MARA up 23% > Marathon Patent Group (MARA)
Management Call; Poised for 2017 Growth
Summary
We hosted a call with management yesterday. Management highlighted they expect revenue growth in 2017. In the Siemens cellular case, the judge recently increased the potential minimum damages to $30 mil from initial $7.5 mil request. There are 8-10 potential licensees for the GE portfolio that could each represent $25 mil+ in value. MARA would look for annual payments over four years.
Key Points
Overarching Commentary. MARA is up to about 12k patents from 330 at this point last year. Given the patents are from GE, include standard essential patents (Siemens), and have solid precedent (Dynamic Advances), the quality is also up y/y we believe. More potential licensees are engaged in soft license discussions than in the past. Soft licenses have higher gross margin than licenses obtained via litigation. MARA expects revenue growth in 2017.
GE Oil & Gas. Mgmt noted the 11.5k GE patents are so wide-reaching that MARA is talking with senior executives among potential licensees. The breadth and depth of the patents basically ensure infringement by counter-parties. While there are 30-50 potential smaller licensees, 8-10 represent large opportunities, each in the $25+ mil range. MARA would also ask for payments annually over four years. MARA is in soft licensing discussions with potential licensees. GE continues to develop new patents, so that would be added to mix in future. GE is also acquiring Baker Hughes, which could add several thousand patents. MARA expects to have at least one license in 2017 from this portfolio. The patents involve location, extraction and transport technologies.
Siemens Cellular Infrastructure. MARA describes this portfolio as a potential homerun given the size of the cellular infrastructure market and the fact that the portfolio includes standard essential patents (SEP). A SEP effectively means that if a company makes a certain type of cellular equipment, the company automatically infringes the patent. While MARA is in soft license discussions with several companies, MARA recently filed suits against several in Germany. The first oral hearing, which can be impactful, is in 4-5 months, with an infringement trial in 8-11 months (ruling would be 2-3 months later). MARA's initial minimum damages request was $7.5 mil, but the judge recently increased that to $30 mil.
Siemens IoT. MARA describes this portfolio as a potential double. MARA recently filed suits against two defendants in Germany. 5-6 months until first oral hearing, and 4-6 months thereafter for second. MARA is in discussions with others.
Dynamic Advances. MARA won $24.9 mil from Apple in 2016 for this speech recognition/natural language processing patent. Given that precedent, and the rapidly increasing use of speech recognition technology (Amazon Alexa for example), MARA is pursuing several other parties here.
Valuation
Our price target is $5.00 based on 15x FY17 Non-GAAP EPS.
Risks to the achievement of price target
Litigation is frequently required as a catalyst to obtaining a licensing agreement. Litigation is inherently risky given the potential for procedure or juror emotion to influence outcomes. An initial victory at trial could be for naught if the appellate court reverses. MARA buys patents prior to full realization of value. If MARA chooses incorrectly or the legal process inadvertently derails monetization efforts, MARA could burn cash or dilute the company. Case law and legislation are very fluid, and can influence patent monetization strategies. MARA’s balance sheet is relatively light, but it does have access to a $50 mil credit facility.
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