RPX Corporation's Profits Fall Yet Again

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Patent trolls continue to wreak havoc on the business models of companies of all shapes and sizes, often forcing them into lengthy court battles and making them rack up huge legal bills. To help companies deal with that ever present threat, RPX Corp (RPXC) has developed an innovative subscription solutions business that helps its client manage their patent related legal risks.

RPX Corp released results from its second quarter after the market closed on Aug. 2, showing yet again that its services continue to be valued by its customers. However, the company continues to struggle at translating new client wins and revenue gains into growth on the bottom line.

Let's take a closer look at how the company performed this quarter to see if its growth story has a chance of getting back on track.

RPX Corp Q2: The raw numbers

DATA SOURCE: RPX CORP.

RPX was able to reverse last quarter's revenue decline, posting significant growth in its top line this quarter. Unfortunately, the company failed to turn that growth into profits as net income and EPS fell year over year once again. On the plus side, the results did come in slightly ahead of management's guidance.

A closer look at the company's quarterly revenue paints a mixed picture. Subscription revenue from its patent risk management services and insurance came in at $63.2 million for the quarter. That was down 6.5% from the $67.6 million that it recorded in the year-ago period, a number that will likely disappoint growth investors. That's especially true when you consider that RPX added 31 net new clients during the quarter, bringing its total client base up to 317, which now includes 150 active insurance policies. On its conference call with investors, management claimed that its renewal rates remain strong -- coming it at right around 90%.

RPX Corp's discovery business -- which came into the picture from its recently closed $232 million acquisition of Inventus Solutions -- appeared to have had a solid quarter. Revenue from this division came in at $19.3 million, up sharply from the $10.6 million that it recorded in the first quarter.

Total net spending on patent acquisition this quarter remained muted, coming in at $20.9 million for the period and included 20 patent transactions. That was roughly flat year over year.

What management had to say

RPX Corp's CEO John Amster had this to say about the company's quarterly performance: 

"Our strategy of diversifying RPX's operations is clearly helping the Company navigate a challenging near term patent environment. In the second quarter the Discovery Services business posted solid results, our patent risk business continued to deliver value to 300+ clients, and we took appropriate operational steps to ensure we achieve our cash generation goals for the year."

Looking ahead

For the third quarter, management is guiding for total revenue to land between $87 million to $89 million and fee-related revenue to reach $5.5 million. Non-GAAP net income ought to fall between $10 million to $11 million, which translates into $0.20 to $0.22 in earnings per share. That forecast represents growth of at least 28% on the top line and between 5% to 16% on the bottom. If achieved, it would be a welcomed reversal from the falling earnings that investors have seen in recent quarters.

For the full year, management now believes that total revenue will be between $330 million to $344 million, which represents a slight decrease from its prior outlook range of $331 million to $349 million. The company's Non-GAAP net income forecast was also reigned in by about a million dollars and is now expected to be between $35 million to $40 million, or $0.67 to $0.77 per share. For comparison, in 2015 the company's EPS was $0.99.

The lowering of expectations is largely being blamed on a weak operating environment. The company believes that merger and acquisitions activity between the company's clients -- which primarily are large technology companies -- is temporarily putting pressure on demand for the company's subscription services.

With RPX's main business facing near-term growth challenges, investors are going to have to increasingly rely on the Inventus business for overall growth. The results this quarter were encouraging on that front, but since Inventus is only expected to be about 20% of total revenue this year its overall effect on growth will likely remain tepid.

Despite the short-term challenges, CEO Amster did his best to remind investors that there are still plenty opportunities for RPX out there:

In the second quarter, for example, in just those sectors where RPX is currently active, more than 475 unique companies were named in NPE suits and more than 400 of these are not yet in the RPX network. More than 70 companies were sued more than once by NPEs during the quarter; of these, nearly half are not yet RPX members. More than 189 non-client companies were sued by NPEs for the first time. Clearly, there still is and there will continue to be a need for effective solutions to the problem of patent risk.