreements were reached in Q2. The company is optimistic that two large deals will be completed in the second half of this year. Revenues could far exceed our estimate if these agreements come to fruition.

Second-quarter revenues were down 36% from Q1 ($61.1m), but Acacia’s revenues fluctuate from quarter to quarter so this isn’t cause for concern. Gross margins are also down as legal expenses and inventor royalties sucked up 54% of revenue in Q2. The company spent $13.0m on legal fees, a 275% increase from the year before; royalties jumped 200% to $8.6m from $2.9m in 2010. These rises stem from Acacia growing as a whole, and should even out over the remainder of 2011.

The company made 29 licensing agreements in the second quarter, and acquired nine new patent portfolios. Acacia now controls more than 180 patent portfolios. This is fewer agreements and portfolios than in the past, but deals are now being made with larger corporations that generate more revenue per agreement. Corporations are beginning to see patents as a strategic asset, as selling/licensing them can offset research and development and other payments.

Companies have three options when it comes to patents: they can create their own litigation business to handle patents, turn their patents over to a company such as Acacia, or sell them outright. Corporations are increasingly unwilling to create their own patent litigation teams, not only because of the substantial costs involved, but because Acacia and companies like it specialize in patent management and have a history of success. Selling outright works for some patents, but patent licensing through Acacia or a similar firm is emerging as the most lucrative option.

Acacia is also exploring the possibility of exclusive licensing. Rather than license a patent to many companies for a small sum each, Acacia could license it to only one corporation for a much greater amount. For example, let’s say Acacia acquires “Patent X”. The patent is in high demand, and in the past Acacia would try to license Patent X to 100 companies for $1m each ($100m total). Now, however, as patents become more valuable, one company could spend $200m for the exclusive use of Patent X in order to lock out its competitors. In this case, the strategic value of the patent exceeds the licensing value. Of course, only a select few patents fall into this category, but Acacia has the resources and experience to identify them.

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