Acacia Research Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Acacia’s subsidiaries acquire, develop, license and enforce patent portfolios; the company reported rights to more than 192 portfolios. Results are unaudited, and licensing revenue can vary substantially with the timing and size of agreements.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $50.6 million | $63.9 million | $151.5 million | $118.7 million |
| Revenue plus verdict insurance proceeds | $63.0 million | $63.9 million | $163.9 million | $118.7 million |
| Operating income | $12.4 million | $28.0 million | $35.2 million | $43.2 million |
| Net income attributable to Acacia | $12.5 million | $24.7 million | $27.0 million | $39.3 million |
| Diluted EPS | $0.29 | $0.70 | $0.66 | $1.14 |
Revenue declined 21% in Q3 but increased 28% for the nine-month period. Including $12.5 million of insurance proceeds, total revenue and other operating income was down 1% in Q3 and up 38% for nine months. Operating income fell 56% in Q3 and 19% for nine months. Calculated operating margin on revenue plus insurance proceeds was approximately 19.7% for Q3 and 21.5% for nine months, versus 43.8% and 36.4% in the comparable 2010 periods.
Nine-month operating cash flow was $45.8 million, compared with $30.3 million a year earlier. Cash and cash equivalents were $310.7 million at September 30, 2011, and short-term investments were $6.5 million; total cash and investments were reported as $319.1 million. Working capital was $306.4 million. The company reported no long-term debt or committed credit lines. Liabilities included $37.1 million of royalties and contingent legal fees payable.
Cash increased by $208.1 million during the nine months, principally reflecting $175.2 million in net proceeds from a March public offering. Stockholders’ equity was $323.1 million, compared with $113.9 million at year-end 2010. Accounts receivable rose to $32.6 million from $8.0 million.
Changes and unusual items
- Nine-month revenue growth reflected higher average revenue per agreement, partly offset by fewer agreements executed: 88 versus 180 in the prior-year period. Q3 agreements also declined, to 24 from 51.
- Q3 2011 included $12.5 million of insurance proceeds after an appeals court reversed a patent-infringement judgment against Yahoo!. Related royalties, contingent legal fees and other costs totaled $7.7 million.
- Royalties and contingent legal fees together represented 55% of Q3 revenue and 48% of nine-month revenue, versus 43% and 36% in the corresponding 2010 periods. General and administrative expense increased 38% in Q3 and 44% for nine months, partly due to higher stock compensation and personnel costs.
- The nine-month tax provision increased to $7.6 million, primarily due to $7.6 million of Korean withholding taxes on certain licensing payments. Management cited anticipated use of tax-loss carryforwards for U.S. taxable income, but noted a full valuation allowance against net deferred tax assets.
Outlook, risks and contingencies
Management said cash, investments, expected operating cash flow and other available sources should meet cash requirements through at least October 2012 and for the foreseeable future. It gave no specific revenue or earnings guidance. It intends to use offering proceeds for operations and general corporate purposes, including working capital and potential strategic acquisitions.
Key risks include volatile, concentrated licensing revenue; two licensees generated 85% of Q3 revenue, and two represented 85% of period-end receivables. Patent enforcement may involve higher legal costs, adverse rulings, sanctions or attorneys’ fee awards. Acacia also held $2.0 million of auction-rate securities subject to continuing failed auctions, limiting access to principal. A 10% decline in U.S. equity markets could, according to the filing’s sensitivity analysis, reduce the value of marketable equity investments by approximately 13%. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor verification points
- Assess the sustainability and collection timing of licensing revenue, particularly given licensee concentration and the rise in receivables.
- Separate recurring licensing performance from the one-time Yahoo!-related insurance recovery and associated costs.
- Track royalty and contingent legal fee rates, patent litigation spending, and the impact of new portfolio acquisitions.
- Confirm the treatment and potential recovery of Korean withholding taxes and the realizability of tax-loss carryforwards.
- Monitor auction-rate security liquidity and market exposure of strategic equity investments.