Friday, March 30, 2012

Acacia Research ( Nasdaq - ACTG ) -- Raising Estimates

Acacia Research (ACTG $41.50) appears on track to produce booming Q1 results.  That trend could continue in subsequent quarters.  The company spent $160 million to acquire several patent portfolios (Adaptix) in the December period.  As part of that process Acacia negotiated substantial licensing deals with Microsoft and Samsung, which were consummated the first week of January.  Acacia had previously signed "structured contracts" with both companies, umbrella deals that provide access to a large amount of intellectual property that Acacia controls or might gain control of in the future.  The Adaptix patents fell outside of those protections.  In February Acacia announced that it already had generated licence income (revenue) of $75 million in Q1.  A large slug of that is believed to have come from the Adaptix deals.  Acacia hasn't signed any more Adaptix licenses since the Microsoft and Samsung contracts.  Those deals probably were arranged on friendly terms, in light of the companies' past relationships, future business opportunities, and the potential leverage the agreements created against other infringers.  Subsequent to the February announcement Acacia has delivered a drumbeat of additional deals, including a recent one with Amazon.  The company still hasn't gotten anywhere with Apple Computer.  That's the biggest infringer of them all, with billions of dollars on the table.  "You can run but you can't hide."  As they say.  Meantime, business is continuing to gain momentum.  New patent portfolios are being acquired.  A major acquisition is in the pipeline.  Competition is declining.  Infringement is increasing.  And large patent holders are becoming more active in trying to monetize their holdings.  Some of them will do it in-house but a growing number are kicking the tires to go partners with Acacia Research.

We are increasing our (fully taxed) 2012 earnings estimate from $1.25 a share to $1.50 a share.  Our revenue estimate also is going up, from $275 million to $325 million.  Neither reflects any contribution from the acquisition Acacia currently is working on, which might generate more firepower than the Adaptix deal.  The company completed a private placement in February to finance the acquisition.  Our earnings estimate includes that dilution but none of the prospective upside. 

The pace of patent acquisitions is accelerating.  Acacia pushed aggressively into the medical device area in 2011.  Recent diversification efforts include automobiles and energy.  In the past Acacia always was a little pressed for capital, so it insisted on 100% payments when infringers agreed to pay a license fee.  Now that liquidity is higher the company is starting to arrange payment terms, spreading out income over a period of time.  Acacia also is negotiating a higher percentage of deals without going to court.  That promises to smooth out quarterly revenue, as well.  Huge spikes are likely to persist, however.  Amplifying that trend is the likely re-focus by the company on "structured deals."  Acacia backed away from those arrangements last year as the intellectual property market took off.  The company didn't want to lock itself into deals that undervalued the intellectual property involved.  Now that valuations have stabilized a new round of structured deals could be in the cards. 

We estimate earnings will keep rising at a fast pace in 2013.  A larger patent portfolio combined with more out of court settlements, less competition, and more structured deals could propel (fully taxed) earnings to $2.25 a share.  Above average growth could be sustained well into the decade.

 ( Click on Table to Enlarge )

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