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Acacia Company Info
Acacia started out as a dot-com incubator and, like most incubators, acquired small companies, and provided them with financing, management expertise, office services and so forth, in the hope of growing them into viable businesses. At some point after the crash of the dot-com market, Acacia made a transformation from being an incubator to being an intellectual property (IP) firm.

The acquisition and exploiting of IP, as a separate business model, is a relatively new phenomenon in high tech. In the past, most high tech IP was exploited by the company that actually invented it. IBM, for example, files more patents than any other company in the world - and as a result receives substantial royalty income. What's unique about "pure" IP companies, like Acacia, is that they acquire patents and then enforce them, generally without participating in the actual innovation process. Some of these companies, such as Rambus Inc. (Los Altos, Calif.), achieve yearly revenues approaching $100 million.

Acacia's strategy is to convince as many companies as possible to pay license fees when they perform any action that is apparently covered by its patents. At this point in time, Acacia wants to create an ongoing revenue stream, but also to create momentum that will help convince other companies to sign up. As of this writing, Acacia's management claims to have gathered a total of 114 licensing agreements overall, at least 10 of which are with adult Internet firms. Potentially the most significant licensing agreement has been with LodgeNet Entertainment Corporation), a major vendor of in-hotel movie systems.

Acacia CEO Paul Ryan touts the fact that much of his management team comes from Gemstar (acquired in 2000 by TV Guide International Inc.), which licenses interactive program guide services and products to companies such as AOL Time Warner. Acacia's senior vice president of intellectual property, Roy Mankovitz, was formerly Gemstar's director and patent portfolio architect. Acacia's vice president of business development is Andrew Duncan, who formerly was Gemstar's vice president of licensing. In addition, Acacia has obtained the services of Rod Dorman and Lee Rahn, who respectively were Gemstar's outside trial counsel and patent prosecution counsel.

However, despite Ryan's apparent pride in his firm's management heritage, Gemstar may not be the best role model for Acacia. Gemstar lost several patent lawsuits in 2002, greatly weakening the strength of its IP portfolio. In August 2002, Gemstar was forced to pay a $5.7 million penalty as part of the settlement of a Department of Justice investigation. The problems with accounting led to a management ouster and takeover, according to Phillip Swann, president and publisher of TVPredictions.com, an analyst firm that covers the TV industry. "If Gemstar is Acacia's rallying cry, they might want to think again," quips Swann. Acacia's own history of patent litigation has not been much better. In September 2002, the company lost a patent lawsuit against Sony, Sharp, and Toshiba for the V-Chip, another patent that Acacia owns. Acacia is waiting for a separate ruling on a related antitrust lawsuit before deciding whether to appeal the V-Chip ruling.

How Strong Is Acacia?
Acacia's most recent quarterly financials reveal a company that has major cash flow problems. The only revenues that the company claimed were $19,000 (from license fees of its media technology) and $6,000 from a service contract related to a non-media division. The company declared a net loss of $6.8 million dollars for the quarter, of which $1.6 million was related to its media research business. (Some of the expenses that contributed to these losses were one-time charges, suggesting that subsequent quarters may be less disastrous.) On the positive side, Acacia has $54 million in cash, a figure that will allow it to tolerate significant operational losses for several quarters into the future.

Other than its media patents, the company appears to have little prospect for future revenues. Revenue from the company's medical research group, CombiMatrix, is negligible. The company no longer receives revenues from its V-Chip patent, but should the company win back its rights on appeal, Sony, Sharp, and Toshiba would be forced to pay back royalties, but only up until 2003, when the V-Chip patent expired. However, because the V-Chip is still involved in an antitrust suit and Acacia has no intention to appeal the V-Chip decision until the antitrust case is settled, Acacia is unlikely to recognize any revenue from that source for some time to come, if ever.

Given the company's balance sheet, it's not surprising that the investment community has been underwhelmed by Acacia's stock, which traded above $2.00 for a brief period after it was first issued late in 2002, and as of this writing, was trading at $1.79. The company's market capitalization (the value of all its outstanding shares) is $35 million - less than the company's cash on hand. This is an unusual situation, and could be reflective of a lack of investor confidence in the company's long-term profitability.

In order to make Acacia's media business profitable, the management will probably have to secure a significant (e.g. more than $1 million a year) return on its media patents. So far, the company has announced 27 license agreements for its streaming media patents, 13 of which were executed in the second quarter of 2003. All of these license agreements provide for recurring license fee payments.

Without adjusting for the fact that some of the licensees may not have paid a full quarter's fees, Acacia's declared quarterly revenue of $19,000 comes out to an average of around $703 per quarter per licensee. Because this is a negligible amount (compared to Acacia's operating costs) it's reasonable to assume that at least some of the license fees that Acacia is receiving are symbolic rather than substantive, and may have been granted in order to create momentum for the patent rather than to add much to the company's revenue stream.

In order to remain viable and to increase the value of its stock, Acacia will probably have to demonstrate an ability to extract significant revenue from its media technology licensees, which means getting some large corporations to pony up. So far, the largest company that's announced a licensing agreement is LodgeNet. However, if Acacia's quarterly revenues do not spike sharply upwards in the third quarter of this year, investors are likely to conclude that the LodgeNet agreement was part of Acacia's ongoing attempt to create credibility and momentum, rather than to add substantial amounts to Acacia's revenue stream.