Marathon Will Report Monster Profits This Quarter

May 16, 2016 3:56 PM ETMARA2 Comments
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Deep Value, Special Situations

Contributor Since 2010

For the past 30 years, I have been involved in startups, as a founder, and active investor. My first company was purchased by Johnson & Johnson, which set the foundation for future investments. By focusing on startups I learned the advantage of investing in promising companies before they became household names. My interest in startups has never waned, and has become my primary focus today.


· Marathon will transition to profitability this quarter, the last time that occurred the shareprice went from $2 to $9.

· Marathon just announced 2 major victories over Yahoo and Apple which sets the stage for other large settlements.

· Marathon will demonstrate 100% year-over-year annual revenue growth this year.

· IP guru Erich Spangenberg just joined Marathon and as it's largest shareholder, has never sold a single share.

· Marathon is trading at an 80% discount to peers.

2016 has been phenomenal for my IP holdings. VirnetX (VHC), went from $1.95 to $10, and Acacia (ACTG), rose from $2.82 to $4.89. My VirnetX analysis that was published right before the run-up can be found here. I expect significant returns with Marathon Patent Group (MARA).

Investors are completely missing the fact that Marathon is only a $26 million company, and will generate at least $33 million in revenue this quarter. Compare that to Acacia which just reported $24 million in quarterly revenue and is valued at $200 million. Or VirnetX which has a $250 million valuation and reported $400,000 in revenue for the last quarter.

Do you see the insane level of mispricing? Marathon should be valued much higher than its current valuation. When you consider the just announced Stryker settlement and the Yahoo victory including injunction, the level of Marathon's undervaluation is even more extreme.

Marathon will turn profitable this quarter

Marathon just announced it will report more than $12 million in profit this quarter. Investors need to keep in mind that the last time Marathon transitioned to profitability, the shareprice went from $2 to $9.

This is not some speculative trade, where investors are hoping that Marathon might generate significant income and possibly turn profitable someday. The numbers have been announced, and most of Wall Street missed it.

The Apple win should inspire other manufacturers to settle

A key statement in the 8K implies that other settlements will be following the Apple settlement.

"The company believes that other voice recognition services also infringe patents involved in the settled action."

This victory is more important for Marathon than most investors realize, because any other infringing companies using this technology will realize that beating Marathon after Apple agreed to settle could be difficult. Settling could be the least expensive alternative.

Apple is not the only handset, tablet, or computer manufacturer out there. There's also some big speech recognition companies that could be liable. Speech recognition is rapidly becoming more widely used, on phones, computers, call centers, in cars etc., and I expect growth in this area to continue.

Winning the Apple case opens the door to other very large settlements and increases Marathon's value well beyond winning the Apple case.

The RPI patent makes it clear that other manufacturers could be liable

I recommend all investors study the RPI patent, and form their own conclusions when determining which other manufacturers besides Apple could be liable. Here is a synopsis of RPI's invention pulled from the patent:

The invention claimed is: a method for processing a natural language input provided by a user, the method comprising: providing a natural language query input by the user; performing, based on the input, without augmentation, a search of one or more language-based databases including at least one meta-database comprising at least one of a group of information types comprising: case information; keywords; information models; and database values; providing through a user interface the result of the search to the user; identifying, for one or more language based databases, a finite number of database objects; and determining a plurality of combinations of the finite number of database objects.

Believe it or not, this section of the patent is actually the easy read. The rest of it gets a lot deeper and more complex.

But what's important, is that when reading the above section pulled from the patent, it does sound like Siri or any other speech recognition program. A natural language input provided by user is a user talking into the microphone. The query and the search of one or more language-based databases sounds like the program going to work to get the answer for you.

The fact that Apple settled for $25 million suggests that additional settlements will be seen from other manufacturers. We should assume that Marathon is already in talks with these other big companies, so other settlement announcements could come at any time.

The Yahoo Pinterest ruling could generate at least $10 million for Marathon

Marathon also just scored a major victory in the Yahoo Pinterest case in Germany. I estimate that Marathon should generate $10 million-$15 million from this case. Given the injunction, the number could be even higher. Again, with Marathon's $26 million valuation, a $10 million to $15 million settlement would be meaningful.

The stock didn't react to this news at all, which was crazy. Investors were confused, because it appeared that a November 17, 2016 validity hearing could compromise Marathon's position. In my opinion the November validity hearing is irrelevant, because Yahoo and Pinterest will not allow their businesses to be shut down until November as a result of the injunction.

The most important aspect of this case was that Marathon was granted injunctive relief, which means it can initiate an injunction immediately. Injunction means it can shut down the areas of Yahoo's and Pinterest's businesses that are using the infringing technology.

Most companies prefer to pay rather than have cash generating businesses shut down. Think about it; shutting down a business not only means losing income, but it creates an unbelievable disruption to the overall business, and generates tremendous ill will among customers. Many customers would not even come back to a business that had been shut down, even temporarily. Most companies will do anything to avoid shutting down a business.

There is even less relevance regarding the November hearing when you realize that the court was not convinced of a high likelihood of patent invalidation, so even if Yahoo and Pinterest wanted to try to prevail at the November hearing, their likelihood of success is minimal.

Here are the salient points regarding this case:

Number 1: the court found Yahoo and Pinterest to be infringing on Marathon's patents.

Number 2: a declaration of liability for damages was included in the ruling.

Number 3: the rulings include injunctive relief.

Number 4: the court was not convinced of a high likelihood of patent invalidation therefore rejected Yahoo and Pinterest request for a stay on the infringement proceedings.

Or to put it more simply:

Number 1: Yahoo and Pinterest have been using Marathon's technology without paying for it.

Number 2: an immediate injunction should force Yahoo and Pinterest to settle quickly because they cannot afford to shut down the infringing businesses.

This case couldn't have gone any better for Marathon, and investors completely missed its importance. I understand, it took me hours of research and a number of conference calls to understand all the ramifications of this verdict.

This is an ideal situation, because it's no longer a case of whether or not Marathon will be paid, but when. Given the injunction, we should see a payment relatively soon.

Marathon has all the leverage with the injunction. Basically they will be telling Yahoo and Pinterest either to pay in a timely fashion, or have the infringing businesses shut down. Investors need to remember that an injunction is the ultimate crown jewel in patent cases because it inspires immediate payment.

Just to be clear, even though I am estimating a settlement to be in the $10 million-$15 million range, a Yahoo settlement could be significantly different from those estimates. The $10 million estimate came from one of the foremost authorities in the patent space. The settlement could be higher or lower, but from what I can determine, it will be substantial.

Yahoo is for sale, and should settle with Marathon before a sale can be concluded

Perhaps an even more important factor that will inspire Yahoo to pay quickly, is that Yahoo is for sale, and the situation with Marathon could delay or prevent the completion of a Yahoo sale. Yahoo is well aware that this liability could deter certain buyers from even making offers.

Potential buyers could demand that Yahoo settle immediately, in order to complete the sale. And Yahoo would want to settle with Marathon quickly so as not to discourage any potential bidders. The more bidders the better. It's best to get this liability off the table as quickly as possible.

Even though one would think that Yahoo will settle quickly in order to enable a successful sale, we have no way of knowing when Yahoo will actually pay. Even once an injunction is in place, which should occur imminently, Yahoo could have some legal means of delaying payment. If a payment occurred this quarter, I would be surprised, these things generally go slower than expected, but I would also be surprised if it didn't happen before the end of summer.

Yahoo is currently valued at $35 billion, so a $10 million or $15 million payment would have little effect on Yahoo, so I would think they would want to get this issue resolved so that it didn't negatively affect the Yahoo sale.

The Yahoo win should bring in other settlements

Parallel proceedings are pending against Tumblr, Inc., Pinterest, Inc., Box Inc., and (UK) Ltd. Marathon's win against Yahoo, particularly with the injunction, should motivate the other potential licensees to settle. I also wouldn't be surprised if infringement suits were filed against companies other than those listed above.

Marathon should generate more revenue this quarter than all of last year

It's unusual yet impressive when a company can produce more revenue in one quarter than it produced the entire previous year. It appears that will be the case with Marathon:

· 2013 revenue: $3.4 million

· 2014 revenue: $21.4 million

· 2015 revenue: $19 million

· 2016 Q2 revenue estimate: $33 million-$36 million

· 2016 revenue estimate: $40 million-$50 million

Do you think the shareprice will remain at a standstill if Marathon demonstrates 100% year-over-year revenue growth?

Marathon's profitability demonstrates the extreme level of undervaluation

Marathon should report over $12 million in profit this quarter, and at least $15 million in profit for the year, based on a minimum of $40 million in annual revenue. With 15 million shares outstanding, and $15 million in earnings, that would generate $1 per share in earnings for 2016. With a PE of 15, that would give Marathon a shareprice of $15.

But keep in mind, calculating a company's valuation based on a PE ratio is not the best way to value an IP company, given the choppy nature of revenue, but that calculation shows how ridiculous a $2 share price is.

Peer comparison demonstrates Marathon's extreme undervaluation

To reiterate, Acacia just reported $24 million in quarterly earnings and is valued at $200 million. Given the recent insider buying by Acacia management, many believe Acacia is undervalued at $200 million.

VirnetX just reported $400,000 in quarterly revenue and has a $250 million valuation. Given the numerous near-term catalysts, and its recent victory over Apple, a $250 million valuation could also be considered low.

Another good example is Unwired Planet (UPIP), which just reported quarterly revenue of $1.3 million and the company has a valuation of $56 million.

And then we have Marathon, which is valued at $26 million, and will generate at least $33 million this quarter. Do you see how crazy that is when compared to others in the sector? At some point Wall Street will catch on, and bid the price to a more appropriate level. This could happen much quicker than most investors realize.

Valuation summary

Acacia VirnetX Unwired Planet Marathon

Quarterly revenue $24 million $400,000 $1.3 million $33 million

Valuation $200 million $250 million $56 million $26 million

For the record, I am long Marathon, VirnetX and Acacia.

The Cuzzo case could be a game changer

On April 25, the Supreme Court heard the Cuzzo versus Lee patent case. With the huge level of amicus brief support from the big players, the Supreme Court should rule in a manner that will favor Marathon and all patent holders. There are just too many big companies that want these unjust laws changed. A positive ruling will essentially eliminate most IPR risk and should push Marathon's shareprice higher.

However, even though experts are cautiously optimistic about the outcome, a positive ruling is not guaranteed, and we will just have to wait until June or July before a ruling is issued.

One thing to keep in mind is that Marathon has already proven successful with IPRs, and this credits their ability to find quality patents, and effectively deal with the court system. A positive outcome for the Cuzzo case will only bolster Marathon's already strong position.

Could the IP sector be turning around?

The IP sector has been decimated, but that's what makes IP companies attractive right now. The pendulum will swing the other direction, and when it does investors who buy quality companies at the bottom will profit. One of the biotech's I bought during the biotech downturn is up 5X from my buy-in position.

It's a bit early to tell, but the first quarter of this year provided a strong indicator that the sector has begun its turn around. The PIPX public IP licensing index was up 13.1%, versus .8% for the S&P 500 in the first quarter of 2016. This was the best quarter for the PIPX since it began tracking IP companies in 2011.

If the upcoming Supreme Court rulings go well, and the PIPX demonstrates a good 2nd quarter, that would help confirm that a turnaround is in effect. When a turnaround is confirmed, all quality IP companies should be lifted higher.

Erich Spangenberg just joined Marathon

Few investors realize how important Erich Spangenberg will be to Marathon. He is one of the most successful patent licensors in the world, having filed suit against nearly 2,000 companies and generated over half a billion dollars in licensing and settlement revenue on behalf of his clients. He understands the patent space and Marathon's business model better than most, and the fact that he has steadfastly remained long is a positive indicator for Marathon's future value.

It's important to remember that Spangenberg knows Marathon's IP given that much of Marathon's patent portfolio was originally his. For those who are not aware of Eric Spangenberg, I recommend investigating his history in the patent space. He is one of the top IP gurus.

Marathon's future never looked brighter

We now are in the midst of a perfect storm; Spangenberg is on board, patent portfolios are selling at an 80% discount, and Marathon has cash. With that combination we should see some transformational patent acquisitions and partnerships this year, which will bolster Marathon's revenue growth.

We need to remember that Spangenberg has the experience and contacts to find the best deals on high quality portfolios, but even more importantly, he knows how to enforce portfolios.

Insiders have held onto their shares

As Marathon's largest shareholder, Spangenberg not sold any shares even when it was trading 3 times higher than today's level. Given the fact that he has such a large position in Marathon speaks volumes on the quality of Marathon's IP.

Equally important, CEO Doug Croxall has not sold any shares of Marathon. There have been no insider sales, except 8000 shares that were sold one year ago by someone on the board. In fact institutional buying has increased, with 221,000 shares purchased by institutions. I don't know who was doing the institutional buying, but institutional holders include Fidelity, Goldman Sachs, and Vanguard. Marathon is on the institutional radar screen, and if institutional buying increases, that could have a major effect on the share price.

Could Kyle Bass be a Marathon shareholder?

Kyle Bass, head of Hayman Capital Management, has developed a profitable and ingenious investment strategy by initiating IPR's. He has teamed up with Eric Spangenberg to invalidate patent claims covering drugs. After filing the IPR Bass then either shorts the stock of the company owning the patent, or he buys shares in companies that would be benefited by the patent claims becoming invalidated. His strategy has proven successful even though some consider it unethical. Just to refresh your memory, Kyle Bass is one of the few who successfully predicted and traded the subprime crisis. He's a visionary and in my opinion an investment genius.

Given Eric Spangenberg's working relationship with Kyle Bass, and his 3 million share position in Marathon, one could speculate that Kyle Bass has become Marathon shareholder. Since the beginning of this year, about 3 million shares have been purchased in the $2 range on the open market. At that level, this is not retail buying. Given Eric Spangenberg's apparent bullishness on Marathon, it's possible that Kyle Bass has jumped on board. This is pure speculation, given that Bass has not filed, but it wouldn't surprise me to learn that he has been accumulating shares.

What are the catalysts?

Following are near-term catalysts that should have a positive effect on the share price:

· Announcement that an injunction against Yahoo and Pinterest has been put in place. This is a big one because that will put immediate pressure on Yahoo and Pinterest to pay.

· With 14 Markman and trial dates in the next couple of months, I would expect additional settlement announcements.

· When Marathon announces record profitability for this quarter, shareholders should benefit.

· With Marathon's current level of undervaluation, the company could initiate a share buyback program.

What's the risk?

I've thrown around a lot of numbers here, some are concrete, such as the Apple settlement, and some are estimates. The risk is that I'm wrong with some of my estimates. Also, I could be off with my timing with regards to when Marathon receives payments.

If Yahoo is able to delay payment, by temporarily delaying the shutdown of its infringing business, it could be possible that the November 17 validity hearing does actually occur. I don't believe that will happen but I just don't know enough about how the German legal system works with regards to enforcing injunctions. In my opinion, particularly with Yahoo wanting to sell itself, Yahoo will pay way before November 17, but I could be wrong.

However, given that the court has already expressed a positive view regarding patent validity, I don't see much risk even if the hearing does take place. However, until Yahoo actually pays, there is some risk.

While I am anticipating numerous positive catalysts, with IP companies, there is always the risk of unfavorable developments. For that reason, this is not a risk free trade.

On the plus side, given the extreme level of undervaluation, and the recently improved balance sheet, the near-term downside risk appears somewhat limited.


Apple agreed to settle for $25 million. That appears to be the largest NPE settlement that Apple has ever entered into. Let's not forget that this is Marathon's 2nd settlement with Apple, and that speaks highly of Marathon's management and patent portfolio.

And then for Marathon to score a victory with Yahoo, including an injunction, that makes Marathon's recent accomplishments home run quality. But what's really important is that both of these cases open the door to settlements with many other large potential infringers. Remember, it's always easier to settle cases once major companies like Apple and Yahoo have already settled.

With Marathon's current level of undervaluation and near-term transition to profitability, we are presented with an ideal asymmetrical trade; significant upside potential, with limited downside risk. This trade is magnified by the recent announcement that Erich Spangenberg is now on board. Marathon appears to be in its strongest position since inception, and the shareprice is trading near a bottom. In my experience, that combination presents an above-average trading opportunity.

Disclaimer and disclosure: It is probable that the author and his associates have a position in the subject securities consistent with the opinion expressed in this article and they reserve the right to buy and/or sell the securities mentioned in this article, at any time without further notice. For complete disclosure and disclaimer information please click here.

Disclosure: I am/we are long MARA, VHC, ACTG.

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