Acacia Research (Nasdaq - ACTG) -- Acquisition Further Expands Patent Portfolio

Acacia Research (ACTG $40.50) remains on track to produce excellent on-target Q4 results. Acacia is the leading provider of intellectual property monetization services. The company collaborates with patent holders to settle IP disputes against infringing businesses. Acacia and its partners divide settlement proceeds.

Acacia acquired 230 new patents (in 13 countries) from its recent purchase of Adaptix Technology, a 4G LTE (“Long Term Evolution”, a high-speed wireless communications standard) technology developer, for $160 million. There are 15 “families” of patents within the portfolio, which cover many aspects of 4G and LTE technology. The company owns 100% of this patent portfolio, meaning it keeps all settlement winnings, minus costs for independent legal counsel. These outside firms typically retain 15%-20% of winnings when they are called in. Early licensing deals for the Adaptix patents have been completed with Microsoft and Samsung without litigation. Both companies entered into “structured settlements” with Acacia in 2010 and 2011, respectively, granting them use of Acacia’s entire portfolio for three years. Acacia has a similar agreement with Oracle, signed in 2010. The company has also asserted the Adaptix patents against AT&T, Motorola, and Nokia Siemens. The lawsuits were filed prior to the Adaptix acquisition to give Acacia a window into the portfolio’s portential.

Several Acacia subsidiaries also recently reached licensing agreements. Smooth Impact LLC avoided litigation by settling with Olympic Tools International, Inc., over impact instrument technology patents. Chalumeau Power Systems LLC resolved a dispute with SMC Networks, regarding Power over Ethernet (“PoE”) patents. Acacia’s medical technology portfolio continues to grow as well, with its recent acquisition of a group of patents involving catheter ablation technology. These licensing agreements will net higher revenues since they were settled outside of court.

The Adaptix acquisition gave Acacia’s stock price a little boost, but investors are still waiting for new structured settlements to increase earnings. Acacia’s fervent acquisition of patents in 2011 has raised the price on future structured settlements, which companies like Apple and Google have been unwilling to pay so far. These settlements immediately augment earnings. Acacia figures it will make even more over time, but from an investor’s point of view that involves risk and the time value of money. Income from standalone deals continues to advance, so results for Q4 should compare favorably to 2010.Our fourth quarter estimates remain unaltered. 

( Click on Table to Enlarge )

Convio (Nasdaq - CNVO) Acquired by Blackbaud

Convio (CNVO), a leading provider of solutions for non-profit organizations, announced Tuesday it agreed to be purchased by rival Blackbaud, Inc. (BLKB) for $16.00 per share. The sale price is 49% higher than Convio's Friday close price of $10.74; it is a 51% increase over Growth Stock Insider's initial recommendation last July of $10.60. There is still a slight chance that another company will purchase Convio moving forward. Oracle and SAG, both of which recently purchased similar software companies, are possible potential buyers. The share price could rise if this happens, but there is risk in waiting it out.

Simulations Plus ( Nasdaq - SLP ) -- Smooth Transition

Simulations Plus (SLP $3.00) appears on track to report excellent on target Q1 (November) results.  The company is the leading provider of software used by pharmaceutical companies to simulate the performance of prospective drug candidates.  The technology steers research in productive directions, saving money and speeding up time to market.  Simulations Plus sold an unrelated subsidiary in the period, netting an estimated $1.5 million after taxes and expenses.  That unit accounted for approximately 25% of sales but was marginally unprofitable.  Earnings are likely to keep following the progression they were on prior to the sale, despite the reduction in total sales volume.  Excluding one time charges we estimate non-GAAP income (excluding stock option expense) rose 25% in the quarter to $.05 a share.  For the entire year a 22% pick-up remains achievable.

New products are in the pipeline.  Existing software packages are being enhanced with more science, faster performance, and more convenient database connections and user interfaces.  Entirely new programs are in development, as well.  Introduction could come in early fiscal 2013 (August).  Simulations Plus also is putting its technology to work in real life demonstrations.  A recent effort used the software to identify eight promising drug candidates for malaria.  Those designs now are being produced by an outside lab.  Testing on actual malaria germs is slated for Q3 (May).  The company doesn't expect a perfect cure to be achieved.  But if the computer generated molecules are active, the effort could serve as a compelling marketing tool by demonstrating the technology's ability to quickly identify promising compounds.

Cash flow remains positive.  Simulations Plus sells its software using a recurring revenue model where customers renew their licenses one year at a time.  Organic growth has been running about 15% a year in the software business.  That trend appears sustainable.  Margins could widen on further volume gains, freeing cash for acquisitions, share buybacks, and dividends.  The company itself represents an attractive takeover candidate, moreover, in light of its reliable cash flow generation, growth prospects, and competitive position.

( Click on Table to Enlarge )



Stamps.com (Nasdaq - STMP) -- First Class Mail

Stamps.com (NasdaqGS: STMP $25.00) is the leading provider of USPS-approved, software-only electronic postage. The company offers a breadth of mail classes to its customers, which range from individuals to large businesses. The postage is printed onto stick-on labels, or directly onto envelopes, using any printer. Customers pay a fee between $15.99 and $39.99 per month to use  the service, in addition to postage. Bulk mailers can receive discounts on select mail classes. The company’s most popular item, NetStamps, lets customers print out stamps of any price, eliminating the fuss of mixing and matching postage.

Stamps.com (“Stamps”) offers service that is cheaper than its competitors’. Unlike chief rival Pitney Bowes, Stamps customers don’t need to purchase or rent postage meters. Postage meters commonly involve a monthly service fee, plus added costs for maintenance, insurance and toner cartridges (which can run hundreds of dollars). Additionally, Stamps’ service can be canceled without penalty. Pitney Bowes customers enter into a lengthy lease with steep cancellation fees. Pitney Bowes deployed a Web-based postage service in 2004, in conjunction with eBay. Endicia (owned by Newell/Rubbermaid), Stamps’ other competitor, traditionally operated in large volume shipping, but now offers services similar to Stamps. Endicia offers a basic plan for $9.95 a month. Stamps has no other direct competition, as the USPS has licensed only these three companies.

Stamps has over 400,000 customers, and that number is growing. The company estimates there are 50 million potential customers in the United States. We estimate Stamps’ market share could increase from the current 0.8% to around 5% (2.5 million customers). Businesses are defecting from Pitney Bowes, whose machines cost up to 80% more per month to operate than Stamps. However, considering the steep buyouts, most companies are waiting until their leases end with Pitney before switching to Stamps.

In addition to the cost savings, larger companies are embracing Stamps’s software. The software, which is included at no extra cost, automatically manages and records orders and shipments for a company’s remote offices. It can also be combined with various e-commerce sites like Amazon and eBay, which aids smaller businesses.

Convenience is the company’s main allure. Customers simply print out exact postage instead of taking lengthy trips to the post office. Stamps can be printed out individually or in bulk. All mailing addresses are automatically verified (using the USPS database) by Stamps beforehand, so customers won’t waste postage by shipping to undeliverable locations. Several small business customers have noted that the printed postage looks more professional than traditional stamps. Stamps keeps an easily accessible history of every parcel a user sends for straightforward record keeping. The company’s service was integrated with Amazon.com Marketplace in July 2010. Stamps won a contract to provide electronic postage for the USPS Click-N-Ship service last February.

Customers also enjoy discounted postage rates, and other services. Users receive discounts of up to 15% off for Priority Mail and up to 21% off Express Mail. Customers that meet certain volume benchmarks qualify for larger discounts: up to 28% off Priority, and up to 32.5% off Express. Delivery confirmation costs between 40 and 70 cents less per package than it would at a post office. However, with the monthly service fees that apply, Stamps is not ideal for infrequent mailers.

It remains to be seen how the decay of the USPS will affect Stamps. The company could mop up customers from areas where offices scale back hours or are closed altogether. But by the same token, businesses may cut back on mailing should the Postal Service decide to do the same with delivery hours and routes.

Revenue should make a significant leap in 2011, after holding steady around $85 million the last four years. We project year end revenue of $100 million, up 17% from $85.5 million last year. We anticipate fully taxed earnings per share of $.85 for the year, an 85% increase from $.46 in 2010. Share earnings could jump another 24% to $1.05 for 2012. Diluted shares outstanding should increase to 16.5 million to 17.0 million in the fourth quarter 2011, from 15.5 million.

Target revenues of $200 million are realistic in the next two to three years, with fully taxed EPS of $2.00. Stamps has more than $200 million in tax loss carryforwards, so it won’t have to pay cash taxes for five to seven years. Earnings excluding income taxes would be $3.00 a share. We anticipate a target price of $50 a share, an appreciation potential of 100% from the current quote.

Stamps is based in Los Angeles, CA. 

 ( Click on Table to Enlarge )