This Wednesday, patent aggregator RPX will begin trading on NASDAQ this Wednesday. Seeking Alpha is reporting that the stock will be priced sometime this evening, but the company’s proposed price values the business at more than $850+ Million. As IAM Magazine Editor Joff Wild notes, this is a huge number compared to the revenue numbers posted thus far, but overall interest in managing IP as an asset remains high. Meanwhile, Seeking Alpha has also named RPX its IPO Pick of the Week:
RPXC is priced at 49 times annualized December quarter earnings, 4.2 times book value, and 12.9 times tangible book value. Based on RPCX’s rapid, profitable sequential growth the stock appears to be a good value at the price range mid-point of $17.
It looks like Seeking Alpha’s basis for this pick is RPX’s cashflows, which I discuss more below.
RPX’s CEO John Amster attempted to convince potential investors of the value in the business model by walking through their basic service offering at their IPO roadshow. Amster’s speech provides a good introduction into the world of IP monetization, as well as an overview of the basic players that drive RPX’s business: NPEs and operating companies. Essentially, inventors create technology, and companies adopt technology. However, outside of actually working for one of these companies, there were very few mechanisms for inventors to get compensated for their contributions. One of the main causes for this problem is the high cost of litigation, which prohibits many inventors successfully licensing their technology. (Aside: The root of that problem is the fact that litigation is the default tool the inventor has at his disposal).
NPEs, according to Amster, solved half of this problem by providing funding needed to bring litigation. Inefficiencies in litigation, however, mean that funds outside of licensing compensation are “wasted” on legal fees for both sides, consuming as much as $10,000,000 total per case. RPX’s business model is designed to provide value by eliminating these costs wherever possible.
As I’ve stated before, RPX has deployed about $250 Million to acquire patents, resulting so far in a return of around $100 Million. RPX continues to acquire patents, but Amster has mentioned several times (and did so again in the roadshow) that one of its key tools is the ability to acquire a smaller set of “sublicense” rights, rather than buy patents in their entirety. This will be necessary, as Amster himself suggests, to avoid the “free-rider” problem potentially created by RPX’s non-assertion pledge.
Turning to cashflows, investor Bill Simpson told Gametime IP that “[o]n a real inflow/outflow monies basis, RPX was solidly cash flow positive in 2010.” As mentioned above, Seeking Alpha also cites to cashflows as one of the reasons for calling RPX a “good value.” But securing membership renewals is key for long-term sustainability of the business model, as Seeking Alpha notes, “RPXC’s ability to grow future revenue will be dependent on clients’ renewal of their subscriptions.” The company is reporting that eight clients as of December 2010 have elected to renew.
However, freedom-to-operate rights reportedly vest after 2 years, which may turn out to be the achilles heel of the business model by eliminating the need to maintain memberships after a period of time. Over the past four years, the top 25 NPE targets have been subject to about 10 new lawsuits per year, on average. (Data from Patent Freedom). RPX may have plenty of opportunity to continue acquiring patents and sublicenses on a two-year “rolling” basis, if it structures its acquisitions carefully. However, based on the shear number of NPEs and patent assertions being made each year, RPX will have a difficult time clearing more than an insignificant percentage of the overall licenses its clients need (the “Goldilocks” problem I referred to earlier).
RPX’s mission becomes more difficult as its client base grows. Any NPE doing business with RPX will insist on higher licensing fees since a larger portion of the NPE’s available licensing market is captured. In addition, RPX’s incentive to provide value is reduced during the two year “vesting” term.
Consider a hypothetical example where one of the top 25 companies signs on with RPX in year 1 because doing so will eliminate 3 of the 10 lawsuits filed against it that year. Knowing that the client must maintain its membership for 2 years to fully “dispose” of these lawsuits, RPX has little incentive to eliminate the remaining 7 lawsuits filed in year 0, or any of the 10 lawsuits filed in year 2. In year 3, the client will be facing 27 lawsuits (less any it has disposed of on its own) that RPX has yet to eliminate. While this does give RPX opportunities to strike deals securing the client’s further allegiance, it also raises doubt as to how much value the service actually provides.
While RPX claims to save clients millions of dollars per patent acquired based on eliminating the cost of defense. However, actual savings are minimal unless the patent represents one that the company would (in absence of RPX) choose to fight. In reality, 80% of cases settle before going to trial. Nevertheless, companies do often waste money litigating cases prior to settlement. By eliminating this unnecessary expense, identifying which cases are worth taking to trial, companies can settle all other cases early, and most likely on more favorable terms.
- RPX IPO: Patent Aggregation, Terrorists and Goldilocks (gametimeip.com)
- Renren, RPX Battle for Spotlight (online.wsj.com)
- Patent Licensing Firm Acacia Offers Public Equity (gametimeip.com)
- Is Patent Aggregation A Good Investment For The Shareholder? Analyzing the RPX IPO (gametimeip.com)