Friday, October 21, 2011

Acacia Research ( Nsadq - ACTG ) -- Outlook Keeps Improving

Acacia Research (ACTG $38.00) reported excellent on target Q3 results. The company didn't sign any structured deals in the period.  In the year ago quarter it concluded at $40 million transaction with Microsoft.  So while Acacia earned some large settlements in the period its revenue was produced entirely from regular business.  Revenues declined 21% to $50.6 million.  Excluding the Microsoft deal, though, they were up 111%.  Reported earnings (fully taxed) were down, as well, at $.24 a share.  But that was a record for any quarter in which Acacia didn't sign a structured transaction.

We originally set our $1.10 a share full year earnings estimate based on the assumption three structured deals would be completed this year.  Acacia did complete one deal in Q1 with Samsung for $45 million.  But that's been it to date.  Our estimate is unchanged but now assumes no further structured deals.  The potential value of any such transaction has increased dramatically due to the addition of more high value patents to the company's portfolio.  So if a transaction or two are consummated in Q4 a substantially stronger showing is possible.

New partners are signing up at an accelerating pace.  Acacia teams up with patent owners to enforce those rights more efficiently than the owners can do it themselves.  Activity is rising because more large corporations are trying to monetize their R&D efforts.  Those companies also are trying to offset payments they have to make.  It normally takes two years to fully prepare a new patent portfolio for commercialization.  So much of the intellectual property now flowing into the company won't turn into revenue until 2013 or even later.  But Acacia already has been bulking up over the past few years and now controls 192 portfolios, 70 of which still haven't even begun to earn anything.  The upward progression is likely to be maintained well into the decade.

We estimate income will advance 27% in 2012 to $1.40 a share (fully taxed).  A stronger showing is possible if the company realizes it's implied target of signing four structured agreements.  In 2-3 years income could top $2.50 a share and keep rising at a superior rate beyond.

( Click on Table to Enlarge )

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