Acacia Research (ACTG, Financial) is an intermediary in the patent market. It facilitates efficiency and delivers financial gains for patent owners by leveraging its legal and technology expertise.
Acacia only represents patent owners that prove in courts their rights are valid and infringed. As a result, Acacia has returned over $750 million for patent partners. So far, over 1,530 license agreements have been executed across 192 patent portfolios, and Acacia has generated nearly $1.40 billion in gross licensing revenue.
Its A+ financial position with no real direct competition, asset-light business model and historical although uneven success can offer investors uncommon value. Acacia benefits from a low-risk, high-reward service model where companies, inventors and research labs use its expertise to fully monetize their IP licensing. The service is mutually beneficial. Customers include small companies, sole inventors and research labs. Further, large corporations can and do use their expertise to fully license their IP businesses.
During the Q1 2017 earnings call management commented on recent first-quarter wins.
Acacia subsidiary Saint Lawrence Communications received a $9.2 million jury verdict against Motorola Solutions (MSI, Financial). A second trial seeking additional damages because the infringement was found to be willful is scheduled within the next few weeks.
Subsidiary Cellular Communications Equipment (CCE)'s patent trial against Apple Inc. (AAPL) begins on July 31, 2017. CCE succeeded with its Apple litigation in Germany. Initially, Apple asserted the suit was unjustified because the European counterpart is the same as a U.S. patent dispute lost in a September infringement verdict. The related German infringement trial against Apple occurs late this year. This win favorably impacts the new U.S. Apple suit lost in September that crushed the stock price. John Rogers (Trades, Portfolio) of Arial Investments comments on the original loss below in a recent memo: "Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost. We have added to the shares because we remain confident in the original thesis."
Looking forward, Acacia subsidiary Limestone Memory Systems has infringement cases pending against Micron and other defendants. Saint Lawrence found success in the first quarter with a patent action in Germany. Specifically, the German court granted an injunction and enforcement proceeding against both Motorola and ZTE. Saint Lawrence has a trial scheduled against Apple in February 2018.
Quarter one conference call financial highlights
Revenues declined 64% ($8.9 million versus $24.7 million). The first-quarter non-GAAP net loss was $4.2 million or $0.08 million after eliminating non-cash charges for amortization and stock options. Average margins for the first quarter were 85% as compared to 77% in the comparable prior quarter. There were fixed SG&A expenses, except non-cash charges, and severance is expected to be between $11.5 million and $12 million for 2017. Even with the negative results cash totaled $156.8 million or $2.88 per share and net cash per share is $2.55. Management's optimism focused on the current patent assets coupled with recent court victories post-first quarter close.
Acacia's focus is to leverage its IT expertise. It plans to employ its experience and proprietary data to increase business in areas of IP outside patent licensing. Patent licensing will continue to be an important part of its business. But, it's a tiny subset of the whole patent ecosystem and current opportunities. High-growth technology companies can benefit from Acacia's patent expertise, skills and industry relationships
An example of the expanded business strategy: loans made to Veritone. Two loans for $20 million in 2016 and an $8 million bridge loan before the Veritone (VERI) IPO on May 26. The principal and accrued interest under both Acacia's $20.0 million secured promissory note and Veritone's $8.0 million line of credit converted to equity. Per a May 26 SEC filing Acacia owns 4,119,521 shares of Veritone. The total shares owned include free shares and exercised warrants. Most shares were purchased at $13.60 and likely an average closer to $10. Veritone shares IPO'ed near $15. Since Veritone's IPO on May 24, details are sparse on the future relationship with Veritone. The current market price for Veritone is $13.30. I hope the Acacia sold Veritone shares during the IPO.
Potential positive news on Veriton is that it was selected as 2016 Red Herring Top 100 North America Award Winner. Veritone's proprietary technology is protected by over 90 issued and pending patents. The patent technology is the likely reason for the relationship.
Net cash oer share is $2.55. Cash per share is $2.88 and current liabilities per share is 33 cents, and it has no long-term debt.
The total insider buys for 2016 and year to date is $6,029,529 or 1,310,235 shares (approximately 2.31% of total shares outstanding).
John Rogers (Trades, Portfolio) from Ariel owns 3,413,174 shares at an average price of $12.85. He owns $13,413,174 or 6.75% of TSO.
In January 2016 John Rogers (Trades, Portfolio) commented on Acacia Research:
"Intellectual property and patent expert Acacia Research Corp. (ACTG, Financial) stock fell -52.14% when it lost a lawsuit that many had expected it to win. In our view, Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost; the lawsuit will be refiled in Germany, where it will be decided by a panel of judges who have technical expertise. We have added to the shares because we remain confident in the original thesis."
Negatives
Equity Investment in Veritone is not supported by fundamentals. Its highly speculative.
Stock option expense during the first quarter increased 23%. These stock options have market-based performance conditions.
There is another interim CEO after the resignation of interim CEO Martin Key. Key was unwilling to relocate his family to California. He replaced CEO Matthew Vella in 2016.
There is poor visibility for the timing of revenues and profitability. This makes valuation speculative.
The author is long ACTG.
