1. InvestmentThesis
Company Overview
- RPXC cannot function unless it has control of a huge number of patents. The
company has acquired these patents through cash flow from operations since
2009, and shows no signs having to alter this pattern. With a Base Case of
cash flows from operations as 65% of revenues, RPXC can fund its acquisi-
tions and has positive growth cash balances through 2019—implying the com-
pany will be able to fund its core competency without raising capital in the near
future.
- Until September 30, 2014, RPX has spent a combined $890 Million to ac-
quire over 4900 patents. A deal with Rockstar was finalized in February 2015
and RPXC effectively doubled its patent assets—worth $1.8B. So long as RPX
increases the number of patents they own, they can increase the number of
companies they attract to subscribe to their services, which gives investors
what they seek: growth.
-Over 96% of RPXC’s revenues are subscription based, and over 90% of
those revenues are renewed each year. These two things allow management
to focus energy on growth through patent acquisitions, and also leads to ex-
tremely high cash flow from operations. Because of this the current price to
cash flow multiple is much lower than is justifiable indicating a deep value to
investors.
-The patent market is growing like weeds, annual litigation costs have tripled
since 2008. RPX brings efficiency and a good name to a broken and badly
branded market. Their network effect allows them to generate more than 2x
revenue per dollar of assets than competitors.
RPX Corporation
Company Snapshot
RPXC *ACTG
Share Price 15.27 10.85
52 Week Range 11.94-
18.16
9.71-
19.93
Target Price $20.68 -
Difference % +35% -
Market Cap 828.83M 335.42M
Key Statistics (as of year end 2014)
EBITDA Margin 72% -47.9%
Operating Margin 54.4% -40.62%
Profit Margin 15.2% -50.45%
P/Operating CF 4.36x 79.0x
TEV/Revenue 1.9x 2.7x
Market Cap/ 3.5x 2.0x
Patent Assets 236.35 286.64
Competitors
*Acacia Research (ACTG)
Marathon Patent Group, Inc. (MARA)
Pendrell Corporation (PCO)
SOURCE: Yahoo! Finance 4/3/15
NASDAQ: RPXC
May 2015
Target: $20.68
BUY
RPX Corporation is a NPE (patent troll) litigation protection service that spe-
cializes in patent risk management solutions within the Tech World. The com-
pany’s objective is to minimize NPE costs and financial risks. It achieves this
through its subscription based business model. Companies buy a subscription
from RPX Corporation for multiple services including: defensive patent acquisi-
tions, litigation insurance, market intelligence, RPX OPEN (a transparent envi-
ronment for sellers and buyers of patents), and RPX R&D (search services to
improve general patent research). RPX Corporation has a very unique busi-
ness model: it is the biggest buyer of patents in the open market and also
helps their clients with ongoing patent litigation cases. Along with tech compa-
nies, RPX Corporation also has clients like Barnes & Noble, Starbucks, Wells
Fargo, and the new addition of Ford Motors. RPX Corporation has first mover
advantage within its market and has huge potential to increase its client base.
t618h047@ku.edu
jacob.vonfeldt@ku.edu
SamCarter@ku.edu
eric.dinkel@ku.edu
Grant.helm@ku.edu
Taylor Herron
Jacob Von Feldt
Samantha Carter
Eric Dinkel
Grant Helm
Group 2
2. Page 2
May 2015 $20.68 BUY Group 2
Competitive Advantage through CAPEX
While RPXC’s business model and revenue growth de-
pends on new subscriptions and renewals, those sub-
scriptions will only keep rolling in if RPXC continues to
acquire new patents to expand its portfolio. More patents
equate to a larger client base, which is key to RPXC’s
subscription growth, stability, and more reoccurring reve-
nue. The industry of tech patent protection has high
growth potential—in 2013 there were approximately 2,500
tech companies sued by patent trolls1
. PPXC has high
probability to grab onto and take control of this market
given that it is the biggest buyer of patents in the open
market, and because the company also helps resolve pa-
tent troll litigation cases. RPXC is a one of a kind business
1 Investor Presentation 2014 3 RPX Corporation Website
2 Email from Boone
model, therefore the only company operating with this sort
of capacity2
. RPXC has first mover advantage in market
that houses over $12.2 billion in NPE litigation costs3
,
which grants a huge competitive advantage and an ex-
tremely wide moat. This moat is sustained because RPXC
holds an enormous amount of data, given the tech nature
of its business, which it uses to meet its clients’ needs—
many of which are big names. These names include Cis-
co, Toshiba, LinkedIn, and many more1
. More than 550
unique companies have been named in patent troll suits
just in Q1 of 2015; 500 of which are not yet clients of
RPXC and half of those experienced their first patent troll
suit. 75 of those 550 companies were sued more than
once, only half of which are current clients of RPXC2
.
In order to attract all of this client potential, RPXC has to
continue to acquire patents. With exception of its first
Base Case: 65% of Revenue
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cash & Cash Equivilents 28.9 46.7 106.7 73.6 100.2 78.0 132.5 193.2 260.0 334.7 417.2
Cash from Operations 17.6 120.1 120.3 91.4 212.5 191.5 208.4 231.4 254.5 277.4 299.6
CapEx Requirement 38.5 72.1 101.2 87.4 127.1 137.0 147.7 164.5 179.8 194.9 209.5
Bear Case: 35% of Revenue
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cash & Cash Equivilents 28.9 46.7 106.7 73.6 100.2 78.0 132.5 97.0 57.0 14.3 (31.2)
Cash from Operations 17.6 120.1 120.3 91.4 212.5 191.5 112.2 124.6 137.0 149.4 161.3
CapEx Requirement 38.5 72.1 101.2 87.4 127.1 137.0 147.7 164.5 179.8 194.9 209.5
Bull Case: 90% of Revenue
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cash & Cash Equivilents 28.9 46.7 106.7 73.6 100.2 78.0 132.5 273.4 429.2 601.7 790.9
Cash from Operations 17.6 120.1 120.3 91.4 212.5 191.5 288.6 320.3 352.4 384.1 414.8
CapEx Requirement 38.5 72.1 101.2 87.4 127.1 137.0 147.7 164.5 179.8 194.9 209.5
year, RPXC has been able to fund its patent acquisitions
from its cash from operations. Historically, cash from oper-
ations as a percent of total revenues has been a fairly sig-
nificant, ranging anywhere from 46-127%, but more con-
sistently around 70% (see table 1). In a Base Case of
65% (table 2) and a Bull Case of 90% (table 4) of reve-
nues, cash from operations will be more than enough to
fund CAPEX needs for a conservatively growing client
base. In both of these cases, through 2019 the cash and
cash equivalent balance is still well within positive
growth—25% in the Base and 31% in in the Bull. In a very
unlikely Bear Case of a historically low (by more than
10%) 35% of revenues (table 3), cash alone will not be
able to fund RPXC’s CAPEX requirements for its growing
client base and the growth will become negative by 2016.
Depreciation and Amortization projections are the basis
of CAPEX projections. Historically, the two line up within
about $10 million of each other, CAPEX being on the
higher end. This is because depreciation and amortization
costs are associated with the acquisition of patents, which
is essentially how RPXC measures CAPEX. This means
that RPXC will likely not have to raise any capital in the
near future in order to fund the company’s business mod-
el. If the company does choose to raise capital, it can do it
through both equity and debt. It’s current debt level is 0%,
and has been since just slightly after it became public.
PRXC has enormous amount of leverage to work with if it
chooses to do so, or if cash from operations as a percent
of revenue fall more in line with the Bear Case.
Historic Operating Cash Flow as % of Revenue
2009 2010 2011 2012 2013 2014
Revenue 32.8 94.9 154.0 197.7 237.5 259.3
Cash Flow from Operating Activities 17.6 120.1 120.3 91.4 212.5 191.5
As % of Rev 54% 127% 78% 46% 89% 74%
Table 1
Table 2
Table 3
Table 4
3. Page 3
May 2015 $20.68 BUY Group 2
Cash Flows & Reoccurring RevenueRockstar Patents Purchase
On Tuesday December 23, 2014, RPX Corp announced
it would buy patents from the likes of Apple and other
Smartphone Tech firms. The sale is supposedly designed
to reduce the number of lawsuits over smartphone tech-
nology. The sale consists of over 4000 patents that are
owned by Rockstar Consortium and according to the man-
agement team at RPX, is the largest structured transac-
tion the company has ever been a part of. The deal, which
includes nearly over 35 other companies, is worth approxi-
mately $900 million.
Rockstar Consortium, was formed from the $4.5 Billion
purchase of about 6000 Nortel Network Corp Patents in
2011 following its bankruptcy. Rockstar also includes oth-
er Silicon Valley giants like Microsoft, Sony Erricson and
Blackberry. This is one of the first purchases of
Smartphone technology patents for RPX and the company
is hailing the deal as a “prototype” and that it hopes to fur-
ther promote innovation through their unique patent sys-
tem. John Amster, Chief Executive Officer of RPX Corp.
said that “Peace is breaking out,” after the deal was an-
nounced. “I Think people have started to realize that li-
censing, not litigation, is the best way to make use of pa-
tents, and this deal I a significant acknowledgement of that
reality.”
Cisco and Google are two of the companies who were
facing litigation from Rockstar so it’s easy to see why Cis-
co’s general counsel was pleased after the deal an-
nouncement; “With RPX acting as a clearing house and
deal manager, a global consortium of unprecedented
scale came together and reached a fair value for licensing
rights in a negotiated business transaction instead of a
courtroom. This is an approach and transaction that is
conducive for the entire industry.”
RPX received a transaction fee for its work, worth ap-
proximately $35 million and has been recognized on Q4
and Q1 revenues. As of September 30, 3024, RPX had
invested $890 Million to acquire approximately 4900 pa-
tent assets and rights, so completion of the deal with
Rockstar (which was finalized on February 3, 2015), effec-
tively doubled the patent assets that RPX has ownership
of, thereby doubling the amount of patents it can give out
to companies in return for subscription revenues. The ac-
quisition of these assets allows Rockstar to break into cell
technology patent industry, one of the busiest in terms of
litigation.
This will allow them to grow their client base substan-
tially. As large portion of RPX’s value is in their patent
“library”, this acquisition will make it increasingly more
valuable to subscribe to RPX patent litigation protection.
Not only will it attract new customers, but it will increase
the amount RPX can charge in each contract.
Due to the subscription business model of RPXC, much
of the company’s revenue is reoccurring in nature. For the
most recent fiscal year, subscription revenue consisted of
$251.4 Million of the total revenue of $259.3 Million. This
means that over the last year over 96% of RPXC Corpora-
tion’s revenue is subscrip-
tion based and therefore
reoccurring. In addition,
90% of the company’s rev-
enue is renewed every
year. It should also be not-
ed that the company gets
most of its revenue in a
single payment, and defers
the revenue evenly over
twelve months to comply
with GAAP. This makes
comparison from a quarter
to quarter perspective
much harder because if
they lost a client it would
not be apparent until the
following year.
The extremely high per-
cent of recurring revenue is im-
portant for any business, but es-
pecially a business like RPX. The
company’s success depends on them being able to go
acquire as many useful patents in order to gain new cli-
ents. One of the benefits of subscription revenue is that
you have the ability to focus on growth rather than focus-
ing on finding enough new or repeat business in order to
hit the same revenue numbers as last year. For example,
if RPX had $100 million in sales last year, they could know
with almost certainty that they could bring in $90 million
the next year, because of the 90% renewal rate. This
leaves management with the task of finding only $10 mil-
lion the next year in new sales, with everything over that
$10 million being growth on the previous revenues. The
reoccurring revenue model is key to RPX’s business be-
cause management can focus on what really matters to
their investors: growth.
Additionally, the reoccurring revenue model is essential
for great cash flows. As previously mentioned, cash flows
from operations (the core business) has since inception of
the company always been over 45%, and averaged over
65% of the total revenue. These cash flows are what we
as investors should be concerned with. Although cash
from operations are not quite the same as free cash flow
to the firm, it is still a good metric to look at. We as inves-
tors should understand that with a company like this, cash
*Chart from Investor Presentation
4. Page 4
May 2015 $20.68 BUY Group 2
Value as Defense Aggregator
flows should be a point of emphasis over earnings num-
bers. Currently RPX trades at over 20 times previous
earnings. This number is very misleading because of
RPX’s high amount of depreciation, currently around 40%
of revenues. This is expected with a patent company, but
because the earnings are being effected by the high
amount of non-cash depreciation, the earnings are being
artificially skewed. The actual cash earnings are much
higher. Right now, the company generates $3.53 per
share in cash flow from operations. They trade at 9.69 of
next years estimated free cash flows, and trade at only
4.36 times of the operating cash flows of last year’s earn-
ings. To get a sense of this high value, cash generating
giant Microsoft generates $3.94 per share in cash flow
from operations and trades at over 12.35 times the operat-
ing cash flow. Although this is a bit of an apples to orang-
es comparison, it still helps to show the great value this
company could be, especially in today’s high-priced mar-
ket.
Over the last 15 years, and more prolifically in the last 7,
the patent industry has shifted its approach from treating
intellectual property (IP) as a complicated legal entity to
treating patents as assets. This shifted has not only al-
tered this niche market, it has greatly affected the legal
and business practices of pretty much all companies doing
business in the United States. The change has created
four main types of patent companies. The most common
and influential companies are called non-practicing entities
(NPEs) and are more commonly referred to as “patent
trolls”. A subset of this category is offensive aggregators.
These companies buy or develop patents and then force
other companies who may possibly infringe on the IP to
buy a license to the patent. If the victim refuses, costly
litigation ensues. Some transactions jump straight to the
litigation face. There are also IP management companies,
who essentially consult with patent owners and how to
maximize revenues generated from their IP, which usually
ends in litigation.
The lack of an efficient market has created a hostile and
legally complex field which has a less than stellar reputa-
tion. The growing bad image of patent trolls has created a
huge market opportunity for RPXC. RPXC is considered a
defense aggregator, and they are the leader in this subcat-
egory. The company’s main services are patent defense
and RPX OPEN. RPXC buys patents on the open market,
then all of their subscribing customers collectively own
rights (with some exceptions) to the patent and can avoid
any infringement litigation. In 2013, 2500 companies faced
litigation. With only 204 customers in 2014, RPXC has a
high ceiling to grow into. Additionally, RPXC offers an
online market place for the buying and selling of patents in
an organized matter. Essentially the EBAY of patents, this
market creates a more efficient and friendly environment
for companies and patent owners to facilitate these trans-
actions. While the current trend is for transactions to occur
through litigation, RPXC hopes to shift trends and move
away from the bad name the industry has developed.
RPXC’s position as a defense aggregator, and more
importantly the largest defense aggregator, gives them a
number of huge competitive advantages. RPXC promises
to never use their patent ownership as a way to generate
litigation revenue. They have aligned their interests with
customers, making them a much better partner than the
alternative. This gives them superior likability and increas-
es the likelihood of subscription. Working as one entity in
the name of their collective customers, RPXC can reduce
inefficiencies. The company can provide one legal team
representing several of their customers in the event of liti-
gation, otherwise each company pays legal expenses and
the costs pile up. The biggest competitive advantage
RPXC has developed is via a network effect. Each cus-
Editors note: Disregards Rockstar Paten Acquisition due to time considerations
5. Page 5
May 2015 $20.68 BUY Group 2
tion is consistent as a percent of revenue, and because
CAPEX usually falls about $10M above Depreciation and
Amortization, CAPEX predications became more reliable.
Cash taxes are usually about $10M under reported in-
come tax expense and change in NWC is around -$25M,
which also increases accuracy of projections (see Appen-
dix B). With all these facts considered, the intrinsic per
share valuation price of RPXC is $20 (see Appendix B).
Because of the nature of predicting future numbers and
the lack of confidence in multiples, this method receives
70% weight in valuation (see Appendix E).
From a relative valuation standpoint, RPXC forces
some creativity. Huge Deprecation and Amortization
amount throw a wrench in EBITDA multiples and in an
industry where the focus needs to be elsewhere than
earning, earnings multiples are also funky. The metrics
developed for this report were MarketCap/PatentAssets
and TEV/Revenue.
RPXC is leading the world in patent acquisitions, which
is a key to the company’s ability to perform for its clients—
which makes a patent asset multiple important. It currently
trades at 3.5x, which is far above its competitors (.4x-2x).
Due to its size and influence within its market, RPXC right-
fully deserves higher multiples than its competition, but to
keep valuation conservative, the current market multiple
was used to deliver a share price of $17.39 (see Appendix
D), which is still a +14% premium when compared to the
current market price. This multiple is very indicative of a
company’s performance within this industry, so a 20%
weight was used in target price triangulation (see Appen-
dix E).
TEV/Revenue was used because it is more representa-
tive of the industry over all due to the fact that the focus is
on cash flows instead of the bottom line earnings to fund
operations. This was a straight forwards analysis, the in-
dustry ranged from 1.9x (RPXC) to 4.6x. Because of the
Rockstar acquisition and other revenue growth potential,
RPXC deserves a higher multiple than where it is currently
trading. 3.6x (see Appendix C) was used because it was
the industry average, so it delivers what we consider to be
conservative comparison given the completive edge
RPXC houses over its peers. This method gave a high
value of $29.12, which is far too inflated, thus only receiv-
ing 10% weight in target price triangulation (see Appendix
E).
When taking all three forms of valuation into considera-
tion, RPXC comes in at a buy recommendation with a
price of $20.68 a share—a 35% market premium. RPXC is
so undervalued because the market fails to see the im-
portance of continual patent acquisition—and RPXC’s ad-
vantage in this arena—and that the focus of valuation
needs to be placed on cash flows from operations rather
than earnings.
tomer gets access to a huge “library” of patents (over
10,000). Each new patent acquired benefits 204 custom-
ers, not just the owner of the patent. Each new subscriber
provides more capital for patent acquisitions. More patent
acquisitions make the “library” more valuable and encour-
ages more subscriptions. This builds rapidly, proliferating
their first mover and size advantages. While it makes
sense theoretically, it shows up in the financial statements
as well. For every dollar of patent assets on their books,
RPXC generates more than twice as much revenue than
their “patent troll” competitors. This financial advantage
will give them a huge advantage in patent acquisition.
More efficient sales generation allows them to buy more
patents adding to their network effect. These competitive
advantages, and RPXC’s alternative business model, give
them a huge leg up on their competitors. These justify
higher multiples in all relative valuation scenarios. The
company should be rewarded for its novel approach and
more importantly for its efficient use of the driving asset of
the industry.
Valuation & Recommendation
With company like RPXC, who’s business model is so
unique, intrinsic value is the bulk of valuation. Followed by
a Market Cap/Patent Assets ratio, and finally TEV/
Revenue. This metrics were chosen because traditional
metrics do not translate well for RPXC. EBITDA Margins
are huge because most of COGS is depreciation and
amortization expense, thereby throwing off EBITDA multi-
ples. P/E is also a poor multiple for RPXC cash flows are
emphasized over earnings.
In forecasting revenues, a revenue per company/client
was used as well as conservative growth estimate in the
total number of companies/clients (see Appendix A2). His-
torically this number for revenue/client has been con-
sistent around $1.40M, which was maintained for projec-
tions. RPXC has been adding clients in the range of 30-40
a year. Projected clients were kept at a conservative 25 for
2015-2018 and 24 in 2019. Not only do all of these projec-
tions fall under historical numbers, the Rockstar acquisi-
tion was also not factored into estimates—leading to over-
all conservative valuation, yet still landing with a buy rec-
ommendation.
RPXC came out as a strong buy because of a stellar Q1
2015, revenues were up by $11M from the previous quar-
ter because of the Rockstar acquisition. In the past, RPXC
has maintained very even quarters because of their dif-
fered revenue structure, and there is no reason to believe
that this will change going forward. However, Q2-Q4 reve-
nues are below the Q1 mark in order to project conserva-
tive numbers forward. Another key in delivering an accu-
rate DCF is CAPEX. Because Depreciation and Amortiza-
