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IP, IP Asset, Patent, RPX

The Volatile Business Of Patent Licensing

Very few companies actually specialize in patent licensing, and most of those are privately held and avoid the limelight where-ever possible.  However, there are five companies in the patent licensing space that are publicly traded: Rambus, Acacia, RPX, Virnetx, and Network-1.  Notably, RPX made its big splash earlier this month when it debuted on the NASDAQ exchange with a $1+ Billion market cap.  Since going public, RPX’s stock price hasn’t dropped below its second day’s closing price of $24.66, and has only briefly closed lower than the third day’s price of $26.75.  Not bad for a company only founded in 2008.  By market cap, RPX is worth roughly the same as Acacia, which has been in the patent licensing business since 1993.

Each of these companies recently released their first quarter financial statements, which offers an interesting opportunity to examine and compare RPX’s track record with that of the more traditional licensing business models.  Please note: I take an active interest in these financial results as a snap shot of the performance for various licensing businesses, but I am not an accountant, nor a financial analyst. (Hell, I haven’t balanced a checkbook since my 18th Birthday).  I have no positions in any of these companies.

RPX reported its first quarter financial results during a conference call and live webcast on Wednesday, May 25.  Because the company is still in an IPO quiet period, no questions were entertain, and CEO John Amster discussed nothing but the first quarter results.  Among the information reported, RPX added 9 new clients since January 1, and generated more than $34M in revenue (a nearly 90% increase over the first three months of last year).  Their cost of revenues (which consists mainly of amortized patent acquisition cost) also nearly doubled to $13M.  (Related: I’ve previously disagreed with the way RPX is amortizing their patent acquisition costs).  Looking at the balance sheet, total equity has grown since December 31 from $10.7M to $18.6M.

Acacia’s first quarter numbers show similar growth to RPX, taking in $60M in revenue (a 50% increase over the $39M earned in the first three months of 2010). Cost of revenues increased across the board, with contingency lawyers’ fees and patent amortization each more than doubling, and inventor royalties more than tripling.  The company paid $9.3M to the lawyers, and chalked up patent amortization was $3.7M.  Inventor royalties were reported at $13M, up from just under $4M over the same period last year.  Curiously enough, the way the expenses worked out, Acacia’s operating income, roughly $20M, was almost identical to their operating income over the same period a year ago.  Turning to Acacia’s balance sheet, they’ve added more than $200M in cash since December 31, and total equity almost tripled to $337M.

Of course, not everyone in the licensing space is growing by leaps and bounds.  Rambus’s royalty revenue is down significantly from $160M through March 31, 2010, to less than $60M through March 31 of this year.  They’ve also burned through quite a bit of cash since December 31.  Coincidentally, they may have spent a lot of money on lawyers earlier this year to argue (and lose) their appeal.

Similarly, Virnetx has been downright stagnant, taking in just seventeen thousand dollars in licensing revenue, yet somehow accumulating more than $2.5 million in operating expenses.  Of course, they still have a hefty amount of cash left on their balance sheet (about $43M), much of it probably owing to that $200M payment from Microsoft announced in May 2010.

Another company worth mentioning is Network-1 Security Solutions, traded over the counter, but publicly traded nonetheless.  They appear to be a relative new-comer to the patent space, compared with the likes of Acacia and Rambus, but they seem to be starting off with a bang.  According to their press release, Network-1 settled with Cisco, Enterasys and others for a total upfront payment of $32M.  In addition, Cisco agreed to maximum royalties of $8M per year through 2015 and $9M per year after that for sales of its Power over Ethernet products.  Reported royalty revenue through March 31 of this year was $3.5 M, compared with a little over $100,000 during the same period last year.  Network-1’s patent portfolio appears to have been assigned from a Connecticut company called Merlot Communications.  If all, or a significant portion, of the relevant market for Network-1’s technology has been licensed by its agreements with Cisco and other networking companies, it will be interesting to see if the company re-invests some of its earnings into acquiring additional IP.

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