Tuesday, February 3, 2009

Marcial: Acacia Research Finds Ways to Make Patents Pay

Marcial: Acacia Research Finds Ways to Make Patents Pay

The niche patent-licensing business of Acacia Research (ACTG) is bearing fruit—and it has proved to be quite lucrative. Titans like Apple (AAPL), Verizon (VZ), Siemens (SI), and Dell Inc. (DELL) have opted to license certain patents held by Acacia. For Acacia, that makes the business all the more rewarding.

What's tiny Acacia's business strategy? It teams up with small, little-known tech companies and takes licenses on their patented technologies. Acacia then goes after companies it believes have infringed those patents. Fortunately for Acacia, it has settled quite a number of such patent violations out of court. And those companies that settle infringement claims usually end up paying fees.

The latest company to come to terms with Acacia is giant computer maker Dell, which entered into a settlement that included a licensing agreement covering a patent relating to network multifunction printer technology. Acacia doesn't disclose fees paid by companies accused of infringing on its patents.

Rapid Growth Path

In 2008, Apple signed two tech licenses with Acacia, and Verizon Wireless took a license on a process that synchronizes IP addresses between wireless network devices, says Acacia Chairman and CEO Paul Ryan. He figures that with the more than 100 patents Acacia now holds, many other companies are likely to end up signing licensing deals with Acacia.

So far, Acacia has been on a rapid growth path, according to both CEO Ryan and analysts. In 2008, says Ryan, Acacia was No. 42 on Deloitte Technology's list of the 500 fastest-growing tech outfits in the U.S. He says Acacia expects revenue growth to come from 45 patent licensing programs that have already begun generating revenues, including those signed in 2009.

Acacia's "growth prospects remain strong," says analyst Sean O'Neill of Singular Research, who rates Acacia a buy. Revenues in the third quarter of 2008, he notes, increased 44.6% from a year earlier, exceeding analysts' expectations. On a sequential quarter-to-quarter basis, revenues jumped 93%, from the $7.1 million Acacia reported in the second quarter, notes O'Neill.

Profits Ahead?

O'Neill expects Acacia to become profitable in 2009, with estimated earnings of 11 a share on projected revenues of $67.9 million. In 2008, Acacia is estimated by analysts to have posted a loss of 46 a share on sales of $44 million.

But how is Acacia's stock doing? O'Neill expects the stock to rise to 7 a share, from its current 3.26. The stock was flying high early in the year, hitting a 52-week high of 8.10. But it has lost strength since then, dropping to a 52-week low of 1.87 on Nov. 21, 2008. It has since regained some ground.

If, as CEO Ryan predicts, more prominent companies sign agreements to settle patent infringements, Acacia's top and bottom lines would leap, along with its stock price.

Strong Balance Sheet

Another Acacia bull is analyst Bennett Notman of investment firm Davenport & Co., which owns shares and has done business with the company. "Acacia is well positioned to deliver strong results in 2009, based on its pipeline of patents that have recently entered, or are about to enter, the revenue-producing stage," says Notman. His projected earnings for 2009 of 20 a share is higher than Singular's 11 forecast. He notes that Acacia's financial standing is solid, with a strong balance sheet that has $45 million in cash, or $1.45 a share.

Notman rates the stock a buy "for risk-tolerant investors," with a price target of 5. The lower price target, he says, reflects the current difficult market conditions. The stock could easily exceed that target, he adds, in a "more normal market—and if management's good execution continues."

Acacia CEO Ryan won't say which companies he expects will sign patent licensing agreements, but he is confident more big tech players will end up signing agreements this year. Expect some surprises.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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