10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`Long Ideas | Services
`RPX Corp: Substantially Undervalued Patent Middleman Generating
`70%+ EBITDA Margins Trading At 3x EBITDA
`
`Jul. 12, 2015 4:20 AM ET15 comments
`by: Lester Goh
`Summary
`
`Patent litigation is a multi-billion dollar industry, largely as a result of patent trolls.
`Due to their large numbers, companies are forced to direct resources and attention
`towards lawsuits.
`
`RPX helps companies drastically reduce their litigation exposure, with a unique
`business model that enjoys several durable competitive advantages.
`
`The firm's addressable market (patent litigation defense & insurance) remains
`largely untapped.
`
`The opportunity exists as most players within this space have a bad reputation, as
`many utilize their portfolio of patents in order to extract settlements/licensing fees
`from companies.
`
`I believe RPX Corporation is substantially undervalued at current levels (with 80%+
`upside) even assuming no multiple expansion. Taking multiple expansion into
`consideration increases upside potential several-fold.
`
`Landscape of patent litigation
`
`Intellectual property laws were created in order to promote progress. The idea was that an
`inventor or creator would be deterred from performing their purpose (inventing and
`creating) if they did not have any protection of their works created. When IP laws were
`created, inventors and creators had sufficient incentive (particularly incentive of the
`financial nature) to come up with new products and services that would allow societal
`progress. If an inventor created a product that was beneficial for society, said product
`could be commercialized, and the inventor could pocket the profit derived. The model
`worked well for decades.
`
`Until recently.
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 1/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 1
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`"Patent trolling" rapidly became infamous in the 2000s. Patent trolls, as they are
`pejoratively named, discovered that they could purchase a portfolio of patents, initiate
`lawsuits on the basis on patent infringement, and pocket the settlement offered by the
`defendant. Typically, the patent troll purchases patent from financially-distressed
`companies, thus allowing the patent troll to acquire intellectual property at cheap prices,
`due to the presence of a cash-strapped and highly motivated seller. This practice was
`highly lucrative resulting in a flood of patent trolls adopting a similar modus operandi.
`Suffice to say, as the number of patent trolls increased, patents became more expensive.
`Regardless, the practice remains feasible from a financial standpoint.
`
`Although successful infringement lawsuits are few and far between, the outsized payout
`(as seen in the above) from a single lawsuit continued to motivate patent trolls.
`Companies began to suffer from lawsuits initiated by patent troll. Most notably, Apple
`(NASDAQ:AAPL) is the #1 target for patent trolls, having received over a hundred lawsuits
`in recent years. Patent trolling is clearly a big problem.
`
`The curious reader would probably have the following question in mind: can't companies
`defend against these lawsuits? To that question, the answer is a resoundingly yes.
`However not only does legal defense not come cheap patent lawsuits tend to distract
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 2/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 2
`
`

`

`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`10/2/2019
`However, not only does legal defense not come cheap, patent lawsuits tend to distract
`
`management from their core operations. Additionally, settlement costs are equally huge.
`Combined, legal defense and settlements costs to the industry have grown from $5.5b in
`2009 to $12.2b in 2014 (as seen below).
`
`Click to enlarge
`
`Furthermore, the defendant is in no position to counter-sue, given that the plaintiff (patent
`troll) typically does not create or sell their own products and services. Hence, there is no
`legal basis for a countersuit.
`
`RPX Corporation (NASDAQ:RPXC) offers a solution.
`
`Enter RPX Corporation
`
`The company's business model is rather simple to understand. RPXC offers two solutions:
`
`a defensive patent aggregation solution,
`
`and insurance to cover the costs of patent litigation.
`
`Simply put, RPXC first acquires a portfolio of patents (thus aggregating them) and then
`provides their clients with licenses to these patent assets, hence protecting said clients
`from potential litigation exposure. In a nutshell, the company acts as a middleman
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 3/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 3
`
`

`

`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`10/2/2019
`from potential litigation exposure. In a nutshell, the company acts as a middleman
`
`between its clients and patents. Additionally, the company also offers patent litigation
`insurance, which serves as a natural add-on to its core patent risk management solution.
`
`Source: RPX Corporation
`
`The firm's core patent risk management solution is a tremendous value-add to its clients.
`The rationale here is simple. Essentially, RPXC helps its clients dramatically reduce the
`cost of patent litigation. The patent market is highly irrational due to the presence of huge
`deadweight losses (primarily legal costs). Non-practicing entities ("NPEs", a more
`palatable term for patent trolls) use litigation to transfer value between patent owners and
`users. Litigation costs are substantial.
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 4/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 4
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`Source: RPX Corporation
`
`Source: RPX Corporation
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 5/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 5
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`RPXC is able to buy high-quality patent assets cheaply (9x and 3x for pre-litigation and
`litigation acquisition respectively) before they become a costly problem (whether pre-
`litigation or during litigation, as seen above) due to the fact that it shares the cost amongst
`its large clientele (over 200 clients and growing), which increases their overall negotiating
`leverage. In the absence of these lawsuits, litigation costs decrease substantially.
`Licenses are less expensive as they are negotiated and not litigated. In a nutshell, RPXC
`can settle litigation issues for its clients at 1/9 or 1/3 of the cost. In addition, the client's
`management team can focus their effort on their core operations instead of lawsuits.
`Suffice to say, RPXC adds substantial value to its clients.
`
`The business makes money from its patent risk management solution through
`subscription fees collected from its clients from the licensing of patent assets. These fees
`are typically calculated as a percentage of the client's top-line or operating income, thus
`allowing RPXC to not only participate in the financial success of its clients but also
`ensures the alignment of interests for both parties. As for the insurance solution, RPXC
`adopts a cookie-cutter insurance model, collecting premiums upfront and distributing
`payouts contingent on certain events.
`
`Reducing litigation exposure with a business model that enjoys durable competitive
`advantages
`
`Barriers to entry to this space are formidable. RPXC derives its competitive advantages
`from the following sources:
`
`capital requirements,
`
`reputation & track record,
`
`scale,
`
`and network effects.
`
`Purchasing one or two patents is just not going to cut it; the value proposition for such
`companies looking to manage patent litigation exposure is just not there. As a result, a
`newcomer looking to enter the space would require substantial amounts of capital in order
`to purchase a diverse portfolio of patent assets (RPXC spends $100m annually to acquire
`patents - to date, the company has spent nearly $1b), resulting in the creation of a
`meaningful barrier to entry.
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 6/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 6
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`However, acquiring these patent assets is not enough. Reputation and track record
`matters. The new challenger would need to spend months or even years (RPXC
`mentioned its sales cycle may span over a year) convincing a potential client that it can be
`trusted as a service provider. The reasoning for this is simple; the potential client has no
`idea if the new entrant would simply do a bait-and-switch (since the new entrant would
`have a portfolio of patents) and litigate the client. Therefore, reputation and track record
`counts for a lot. RPXC has been in operation for 7 years, and to the best of my
`knowledge, the company has maintained a pristine track record of never litigating its
`clients.
`
`Even if capital requirements, reputation, and track record were not an issue, without a
`large installed base of clients providing a steady stream of subscription fees, the
`challenger would need to operate at a loss for many years before they achieve scale.
`
`Finally, network effects are particularly prominent in this space. There is only a limited
`number of patents issued every year, and patents do expire (usually within 20 years from
`date of issue). Major players such as RPXC who possess a portfolio of 227 high-quality
`(diverse applications across their clientele) patent assets present a compelling proposition
`to existing and potential clients. As the company expands its client base, new patents that
`are acquired from the addition of clients can be licensed to existing clients, resulting in
`value enhancement for the entire network with each incremental addition. Additionally, as
`the network grows, its negotiating leverage grows in tandem, as purchases of patent
`assets are made by a consortium, not a single entity.
`
`In a nutshell, we have a business that:
`
`provides a highly compelling value proposition to companies that face patent litigation
`exposure (i.e. nearly every technology company),
`
`possesses extremely durable competitive advantages stemming from formidable
`barriers to entry (which manifests from the presence of capital requirements, scale,
`reputation & track record, and network effects),
`
`and generates highly-recurring cash flows (derived from a large installed base of
`subscribers and consistent cash in-flow from insurance premiums).
`
`Not many businesses share these characteristics; RPXC is without a doubt, a great
`business.
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 7/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 7
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`As always, qualitative discussion is all well and good, but the numbers need to back up
`the narrative. In this case, they do. Competition theory tells us that the greater the barriers
`to entry, the higher the profit margins the incumbent can earn, and the longer the
`incumbent can maintain said profit margins. RPXC has consistently earned 73% EBITDA
`margins (per Morningstar data) that have remained remarkably stable in the past half-
`decade. Subscription fees and insurance premiums, revenue streams that are highly-
`recurring (90% renewal rates), form the entirety of the company's revenue base.
`
`The firm's addressable market (patent litigation defense & insurance) remains
`largely untapped
`
`Due to its rather unique business model, RPXC can grow in several ways. I believe the
`most plausible ways are:
`
`continued additions to its client base (results in increased subscription fees and
`insurance premiums collected),
`
`and improvement in financial performance of its network of clients (as subscription
`fees are tied to revenues/operating income of RPXC's customers).
`
`Earlier, I emphasized the fact that RPXC helps companies reduce litigation costs in two
`key areas - pre-litigation and during litigation. It follows that the market opportunity for
`RPXC in the latter area can be quantified by a metric that measures the volume of
`litigation - specifically the number of active NPE campaigns.
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 8/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 8
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`Source: RPX Corporation
`
`As seen above, the number of active NPE campaigns have been growing at a rapid pace -
`the 2014 number is more than double that in 2010. This effectively illustrates the size of
`the market opportunity that is available to RPXC. To put things in perspective, RPXC was
`able to obtain sub-licenses for 35 campaigns in 2014, compared to a total of 1348
`campaigns. This represents a mere 2.6% penetration, supporting my belief that the
`company's addressable market (within the pre-litigation and litigation areas) remains
`largely untapped.
`
`New campaigns will always be filed as more patents get approved, but due to RPXC's
`tremendous value-add (discussed earlier), its clients would either exit those actions or
`never encounter them in the first place. It is good to be an RPXC client. Due to the
`company's highly attractive value proposition and the prevalent nature of NPE campaigns,
`I expect RPXC's penetration to increase meaningfully in the near-term.
`
`Network effects will play a huge role in enticing new clients to come on board. This is not a
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x-… 9/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 9
`
`

`

`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`10/2/2019
`mere hypothetical - it is already happening. The company managed to add an increasing
`number of clients year after year (client additions were 36, 28, and 28 for the years 2014,
`2013, and 2012). In Q1 FY15 alone, the company added 20 new clients on a net basis,
`indicating that network effects are ever-strengthening.
`
`Source: RPX Corporation
`
`The market potential within the patent litigation insurance space is similarly untapped. To
`date, the company has 57 policyholders (they only began selling policies late-2014). As
`seen above, management has identified that there are possibly over 10,000 companies
`that require such insurance. Although one can make the argument that other insurance
`companies (as insurance is largely a commodity) can acquire market share in the patent
`litigation insurance space, the argument does not hold.
`
`This is because underwriting insurance policies in this area is largely unheard of, due to
`the inability of insurers to estimate the likelihood of payouts in order to price premiums
`correctly. In the case of RPXC, the company has been able to compile proprietary data
`sets on the frequency of NPE litigations and the cost of said litigations. This is thanks to
`their core patent risk management solution which provides RPXC with an underwriting
`advantage, thus allowing the firm to estimate likelihood of payouts and price premiums
`very accurately. Other insurers are simply unable to do this - they do not have the data.
`This underwriting advantage is likely to be durable as the company expands its data sets
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 10/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 10
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`over time. As a result, RPXC currently faces next to no competition in the area of patent
`litigation insurance, and should soon see increasing penetration (due to network effects
`detailed earlier) going forward.
`
`Source: RPX Corporation
`
`Additionally, as subscription fees derived from the company's core patent risk
`management solution is structured as a percentage of the revenue/operating income of its
`clients, RPXC can benefit from improvements in the operating performance of their clients.
`As seen above, the firm's client network is highly diversified within the technology sector.
`The sector is likely to experience massive growth in the near-term due to the trends in
`cloud computing, big data, social, eCommerce and mobile. RPXC will tag along with this
`growth.
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 11/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 11
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`Source: RPX Corporation
`
`This tag-along is likely to benefit RPXC hugely as the company's clients are major players
`that participate in fast-growing markets mentioned above. They include heavyweights
`such as Cisco (NASDAQ:CSCO), eBay (NASDAQ:EBAY), LinkedIn (LNKD), IBM
`(NYSE:IBM), Microsoft (NASDAQ:MSFT), and many more.
`
`Valuation
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 12/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 12
`
`

`

`10/2/2019
`
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`
`Note that capital expenditures are not assumed to be constant thus it is left blank in the
`key assumptions tab, and varied within the model itself.
`
`I have modeled out the company's free cash flows as seen above. FY15 revenue growth
`is expected to be in the high single-digits, which is in-line with management estimates.
`From FY16-18, I expect RPXC to be able to continue growing revenue at mid to high
`single-digit growth rates. I believe this growth will be driven by greater penetration within
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 13/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 13
`
`

`

`g g
`g
`y g
`p
`g
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`10/2/2019
`the markets (patent risk management & insurance) that the firm serves, along with client
`
`operating performance improvements. EBITDA margins are expected to be flat at ~72%.
`This is due to the fact that formidable barriers to entry (as outlined earlier) are able to
`deter new entrants for entering the space and forcing margins down. I will address this
`point further in a later section. I believe this is a conservative estimate as the company
`managed 40% operating margins in Q1 FY15, compared to the normal 32% in prior
`quarters. If this margin expansion is sustainable, upside potential will be far greater.
`
`Source: RPX Corporation
`
`Capital expenditures include net acquisition spending on patent assets. I have modeled
`this line item to decline meaningfully as a percentage of sales as the company begins to
`benefit from increased scale as a result of the addition of more clients to its network. This
`is further supported by the company's historical net acquisition spend as seen above.
`Utilizing a terminal growth rate of 3% and a 10% discount rate, my model implies
`substantial upside (80%+) from current levels. Additionally, this analysis does not include
`the upside potential as a result of margin expansion. As a result, I believe the company is
`severely undervalued at current trading prices.
`
`"Stagnant" profitability
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 14/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 14
`
`

`

`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`10/2/2019
`Stagnant profitability
`
`One potential bone of contention that investors might have with the company is its
`apparently-stagnant GAAP profitability (net income has remained at $39-$41m throughout
`2012-2014). However, I believe that net income is not a reasonable metric to measure the
`company's performance. As a by-product of RPXC's business model, amortization
`charges have been the primary contributor to a flat net income over the period mentioned.
`I opine that examining cash flow metrics is a better indicator of the firm's performance.
`Over the 2012-2014 period, cash from operations doubled. Thus, I believe that the
`company actually benefits from its huge amortization expenses which allow it to reduce
`pre-tax income, thus leading to lower taxes paid.
`
`Why this opportunity exists and risks to the thesis
`
`Historically, NPEs have a rather bad reputation. Not only are their practices controversial,
`their business models are highly volatile (and thus unattractive to investors) due to their
`reliance on large (and essentially "forced") licensing deals and settlements that they can
`extract from the companies they litigate or threaten to litigate. RPXC gets lumped together
`with NPEs due to the fact that both parties compete with one another in the patent
`acquisition market. It follows that RPXC is underfollowed as investors may dismiss the
`company as an NPE due to its activity in the patent acquisition market.
`
`Further, prominent NPEs such as Acacia Research (NASDAQ:ACTG) trade at multiples
`that are drastically higher than that of RPXC. For reference, RPXC currently trades at
`about 2-3x EBITDA, while ACTG trades at about 30x EBITDA. I believe the reason why
`ACTG trades at such a premium multiple is due to their presumably sizable backlog of
`pending litigation activity, which investors feel may result in large payouts either in the
`form of settlements of licensing deals.
`
`I believe that the primary risk to the bull case is the threat of competition. If one considers
`RPXC's coveted EBITDA margins, it is not a stretch to assert that the threat of competition
`should be on every investor's mind. However, I believe this risk is heavily mitigated by
`several factors explained below.
`
`The model that ACTG and Intellectual Ventures (another high-profile NPE) adopts is not
`sustainable without frequent external capital infusions. These companies can go a long
`time without pocketing a large payout. One need only examine ACTG falling revenues as
`evidence of this. The NPE has been executing lesser agreements (whether settlement or
`licensing) in recent years, with the number of new agreements executed falling from 138
`to 88 over the 2012-2014 period. In addition, the company's cash-flow streams are slowly
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 15/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 15
`
`

`

`10/2/2019
`
`p
`,
`p
`y
`y
`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`drying up, as the number of licensing and enforcement programs that generate revenue
`
`fell from 68 to 46 over the same period. ACTG reported a net loss for 2014 and is also
`cash-flow negative. A side effect of this unprofitability is that ACTG is unlikely to be able to
`meaningfully compete with RPXC in the area of patent asset acquisition. As ACTG is
`cash-strapped and RPXC is not (as RPXC is able to syndicate capital through its network
`of clients, substantially increasing its financial strength to buy patents), ACTG is unlikely to
`be able to bid higher than RPXC for patent assets. A similar case can be made for other
`patent trolls. Clearly, the patent troll model is not built to last.
`
`In contrast, RPXC's business model is built with long-term durability in mind. The firm
`does not rely on huge one-time payouts or short-lived annuity streams to finance further
`growth. Instead, its cash-flow is generated from the subscription fees collected from its
`clientele and insurance premiums that it collects from underwriting patent litigation
`insurance. Without a doubt, RPXC's business model is clearly better. Therefore, I opine
`that the company is likely to experience meaningful multiple expansion as investors begin
`to realize the difference between the RPXC model and the patent troll model.
`
`The clever reader would then pose the following question: can't NPEs transition into a
`model similar to RPXC? At first sight, this seems to be possible. After all, many NPEs
`possess substantial patent assets (particularly Intellectual Ventures, which has
`consistently been ranked in the top 5 patent owners in the US). However, if one examines
`further, they would come to the conclusion that such a transition is nearly impossible.
`
`The reasoning is simple. These NPEs have a history of litigating companies in order to
`extract huge payouts. As elaborated earlier, reputation and track record counts for a lot in
`this space. It would be a huge stretch to posit that potential clients would be willing to work
`with a former NPE instead of RPXC, given the NPEs' tainted track record. Other
`competitive advantages which mitigate the threat of competition, such as capital
`requirements, scale, and network effects have been explained in earlier paragraphs.
`
`Substantially undervalued middleman in the patent litigation industry
`
`RPXC is a pioneer in the field of patent litigation, and adopts a business model that enjoys
`several highly-durable competitive advantages. New entrants would have a tough time
`entering the industry, thus allowing the RPXC to maintain its 70%+ EBITDA margins going
`forward. Furthermore, it would be nigh impossible for existing competitors that compete
`with the company in the market for patent assets to transition to the RPXC model. The
`potential for growth remains largely untapped, whether in patent risk management or in
`patent litigation insurance. As detailed earlier, RPXC is severely undervalued even if we
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-generating-70-percent-ebitda-margins-trading-at-3x… 16/18
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1055, page 16
`
`

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`RPX Corp: Substantially Undervalued Patent Middleman Generating 70%+ EBITDA Margins Trading At 3x EBITDA - RPX Corporation (…
`10/2/2019
`assume that the company would not be able to experience multiple expansion in the
`
`future, something that I view is highly unlikely. I have little doubt that RPXC is a terrific
`business due to its numerous competitive advantages, and thus the firm deserves a
`premium multiple.
`
`RPXC is a highly attractive long candidate for the investor with a long-term horizon. The
`company is poised to acquire market share with little threat of competition and thus is
`likely to trade at a steep multiple in the future. Its defensive end-market exposure (patent
`litigation is unlikely to be hugely affected by ebbs and flows in the economy) should
`mitigate cyclicality. Couple this with its strong cash flow conversion, the firm should offer
`solid FCF yield even if it trades at higher multiples.The firm is also substantially
`undervalued at current levels with 80% upside per my DCF. Thus, I highly recommend a
`long position in RPXC. After all, it is not every day one finds a firm generating 70%+
`EBITDA margins (that are likely to remain stable going forward), with largely-untapped
`growth potential, trading at 3x EBITDA.
`
`Disclosure: I am/we are long RPXC. I wrote this article myself, and it expresses my own opinions. I am not receiving
`compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is
`mentioned in this article.
`
`Comments (15)
`
`investor19891
`Great article.
`
`I am Long RPX to
`
`Just one question: You have assumed negative working Capital needs going forward. You need to know that the
`current negative working Capital is primarily because of Insurance Premiums and license fees not earned yet
`(unearned revenue) and Insurance claims not handled yet.
`
`In your model, this is "free Cash flow" - i will argue that when they write Insurance, this is not "free" because its not
`distributable to investors because they will need Cash and Investments on the balance sheets like "normal" Insurance
`Companies to meet future payments.
`
`With that said, great article. I think specially the Insurance market is really big and huge and this Company is great.
`Also with higher interest rates going forward, they will earn more on their Investments income.
`
`Lastly they have just started a 75 mio. $ share buyback program to adress the current undervaluation of the shares.
`
`12 Jul 2015, 07:42 AM
`
`https://seekingalpha.com/article/3318575-rpx-corp-substantially-undervalued-patent-middleman-ge