A patent sample. Image: RPX.

The U.S. legal system draws criticism from around the world because of frivolous litigation and baseless intellectual-property allegations. To respond to the threat of huge expenses and the annoyance of patent litigation, RPX (RPXC) has developed a business model that has drawn the interest of some of the biggest technology companies in the industry. Coming into Tuesday afternoon's second-quarter earnings report, investors had mixed views about RPX's prospects, expecting a decline in earnings even as revenue continued to rise. The results that RPX posted confirmed that general view, although the decline in earnings was less extreme than many had feared. Let's take a closer look at what RPX said about its latest quarter and what it sees ahead for the company.

RPX keeps fighting the patent trolls
After the huge gains that RPX investors have seen in past quarters, the company's second-quarter results showed how difficult it can be for even a small company to sustain its growth momentum. Revenue climbed by 5% to $67.7 million, just slightly exceeding the consensus among investors following the company. After removing stock-based compensation and other extraordinary items, adjusted net income fell 13% to $11.2 million, but that still worked out to $0.20 per share, $0.04 per share better than what most investors had expected to see.

Taking a closer look at RPX's results reveals the slowdown in growth that the company has seen. RPX's client count rose to 225, adding just a single client during the quarter. Fee-related revenue disappeared during the quarter, leaving all of the company's sales coming from subscribers.

RPX's pace of spending on patent-asset acquisitions also came nearly to a standstill. RPX spent just $20.6 million on 21 different assets, down by more than 60% from the first quarter despite being fairly consistent with year-ago levels.

CEO John Amster once again praised the company for its performance, arguing that "RPX executed successfully against its goals in the second quarter." As Amster went on, "We continued to reduce patent risk for our clients, expanded the infrastructure for our insurance offering, and remained on track for our planned growth over the second half of the year."

Can RPX get its bottom line growing again?
RPX's guidance for the third quarter was somewhat disappointing, however, falling short of the consensus figures among investors. Revenue of $67.7 million to $68.2 million would work out to growth of roughly 3% to 4% from last year's third quarter, but investors were hoping for RPX to top the $70 million mark. Similarly, RPX's adjusted earnings projections work out to around $0.14 to $0.15 per share, quite a bit lower than the $0.19 per share forecast among analysts.

Still, RPX believes that its full-year results will still come in as previously expected. Of the total expected revenue of $285 million to $300 million, more than 90% should come from RPX's subscription sales, and adjusted earnings of between $0.90 and $0.97 per share are consistent with the $0.95 projected forecast among investors.

What RPX needs to keep demonstrating is that its strategy actually succeeds in preventing patent litigation. With the company having already picked the low-hanging fruit in the industry, the more challenging road ahead for RPX will involve convincing those potential clients who've so far stayed on the sidelines that they should join their peers as policyholders of RPX's insurance products. Once that occurs, positive network effects should help bolster the business, but a long plateau could eventually lead to erosion among the existing customer base.

RPX shares were almost unchanged in the first hour of trading in the after-hours market following the announcement, reflecting the general view that the company still needs to demonstrate its long-term growth potential before investors will fully back its strategic vision. Nevertheless, with such an unusual business model, RPX is an intriguing opportunity for investors who are interested in the prospects for a service that could do so much good in thwarting legal nuisances.