Joff Wild

RPX Corp revenues rose over 60% during fiscal year 2011, the defensive patent aggregator announced on Monday. GAAP net income was up by over 100% to $29.1 million, while the firm spent $99 million on patent acquisitions.

What with the announcement of the Alcatel-Lucent deal last week and a share price that has climbed by 46% since the start of the year, it has been a pretty decent start to 2012 for RPX. Some, at least, believe the good times could be set fair for a while yet. In a briefing paper issued on 14th February Davenport & Co Equity Research rated RPX stock a buy and stated:

RPX added nine new clients in 4Q11 and ended the year with 112 clients, up from 72 at the end of the prior year. Management stated that its near-term target client list continues to grow and currently stands at 275 clients (up from 250 clients in 3Q11) consisting of mostly companies in verticals within the IT space that have faced two or more patent assertions by NPEs since 2010. Of note, RPX increased its rate card for the third time since inception with a new ceiling of $6.9 million (up from $6.6 million) and a floor of $65,000 (up from $60,000). We believe these rate card increases combined with the expanding target client list will help RPX sustain 20%+ revenue growth rates over the next few years.

Davenport’s target for the RPX share price is $26 – substantially higher than the $17 projected by Barclays Capital at the beginning of this year.

Also on 13th February, an earnings call to discuss the results and future RPX strategy was hosted by CEO John Amster and CFO Adam Spiegel. Listening in were analysts from Goldman Sachs, Barclays Capital, Robert W. Baird, Bank of America Merrill Lynch, Davenport & Company, JPMorgan, Lazard Capital Markets and Cowen & Company. If you have a few minutes you should read through the transcript of the call. You’ll get a lot more information about RPX’s operation and the deal with Alcatel Lucent for a start. It is made clear, for example, that it was the telecoms company that approached RPX, while there looks to be an initial six month time limit on the agreement. While it is obvious how this works for Alcatel Lucent, Amster makes clear that it is also quite a handy tool for RPX too: “If somebody wants to participate and they want to participate before that first break point because they don't want to take the chances of this program ending at that first break point then they would need to sign up in order to ensure that they could be part of it.”

What is not discussed is how much consultation RPX had with its client base and how deeply it looked into clients’ existing portfolios before doing the deal. I may be naïve, but it seems to me that this is not something RPX would have done without discussions with at least some of the companies it works with, neither would it have proceeded unless it was confident there would be some quick wins. Amster certainly hints that he believes there are some out there: “It's a large portfolio. It's got [a] fairly diverse set of things covered in it. It is one of the larger technology portfolios out there. We think there are going to be a lot of companies that might view this as an opportunity. We have a lot of large technology companies [which] are already our clients and so we think that there is a bunch of our clients that are going to think that this is an interesting opportunity …”

There are also some important insights into other areas as well. On the existence or otherwise of a patent pricing bubble, Amster is clear:

We've seen pretty stable pricing. At least from our perspective, we've been able to get acquisitions done at prices that we're very comfortable with within our model and we've seen no escalation in prices. Regardless of what happens with things like InterDigital or Kodak or any of these things, that still is frankly orthogonal to the everyday buying that goes on in our model. So, from a modeling perspective, I would say, even if we're wrong about these bigger deals and if there are some other deals that are anomalies in terms of pricing that it's probably not going to impact our core buying because even when there was an anomaly, it didn't impact it that. So, we feel like we've seen enough data over the last – over the period in time since the Nortel auction and since Motorola mobility and we've seen enough other big transactions in the market that haven't happened at ridiculous prices, that we feel pretty good that the markets reasonably stable.

As to the possibility that the America Invents Act may have a calming affect on litigation in the US, and NPE suits in particular, Amster does not think so:

We've not seen anything to indicate that there is or going to be any sort of meaningful impact. We still stick by our mantra which we're happy to hear our peers in the IP space are parading which is more things changed, the more they stay the same and be aware of the unintended consequences. So far we've for the full year of 2011 there was a good step-up in NPE activity. We expect there's still lots of filings going on and so we expect there is going to be plenty of NPE activity in 2012. So, we don't think there is going to be any meaningful impact. In fact there are some elements of the law that we think could have over time a worsening effect on the NPE problem.

Amster and RPX obviously have a line to spin, but at the same time no-one from the firm is going to say that there are certain trends in a market if the opposite is the case. It is RPX’s job to know what IP is out there to buy, who is selling, who is interested, how much it is worth, what is likely to end up being asserted, who by and so on. If they say things are and are not happening, then as far as I am concerned they are. So: no patent bubble, but sensible pricing; and, despite the AIA, no let-up in NPE activity. Hold on to your hats.