In today's highly competitive technology field, patent deals and intellectual property (IP) disputes frequent the headlines. Patents are valuable assets for firms to wield against competitors and to defend themselves against IP infringement lawsuits. According to data compiled by Bloomberg, in the past 12 months the value of patent deals has jumped to $18.8 billion from $450 million the year before.
Indeed, a multi-billion dollar industry has emerged based on litigating IP rights for financial gain. The competition among Apple, Google, Microsoft and others to dominate the wireless market accounts for much of this rise. It is believed that the need for patents was a chief reason leading Google to buy out Motorola Mobility for an enormous sum of $12.5 billion. This purchase allowed Google to access Motorola's roughly 25,000 wireless patents. Intel also recently purchased $375 million worth of mobile patents from InterDigital. Finally, last summer's $4.5 billion purchase of Nortel by a willing coalition of Microsoft, Apple, Sony and RIM epitomizes the value in securing the right patents in the current competitive climate. The environment is ripe for a company such as RPX Corporation (RPXC).
RPX is a San Francisco-based firm that buys and licenses patents. RPX's business model is to provide patent risk solutions to companies on a subscription basis so that they can avoid expensive and time-consuming patent litigation. RPX holds a portfolio of over 2,000+ patents and rights which provide broad protection against patent litigation in technology sectors including consumer electronics, software, e-commerce, mobile communications and semi conductors. RPX's clients then pay the company an annual fee between $65,000 to $6.9 million a year to license RPX's patents and avoid patent litigation. The size of the annual fee is calculated based on normalized operating income: the greater the income of the client, the greater the fee. To spur growth, RPX then uses its recurring revenues to expand its patent portfolio and attract new clients. For RPX's business model, patents are the assets and operating technology companies are the revenue source.
RPX is profitable with growing revenues (27.5% quarterly growth). RPX recently posted EPS of 0.19, up from analyst's estimates of 0.16. Over the last four quarters RPX has generated earnings that have consistently exceeded analyst estimates. The company maintains a strong cash position ($102M) with no long-term debt. RPX trades at a P/E of 12.84. This is favorable compared to its main competitor Acacia Research Corporation (ATCG), which trades at a P/E of 29.57. Wi-Lan Inc. is another patent licensing company to take a look at, although WIN has posted negative earnings for the past two quarters. Based on performance, RPX appears to be the safest bet for the investor looking to take advantage of the patent litigation wars.
In my view RPX's unique subscription model is an innovative solution to a very real legal problem. RPX clearly understands the intrinsic motivators of every player operating in this environment. A deal with RPX is about playing defense, keeping it simple and avoiding costly legal battles. RPX's solution not only fits the needs of its customers but offers them relatively strong value as well.
However, risk lies in the fact that RPX will forever be at the mercy of patent court room decisions. Understandably, they are operating in a fast-changing legal and regulatory environment. To diversify, RPX also offers alternative litigation strategies for its clients, including defensive buying, acquisition syndication, patent intelligence and advisory services.
All in all, the IP dispute flurry appears to be just heating up. Of course, not all patents are created equal. To maintain earnings growth, RPX Corporation must invest in the right patents and continue to provide value and protection for its clients.
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