Patent litigation abuse is a major problem in the tech industry, and policymakers have looked for ways to fight it. RPX (NASDAQ:RPXC) came up with a unique approach to patent protection involving purchases of various intellectual property to deter would-be plaintiffs from challenging ownership. Yet the market for those services hasn't grown the way some had anticipated, and even after diversifying into legal discovery services, RPX saw little choice but to start pursuing strategic alternatives to come up with a future direction for its business.
RPX had initially expected to release its first-quarter earnings report yesterday, but as it turned out, the company actually decided to accelerate the release. With investors having expected more deterioration in RPX's results, it came as little surprise to most that the company accepted an acquisition bid -- even though the terms were far from ideal for shareholders. At this point, it's highly likely that RPX will no longer be a publicly traded company in the near future.
How RPX's earnings fared
RPX's first-quarter results financial results didn't live up to most people's hopes. Revenue of $67.1 million was down 11% from year-ago levels, falling short of the consensus forecast for almost $70 million in sales. Net income came in just above break-even, and even after accounting for some extraordinary items, adjusted earnings of $0.10 per share was less than the $0.13 that most investors were expecting to see.
RPX continued to see pressure from the patent side of its business. Subscription revenue for patent risk management services and insurance fell by 14% to $40.5 million. That decline wiped out a fairly strong performance from the Inventus discovery services unit, where sales climbed 13% to $20.4 million. However, RPX noted that much of the gains on the discovery side of the business came from several big review projects in Europe that haven't come to a conclusion as quickly as it had initially anticipated. Once those projects do wind up, RPX will face the challenge of replacing them in order to sustain current revenue levels.
Fundamentally, RPX dramatically slowed down its core investment. Gross patent spending dropped roughly 70% to just $19.5 million, likely reflecting the company's pursuit of strategic alternatives that temporarily distracted it from its focus on growing its business for the long run.
The big news for RPX
Rather than discussing earnings, RPX saved commentary for its newly announced acquisition agreement with private equity company HGGC. Under the terms of the $555 million deal, HGGC will make a tender offer for RPX shares, offering $10.50 per share in cash. RPX's board of directors approved the deal, with board chair Shelby Bonnie arguing that the "transaction provides great, certain and immediate value to RPX shareholders."
CEO Marty Roberts also tried to put the most positive spin possible on the buyout. "We are thrilled to partner with HGGC," Roberts said, "to achieve our next phase of growth for our patent risk and discovery management business." The CEO believes that the deal will open up new resources for RPX to serve its clients. HGGC executives also supported this vision of RPX's future.
Yet some were unhappy with the terms of the merger. The day before the announcement, RPX shares had closed at $10.85 per share, so the offer as made was a rare underbid of the then-current market price. In addition, RPX will suspend its dividend pending closure of the deal, which is expected in the second or third quarter of 2018. The stock has dropped below the level of the tender offer, though, which suggests that shareholders are resigned to having the scenario play out as HGGC and RPX have agreed.
Looking ahead, shareholders can only wait for further news about the status of the deal. If something unexpected happens to spook HGGC into withdrawing its bid, then it could raise even bigger doubts about RPX's future. Despite a disappointing end to RPX's story as a public company, a cash deal is probably the best outcome for its shareholders.