Acacia Research Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Acacia’s operating subsidiaries acquire, develop, license and enforce patent rights, sharing licensing proceeds with patent owners under negotiated arrangements.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $15.5 million | $34.9 million | $115.5 million | $184.5 million |
| Operating income (loss) | $(35.3) million | $(8.4) million | $(51.2) million | $65.8 million |
| Net income (loss) attributable to Acacia | $(15.7) million | $(6.6) million | $(23.1) million | $49.6 million |
| Diluted EPS | $(0.33) | $(0.14) | $(0.49) | $1.02 |
| Operating cash flow | Not separately reported | Not separately reported | $(4.8) million | $70.2 million |
Revenue fell 56% in Q3 and 37% for the nine-month period. Derived operating margins were approximately (228)% and (44)% in 2013, versus (24)% and 36% in the comparable 2012 periods. The filing reports no debt or committed credit lines. At September 30, cash and cash equivalents were $118.3 million and short-term investments were $167.0 million; working capital was $296.1 million. Total cash and investments were $285.3 million.
Material changes and drivers
- Revenue declined as both agreement count and average revenue per agreement decreased. Acacia signed 24 agreements in Q3 versus 33 a year earlier; average revenue per agreement was $647,000 versus $1.059 million. Trailing-12-month revenue was $181.8 million, down 10% year over year.
- Nine-month operating costs rose 40% to $166.7 million despite lower revenue. Patent litigation and licensing expense increased to $30.4 million from $14.6 million, and patent amortization rose to $36.9 million from $20.9 million, in part reflecting newer portfolios.
- Q3 included a $3.5 million one-time charge to resolve a dispute over legal fees from a prior matter. General and administrative expense also reflected former CEO retirement-related costs, severance and higher staffing and corporate costs.
- Nine-month results include a $25.3 million income tax benefit, while the comparable 2012 period had a $16.3 million tax provision. The 2012 comparison benefited from a $10.2 million release of a deferred-tax valuation allowance. The 2013 nine-month effective tax rate was approximately 52%.
- Acacia acquired control of six new patent portfolios in Q3 and partnered on 22 portfolios during the nine-month period. Patent acquisition costs paid during the nine months were $10.4 million; an additional $9.75 million was accrued.
Cash, outlook and risks
Cash and investments decreased from $311.3 million at December 31, 2012, to $285.3 million at September 30, 2013. Nine-month operating cash flow was negative, and Acacia paid $12.4 million in dividends. Management stated that available cash, investments, anticipated operating cash flows and other potential credit sources should cover requirements through at least November 2014; the filing gives no specific revenue or earnings forecast. The board’s expected annual dividend policy was $0.50 per share, subject to board discretion; a third $0.125 quarterly dividend was announced after quarter-end.
- Revenue is inherently volatile and concentrated: three licensees contributed 34%, 31% and 19% of Q3 revenue; two contributed 43% and 17% for the nine months.
- Patent enforcement outcomes, legal costs, adverse rulings, sanctions or attorney-fee awards, legislative or regulatory changes, and the ability to acquire and monetize patents may affect results. Management expects patent-related legal expenses to continue fluctuating.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether licensing receipts and new agreements recover from the sharp year-over-year revenue decline and continued decrease in trailing-12-month revenue.
- Revenue concentration and the timing and collectibility of major licensee receivables; four licensees represented approximately 32%, 27%, 18% and 16% of receivables at quarter-end.
- Cash generation after patent investment, litigation spending and dividends, and the assumptions behind management’s liquidity outlook.
- The sustainability of the tax benefit and the impact of the revised two-class EPS method. Acacia said prior-period EPS errors were immaterial, but revised the comparative figures presented.
- Potential exposure from ongoing patent litigation and the accrued patent acquisition commitments.