IPO Pick of the Week: RPX Corporation

May. 3.11 | About: RPX Corporation (RPXC)

RPX Corporation [proposed ticker (NASDAQ:RPXC)] is scheduling a $124 million IPO with a market capitalization of $765 million at the price range mid-point of $17 for Wednesday May 4, 2011. The IPO calendar includes seven others for this week.

SUMMARY -- Based in San Francisco, Calif., RPXC is in a new market segment: non-practicing entities (NPEs) that acquire patent rights and license them to clients on a renewal basis. RPXC monetizes patent rights by selling renewal subscriptions to clients that need the patents for defensive purposes.

For 2010 vs 2009 sales were up 188% to $95 million in 2010 from $33 million in 2009. Net income was up 637% to $14 million in 2010 from $1.9 million in 2009. For the last six quarters, revenue and net profits have increased sequentially.

VALUATION -- 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.

RPXC Valuation Metrics

BUSINESS -- Founded in 2008 RPXC provides defensive patent aggregation. RPCXC acquires patent assets that are being or may be asserted against current and prospective clients. RPXC then licenses these patent assets to clients to protect them from potential patent infringement assertions.

From inception through December 31, 2010, RPXC has deployed over $250 million to acquire patent assets in over 50 separate transactions. The substantial majority of the over 50 acquisitions through December 31, 2010, involved patent assets that are believed to be relevant to multiple clients and/or prospective clients. The acquisition were funded with international capital resources, which consist of equity financing, subscription fee collections and seller financing.

NON-PRACTICING ENTITIES -- Entities that do not create or sell products or services and exist to monetize patents through licensing and litigation are referred to as non-practicing entities, or NPEs. NPEs have become a major factor in the patent market and an important source of liquidity for patent owners.

Several developments have led to an attractive environment for patent assertions. These developments include:

  • The searchability of the entire United States patent database on the Internet
  • The ability to use the Internet to quickly identify products and services that potentially relate to patents, (iii) a proliferation and overlap of technology patents,
  • The use of multiple technology components in a single product or service,
  • An increase in the number of businesses that make, use or sell products or services that utilize technology; and
  • The creation of a specialized appellate court for patent cases, providing for a more uniform application of patent law.

RPXC RENEWALS -- RPXC's ability to grow future revenue will be dependent on clients' renewal of their subscriptions. RPXC counts each client's decision to extend its subscription agreement as a renewal, whether the extension is due to the waiver of a right of termination or an affirmative exercise of a right of extension.

As of December 31, 2010, eight clients had renewed their subscription agreements, and no clients had elected not to renew. In 2011, eight clients will have the opportunity to renew, and in 2012, 23 clients will have the opportunity to renew. Because of RPXC's limited history, it cannot accurately predict membership renewal rates.

GROWTH PLAN -- The current focus of RPXC's membership sales team is developing opportunities within the over 240 companies that have been sued by NPEs twice or more since the beginning of 2010. PRCX believes that new clients in the next year will be a subset of this group.

Based on RPXC's internal analysis, it believes there were over 500 patent infringement cases filed by NPEs in 2009 against more than 1,400 unique defendants, and more than 600 patent infringement cases filed by NPEs in 2010 against more than 2,000 unique defendants, some of which were sued more than once.

EMPLOYEES -- RPXC had 66 employees as of December 31, 2010.

COMPETITON -- RPXC competes to acquire patent assets. Primary competitors include other entities that seek to accumulate patent assets, including NPEs such as Acacia Research (NASDAQ:ACTG), Altitude Capital Partners, Coller IP, Intellectual Ventures, Millennium Partners and Rembrandt IP Management, along with patent-buying consortiums such as Allied Security Trust.

USE OF PROCEEDS -- $112 million form sale of 7.3 million shares will be used for working capital and other general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.