Continued revenue stream
RPX Corp (NASDAQ:RPXC) purchases patents from companies and leases the rights to its patent portfolio to its clients. The company actively seeks out patents that are at high risk of being infringed, licensing out the use of those patents to companies to remove the risk of costly legal battles. Most companies are not in the business of legal issues, and RPX Corp (NASDAQ:RPXC) can leverage its expertise to both infringing companies and those being infringed upon to create a win-win situation for all.
RPX is currently trading at a reasonable price with an earnings multiple of 17 and operating margin of nearly 34%. The company expects to earn $0.23 per share next quarter, and continues to increase both revenue and earnings by rates of over 16% annually. RPX emphasized in its last earnings call that the increased frequency and cost of patent risk will make its services increasingly valuable to a broader range of companies. These companies will then continue to pay RPX Corp (NASDAQ:RPXC) for patent licenses and risk management services for as long as they make products that rely on RPX’s pool of patents.
Value add
Companies often pour a significant portion of their revenue back into research and development; Apple Inc. (NASDAQ:AAPL), for example, spent over $3.3 billion on R&D alone in 2012. These R&D dollars are only as valuable to the company as the company’s ability to protect its products. Patents from R&D companies are prime candidates for lease or purchase by RPX Corp (NASDAQ:RPXC), allowing the company to turn around and locate clients that could potentially infringe on the patent rights. It then offers the infringing company immunity (for a fee) to use RPX Corp (NASDAQ:RPXC)’s total patent portfolio and stem any legal risk associated with patent infringement.
The great patent war between Apple Inc. (NASDAQ:AAPL) and Samsung could have been partially settled had RPX been involved as an intermediary between the two giants, allowing Apple and Samsung to both make a profit. Apple would have received revenue from the use of some utility patents, and both companies would have reduced their legal expenses. Between 2010 and 2012, over $20 billion was spent worldwide on litigation over smartphone patents including the Apple-Samsung suit. Apple is currently struggling to keep up its operating margin, as its main strength is the Apple ecosystem instead of having the best hardware around. By licensing out its hardware patents, Apple could potentially prevent some margin erosion by reducing its legal expenses and increasing revenue from patents.
Origins
There are many companies that rely on patents for revenue. The Eastman Kodak Company was one of the first developers of digital cameras, and held essential digital imaging patents that are relevant in today’s smartphones. As the company struggled with a turnaround, it sold off most of its consumer-based businesses so it could focus on corporate imaging and motion pictures. While in bankruptcy, Kodak then sold off many of its patents for $525 million to a consortium which in turn founded RPX.
Source: PC Magazine
The above chart show just how many intellectual property lawsuits there have been in recent years. Even though the patents that Kodak sold during the bankruptcy were the building blocks that today’s smartphones are built on, Kodak was slow to move into the space and saw its traditional film market dry up while trying to do so. Kodak will emerge from bankruptcy at a fraction of the size of the former empire. It will be focused on highly competitive but more lucrative corporate clients and selling off its name-brand consumer goods.
Foolish bottom line
The future of technology builds upon the technology of the past for progress. Future companies will rely on an increasing number of patented technologies, and also on access to those patents. RPX Corp (NASDAQ:RPXC) will see its top and bottom-line grow as more companies adopt the model of partially outsourcing their legal departments. RPX will be able to provide litigation risk management and access to a host of patents for these companies, allowing them to focus on what they do best: building products that consumers and businesses want.
The article One Company Holds the Key to Avoiding Patent Lawsuits originally appeared on Fool.com and is written by Wes Patoka.
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