A timeline showing the value of the RPX business strategy. Image: RPX.
Patent trolls are a persistent threat in the technology industry, with constant allegations of infringement against intellectual property rights posing what can be a fatal distraction for companies that find themselves the target of litigation attacks. In its mission to help offer ways for its clients to protect against the risk of patent-related litigation, RPX (RPXC +0.00%) has found an interesting niche from which to profit from demand for insurance coverage against possible infringement lawsuits.
Coming into Tuesday afternoon's first-quarter earnings report, investors were optimistic about RPX's prospects, bidding shares back up to their highest levels since late last year after a sizable 25% in the second half of 2014. RPX's results largely confirmed those optimistic assessments, with the company continuing to see solid growth. Let's look more closely at RPX and what its latest results say about its future.
RPX stays on target for growth
RPX's first-quarter results showed just how strong the company has been recently. Revenue soared by more than a third from the year-ago quarter, to $83.3 million, topping even the ambitious expectations that many investors had for the patent-protection specialist. Adjusted earnings of $0.38 per share reflected gains of more than two-thirds in net income compared to last year's quarter, and beat the consensus projections by $0.02 per share.
Looking more closely at RPX's results, you'll see some more valuable information on the health of the business. Subscription-based revenue rose at a more modest 9% pace during the first quarter, showing RPX's continuing efforts to build up a loyal client base that it can count on for repeat business year after year. The company added 20 new clients during the quarter, boosting its total count by almost 10%, to 224.
At the same time, RPX also kept spending money to acquire more patent assets, which form the foundation of its business model. RPX made two dozen new acquisitions during the quarter at a cost of $53.6 million, and the closing of its acquisition of Rockstar Consortium's patent assets resulted in the dismissal of eight lawsuits against companies including Cisco Systems (CSCO +0.77%) and Google (GOOG 0.95%). The patent-protection company's business relies on such success stories to motivate new customers to sign on and become part of its network, and high-profile cases can do as much to drive marketing efforts as they save existing customers.
Image: RPX.
CEO John Amster highlighted the positives of RPX's quarter, noting positive performance in metrics "including the size of our network, number of insurance policy holders, fee revenue, and cash generation." Amster believes that it should be able to continue to succeed in controlling the risk of patent-related litigation for its tech-company clients well into the future.
What's next for RPX?
RPX's guidance, however, was somewhat mixed. The company largely reiterated its past guidance for the full 2015 year, giving investors few surprises in its outlook. Yet for the second quarter, revenue guidance for $67 million to $67.5 million was substantially below the $69.5 million that investors were expecting, and the company's net income guidance of $9.1 million to $9.6 million equates to just $0.16 to $0.17 per share, below the $0.20 per share consensus target.
One interesting question the company faces is whether RPX's Open Patent Exchange Network will succeed in getting participants to pledge to notify each other and RPX before transferring intellectual property to troll-like business entities. With big names like Cisco and Apple (AAPL 0.96%) among the initial players involved, Amster believes that what he calls a "multiple listing service" for patents could help affected companies negotiate licenses or purchases rather than facing costly litigation. With so little transparency in the patent realm, just knowing about existing intellectual property can be a huge advantage.
RPX shares didn't move dramatically after it announced its financial results, but the company's growth remains impressive. With no shortage of potential disputes concerning intellectual property, RPX's business model should remain in demand for the foreseeable future, giving long-term shareholders a chance at solid growth over time.
