Posted on the WiLan board
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RPX Corp. (RPXC-NASDAQ-US$24.50)
De-Risking the Patent Market; Initiating with a Buy Rating
RATING: Buy SECTOR: Technology
TARGET PRICE: US$31 SECTOR RECOMMENDATION: Market-weight
BASIS OF TARGET: 34x 2012 adjusted EPS; 18x 2012 Operating Income
We are Initiating Coverage of RPX with a Buy Rating and $31 Target
RPX is a leading provider of patent
riskmanagement solutions for companies. Its
core solution is defensive patent aggregation, which involves acquiring patent
assets that are being or may be asserted against companies to protect them from
patent litigation. We believe its solution is unique in the market and addresses an
increasing need for companies to reduce patent-related risk and expenses. Patent
litigation has become a multi-billion industry and the number of companies facing
lawsuits has more than tripled over the past five years.
Patent Litigation is a Multi-Billion Risk for Operating Companies
Since there is no market to facilitate the exchange of patent value between owners and
users, the transfer of value is primarily driven by litigation especially when the owner is
a non-practicing entity (NPE). NPEs do not create or sell products or services, but exist
to monetize patents through licensing and litigation. NPEs have become a major factor
in the patent market by acquiring patents from owners and asserting them against
operating companies for financial gain. In 2010, NPEs filed over 700 lawsuits against
more than 4,000 defendants with the cost to defend and resolve a lawsuit ranging from
$100s of thousands to $10s of millions.
Patent Market Play with a Predictable Subscription-Based Business Model
RPX charges companies an annual subscription fee ranging from $60k to $6.6 million
based on historical financial results. The subscription-based model includes multi-year
contracts, which provides a highly visible revenue stream. The subscription model is
unique among companies in the patent space where revenues are primarily driven by
royalties on product sales, one-time paid-up licensing agreements or legal outcomes,
none of which provide much revenue visibility. We believe its subscription model
combined with its exposure to the emerging patent asset class makes RPX’s business
attractive.
$31 Price Target Reflects Growth Rate, Comparables and Market Position
Our price target is based on a P/E multiple of 34x our 2012 adjusted EPS estimate of
.90 and 18x 2012 adjusted operating income. These multiples are supported by a
three-year compound annual EPS growth rate of more than 50%, trading comparables
and RPX’s early leadership position in the emerging patent market.
Valuation Data
2011E 2012E
Projected P/E: 38.3x 27.2x
Forecasted Revenue
Estimates: $160.4 $216.1
Projected
EPS: Q1 --
.16
.21
Q2 --
.15
.22
Q3 --
.15
.22
Q4 --
.17
.25
Total
.64
.90