RPX Looks to Capitalize on Patent Litigation Surge

RPX tries to keep companies out of the courtroom. Image source: Getty Images.

Patent protection specialist RPX (RPXC) has built a unique business model as it seeks to provide ways for technology companies to avoid costly and distracting patent litigation battles. There's no question that the number of so-called patent trolls has increased dramatically in recent years, and RPX investors have waited patiently to reap the rewards of the company's solutions. Yet RPX's profitability hasn't moved upward in a straight line, and coming into its second-quarter financial report on Aug. 2, investors are bracing for another reduction in the company's bottom line results. Let's take an early look at RPX to see whether it can start giving investors more of what they want to see.

Stats on RPX

Data source: Yahoo! Finance.

Are RPX earnings destined to drop?

Investors in RPX have gotten more pessimistic in recent months about the company's earnings prospects. They've cut their second-quarter projections by more than a third, and they've made smaller reductions to their views on full-year 2016 and 2017 results. The stock has remained on the defensive, falling 13% since mid-April.

A large part of the quarterly declines for RPX's share price came from its first-quarter earnings report, which once again gave investors something to worry about. Revenue fell 4%, and adjusted net income dropped by almost two-thirds. Client counts jumped by more than 12% just over the three-month period, but RPX spent only a minimal amount on acquiring patents for its protective portfolio during the quarter. Mixed guidance included a boost for overall revenue for 2016, but at the cost of falling net income projections. The stock lost more than 10% of its value in response to the report, as investors concluded that RPX's growth trajectory might have to slow going forward.

Still, RPX resolved one huge potential roadblock that could have proven to be an even larger distraction. In May, the company came to an agreement with activist investors at Mangrove Partners, which had sent a letter to shareholders calling for them to elect three nominated directors to the RPX board. To avoid a proxy fight, RPX said in late May that it would appoint Gilbert Palter to its board of directors. The settlement agreement also included an increase of $50 million in its stock buyback authorization, addressing Mangrove's concerns that RPX wasn't handling capital in an optimal fashion. As a result, the shareholder meeting went smoothly, and all matters submitted to shareholders for vote passed by wide margins.

RPX's vision for growth

What's clear is that RPX has plenty of opportunity to boost its business. The company released a report that indicated a huge uptick in the number of lawsuits that patent trolls brought against defendants during the second quarter, rising by more than half from the previous quarter to 780. Although RPX admitted that some of the rise was likely due to changes in legal procedures that encouraged greater numbers of lawsuits in the fourth quarter of 2015 compared to the first quarter of 2016, it still believes that signs of growth in litigation activity could reverse what has been a mildly declining trend in recent years.

RPX also sees the value of diversifying its exposure to the legal industry. The addition of discovery services with the acquisition of Inventus should help create a path toward providing more legal services that go beyond its core patent protection business. That could come with hits to earnings in the near-term, but there's a lot of value in having an alternative business if changes in patent law make its core business obsolete.

In the RPX earnings report, investors should look to see how the company's efforts to strengthen all of the elements of its overall business are faring. Having identified a need, the key to RPX's success is whether it can meet that need. Lately, shareholders haven't seemed convinced that it can, but a positive surprise would likely give shareholders some relief from recent stock-price losses.