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RPX Deals With Shrinking Profits

By Dan Caplinger - May 3, 2016 at 6:40PM

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The patent-protection specialist saw a big jump in costs of revenue eat into its bottom line.

Image: RPX.

Dealing with patent trolls is a nuisance for even the largest of technology companies, and RPX (RPXC) aims to offer protection to its customers from the threat of patent-related litigation. Yet the small company is still working to figure out how to make that business as profitable as possible, and coming into Tuesday's first-quarter earnings report, RPX investors expected that the company would suffer a huge decline in its net income on falling sales. RPX's results did indeed including shrinking figures on the top and bottom lines, but the damage wasn't quite as bad as many had feared. Let's look more closely at how RPX did and what's ahead for the company.

RPX minimizes its hit
RPX's first-quarter results weren't pretty, even if they did exceed expectations. Revenue was down more than 4% to $79.7 million, but that was a bit better than the 5% decline that investors were looking to see. Net income took a much larger hit, dropping by almost two-thirds to $7.8 million on an adjusted basis. Yet the $0.15 per share in adjusted earnings that RPX had was $0.02 better than the consensus forecast among investors.

Looking at its operational numbers, RPX showed a mixed performance. The company enjoyed a big boost in its number of new clients, adding 31 during the quarter to hit 286 in total. That's up almost 28% compared to a year ago. However, RPX spent relatively little on patents this quarter, posting $16.2 million on 23 different patent transactions.

RPX's primary patent risk management services segment had relatively flat results. Sales there climbed by less than $1 million to $67.1 million. The new discovery services unit posted $10.6 million in revenue, but fee-related revenue fell by $15 million compared to the prior-year period, eating up all of the gains in discovery services.

CEO John Amster was comfortable with the company's performance, arguing that "RPX executed on multiple fronts during the first quarter." As Amster sees it, "Both the patent risk management and Inventus discovery services businesses performed in-line with expectations," and the CEO seems pleased with efforts to obtain more capital financing and approve a stock buyback program increase of $25 million.

Can RPX get back into the groove?
RPX made some changes to its full-year guidance to reflect the first-quarter results as well as the acquisition of Inventus. The company now expects total revenue of $331 million to $349 million, which is between $2 million and $7 million higher than RPX projected a few months ago. However, the company downgraded its views on its profitability, cutting its adjusted net income range by between $3 million and $5 million. RPX now expects $36 million to $41 million in adjusted net income, further degrading what investors had expected from the company.

The second quarter could be equally grim for RPX. Adjusted net income of just $6 million to $7 million would again come in between $0.11 and $0.13 per share, which is far less than the $0.21 per share that investors currently expect. Revenue of $81 million to $82 million would be short of investor consensus as well.

It'll be interesting to see how Inventus ramps up. Currently, RPX expects about 20% of its business in 2016 to come from discovery-related revenue, and the segment helps RPX diversify its overall exposure to encompass a broader portion of the patent-litigation field. If the move helps RPX achieve its goal of becoming a patent clearinghouse, serving its clients with capabilities that their legal departments can use will be useful.

RPX stock hasn't done much lately, but investors hope that better results will prompt a bounce in the share price. In the long run, RPX has to keep moving forward on multiple fronts to realize its full potential and give shareholders the returns they want.

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