RPX Disappoints With Falling Profits, Tepid Guidance

By Dan Caplinger Markets Fool.com

RPX (NASDAQ: RPXC) set out to solve a huge problem: how to deter patent trolls from attacking large corporations through intellectual property litigation. Yet as valuable as that service has been, RPX has recently had trouble finding ways to grow its revenue from subscribing clients. Coming into Tuesday's fourth-quarter earnings report, investors knew that RPX's relatively new discovery services business would lead to an overall sales increase, but they still wanted to see signs of growth elsewhere.

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RPX's results didn't live up to those expectations, and the company's future guidance created new concerns about its near-term future. Let's look more closely at RPX to see how it did and what it expects for 2017.

RPX tries to keep patent clients out of courtrooms. Image source: Getty Images.

RPX deals with challenges

RPX's fourth-quarter results reflected the sluggishness that the company has seen in parts of its business. Revenue was up 12% to $81.8 million, and that was slightly slower than the 14% consensus forecast among investors for sales growth. But adjusted net income plunged by nearly half to $6.2 million, and the resulting adjusted earnings of $0.12 per share were $0.05 less than most of those following the stock had expected to see.

Looking at the company's operational results, RPX is still finding new business. The patent protection specialist brought in 20 net additional clients during the fourth quarter alone, bringing its total customer count to 348. That's up by more than a third from year-ago levels, but the net amount that RPX spent on patents fell by about 10% to $45.5 million, which captured 12 new patent acquisitions.

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Once again, though, RPX relied on its discovery business for sales growth. The unit had $18.3 million in sales during the quarter, representing more than a fifth of its overall revenue. Yet the amount was roughly comparable to what RPX brought in from the business in the second and third quarters, suggesting that once the company has a full year under its belt with discovery revenue added in, growth could slow further. Meanwhile, subscription revenue slid more than 7% from year-ago levels, and the small amount of fee-related revenue that RPX gets plunged more than 80%.

Interim CEO Martin Roberts put the results in the perspective of RPX's general mission. "RPX was founded to bring efficiency and transparency to the patent market," Roberts said, "and our financial performance in 2016 reflects our continued progress in achieving that goal." The interim CEO also pointed to the company's success in improving on execution in helping to cultivate a new culture of success.

Can RPX get its growth to accelerate?

RPX sees room for further growth. As Roberts put it, "We enter 2017 as a stronger, more nimble organization and are optimistic about RPX's opportunity to further impact both the patent and e-discovery markets."

Still, as we've seen in past quarters, RPX's guidance didn't seem to reflect that enthusiasm to the same extent as investors had hoped. For the first quarter, RPX sees sales of between $80 million and $82 million, and that should result in adjusted net income of $5 million to $7 million, or $0.10 to $0.14 per share. Both figures are quite a bit less than most investors had expected.

Meanwhile, RPX also gave guidance for the full 2017 year. It called for total sales of $315 million to $344 million, about three-quarters of which should come from subscription revenue. Discovery-related sales of $70 million to $79 million would represent just 6% to 20% growth for the segment, even though the business was still ramping up in the first quarter of 2016. Meanwhile, adjusted net income of $31 million to $42 million works out to $0.62 to $0.84 per share in adjusted earnings. That compares unfavorably with projections for total sales of almost $350 million and a bottom line of $0.85 per share.

RPX investors were slightly disappointed by the news, and the stock fell more than 1% in after-hours trading following the announcement. Of far more importance is that RPX needs to find a way to grow its fundamental business more quickly if it wants to sustain investor confidence in 2017 and beyond.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends RPX. The Motley Fool has a disclosure policy.