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RPX Corporation (NASDAQ:RPXC)

Q1 2013 Earnings Conference Call

April 30, 2013 5:00 PM ET

Executives

Joann Horne – IR

John Amster – CEO and Co-Founder

Ned Segal – CFO

Analysts

Tim Quillin – Stephens, Inc.

Daniel Amir – Lazard Capital Markets

Jeff Meuler – Robert W. Baird

Eric Ghernati – Bank of America Merrill Lynch

Operator

Good day ladies and gentlemen and welcome to the RPX Corporation’s First Quarter 2013 Earnings Conference Call. At this time, all parties are in a listen-only mode. Following today’s presentation, the conference will be opened for questions. (Operator Instructions) As a reminder this conference is being recorded today April 30, 2013.

I would now like to turn the conference over to Joann Horne with Investor Relations. Please go ahead ma’am.

Joann Horne

Thank you, operator and good afternoon everyone and welcome to RPX Corporation’s first quarter 2013 financial results conference call. Joining the call today are John Amster, Chief Executive Officer; and Ned Segal, Chief Financial Officer.

The agenda for today’s call includes commentary from John followed by a discussion of the financial results from Ned and then Q&A

This afternoon RPX issued a press release announcing its first quarter 2013 financial results, which is available on the company’s website at www.rpxcorp.com. This call is being broadcast live over the Internet and the audio of this call will be available on the Investor Relations page of the company’s website.

I’d like to remind everyone that the conference call will contain forward-looking statements that are not historical facts, but are rather based on the company’s current expectations and beliefs. RPX’s actual results may differ materially from these forward-looking statements. Please refer to the company’s SEC filings for detailed information.

In addition, non-GAAP financial measures may be discussed during this call. Reconciliations to the most directly comparable GAAP financial measures are included in a table attached to the earnings release on the website.

Now I’d like to turn the call over to John Amster. John?

John Amster

Thanks Joann. Hello, thanks for joining us today. I want to start by welcoming our new CFO, Ned Segal. Ned has been on board essentially for less than a week now, but he is fully engaged and we both look forward to your questions at the end of the call.

The first quarter was a solid start to 2013 for RPX with revenue up 40% and non-GAAP net income up 76% year-to-year. We added a net of six clients to the RPX network, continue to execute on pipeline development and renewals and continue to reinforce our position as one of the patent markets’ leading acquirers and syndicators.

As we noted in past calls, the nature of our client prospects and their experiences with patent risk means that our sales cycle will vary from quarter-to-quarter. With the growing frequency in cost of patent risk means that our services are increasingly valuable for a broad group of companies.

I want to spend a moment describing this addressable market in terms of the frequency of cases and the number of total companies affected. Since the beginning of 2010, there have been 6200 unique companies that are been sued by an NPE, 450 of those 6200 companies have been sued five times or more since 2010.

In Q1 of this year alone, there were 852 NPE lawsuits against 807 unique company defendants, 747 of which are still prospective clients of RPX. Of these prospects, 97 were sued more than once last quarter alone. When you consider these numbers and the scale of the problem, it isn’t hard to see how NPE litigation represented nearly $11 billion in total cost to operating companies in 2012.

This we’ve shown that these companies are going to see more not less NPE litigation, again the nature and timing of how these companies experience patent risk to make our sales cycle variable in the short-term. But we noticed patent risk continues to rise and we believe we have proven that our network is the single most effective way for companies to reduce these costs.

Given the breadth of companies affected and the growing frequency and cost they are facing, you can understand our confidence in RPX’s long-term prospects for renewals and the continued growth of our network.

With that in mind, let me share some highlights from the first quarter before handing it over to Ned for a bit more detail. Revenue for the first quarter of 2013 totaled $61.2 million, up 40% from the prior year period.

Non-GAAP net income for the first quarter of 2013 was $17.5 million or $0.33 per pro forma diluted share. Net acquisition spend during the quarter totaled $29.4 million and included eleven new acquisitions of patent assets.

We ended the quarter with 146 clients, of note, you might remember that I mentioned on the last call that getting an anchored tenant in a new vertical can be a catalyst for further progress in that vertical. Our expectation is that this process may take longer than it did in our first two or three years of operation.

In fact, we saw evidence of this in the first quarter, after signing a strong anchored tenant in media and content distribution in Q2 of last year, this past quarter, we began to expand our presence in that vertical with two new clients. Last quarter, we think we began this process in another new vertical landing an important new client in financial services.

As we’ve seen, with these other verticals, in Q2, we saw stronger engagements with other leading financial service companies and hope to increase our presence in this vertical over time. We also added five new insurance customers in the quarter, one of them being an existing RPX client that converted to insurance upon renewing.

We are still in the early stages of rolling out this new service, but our insurance offering is gaining traction and we have a solid pipeline of opportunities. At the end of Q1, we had a total of 11 insurance clients. Renewals in Q1 were again comfortably about 90% confirming the value adds we are providing to clients.

One thing we are learning from the renewal discussions is that our ability to use data to quantify patent risk and the savings we can deliver to clients is key. Clearly, our value proposition begins with our ability to intervene in the market, acquire high risk patents and reduce litigation costs.

But we are also starting to see leverage from the investment we made in our data infrastructure and the ability of our team to use it to maintain strong relationships with our clients. This ability to quantify our value and provides best-in-class real-time information on the patent market also enhances our syndication business.

Today, we have executed 17 structured transactions and our data foundation not only puts us in position to execute these transactions effectively, it’s also a factor in our ability to charge for this service.

While this kind of high margin fee-based business is difficult to predict at this point, we do think it will continue to be an important way for us to deepen existing relationships, while also allowing us to charge more for our services as appropriate. This is especially true for those clients at the top of the rate curve

As I said at the top of the call, we feel confident about the future of RPX. Operating companies are coming to a more clear understanding of the scale and scope of the NPE stress and large part due to the information we are bringing into the market. We believe we are bringing transparency to a market that was almost entirely okay in just a few short years ago.

The number of companies facing NPE litigation continues to grow as the ways in which technology is being used expands. We continue to get better at quantifying the risk companies face and pricing that risk and then effectively communicating it to our clients and prospects. We will continue to develop new products and services that can broaden our ability to mitigate patent risk and add value for both large and small companies.

And finally, we are getting better at structuring complex transactions to minimize risk for our clients and generate strong returns for RPX. While we will always caution that our quarterly results will vary, we believe the long-term opportunity is expanding.

So I just spend a few moments illustrating the significance of data which will be a key theme to our Investor Day in New York on May 21. We will discuss where we get it and how we use it to run our business both internally and also with clients and prospects. We look forward to seeing many of you there.

And with that, I will turn it over to Ned to review the financial results.

Ned Segal

Thanks, John. Let me start by saying, I am excited to be here. Although I formally started last week, I’ve known the business and people at RPX for three years and it’s great to be a formal part of the RPX family.

Let’s turn to the quarter. I want to point out we’ll try to give you a little more color in certain areas that previously provided. We are going to describe these details for you, but we cannot promise these will all be provided on a go forward basis.

I’m going to focus on our financial results today on non-GAAP metrics which exclude stock-based compensation and amortization of acquired intangibles. In each case, these items are net of their respective tax effects. A complete reconciliation from our non-GAAP measures to our associated GAAP measures can be found in our press release on our website.

I’ll start with the P&L. For the first quarter, revenue totaled $61.2 million, which was a 40% increase over last year’s Q1 revenue of $43.8 million. We ended the quarter with 146 clients, a net increase of six from last quarter. Last quarter we mentioned we had about 30 renewals left in the year. We are very comfortable with where we are and working through those renewals.

Subscription revenue for the quarter was $54 million, up 23% over the year ago period. In addition, we demonstrated our ability to generate significant licensing and advisory revenue which contributed $7.2 million to our total revenues in the first quarter.

Although timing will continue to be unpredictable, our advisory business is an important way for us to deliver value to our clients, differentiate our pricing, and add incremental high margin revenues to the income statement.

As we move down the P&L, I’ll cover non-GAAP cost of revenue, which is primarily the amortization expense from our patent assets. It was $23.6 million in Q1 of 2013, compared to $18 million in the first quarter of 2012. Expressed as a percentage of revenue, non-GAAP cost of revenue was 39% in Q1, compared to 41% in the year ago period, which then $29.4 million of acquired patent assets this quarter, up $16 million from last year’s $13.4 million.

We completed 11 acquisitions of patent assets during the quarter. While this quarter’s gross and net spend were the same. As we’ve previously discussed, these amounts they often fluctuate based on the structure of our acquisitions of patent assets.

Historically, the average amortization period for patent assets we’ve acquired has been around 46 months. This quarter’s acquisitions patent amortization period, a bit shorter than that average. This can be attributed primarily to a few rights deals as opposed to patent acquisitions as rights deals typically have shorter amortization periods than patent acquisitions do.

This is a good place to discuss a question we often hear. The company is often asked that we have a fee rider problem. We – mean to help address this perceived issue and rights deals are a big tool in that toolbox. Rights deals typically resolve existing or impending litigation for our current and often our prospective clients and as a result, we have a highly quantifiable ROI for us and for our clients.

For our clients, because we resolve it down track, and for RPX, because we efficiently deploy capital only for the benefit of the RPX client network. The bottom-line is, rights deals with non-RPX clients expose to current or future litigation risks and they help drive our client growth.

We’ll continue to pursue both patents and rights deals depending on what is best for our existing and future clients. All things equal in forecasting, we prioritize our total patent spend in a given period over amortization, but we will take those into account when acquiring patent assets forecasting the business and giving guidance.

Non-GAAP SG&A expenses which exclude stock-based compensation and the amortization of acquired intangibles were $10.4 million in Q1, compared to $10.5 million in the year ago period. Our spending was below our expectations primarily due to adding fewer new employees than anticipated.

Although we’ve been able to scale the business with fewer people than we thought, we are still focused on hiring to continue to drive growth across the many opportunities that we see. Our headcount as of quarter end was 125. Non-GAAP net income in Q1 was $17.5 million, up 75% compared to $10 million in the year ago quarter.

Looking at pro forma earnings per share, non-GAAP net income per pro forma diluted share was $0.33 for the first quarter, up from $0.19 in the year ago period. For the quarter, our GAAP and non-GAAP effective tax rate was 36%. We continue to expect that 37% tax rate for the second quarter and for the full year.

Turning to the balance sheet, we ended Q1 with $283.4 million in cash, cash equivalents and short-term investments. We had a very strong cash generation quarter producing over $100 million from operations. Our deferred revenue balance at the end of the quarter was $118.2 million, compared to $104.4 million as of the end of 2012.

As we discussed in our year end call, as of December 31, we had other receivable balance of approximately $34 million. This balance related to contributions received in connection with one of our structured transactions that were unpaid as of year end, but were collected during the first quarter. We believe our progress demonstrates many of the ways that the RPX vision can play out for our clients and shareholders benefit.

This quarter we saw the follow-on impact of a transaction announced in Q4 where we used our balance sheet to facilitate an important patent acquisition for our clients. We’ve collected our new bookings and renewals. We were able to acquire nearly $30 million of patent assets for our clients. We recognized meaningful other revenues and at more in front of us in Q2 that I will tell you about in a moment.

We are really excited about all of this and the opportunity to continue in this direction. All that said, we don’t expect every quarters generate cash like Q1 did.

Looking ahead for the second quarter of 2013, our current expectations are as follows: subscription revenue in the range of $54.3 million to $54.8 million, other revenue of $2.5 million, which represents a completed transaction, total revenue in the range of $56.8 million to $57.3 million.

Non-GAAP net income in the range of $12.1 million to $12.6 million and 53.2 million diluted shares outstanding on a pro forma weighted average basis. Looking at 2013 overall, we are reiterating our guidance for the full year.

To sum up, we are pleased with our solid start to 2013 and we feel the company is making good progress on all fronts, from renewals to new client acquisition to the rollout insurance. That said, we also know it’s early in the year and we have a great deal of work to do to keep building on the company’s momentum. We are looking forward to it. That will do it for me.

John and I will be happy to answer your questions now.

Joann Horne

Operator, we will take questions now please.

Question-and-Answer-Session

Operator

(Operator Instructions) And our first question comes from the line of Tim Quillin with Stephens, Inc. Please go ahead.

Tim Quillin – Stephens, Inc.

Hey, good afternoon.

John Amster

Hi, Tim.

Tim Quillin – Stephens, Inc.

First, could you just talk about the renewal rates in the quarter and the timing of renewals that you are gong to have over the remainder of 2013?

John Amster

Sure, I can’t say much beyond what we said in my prepared remarks and also Ned’s prepared remarks which is that we are comfortably about 90% and we are also comfortable where we are from a timing perspective relative to what we told you last time about a little over 30% and we are comfortable with where we are.

Tim Quillin – Stephens, Inc.

Okay, and the 90% is to-date, is that correct? The 90% plus renewal rate is the to-date renewal rate?

John Amster

I think everything we are talking about here Tim is as of the end of the end of the quarter.

Tim Quillin – Stephens, Inc.

Yeah, was it just for 1Q or in aggregate up to today?

John Amster

Sure, Tim we calculated over a three year period. So the three years that ended on March 31.

Tim Quillin – Stephens, Inc.

Okay, thank you. I just want to make sure I was clear on that. And then on the free cash flow net, so it’s good to see that CFO come in and generate $8 million in free cash flow in the first quarter, I don’t think we would expect that for the year even, so what kind of free cash flow should we be forecasting for this year?

John Amster

Excellent question, Tim. We just haven’t given guidance on free cash flow. So I just point you back to the guidance that we did give I think, I did say in my prepared remarks, we just – there were a few things from a timing perspective, which causes to be a really healthy quarter from a cash flow generation perspective. We wouldn’t expect that to happen every quarter going forward.

Tim Quillin – Stephens, Inc.

Yeah, absolutely. And then just lastly, John, my sense is that there is at least 5 to 10 of potential clients out there that would be top of the rate card where they fit into an existing ecosystem where you already have patents you are doing good for other clients within that ecosystem. How are you going to get those hold outs to come over and convert those into revenue generating customers that would be I guess as much as $70 million in additional revenue for you?

John Amster

It’s a good question Tim. I think there is going to be some of them that we get over time that the problem just continues to persist and the data we are able to show them about the benefit of being in the RPX client network is posted out just becomes frankly overwhelming.

And even in this last quarter, we had some examples of that, some big consumer electronics company that said, we are just not going to sign up because we’d rather pay our lawyers than pay anybody else, that is maybe changing their – who knows whether we’ll get or not.

But, there seems to be a different conversation going on with that, with this one particular example. And so the other example where there are some companies where I don’t, there is a chance we never get and if that’s the case, then what we have to do, going back to Ned’s prepared remarks about raise deals.

Those are areas where we can use our capital very efficiently just for our clients in the network and frankly do cheaper deals because there are one or two big fish out there for an NPE to continue to go after, that’s not the exact thing for our business and if that is the case in a couple of these verticals, we’ll figure out the way to use it to our match.

Tim Quillin – Stephens, Inc.

Great, thank you.

John Amster

Thanks, Tim.

Operator

And our next question comes from the line of Daniel Amir with Lazard. Please go ahead.

Daniel Amir – Lazard Capital Markets

Thanks a lot and congratulations on a good start of the year here. So, as we look at kind of the year-over-year aspect here, clearly significant year-over-year revenue growth. How much of this is related to you are starting to persuade your clients of the agent problem that always exist in the business?

And also that your data collection effort has maybe started to bear fruit or is it just that the market is gradually maturing and people understand your business better? I mean, because going forward, this is clearly the revenue growth is a lot more significant than it was in the past few quarters on a year-over-year basis?

John Amster

I think it’s all of the above, right. I think we are getting better at understanding the risk that prospects we are talking to today face and we got data that we can walk in and have a different level of dialogue when we walk into a prospect to better understand what they spent in the past and understand therefore how can prove to them that we are going to deliver an ROI in the future.

That said, I have to just, only because – I think we’ve only said it collectively between the two of us seven or eight times, but the business is going to vary quarter-to-quarter, right. The key thing for us is, we understand the level of NPE activity, and we understand where it’s going. We can look at companies that are facing and do a really good job today in a way that we could not do this time last year of quantifying that risk and going and the make the sale.

And hopefully we’ll continue to see the benefits of that on the new clients. I think we are absolutely also seeing the benefits of that on the existing clients and over time, I think that enables us to do what we’ve been doing. There is a progression of what we’ve done. Early on, we were able to do it with some of the bigger clients. And that enabled us to go to them and say, look, we done a bunch of stuff for you up until this point this year, let’s do a syndicated deal where you give us more money to buy a patent.

We couldn’t do that without an implicit belief on their part and our ability to prove to them to some degree that we were delivering value. So that was step number one, step number two was, okay, we are going to do that the same type of deal you are going to pay us money for the patent and you are also going to pay our expenses.

We just recently really had a cadence on step three which is actually pay us to perform that service. So we are getting more money out of our existing clients and that all dials back to our ability to prove to them the ROI and it is a key part of that.

Daniel Amir – Lazard Capital Markets

Okay, and a follow-up question on the syndication side, I know it’s a lumpy business. It depends obviously on the timing of contracts. But if you look at the trend here, I mean do you see more and more potential syndication deals that will exist in the market here or would it be at the same pace as it was in the past few years is it just now you are obviously collecting a fee for it while in the past, you weren’t necessarily collecting a fee for it?

John Amster

That’s also a really interesting question. I think the short answer is that we don’t think there is going to be any major uptick in activity. There seems to be a fairly regular cadence of couple of big deals a year.

That said, I think the critical thing is, I do think we believe and I think we believe that we are in part responsible for this. The market definitely is going towards syndications being a key factor in every major transaction that takes place. And so, while we don’t think there is all that many more transactions taking place, we do think that we don’t have to convince our clients anymore of the value that a syndicate brings to the process.

Okay, with all that said, you definitely hear more companies talking about the potential of selling patents and so, it’s entirely possible that there is more larger deals that come down the pipe, but we just don’t have any visibility into that.

Daniel Amir – Lazard Capital Markets

Okay, great. Thanks a lot.

John Amster

Thank you.

Operator

And our next question comes from the line of Jeff Meuler with Robert W. Baird. Please go ahead.

Jeff Meuler – Robert W. Baird

Good afternoon. The handful of – or I guess just a few of the non-insurance clients that were added this quarter, can you give us any sort of order of magnitude of their size?

Ned Segal

Sure, hey Jeff, it’s Ned. So, I think the best way to characterize is the, if you look at the new clients this quarter there were a couple that were at the very low end of the rate card, I’d say aside from that pretty difficult from the – to the usual distribution.

Jeff Meuler – Robert W. Baird

Okay. And then, the 30 that you expect to renew this year, is it roughly evenly spread throughout the year or is there a one big quarter, I’m just transferring – about that?

Ned Segal

So we haven’t really talked about how the distribution works over the course of the year Jeff, what we have said is that, that we are comfortably – we are pretty comfortable with where we are in getting through those 30 or so and that was 30 or so as of the last conference call.

Jeff Meuler – Robert W. Baird

Okay. And then, the pricing reset in terms of the inflation adjusted, is that a January 1 event? Or is that kind of evenly spread throughout the year as clients contracted their one year mark?

John Amster

That’s throughout the year Jeff as there are contracts – when there are – the annual maintenance contracts.

Jeff Meuler – Robert W. Baird

Okay. And then just one final one for me, I guess that you guys are increasingly using the data as part of the selling a renewal process, are you seeing in terms of client usage of your data portal have they started to embrace it yet or?

John Amster

We are not seeing any – well, first of all I think relative to metrics like that when you look at for example an internet related business with the metrics are not overwhelming given that we have a 146 clients. We are starting to see more usage. It’s starting to get to the point where it’s actually meaningful for us to track it as we rollout new features.

But it’s still relatively new. So, short answer it, we are just at the point where we can make push to educate our clients on how to use it. I’d say our heavy user clients use it a lot and the feedback on it has been very good.

Jeff Meuler – Robert W. Baird

Okay, and then actually I have one more question. If you take basically the low end of your Q2 subscription revenue guidance and would use that for Q3 and Q4 as well, that already gets you to the low end I think of your 2013 subs revenue guidance? Is that conservatism or is there is some other factor that we should be thinking about – especially coming of the strong Q1 performance and just the additional step up we get in Q2?

John Amster

I guess, I would just say refer back to the prepared remarks Jeff, there is not much more color that we can give you on that.

Jeff Meuler – Robert W. Baird

All right. Thanks guys.

Operator

And our next question comes from the line of Eric Ghernati with Bank of America Merrill Lynch. Please go ahead.

Eric Ghernati – Bank of America Merrill Lynch

Yes, hi, thanks for taking my question. Actually a similar question on net income because you beat pro forma net income by 2.25 million, your guidance for Q2 is an upside of $1 million versus consensus. Yet your fiscal 2013 guidance remains unchanged and it implies like a massive deceleration on the net income side, just can you just give us a sense of what are your thoughts there?

John Amster

I am not sure if there is a question there, can you try – what exactly are you asking?

Eric Ghernati – Bank of America Merrill Lynch

So the midpoint of the guidance, before it was $49.5 million, that was in pro forma net income and you are tracking at least $3 million ahead of that. Yet you haven’t changed the guidance range.

John Amster

That’s right. We haven’t changed the guidance range and really beyond what we shared during the prepared portion of this half, all I would say is that, iterate that we don’t match business quarter-to-quarter. That we like where we are, we were off to a good start and – but we don’t there is nothing that we see that, that leads us to change it.

Eric Ghernati – Bank of America Merrill Lynch

Okay, on the cash flow, there was a $33.5 million, that was a net negative to your working capital in the December quarter. It was above this quarter. So what that was for?

John Amster

Sure, that was related to a structured transaction that we had done where there were payments that came in related to the transaction this quarter. We were able to use our balance sheet to facilitate the transaction and that transaction closed in December and for us, when we received the offset for it early in this quarter .

Eric Ghernati – Bank of America Merrill Lynch

Okay, as the – for the last year, your weighted average subscription was like 2.8 years, has it changed as of Q1?

John Amster

The overall number hasn’t changed now. That number will change over time as it relates to insurance customers who – remember those are just one year contracts that we sign with them but it’s not something that’s changed anything this way.

Eric Ghernati – Bank of America Merrill Lynch

Okay and then on that thought like, how much of the – I didn’t catch this maybe you said it, but how much of the six clients that you added were insurance clients?

John Amster

So I think what we said was we added five insurance clients in the quarter and we added six net clients.

Eric Ghernati – Bank of America Merrill Lynch

Got it, okay. So of the six, five are insurance just want to make sure.

John Amster

We got five new clients that were insurance clients and we got one converted who was an existing client and we have six net new clients

Eric Ghernati – Bank of America Merrill Lynch

Got it, okay, thank you.

Operator

(Operator Instructions) And we have a follow-up question from the line of Tim Quillin with Stephens, Inc. Please go ahead.

Tim Quillin – Stephens, Inc.

Hey, thank you for taking my follow-up. So on the insurance clients, you said the two of your client additions were on the low end of the rate card which really implies that at least two or three of the insurance clients weren’t on the low end of the rate card. Is that a surprise to you? And what is kind of the range within the rate card that you would expect to get insurance clients?

John Amster

I think you are almost making a right assumption. In insurance clients we’ve got – we have eight signed up purely for RPX with the – on the low end of the rate card. Ned’s comments are directed to the non-insurance clients in terms of a distribution of the remaining. And so you have to remember what you don’t know is the total number of client adds. You just know the net number. And I’ll just leave it that. Does that make sense to you Tim?

Tim Quillin – Stephens, Inc.

Yes. That makes sense.

John Amster

Okay. And then what we said on the last call is, and somebody in the room correct me if I say this incorrectly, but I believe I remember, we said it’s somewhere in the $150 to $250-ish thousand range is what we expect in terms of premiums from our clients. But again remember, it’s super early we are playing around with the dials of what the market will be and also what comes out of our underwriting cost but that seems to be still pretty consistent.

Tim Quillin – Stephens, Inc.

Right, and in terms of the net client additions that are non-insurance, I guess which would be one is I know you cant look at your business on a quarterly basis. We definitely had some variation in 2012 around the timing of additions but was that – is that a disappointment that maybe especially in some of the newer verticals like financial services that you weren’t able to win a few more?

John Amster

No, not at all. And so, before I answer that, let me just say, I think your net one is probably not – I don’t think you can split insurance and non-insurance and then come up with a net number, or let’s just say it would be higher than that. In terms of just characterizing it Jim, I think in particular on the new vertical stuff.

We are actually really, really pleased and when we talk about a catalyst and an anchor tenant, for the first couple of years of our – in particular the first two years, when we got the anchor tenant we would really quickly get very healthy penetration in that vertical market within a couple of quarters maybe, two, three quarters.

And our sense now is that, for example, last year when we did these two deals, we got our anchor tenants shortly after that and the media content distribution space, we thought it might take us a year and 18 months to start to see the results of getting the anchor tenant and then really developing the relationships and getting some conversions. And we are basically seeing it’s just about a year after that.

So we are really, really happy that we added two in that space. We are not only happy just in an absolute level because we’ve got a good pipeline continuing there as well, and expect that we’ll continue to see good results there. But it also bodes well that that should translate to financial services.

So last quarter we saw really healthy dialogue. We saw a healthy increase in the dialogue, we think as a result of our anchor tenant. No expectation on our part of getting some signings within a quarter of the anchor tenant.

And so this is a wait and see what we are really looking at is, are we having healthy pipeline development, that’s what Steve Swank and I spend a lot of time talking about is, where is the pipeline going and the sales people in charge are doing a terrific job. So, we are actually super pleased with our progress in that regard.

Tim Quillin – Stephens, Inc.

That’s good color and then on the SG&A, SG&A was lower than I would have expected. You hired fewer people than I think you expected, you’ve maintained full year SG&A guidance of $48 million to $52 million and I think you also said in your remarks that you are scaling maybe without as many employee additions as you thought you might need.

So, do you still want to hire more people and are able to find the right people and it’s just a timing of when you might make those additions or what’s going on behind the scenes there?

John Amster

Well freezed, perfect question. We are not having trouble finding the right people to hire at all. We are seeing leverage in the back that we are the data business and our ability to do certain things that we couldn’t do last year that be helping us. It’s not trouble in finding the right people.

It’s a couple of things, one we made certain changes and really a lot of it has to do with timing of hiring people and the example I would give you is, one of the areas that we talked about wanting to continue to develop out in terms of interest structure on the system development side which is the collection of the data describing the organization of it and then the surfacing of it to our clients through things like the client portal.

We were looking to hire a head of systems process is really kicking in some of the hiring plans that we have throughout the rest of the year and that we ran a search to do that process. We are at the end of that process and we should see some uptick in our hiring in that area as a result potentially.

But wanted to wait till that person comes before we really start moving forward on some of those plans. And I would say, so that’s one example and I think there is probably examples like straight throughout the organization of just wanting to make the right hire at the right time. So it’s really not an issue finding the right people. And the other thing I would say is, as it relates to guidance. We are seeing a lot of opportunities in the business and this does frankly gives us some flexibility and we’d like to have that flexibility.

Tim Quillin – Stephens, Inc.

Yes, fair. And then just lastly, on the legislation risk, a lot of people hear lot of concerns about how legislation might impact your business. The Shield Act is one particularly piece of legislation that probably would make it more difficult for smaller NPEs with more nuisance type of suits and I am just wondering, as you look at your business, how much do you think that you protect operating companies against the nuisance suits versus the more credible suits from larger more legitimate NPEs?

John Amster

So, as usual, I take a very astute observation and characterization of the Shield Act and what it applies to. So, for those on the call who are not familiar with this, basically, the key piece of the Shield Act is a shift, which shifts the burden of losing a case to level off the case.

And so the assumption is, I think Tim right about this, is the assumption is that, it’s really going to have an impact on nuisance cases. In other words, people who really think they have a chance of winning are not going to worry about this because the potential damage to entitlements would partly the potential loss of legal fees.

I think there is one other element to your assumption about nuisance cases which is, first of all how do you define a nuisance case and also who is bringing them and so I think the key thing is, a lot of nuisance cases are brought by people who can absolutely bear the cost of fighting them out.

And the real issue is, when you look at win rates and loss rates, are you still going to take chance on potentially losing a patent case, because of a couple of million dollars and spend a couple of million dollars as legal fees just because you have the chance of getting those legal fees back and we don’t believe that that’s case.

We don’t believe it’s going to have a major impact on the behavior, because the NPEs are spontaneous to be able to take the litigation and potentially bear those cost and when you look historically, 98-ish percent of the case is settled – and they don’t generally settle because the patents are garbage.

They generally sell because at some point after a year or two years of litigation, the defendants believe that they might actually have risk because and I will admit maybe the arbitrary nature of some litigation. But that the reality is, that litigation is a very risky thing – very hard to predict and I think that’s what NPEs stay upon.

So our view is that, if the Shield Act, if it impacted anything it would impact the very low end of the market only those NPEs that have got no funding, he can’t bear the cost and that that’s focusing on the Shield Act frankly really ignores the fact that it really is something that’s trying to address 2 % of the market.

It’s trying to adjust those cases that actually go through the distance. Most cases settle and our view is, they are not generally settling just because its nuisance value and it costs less than defending it.

Tim Quillin – Stephens, Inc.

Great. That’s great feedback. I’ll save the rest of my questions for the Analyst Day. Thanks.

John Amster

Thank you, Tim.

Operator

And Mr. Amster, there are no further questions at this time.

John Amster

All right, well, thank you all for joining us. We look forward to seeing you at the Investor Day.

Ned Segal

Thanks everyone.

Operator

Ladies and gentlemen, this concludes the conference for today. You may now disconnect.

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