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Falling Income, Revenue Plague RPX

RPX (NASDAQ: RPXC) has followed an interesting trajectory as a company. Initially set up to provide services to manage patent litigation risk, RPX did its best to flesh out that industry to its fullest. More recently, it expanded to offer a wider array of services in the area of legal discovery proceedings in the hope that greater exposure would produce lasting growth opportunities. Yet it has been a challenge for RPX to grow to its full potential.

Coming into Monday's third-quarter earnings report, RPX investors were resigned to the idea that the company wouldn't be able to grow its top or bottom lines. RPX's results indeed reflected the challenges that the business faces, but it remains optimistic about its ability to identify new ways to thrive in the future. Let's take a closer look at RPX and what its latest results say about its strategic direction.

RPX seeks to keep its clients out of the courtroom. Image source: Getty Images.

RPX deals with headwinds

RPX's third-quarter results showed the sluggishness that the business faces right now, but they also weren't quite as dire as some had feared. Revenue was down 3% to $85.7 million, which was actually roughly half the pace of decline that most investors were expecting to see from the company. Similarly, adjusted net income was down 14% to $10.9 million, but the resulting $0.22 per share was quite a bit better than the consensus forecast for $0.17 per share.

The strength of RPX's operation came from its discovery business, as has been the case for some time. Segment revenue was higher by 17% from year-ago levels, leading the way forward for the company. Subscription revenue from the patent risk management business was roughly flat on the top line, but where RPX took a big hit was from its miscellaneous fee-related revenue. In that segment, sales were down by nearly three-quarters from the third quarter of 2016, and that was enough to pull the entire business downward.

Perhaps in response to the sluggish conditions on the patent side of the business, RPX made dramatic reductions to the amount that it spent on patent-related intellectual property. The company made 11 patent transactions, spending $13 million net to do so. That's up from the second quarter, but it represents more than a 60% reduction compared to what RPX paid during last year's third quarter. Gross patent spend similarly fell by more than half from year-ago levels.

CEO Marty Roberts was kept a positive spin on how the company did. "RPX posted a slid third quarter," Roberts said, "with results exceeding expectations in both our patent risk management and discovery services businesses." The CEO also pointed to rising cash flow as a positive for the business going forward.

What's next for RPX?

RPX is also optimistic about its near-term future. As Roberts said, "We also have made progress in identifying new emerging business opportunities that leverage our unique position in the patent space, including tech-enabled services, new licensing models, and expansion into foreign jurisdictions."

Interestingly, RPX started paying a dividend to its shareholders. The company will pay $0.05 per share to investors later this year, reflecting capital available after the repayment of debt under its term credit facility.

As we've seen before, however, guidance from RPX didn't produce big positive surprises. Sales for the fourth quarter should be between $77 million and $82 million, which would be less than the nearly $83 million that investors currently expect. Adjusted net income of $6 million to $8 million works out to earnings of roughly $0.12 to $0.16 per share, which would miss projections for $0.18 per share in earnings among those following the stock. RPX's latest full-year 2017 guidance called for revenue of $325 million to $330 million and adjusted income of $36 million to $38 million. The bottom-line revision pushed RPX to the top end of its previous range, but revenue will likely come in below the midpoint of the company's prior guidance.

RPX investors didn't seem particularly surprised one way or the other at the news, and the stock didn't immediately move in after-hours trading following the announcement. With the stock price near its best levels since late 2015, though, RPX will need to back up its confidence with future performance and concrete results in order to fully satisfy shareholders who have believed in the potential of the company for a long time now.

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