Thursday, April 18, 2013

Acacia Research ( Nasdaq - ACTG ) -- Apple Settlement Disappoints

Acacia Research (ACTG $29.00) reported lower than expected Q1 results.  The company settled its patent infringement case against Apple Computer in the period.  That involved fundamental smart phone technology originally invented for the Palm Pilot.  The company received $50 million, a small increase from the payments received from Samsung and Microsoft.  Acacia spent most of those proceeds on legal preparation costs and royalty payments to the original inventors.  Only a modest profit was realized.  That might prove to be a positive outcome in the long run if Apple becomes more receptive to working with Acacia in the future.  The company already is working with several major corporations to establish something of a patent exchange, with Acacia serving as the nucleus.

Future quarters promise to demonstrate higher profit margins.  Acacia spent heavily to prepare its case against Apple.  Legal expenses are likely to diminish as more settlements are realized via negotiation.  The company's growing inventory facilitates those types of transactions because the counter parties can resolve all their loose ends at once,  Acacia substantially expanded its patent portfolio over the past two years, laying the groundwork for an acceleration of deals in upcoming periods.  We have reduced our 2013 earnings estimate to reflect the higher than expected costs associated with the Apple settlement.  But a strong performance appears to be in the cards, nonetheless.  Growth is poised to remain vibrant in 2014 and beyond as the company's newer portfolios start producing income, and new technology is added.  Legislative threats appear insignificant despite periodic bursts of rhetoric.

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