Acacia Research Corporation — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2011. Acacia’s subsidiaries acquire, develop, license and enforce patented technologies; the company reported rights to more than 184 patent portfolios and 104 licensing programs that had generated revenue.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $39.7 | $15.0 | $100.9 | $54.8 |
| Operating income (loss) | $2.1 | ($4.2) | $22.8 | $15.2 |
| Net income (loss) attributable to Acacia | $2.1 | ($3.9) | $14.5 | $14.6 |
| Diluted earnings (loss) per share | $0.05 | ($0.12) | $0.37 | $0.43 |
| Operating margin | 5.3% | (27.7%) | 22.6% | 27.7% |
- Cash flow and liquidity: Six-month operating cash flow was $25.1 million, compared with $16.2 million in 2010. Cash and cash equivalents were $299.4 million at June 30; cash plus investments totaled $301.4 million. Working capital was $291.4 million.
- Balance sheet and debt: Total liabilities were $31.0 million, including $22.7 million in royalties and contingent legal fees payable. The company reported no long-term debt or committed credit lines.
- Cash generation and funding: Financing activities provided $173.6 million in the first half, primarily from a March public offering that generated $175.2 million net. Investing activities used $1.9 million, including $1.8 million for patent acquisitions.
Material changes versus the prior comparable period
- Q2 revenue rose 165%; first-half revenue rose 84%. Management attributed the increases primarily to higher average revenue per executed agreement, rather than an increase in agreement counts: 29 agreements were executed in Q2 versus 89 a year earlier, and 64 in the first half versus 129.
- Q2 operating results turned positive from a loss in the prior-year quarter. First-half operating income increased 50%, while first-half net income attributable to Acacia was nearly unchanged, reflecting a higher tax provision.
- Combined inventor royalties, noncontrolling interests and contingent legal fees increased to 54% of Q2 revenue from 41% a year earlier, and to 44% of first-half revenue from 27%. The mix of portfolios and their differing contractual obligations affected these costs.
- Marketing, general and administrative expense rose 37% in Q2 and 48% in the first half, driven by higher stock compensation, performance-based compensation, staffing and corporate costs. Patent amortization also increased, including accelerated amortization tied to recovered acquisition costs.
- Cash rose substantially from year-end, principally due to the equity offering. Shares outstanding at June 30 were approximately 42.9 million versus 36.0 million at December 31, 2010.
Outlook, commentary and risks
- Management gave no specific revenue or earnings guidance. It said cash, investments, anticipated operating cash flow and other potential sources were expected to meet cash requirements through at least August 2012 and for the foreseeable future.
- Management described revenue as volatile and dependent on the timing, size and terms of licensing agreements, litigation outcomes, active programs and licensee payments. Trailing twelve-month revenue at June 30 was $177.9 million, up 16% from March 31, 2011.
- Three licensees accounted for 30%, 28% and 12% of Q2 revenue; three accounted for 45%, 12% and 11% of first-half revenue. Two licensees represented approximately 59% and 24% of quarter-end receivables.
- First-half income tax expense included $7.6 million of Korean withholding taxes on certain licensing payments. Management noted foreign taxes may be deductible or creditable in future U.S. tax returns, subject to limitations; it maintained a full valuation allowance on net deferred tax assets.
- Patent enforcement carries risks of adverse court decisions, increased legal costs, changes in laws or rules, and potential sanctions or fee awards. Management said ordinary-course claims were not expected to materially affect the company, but enforcement-related sanctions could be material.
- Approximately $2.0 million of auction-rate securities remained classified as noncurrent after repeated failed auctions; access to principal may depend on a successful auction, issuer redemption or a secondary-market buyer.
- Known contractual obligations totaled $5.6 million, including operating leases, scheduled patent-acquisition payments and consultant payments. Management reported no significant 2011 capital expenditure commitments.
Important facts for investors to verify
- Whether the unusually strong revenue growth and higher average agreement value are repeatable, given quarterly variability and customer concentration.
- How much of future licensing revenue will be absorbed by inventor royalties, contingent legal fees, patent amortization and litigation spending.
- The collection timing and collectibility of concentrated receivables, and the timing of related royalty and legal-fee payments.
- The effect of Korean withholding taxes, available tax attributes and any ownership-change limits on future cash taxes.
- Progress in deploying offering proceeds, acquiring portfolios and raising capital for the Acacia IP Fund, which was authorized to raise up to $250 million.
- Developments in patent litigation, possible sanctions or fee awards, and the recoverability and liquidity of the auction-rate securities.