Rational Patent Exchange Corporation
Buy Pitch
Michael Yuan
Vedant Suri
Agenda
• Business Overview
• Investment Thesis
• Qualitative Analysis
• Valuation
• Risks & Catalysts
• Conclusion
Business Overview
RPX is a defensive patent aggregator, providing patent risk management
for clients on a subscription basis
• IPO in May 2011
• Headquarters: San Francisco
• 138 employees; projected 150 by year
end
• Clients include eBay, Apple, Google,
Cisco
• 10% of open market activity
Financial Data
Price
13.25
52 week low
13.06
Market Cap
776.77m
Revenue
(FY 2013)
237.5m
(+16.8% YoY)
Net Income
(FY 2013)
40.78m
(+4.7% YoY)
Business Overview
• Purchases patents on open market, then
licenses to members to protect against
litigation
• Non-Practicing Entities (NPEs): Patent
trolls
• Members: Subscription basis. Average of
2.5 year contract
• +90% renewal rate
$13b in direct costs
caused by patent trolls
1900 avoided litigations.
575 dismissal negotiations
Business Overview
• Interested in creating more efficient,
transparent market
• Unparalled data accumulated
• Free search for patent & litigation
data. Marketplace setting rather than
court (huge legal costs)
• $1m average patent defense.
$2.5m for full defense
Business Overview
Insurance Business
• Growing insurance business: Deal
with Lloyds. Recently purchased
PatentFreedom & insurance
wholesaler
• Targeted to SMEs - most vulnerable
to patent trolls
• Recently started offering to startups
• Addressable market of 5800+
companies
Policy Details
• $50,000 - $500,000 + retentions
• Up to $10m coverage
• $7,500-$10,000 for startups
• Up to $1m coverage
Investment Thesis
1. Strong Fundamentals
•
•
•
$317m in cash & short term investments – 40% of market cap.
Declining debt – currently none.
Subscribers pay annual fee in advance – predictable flow of cash.
2. Undervalued by Market
•
•
•
Market has reacted to slow insurance growth. High volume of insider selling
Recent patent rulings
Reproduction cost of patent portfolio + cash & short term investments greater than EV
•
We believe that these have already been priced into RPX’s current share price
Investment Thesis
3. Attractive Growth Potential
•
•
Out of 6300 companies sued by NPEs between 2011-13, only 184 were clients of RPX
Insurance business poised to grow:
• Deal with Lloyds and purchase of PatentFreedom build infrastructure & expertise
• Only have 38 clients in 5800+ addressable market
4. Unparalleled Data as Significant Competitive Advantage
•
•
•
First mover advantage. 6 years’ expertise and $830m of patent purchases
•
Data will greatly assist in underwriting & pricing of insurance business
Insights are strong value proposition to potential clients
Free release of data earns trust by proving commitment to transparency
5. Network Effect
•
Gains more value the more members it acquires
•
Pooled data & access to patents
Internal Analysis
Growth Potential
• 6286 potential clients in addressable market for core business
• 300 clients in prospect pipeline
• $1.3m average revenue from subscription
• 150 additional clients within 5 years (pace of last year’s additions)
• $97.5m in additional revenue over 5 years
Internal Analysis
Growth Potential
• 5811 potential insurance clients in addressable market
• 2079 in prospect pipeline
• $200,000 average per policy
• Assume 10% conversion of prospect to sale => $41.6m potential revenue over 5
years
Internal Analysis
Insurance Business
• Unique competitive advantage:
• Huge data on patent trolls allows it to underwrite & price effectively
• First to offer “A” policy for patent litigation
• Purchased PatentFreedom & an insurance wholesaler and struck deal with
Lloyd’s
• Need to gain expertise & infrastructure before scaling up
• Insurance important to growth of company
Internal Analysis
Growth Potential
Sensitivity Analysis for Core Clients
10% Conversion Rate
$39m potential revenue
20% Conversion Rate
$78m potential revenue
30% Conversion Rate
$117m potential revenue
Sensitivity Analysis for Insurance Clients
5% Conversion Rate
$20.8m potential revenue
10% Conversion Rate
$41.6m potential revenue
20% Conversion Rate
$83.2m potential revenue
Internal Analysis
Client Trust
• Market leader in data & transparency
• Free reports & searchable data reduces costs,
even if not member with RPX
• Gained trust of clients
• IPRs on behalf of certain companies
• +90% renewal rate
• Former client that left RPX signed on again in
recent quarter
Positive reputation in B2B context could lead to word-of-mouth driving future growth.
Could target more of addressable market & more easily prospect potential clients
External Analysis
Trends in NPE Litigation
• NPE activity at record high
• 67% of all patent litigations
• Patent litigation cases tend to
drag on. Companies wishing to
avoid this pain point would be
well served with RPX’s service
External Analysis
Frustrating Progress in Patent Reform
•
•
•
•
Patent Reform Act in 2007
America Invents Act of 2011
Innovation Act of 2013
Recent attempt to reform in 2014
• Collapsed after pressure from
pharmaceutical companies
Yet NPE activity has persisted. Difficulty enacting reform in
government. Complicated by interest groups.
Quantitative Analysis
Comparable Company Analysis
Company
Price
Market Cap
EPS
P/E
Acacia
16.33
825 m
-$1.80
-
Vringo
0.99
91.1m
-$0.49
-
Spherix
0.92
25.7m
-$11.02
-
RPX
14.40
776.8m
0.64
22.61
Company
Members
Allied Security Trust
28 members
Open Innovation
Network
600 licensees 850 patents owned
RPX
184 clients
Scope
Activity
25,000 patents seen by Members contribute
members annually
to fund
2000 patents
purchased
Members commit to
Linux OS
Members take
advantage of network;
subscription
Quantitative Analysis
DCF
Quantitative Analysis
DCF (20.7% Implied Upside)
Quantitative Analysis
DCF
Quantitative Analysis – Base Case
Quantitative Analysis – Bear Case
Quantitative Analysis – Bull Case
Risks & Catalysts
Risks
• Future political reform decreases utility
of RPX’s service
• Subscription fees based on client’s
operating results; economic downturn
could hurt RPX’s revenue
• Technological advance might make
RPX’s patents obsolete too quick
Catalysts
• Next earnings report might show
strength in growth of insurance
business, impressing investors
• Could see another impressive deal in
the near future, such as the one
conducted with Lloyds. Or purchase of
company like PatentFreedom
• Patent reform could be favourable, as
with 2011 America Invents Act
Rational Patent Exchange Corporation
Buy Pitch
Michael Yuan
Vedant Suri