Oracle, Microsoft and Samsung Paid this Little Company Tens of Millions of Dollars Upfront
Saul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Acacia Research (Nasdaq: ACTG) started off representing small investors and small companies who didn’t know how or couldn’t afford to enforce patents that they had obtained. After all, it’s not obvious how a small company or an individual can even find out who is violating their patents, and then it’s expensive and requires a lot of skill to defend them. It can also be very time consuming.
Acacia partnered with the patent holders, either becoming an exclusive licensee or buying the patents. It then assigned the patent portfolio to one of its subsidiaries that either licensed the patent to companies that needed it or enforced the patent in court. Acacia then gave a pre-agreed percentage of the recovery or license fee to the original owner.
As you can see, this worked great for the small patent holder or small company, and worked very well for Acacia as well.
Acacia’s revenues have gone from $67 million in 2009, and $132 million in 2010, to $185 million in 2011, nearly tripling in two years! They have continued to grow revenue in 2012, with about $150 million already in the first six months.
Earnings have grown even faster, with $1.91 so far in non-GAAP earnings in the first six months of this year.
Although they started out with small companies as partners, a few years ago as Acacia grew in scale they started buying or licensing entire patent portfolios from larger companies that wanted to monetize their patent holdings. They also started buying some patent portfolios outright from companies that needed cash upfront. This way Acacia doesn’t have to split the winnings with a partner, which increases their margins.
Then in 2010 they had a breakthrough of sorts and negotiated a non-exclusive structured deal, whereby they licensed all of the patents in their portfolios for three years to Oracle (NASDAQ: ORCL) for $25 million! Yes, you read it correctly, $25 million in one deal, paid upfront.
Six months later they negotiated another similar deal with Microsoft (NASDAQ: MSFT) for $40 million, and another in 2011 with Samsung for $45 million!
These large structured deals naturally make their revenues and earnings “lumpy,” to say the least, but their twelve-month trailing revenues keep going up rapidly.
Earlier this year they announced a series of licenses with Cisco (NASDAQ: CSCO), which was associated with a quarter of mammoth revenues, and in July they announced a deal whereby one of their subsidiaries licensed their entire patent portfolio to Hewlett-Packard. This is in addition to a constant stream of announcements of settlements with smaller companies, as well as some larger ones, such as the recently announced settlements with Commerce Bancshares and Citigroup (NYSE: C).
Clearly Acacia had moved up to playing with the big boys. Companies now tend to settle or license with them rather than go to court. After all, if Microsoft, Oracle, and Samsung feel that the patents are good enough so that they are willing to license, a smaller company is going to think twice about their own chances of winning a patent fight. This improves Acacia’s margins, as they don’t have to split with the lawyers.
Acacia’s stock price has fallen in recent months from over $42 to about $25, where its non-GAAP price-earnings ratio is around 11 or 12. This is for a company that tripled revenue in the previous two years.
The concern seems to have been the circus around the Apple versus Samsung patent fight, and how it would affect Acacia if Samsung lost. However, the patents involved in that fight have nothing to do with the patents that Samsung is licensing from Acacia. Another concern has been that Congress might change the patent laws to make them harder to enforce. This seems quite unlikely, at least in the foreseeable future.
Acacia has recently expanded their patent portfolio and expertise into medical technology and they are looking for new fields to conquer.
So we are left with a company that is growing at a phenomenal rate, continually acquiring new assets, and selling at a ridiculously low price. It’s hard not to invest in a company that has a seal of approval of sorts from Oracle, Microsoft, Samsung, Cisco and Hewlett-Packard, among many others.
SaulR80683 is long Acacia Research and Apple and has no position in any other company mentioned. The Motley Fool owns shares of Citigroup Inc., Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.