Anyone who owns stock in a technology company knows how difficult it can be to protect against frivolous intellectual property litigation. RPX (NASDAQ:RPXC) has made it its business to try to improve its clients' defenses against IP claims, and its services have helped it attract a client base that includes many well-known tech giants from across the industry. Companies like Cisco Systems (NASDAQ:CSCO) have participated in deals that RPX has done, lending it credibility. Coming into Tuesday afternoon's third-quarter earnings report, though, weren't certain what to expect from RPX, with concerns about whether the company would be able to grow its revenue and produce more profit. Even though RPX did slightly better than most investors had expected, the company still has a clear challenge in squeezing out as much in net income as possible from its sales. Let's look more closely at how RPX fared this quarter and whether it can do a better job of producing bottom-line growth in the future.
RPX is still making progress against patent risk
RPX has seen its growth rates slow dramatically recently, and its third-quarter results showed that the slowing trend is continuing. Revenue rose just 4% to $68.2 million, which was almost exactly in line with what investors had expected to see. After removing stock-based compensation and other extraordinary items, RPX's adjusted net income dropped by more than 25% to $10.6 million, and that worked out to adjusted earnings of $0.19 per share, down from last year's $0.26 per share but $0.04 better than the consensus forecast among investors.
Looking more closely at how RPX did during the quarter, the company experienced a nice rebound in client growth. The total number of clients RPX served rose by 20 to 245, accelerating nicely from its near-standstill during the second quarter. Similarly, the company boosted its spending on patent assets during the quarter, executing 22 new acquisitions and spending $36.2 million to do so, up 75% from the second quarter's pace. Year-to-date, though, RPX has still seen slowing activity on the patent acquisition front, spending about 20% less during the first nine months of 2015 than it did during the same period in 2014.
CEO John Amster was pleased with RPX's slow but dependable progress. "We continued to quantifiably reduce patent risk for our clients," Amster said, "expanded the sales infrastructure for our insurance offerings, and further strengthened our data and intelligence tools." The CEO believes that RPX continues to emerge as the place to go for managing patent risk without having to engage in costly litigation.
Is a slowdown coming for RPX?
RPX nevertheless faces a problem with the guidance it gave investors. For the fourth quarter, RPX now expects total revenue of between $67.4 million and $68 million, which would represent roughly break-even performance compared to the fourth quarter of 2014 and is far below the 8% growth rate that investors were expecting to see. Similarly, non-GAAP net income of $7.3 million to $8.5 million would work out to around $0.13 to $0.15 per share, and that's well shy of the current $0.22 per share consensus forecast among those following the stock.
For the full year, RPX guided investors to the lower end of some of its previous ranges. Sales of $286.5 million to $287.1 million would be near the bottom end of RPX's prior guidance, and adjusted earnings per share are likely to work out to around $0.91 to $0.92 for the full year, which is below the current projection for $0.95 per share.
RPX's results weren't that far out of line with what investors had expected, but in the long run, what will move the company's stock is the success or failure of its long-term strategy in preventing patent litigation. As long as companies like Cisco can benefit from working with RPX and as long as RPX's long-term clients see value from the service that they're getting, then RPX will have the ability to survive and thrive. If the strategy fails, though, then RPX could find itself losing its hard-earned business.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and RPX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.