Apple's win validated Acacia's business model and made all of Acacia's patent portfolios more valuable. It showed, with lots of publicity, that patents can be defended and awards can be huge. This, of course, will make companies infringing on patents held by Acacia more willing to settle out of court and license use of the patents. And settling out of court is better for Acacia, as that way they avoid lawyers' fees and have higher margins.
Let me explain exactly what Acacia does. They began by representing individual inventors, small companies, and university labs, who didn't have the know-how, or the time, energy, resources and money, to defend their own patents. If you think about it, it may be difficult for a small company or an individual to even find out who is infringing on their patents.
What Acacia did was to partner with the patent holders, usually by becoming an exclusive licensee. It then assigned the patent portfolio to one of its subsidiaries that specialized in a certain area of technology. The subsidiary then contacted infringing companies and either licensed the patent to them or enforced the patent in court. Acacia then gave a pre-agreed percentage of the recovery or license fee to the original owner. Here's how Acacia summarizes what they do:
Acacia Research Corporation's subsidiaries partner with inventors and patent owners, license the patents to corporate users, and share the revenue. Acacia Research Corporation's subsidiaries control over 200 patent portfolios, covering technologies used in a wide variety of industries.
As you can see, this worked great for the small patent holder or small company, and worked very well for Acacia as well. Acacia grew their revenue from $67 million in 2009 to $185 million in 2011, nearly tripling their revenues in two years! Their revenues have continued to grow this year, with about $150 million already booked in the first six months.
Their earnings have grown even faster, and they have almost $2.00 in non-GAAP earnings in the first six months of this year. Yes, that's almost $2.00 in six months… and they are selling at about $26.50 as I write this!
Acacia started out with small companies as partners, as I mentioned above, but a few years ago, as they grew in scale, they started to license entire patent portfolios from larger companies that wanted to make some profit out of their patent holdings. They also began making some outright purchases of patent portfolios from companies that needed cash and were willing to sell. If they own the patent outright, Acacia doesn't have to split the winnings with a partner, and this can double their margins.
In 2010, they had an enormous breakthrough and negotiated a non-exclusive structured deal with Oracle (ORCL). Acacia licensed all the patents in all their portfolios for three years to Oracle for $25 million! Yes, you read it correctly, $25 million in one deal, paid upfront. They weren't finished there, however. They negotiated another similar deal with Microsoft (MSFT) six months later for $40 million. Then in 2011 they negotiated a similar deal with Samsung (GM:SSNLF) for $45 million!
These large structured deals naturally make their revenues and earnings extraordinarily "lumpy," but if you look at their twelve-month trailing revenues, you'll see that they keep rising at a rapid pace.
Earlier this year, Acacia announced a series of licensing deals with Cisco (CSCO), in association with a March quarter with record revenues, and in July, they announced a deal whereby one of their subsidiaries licensed their entire patent portfolio to Hewlett-Packard (HPQ). 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 (CBSH) and Citigroup (C).
Acacia has by now obviously moved up to playing in the big leagues. Infringing companies now find it more prudent (and easier) to settle with them or to license their patents rather than fight it out in court. They evidently feel that if Microsoft, Oracle, and Samsung have found Acacia's patents are strong enough so that they are willing to license, a smaller company needs to think twice about a court fight, which would be expensive, and which they'd probably lose.
Clearly, Apple's huge win in their patent defense battle will only reinforce this trend, and has to be good both for both Acacia's earnings and its share price.
Acacia's share price had actually fallen in recent months from over $42 to a low of about $23.50 before it started to rebound. At $23.50, its trailing non-GAAP price-earnings ratio was around $10 or $11. This is for a company that tripled revenues in the previous two years.
The reason for the fall in the share price seems to have been the media circus around the Apple versus Samsung patent fight. Since Samsung was a big customer of Acacia, there was worry about how a Samsung loss would affect Acacia. However, the patents that were involved in that fight had nothing to do with the patents that Samsung is licensing from Acacia. On the contrary, Apple's win only reinforces the value of Acacia's entire patent portfolio.
Another rumored concern was that Congress might change the patent laws to make them harder to enforce. This seems quite unlikely, at least in the foreseeable future. However, as is always true when one is dependent on the legal system, the patent laws could possibly be changed by Congress, and one would have to be aware of this possibility. The good news is that if Congress was planning to make a major change in the patent laws, which so many companies depend on, you'd see it being discussed in the papers, hear about it on television and read about it in financial blogs long before anything actually happened.
There's also the possibility that another company could out-compete them for the best patent portfolios, etc., but Acacia is run by very smart guys, and when you have achieved the kind of success they have, there is a moat of perception: Why go with a new untried company when you can go with the company that Oracle, Microsoft and Samsung were willing to deal with?
Acacia has recently expanded into the field of medical technology, and they are constantly evaluating new fields for expansion.
To sum up, Acacia is a company with phenomenal growth, a company which is continually acquiring new patent portfolios and licensing others, and which is selling at a ridiculously low price. After all, this is a company that has received a seal of approval of sorts from Oracle, Microsoft, Samsung, Cisco and Hewlett-Packard, among many others. And now, the Apple win has only further increased the value of their business model. It's hard not to like an investment in this company.
Additional disclosure: I have no positions in any other stock mentioned.