Joff Wild

Acacia posted its 2012 Q3 results last Friday and they showed that the NPE generated revenues of $34,939,000, down nearly $30 million year on year; while GAAP net loss was $6,402,000. However, total revenues for the three quarters stood at $184,463,000, up over $20 million on the same period in FY 2011, while the rolling 12 month revenue total stood at $205,258,000, compared to $177,014,000 at the same time last year. Yesterday evening, Acacia’s share price closed at $23.49, which is equivalent to a market capitalisation of $1.167 billion. As recently as May, the firm was flirting with a market cap of $2 billion, with shares at over $42 a pop.

So Acacia has experienced an $800 million decline in value in less than six months. Indeed, as CEO Paul Ryan pointed out in the earnings call to analysts he took part in with other senior firm members on Friday, the transcript of which is available via Seeking Alpha, if you throw in the $400 million that Acacia is currently sitting on “ex-cash the company's enterprise value has dropped to full 50% following last quarter’s strong performance”. That is some fall; especially when you consider that, according to Ryan, the fundamentals have not changed:

This loss in enterprise value has come during a period of exceptional growth in new assets which historically have driven future revenue growth. With 45 new patent portfolios acquired this year, including $214 million in investments, we have significantly expanded Acacia’s future revenue platform in the technology sector, as well as beginning to expand Acacia’s future revenue platform to include the medical technology, automotive and industrial technology sectors.

Historically, there has been a high correlation between growth in new patent assets and the subsequent growth in future revenues. We do not see any reason why that should not continue to be the case in the future.

We recognize that it is often difficult to track our progress given the confidentiality requirements of the licensing business. So we are actively considering new ways to enhance and expand our communications to better enable the investment community to track and evaluate our business.

Our management team has driven exceptional revenue growth from $67 million in 2009 to a $132 million in 2010 to $172 million in 2011, an increase of 157% in three years and as stated earlier, we have already exceeded last year's record in the first nine months of this year.

Even with this exceptional growth, some investors think our recent revenue growth could have been stronger and we don't disagree. What we will point out is as the dollar value of transactions on some of our newer portfolios increases, the time to negotiate some of these transactions has also increased.

Also some potential licensees want to negotiate broader ongoing process for future licensing matters as part of these licensing transactions and some companies are interested in having us take over the licensing of certain of their patent assets.

While these are very positive developments for the long-term success of our company, they do take time to negotiate and this can push out the timing and revenues. The good news is that these revenue opportunities stay in place and will be generated in the future quarter.

With $400 million in the bank as well as revenues from licensing recently acquired portfolios to fund further purchases, Acacia remains very well placed to build its asset base across a wide range of technologies at a time when there are more high quality portfolios available to buy than ever before. On top of that, it relationships with many operating companies are developing in a positive way, there is the prospect of spending less on litigation moving forwards, it has a range of operational advantages as a result of the America Invents Act and plans are afoot to do more monetisation outside of the US – all of which, and more, are explained in the transcript.

Thus, while it is absolutely right to observe that share prices do fluctuate and are not really worth worrying about day to day, the fact that Acacia’s has moved down by so much so quickly when fundamentally the firm has an awful lot going for it, once again goes to show that when it comes to IP investment the markets still have much to learn. In part at least, this is because, as Ryan observes, the way in which IP deal-making and revenue generation work does not fit in with established, well-understood financial models. And although that is a problem, it can also be seen as an opportunity. There are not too many people who have an intimate understanding of both IP markets and Wall Street, but those who do are very well placed to make potentially lucrative calls as more mainstream investors struggle to come to grips with the subtleties of what is a developing asset class. Who knows, perhaps they may start with what could be significantly under-priced Acacia stock.

Disclosure: I have no stakes in any IP pure plays, as far as I know. It’s possible that one or other of the funds my pension is invested in has taken positions, but given that they are run out of the UK I very much doubt it; and even if they have I have no idea. I really should take a closer look I suppose, but there always seems to be something better to do when it comes to reviewing my pension …