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RPX Corporation (NASDAQ:RPXC)

Q2 2013 Earnings Conference Call

July 30, 2013 5:00 PM ET

Executives

Joann Horne – Investor Relations

John A. Amster – President and Chief Executive Officer

Ned Segal – Chief Financial Officer, Senior Vice President, Treasurer, Principal Financial Officer

Analysts

Timothy J. Quillin – Stephens, Inc.

Jeffrey P. Meuler – Robert W. Baird & Co.

Adam Carron – Barclays Capital, Inc.

Philip H. Lee – Lazard Capital Markets, LLC

Eric A. Ghernati – Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the RPX Corporation Second Quarter 2013 Earnings Conference Call. During today’s presentation, all parties will in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, July 30 of 2013.

And I would now like to turn the conference over to Joann Horne, Investor Relations. Please go ahead.

Joann Horne

Thank you, operator, and good afternoon, everyone, and welcome to RPX Corporation’s second 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 second quarter 2013 financial results, which is available on the company’s website at www.rpxcorp.com. This call is being broadcast over the Internet and the audio of this call will be available on the Investor Relations page of the company’s website. Also please note that there are slides corresponding to the information on today’s call available on the IR 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. Reconciliation to the most directly comparable GAAP financial measures are included in a table attached to the earnings release on the website.

Before I turn the call over to John, I just want to point out that we’ve had some phone issues and while we do not anticipate any interruption, if for some reason we do loose the call, please remain on the line and we’ll dial right back in. Thanks.

Now, I’ll turn the call over to John Amster.

John A. Amster

Thanks, Joann. Good afternoon and thank you all for joining us today. As usual, I am going to give a quick overview of the quarter before handing it over to Ned for more details on our results. Overall, RPX had a very solid second quarter. Revenue and net income both exceeded our expectations. We added 11 net new clients to the network and expanded our presence in both the content distribution vertical and in Asia. We continue to meet or exceed our client renewal objectives and the insurance business grew inline with our plans.

We also strengthened the infrastructure for our continued growth further building up the data gathering and market intelligence capabilities that are a key differentiator and competitive advantage for RPX. All in all, a good quarter to conclude a good first half, which we think leaves us well positioned for a solid second half of 2013. In the second quarter, subscription revenues increased 20% year-over-year with total revenues increasing 4% year-over-year. We are also pleased with our net income and EPS growth. Ned will provide additional color on this.

Our network stood at 157 members at the end of the quarter. We continue to add clients in the cable sector and now with a little over a year after the Altitude transaction, we have a very strong penetration in cable. Our success here is further evidence of our strategy of establishing anchor tenants in the vertical and we are optimistic that we’ll succeed in this approach to build our penetration of other verticals overtime.

It’s also worth noting that several of our second quarter client additions joined in part because of the GPH acquisition we completed at the end of last year. This is a good illustration of how our ability to clear specific patent risk for operating companies can lead to a membership dialogue. These client adds also illustrate how the capital we deploy in acquisitions result in leverage over many quarters to build our client base. We said it before, but it bears repeating, the length of our sales cycle can vary widely from client to client. Sometimes our value proposition is immediately obvious to a prospect, sometimes it can take several quarters or longer.

Despite this variability, we remain confident that more and more clients can and will benefit from our proven ability to quantifiably reduce the costs associated with NPE litigation. NPE activity is not declining and the number of companies at risk is large and growing. In Q2 alone, 716 unique companies were sued, almost 650 of these are perspective RPX clients and more than 80 of them were sued more than once in the quarter. There is a lot of running room still ahead for RPX in our core business.

Those of you, who attended our Investor Day in May, heard us talk at some length about the market opportunity and how we ensure that we’re addressing the entire team for RPX services. We began that process with a rollout of our insurance product, which cost effectively addresses the risks faced by small and medium sized companies that have not yet become regular targets of NPE assertion.

Now, as we described at the Investor Day, we are extending that effort by identifying larger companies that have an NPE problem, but with somewhat lower risk profile than is typical for a company of their size. The key to this approach is our data and market intelligence, which increasingly enables us to quantify the RPX value proposition for a wide range of companies. We’ve made good progress building out the team that collects, analyzes and makes the data available for both internal and external use. This past quarter, we made some important hires at the VP level and beyond, and I am excited about the continued strengthening of the RPX team.

That said, it is worth noting that we have modified our headcount claim somewhat. We are making good progress hiring to our objectives, but at the same time, we’ve also made reductions in some areas, that has actually taken our overall headcount down year-to-year. So we are making some changes in how we manage the evolution of our team, which makes sense given where we are as professional services company entering its sixth year of operation. Bottom line, we are pleased that we are seeing scale in the team and that we’ve been able to execute toward our plans for the year with new headcount. Ned will discuss this as well.

As we expand the data and intelligence, we are looking hard at additional service lines that would leverage our data to provide additional services to our clients and drive return to our shareholders. We continue to be pleased about our syndicated transaction service. Syndicated deals have already contributed high margin fee revenue to our top line and we continue to develop our pipeline of potential transactions. Other service lines are still on the drawing board, but we are very encouraged by the potential we see and we believe there are a number of ways we can leverage our unique data and neutrality in the market to expand how RPX helps operating companies deal with patent risk.

At the Investor Day, we also discussed another part of our business benefitting from RPX’s unique data expertise, our insurance product. We sold a total of eight new insurance policies in Q2, six of which were sold to new clients, and two to existing clients upon their renewal. So far, the insurance model is working to plan, our underwriting policies appear sound and the actuarial predictions developed using our data are proving accurate.

We’ve had our first claims, and remember, we need claims to prove this as a service that customers need, and the process is working as anticipated. we ended the first half of the year with 19 insurance policies and are very comfortable we will achieve our target of 20 to 40 total clients by year-end. We continue to take a measured approach to growing the business and believe there are more than 1,800 companies better suited for this product.

With that, let me turn the call over to Ned to provide more detail on Q2 and our outlook for the balance of the year. Ned?

Ned Segal

Thanks, John. Like we did in Q1, we’ll try to give you a little more color in certain areas that we previously provided, as we continue to try to make the business as transparent as possible. You’ll notice we’ve included a slide deck on IR site that corresponds to our financial discussion here today. We hope you find that useful.

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

Let’s start with the P&L. For the second quarter, we’re pleased to report revenue totaled $57.5 million, which was a 4% increase over last year’s Q2 revenue of $55.2 million. To put this in perspective, recall in the year ago period, we recognized $9.4 million in fee-related revenue from two structured transactions, compared to $2.5 million for the quarter we just completed. Subscription revenue for the quarter was $55 million, up 20% over the year ago period to primarily to ongoing growth in the core client base, including 11 net new clients for this quarter. We ended the quarter with 157 clients.

On subscriber renewals, we stated at the beginning of the year that the second and third quarters were particularly heavy on renewals. On our April call, we said we were very comfortable with where we were in working through those renewals. We ended the second quarter very pleased with our progress. so we continue to be comfortable with another important quarter in front of us. Our renewal rate continues to trend comfortably over the 90% range we had discussed previously. We again demonstrated our ability to generate significant fee-related revenue, which as expected, contributed $2.5 million to our total revenues in the second quarter.

Although, timing will be unpredictable, our fee-related business continues to play a key role in delivering value to our clients and prospects, while allowing RPX to generate additional revenues from subscribers and adding incremental high margin revenues to the income statement.

In Q3, we expect approximately $500,000 of fee-related revenue. You should expect us to continue to tell you on these calls about these high margins, but less predictable revenues as we see them coming. As we move down the P&L, non-GAAP cost of revenue, which is primarily the amortization expense from our patent assets, was $24.6 million in Q2 of 2013, compared to $20.5 million in the second quarter of 2012.

Expressed as a percentage of total revenue, non-GAAP cost of revenue was 42% in Q2, compared to 37% in the year ago period. Last quarter, we mentioned the amortization period of newly acquired assets was trending a bit below our historical 45 month or 46 month level. This continues to be the case and the newly acquired patent assets during the second quarter will be amortized over a period of about 43 months.

Among the reasons for this is the bias in the quarter to rights transactions as opposed to patent deals, as rights deals are typically amortized over shorter periods, but have the benefit of ensuring that our spend budget is focused first and foremost on our client and near-term prospects. As you would imagine, the vast majority of our cost of revenues in any given period is the amortization of previously acquired patents as opposed to anything we acquire inside of that period.

We’ll continue to focus first on our overall patent spend and second on the amortization period when evaluating opportunities to acquire patent assets to drive renewal activity or new clients to the RPX network. On that note, looking at patent acquisition activity, we completed eight acquisitions of patent assets during the quarter. Our gross patent acquisition spend in Q2 was $41.1 million, and our net acquisition spend was $39.1 million. Halfway through the year, we’re about $70 million into our previous $115 million to $125 million spend guidance, and we’re comfortable with our acquisition based relative to that guidance.

Non-GAAP SG&A expenses, which exclude stock-based compensation and the amortization of acquired intangibles, were $10.4 million in Q2, compared to $10.7 million in the year ago period. Our spending was below our expectations and this is in large part due to the evolution and how we’re thinking about the team. Our headcount as of quarter end was 123, down slightly from a year ago and last quarter, but as John said earlier, we’re actually making very good progress in hiring to the positions we need to fill. In fact, we are continuing to attract very qualified, high quality candidates, and as a result, we’ve recognized that in many functions, we’re able to achieve the needed level of expertise and productivity with fewer total full time employees, and in some areas, we also recognized that there is additional leverage in balancing internal management of a function with some degree of outsourcing.

So given the quality of our recent hires and how they did executing, our thinking has evolved to where we believe we can achieve our goals with somewhat fewer overall hires. As John mentioned, part of this evolution has also led to some attrition in certain parts of the company. We believe this shift in our approach makes sense given where we are in our development. So while we expect OpEx to grow over the next couple of quarters, as we continue pushing forward on the hiring front, it’s unlikely that we’ll scale headcounts to the 160 level by the end of the year as we have talked about back at February.

Non-GAAP net income in Q2 was $14.1 million compared to $15.4 million in the year ago quarter. Looking at pro forma earnings per share, non-GAAP net income per pro forma diluted share was $0.26 for the second quarter, down from $0.29 in the year ago period. Again, the $9.4 million fee-related revenue in Q2 of 2012 was very high margin. So it had a substantial impact on the year-over-year income comparison. For the quarter, non-GAAP effective tax rate was 36%. We do continue to expect a 37% tax rate for the third quarter and for the full year.

Turning to the balance sheet, we ended Q2 with $259.3 million in cash, cash equivalents and short-term investments. Cash was down relative to last quarter due to regular operating activities, including the increased patent spend, the timing of a payment for patent portfolio acquired in Q1 and normal activity. Although, we have not guided the cash flow, we should point out we do expect this cash balance to bounce around from one period to the next as we build clients, acquire patents and complete structured transactions in ways that do not always correspond to a quarterly reporting period, but we do believe are in the best long-term interest of the business. To that end, our deferred revenue balance at the end of the quarter was $117.5 million compared to $106 million a year ago and down slightly sequentially.

Keep in mind that our deferred revenue balance is not just a function of the timing of signing of new clients, but also the billings of existing clients, which makes it a difficult metric to read anything into and we had another reason we always stress that RPX’s progress is difficult to evaluate on a quarter-to-quarter basis or just by looking at financial statements from one period to the next. For example, if we have one quarter in which more existing clients are billed for their next year of service versus the prior quarter, and yet not one new client was signed and build, we got a meaningful uptick in deferred, yet no related new business.

Looking ahead for the third quarter of 2013, our current expectations are as follows, subscription revenue in the range of $57.2 million to $57.7 million, fee-related revenue of $500,000, which represents a completed transaction, total revenue in the range of $57.7 million to $58.2 million, non-GAAP net income in the range of $10.6 million to a $11.1 million, and $54.2 million diluted shares outstanding on a pro forma weighted average basis.

Looking at 2013 overall, we’re also updating our guidance for the full year. Our updated expectations are as follows; subscription revenue up $219 million to $225 million, from $215 million to $225 million previously, fee-related revenue of $10 million to $11 million, from $8 million to $10 million previously, total revenue of $229 million to $235 million from the previous range of $223 million to $235 million; non-GAAP cost of revenue of $103 million to $105 million from the previous range of $96 million to $111 million; SG&A of $46 million to $48 million from the previous range of $48 million to $52 million, non-GAAP net income of $50 million to $53 million from the previous range of $47 million to $52 million; 53.7 million diluted shares outstanding on a pro forma weighted average basis for the year from 53.3 million shares; lastly, on the acquisition front, net spend of $120 million to $125 million from the previous range of $115 million to $125 million.

We began the year by exceeding a few of our guidance ranges by millions of dollars. At this point in the year ago, we thought it was appropriate to tighten the ranges we’ve guided to for the full year and to more closely align our guidance with our internal expectations.

To sum it up, we are very pleased with the second quarter and we feel the company continues to make strong progress on all fronts, from renewals to new client acquisitions to the rollout of our insurance business. This is a difficult business to look at on a quarterly basis, but as we look back at the first half of the year, we’re exactly where we thought we’d be and we’re really excited as we head into Q3. As always, there is a lot of work to do to keep building on the company’s momentum and we remain committed to solid execution and delivering value to our clients and shareholders.

Now, John and I’ll be happy to answer your questions.

Joann Horne

Thank you. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, the question-and-answer session will begin. (Operator Instructions) And our first question comes from the line of Tim Quillin with Stephens, Inc. Please go ahead.

Timothy J. Quillin – Stephens, Inc.

Hi. Good afternoon. Nice quarter.

John A. Amster

Thanks

Ned Segal

Hi, Tim. Thanks.

Timothy J. Quillin – Stephens, Inc.

So you mentioned that you exercised some options to acquire licenses for new clients and then you talked about the build-out of the cable opportunity and maybe the impact that the GPH acquisition is having, but can you just talk maybe in specifics about how you are, first like as what options you are exercising and then how you are building out those areas, how that’s coming together?

John A. Amster

Sure, Tim. So as usual, we really can’t get into specifics, particular options with respect to particular clients or particular deals. First on the cable side, I think the important thing that we looked at last year when we did the Altitude deal is we wanted that to be a catalyst for opening up a meaningful dialogue in the cable industry, and I think the message we are trying to get across is that’s worked well. I wouldn’t assume necessarily that means we exercised a lot of options with respect to it, it just means that the dialogue worked well, we got an anchor tenant and from that anchor tenant, we were able to build out and continually penetrate that market over the course of the year, which I think we’re very pleased with where we are relative to what our expectations were.

With respect to GPH, that was a transaction that we did at the end of last year and we did have options on it and we just wanted to basically let people know that the options have been useful and did lead to some good client dialogues, and ultimately, some conversions from prospects to client.

Timothy J. Quillin – Stephens, Inc.

Good, and then on the cable side, are there any large MSOs that are still out there that haven’t joined the ecosystem?

John A. Amster

Yeah, and I think it’s a good question again without going too much into specific detail. It’s a little bit like I think I talked about it on the last call, we got an anchor tenant and hurly days like in handset, it was quarters that we got really meaningful penetration. We have very meaningful penetration in the cable market, but there still are a few people out there, few companies out there and I think it’s the same thing goes for semiconductor, the same thing goes for, even in handsets, there’s two companies out there that aren’t our clients. So I think we get significant amount of penetration over the course of some period of time and then there is still to borrow from Ned’s phrase, still some wood to chop, in the existing verticals and also in the cable industry as well.

Timothy J. Quillin – Stephens, Inc.

Great, great. Are there any signs right now that clients are becoming less concerned about the NPE threat. Obviously, there are still a lot of lawsuits being filed, but there is theoretically a lot of legislative efforts on patent reform, is that influencing potential client behavior at all?

John A. Amster

It’s a good question. We definitely get the question from clients. There definitely are some clients who are very focused on patent reform and really that’s the message that I think our investors should understand, which is this isn’t going anywhere, it’s been around for seven years or eight years right there and it got passed and they immediately started working on the next set of reforms. If we think this discussion is here to stay and we think for sure with the White House pronouncement, it’s here to stay, our view remains the same and for those of you who haven’t looked at the materials from the Investor Day, I encourage you to do so.

We think subsequently there are certain elements to reform that we are very supportive of, in particular, patent quality, that we think would be interesting and are completely complementary and consistent with our market based approach to solving the problem. and our view is that, that legislative and judicial approaches are certainly something that people have been trying to do and they could have some impact, but they’re not going to solve the many billions of dollars that companies spend today and that a market based approach is also needed. and interestingly, for us now the data that we have that I think it’s becoming very clear to those involved in the pat reform to be that RPX occupies a unique position in the market, one of neutrality, one of having a client base that is far in excess of anybody else’s client base, one that is involved in day-to-day buying on the pat market, in fact, is one of the leading buyers.

And on top of that, did not sue anybody, puts us in a very unique position to have our data, they are utilizing a variety of different ways, and puts us in a position to really be part of the dialog in a way that we can help government officials do what they need to do, provide them with data and the like. and we’re very pleased with that, for example, in the White House report that they did reference RPX data. So long answer to your question, I think it’s your state. it doesn’t seem to be you’re packing any client discussions and it’s something that frankly, we see an opportunity for RPX.

Timothy J. Quillin – Stephens, Inc.

Okay. And then just one last question, can you give us any teasers on new business opportunities that might leverage the data. And I don’t think this would be an example of something that would leverage your data, but I know that your clients tend to be attorneys, they’d like to fight. And so is there any thought of providing more aggressive legal services for clients like facilitating, re-examine a patent?

John A. Amster

Without answering your question, Tim, if I can do so politely, you’re thinking along the right line, think about things that we can do for our clients that go towards lowering the risk and in particular, the transaction costs in the market that focus on utilizing data to do so. and really importantly, that leverage the fact that we’ve done 150 plus clients. Right, so things that RPX can have a level of scale that nobody else can achieve. those are the types of things that we’re focused on. The reason we bring it up is not to teach, but it is to let you know that we are spending money and within the SG&A budget that we have right now, we’re able to do what is in effect our R&D, which is really trying to come up with new areas and new ideas to push our services forward and deliver more value for our clients and therefore our shareholders.

Timothy J. Quillin – Stephens, Inc.

Great, perfect. Thank you very much.

John A. Amster

Thanks, Tim.

Operator

Thank you. Our next question comes from the line of Jeff Meuler with Robert W. Baird. Please go ahead.

Jeffrey P. Meuler – Robert W. Baird & Co.

Yeah, good afternoon, thank you. I guess just first on the subscription revenue guidance, if we take, I guess any point of the range from Q3 and then kind of back into what is implied for Q4 by the full-year guidance, one that implies a pretty wide range and at the low-end, it implies a pretty large sequential decline. Is that just a built-in conservatism given the larger note there, you still have ahead of you in Q3 or why the wide range what could cause a potential sequential decline of the magnitude implied at the low-end of guidance?

Ned Segal

Hey, Jeff. Thanks for the question. It’s Ned. So first of all, just a reminder, we’re guiding for Q3 and we’re tightening towards the top end of the range, but the guidance that we’ve given for the full-year. So we’ve recognized that will fall out, that is Jeff, we did some math and that the math ends up with a wider range than you might like for Q4 and that it ends up with a sequential decrease from one end of that range and a sequential increase to other end of that range. So recognizing that math, but not given any guidance for the fourth quarter. I think you could probably think about the things that could cause that business to grow or decline in any given period.

I think it’s probably worth pointing out that in any given period, we could have some predictable and regular core stuff happen around our business since we really chart around the business on an annual basis, where you could have non renewals happen at the beginning of the quarter, and you could have a ton of new business activity – at the end of the quarter, so it provided tones of predictability and growth in the future, but didn’t impact the P&L in that period, and with a quarter that looked like it was down sequentially on a revenue basis from the previous quarter. So we’re not trying to preview anything like that, where people who are just not really talking about the fourth quarter at this point, but those are the kinds of things that could impact growth or decline in any given period.

Jeffrey P. Meuler – Robert W. Baird & Co.

Let me ask you it maybe this way. As you – obviously, the renewals have been really strong over the last 12 months. As you kind of look at the heat map or the risk profile of the clients that are coming up for renewal over the next couple of quarters, is there any reason to believe that they are at higher risk of non-renewal than kind of a tranche that you just went through?

Ned Segal

So it’s a good question, Jeff. The first, I’d just point out what we’ve said in the past on the renewal stuff. We’ve mentioned that Q2 and Q3 were important periods for us. Obviously, we’re now halfway through that, but with another important quarter in front of us. We just been executing our business on an ongoing basis. There always are high risk renewals that are working that way through the system. And we, when we’re forecasting the business, we go one by one, – come up with the forecast and the guidance that we give as opposed to trying to look at it holistically and when we build it up, these are numbers that you end up with for the third quarter and for the full year.

Jeffrey P. Meuler – Robert W. Baird & Co.

Okay. And then on doing more rights transactions this period and obliviously that’s flowing through into the cost of revenue and the guidance. Should we think about that as that were some just natural variance that resulted in a lot of rights transactions occurring in Q2 or should we view that as more strategic in terms of you guys preferring to do rights transactions and that that phenomenon and that type of amortization period is likelier to stay?

John A. Amster

So, I think it’s a little bit of both, Jeff. So first of all, we’ve historically done more rights deals than we have patent deals. It’s more like two-thirds of the deals end up being rights related, historically. And we think that that trend will continue, although, it will definitely vary from one quarter to the next based on the opportunities that are in front of us and of our clients and our prospects. So that’s number one. Number two, the rights deals typically has shorter amortization period than the patent deals do, but that’s not always the case. And we spend sometime talking about this at the Investor Day, some of the things push and pull on the amortization periods for each of those. But if you took them in their entirety, you’d say that the rights deal were amortized over a shorter period.

So this quarter is probably good skew more towards rights deals as if often the case, but also rights deals in this case where amortization period was shorter than where it typically has been for the entire portfolio and that definitely is a little bit what pulled things down, but I wouldn’t assume that there’s going to be a quarter where we just did patent deals, where the amortization period was shorter than it was overall also and I guess, the last thing I’d point out is, if that amortization period, we are certainly aware of that, but we really try to focus much more on the spend budget, when we think about how we can help our clients and the commitments that we make to our shareholders. We try to stay within the range that we give you for the cost of revenues, but that ends up being much more accounting and not the business drivers such as the patent spend would be.

Jeffrey P. Meuler – Robert W. Baird & Co.

Understood, thanks guys.

Ned Segal

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Adam Carron with Barclays Capital. Please go ahead.

Adam Carron – Barclays Capital, Inc.

Hey, yeah. How are you? Just wanted similar to some of the preceding questions, just wanted to make sure I’m understanding this right. So if we were to just kind of flat line, which you’re seeing from the net income standpoint over the first half and the second half, obviously, there is somewhat of a slowdown, I believe that it’s driven by the fact that you have a number of revenues coming in over the first half of the year to higher margin plus the higher amortization expense associated with the right spills. Is there anything else from there that could be a factor there, how much of that is really conservatism?

Ned Segal

I’m sorry Adam, if you ain’t mind, just repeat the question, I will make sure we answer it well.

Adam Carron – Barclays Capital, Inc.

Sure. I was just kind of looking at the adjusted net income over the first two to three quarters given your quarter guidance as compared to the full-year. It seems like the delta versus what we’re seeing in the first half versus the full-year is really having to do in my opinion with the other revenues coming in at higher margin plus the impact of higher amortization expense, and we probably expected over the beginning of the year. Is there anything else that you could point out there or is there an element of concern, which has been embedded as well?

Ned Segal

Sure. so first of all, I guess I’d say we try and we have been trying to guide to what we can see in front of us, and I’d give you a sense as best as we can see it for how things are going to play up. I think you highlighted some of the issues that would impact the P&L going forward relative to the first half of the year. but I guess the one that I didn’t hear you say that I would want to point out would be embedded in the SG&A guidance that we gave for the full year is that we would have more dollars spent on SG&A in the second half of the year than we did in the first half of the year. And I would expect that although, we haven’t really broken that out a quarterly basis. I think, you’d assume that if we hired people gradually over the second half of the year, you’d assume. Then I would imagine that our fourth quarter SG&A would be up sequentially from our third quarter SG&A. so that’s one driver that I didn’t hear you mentioned that I just want to point out. and then that cost revenues point that you made I think is an important one too.

Adam Carron – Barclays Capital, Inc.

Yeah, that’s very helpful color. And then secondly, you mentioned the cable vertical. And I just wanted to kind of get some additional color maybe on the financial services vertical, it’s been about six to nine months or so since you guys on board of BofA and I wanted to see if may be you could provide some color around how these conversations have been in production with other perspective clients in that vertical, and if you have any changes to what you emphasize your initial timeline besides another large numbers?

Ned Segal

It’s a good question. I think that’s why I mentioned, as I did on the last call, we’ve seen a pattern, I think relative to the first couple of years, we think that that pattern is going to take place over a longer time period. I think as we did with cable with more than a year until we kind of really saw the results. We often expect that that’s going to happen in financial services. but obviously, there is work to do there. But we like what we’re seeing so far right there, the level of dialog is progressed and the quality of the dialog is progressed, and so often seem to be tracking, but again, a lot of work to do there too.

Adam Carron – Barclays Capital, Inc.

Great, thanks a lot, guys. I really appreciate it.

Ned Segal

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Philip Lee with Lazard Capital Markets. Please go ahead.

Philip H. Lee – Lazard Capital Markets, LLC

Hey, guys. thanks for taking my question and good job on the quarter.

Ned Segal

Thanks, Philip.

Philip H. Lee – Lazard Capital Markets, LLC

John, can you give me some more color around the plans in Asia and what you guys are doing in that geography?

John A. Amster

So Asia has always been a very important market from us from the very beginning. I remember correctly, I think our third client was in Japan, it’s the only other office that we have within Tokyo. and so it’s always been an important geography for us. We have clients in Japan, China, South Korea and Taiwan. we pointed it out, just because we happened to get a few clients that were traded out in the area. Beyond that, it’s steady as it goes; we think there is still market there, but no particular new plans there.

Philip H. Lee – Lazard Capital Markets, LLC

Got it, that’s helpful. Thanks. Ned for the annual guidance, it looks like the high range of the subscription revenue is $225 million, high range for the fee-related revenues is $11 million. but that is an add-up to the high-end of the total revenue what you guys have $235 million. What’s the discrepancy there?

Ned Segal

Yeah. We thought we’ve actually missed from that to get to the high-end, what we’re not trying to be hit there so much as we’re just trying to point out, but there are a couple of different ways that you can get those adds to those ranges.

Philip H. Lee – Lazard Capital Markets, LLC

Okay, got it. thanks so much, guys.

John A. Amster

Thanks.

Ned Segal

Thank you, Phil.

Operator

Thank you. Our next question comes from the line of Jeff Meuler with Robert W. Baird as a follow-up. Please go ahead.

Jeffrey P. Meuler – Robert W. Baird & Co.

Thanks for taking my follow-up.

Ned Segal

All right.

Jeffrey P. Meuler – Robert W. Baird & Co.

Could you just talk about the – and I know you guys don’t manage this on a quarter-to-quarter basis and there is a lot of volatility. so I’m not asking over the next quarter or the next two quarters, but as you look at kind of the sales pipeline and the market opportunity, does it feel like the gross client adds opportunity is expanding, and I have said in the context of at least the net client adds ticked down from 2010 to 2011 to 2012? And now if you look over the last, I guess three quarters or so it seems like the net adds are kind of back on that 40 number that I’m guessing gross is even higher. so it seems to be picking up again, just over time 2014, 2015, 2016. We do expect the gross adds number to increase on an absolute basis as time unfolds?

Ned Segal

It’s really, really hard for us to answer. I think the biggest variable in terms of the growth in terms of the adds is going to be insurance, in terms of the core business, it seems to be at, I guess a pretty reasonable cadence if you will. it’s really, really hard to say, because what we focus on is, what’s the overall term, we focus on the quarterly metrics and the annual metrics about the number of companies that are getting hit multiple times in a quarter, things like that really indicate to us whether or not there is still hundreds of companies that are impacted by this problem and whether more and more companies are getting impacted, more and more frequently quarter-after-quarter. and we certainly think that is the case, so that that’s why we believe that there is a plenty of running room left in the core business. On that, I think that’s hopefully helps give you a little color.

Jeffrey P. Meuler – Robert W. Baird & Co.

Okay. and then at the Analyst Day, you talked about a willingness to go off rate card for clients of the different, I guess risk profile. Is that still kind of conceptual or is that happening today and driving additional business?

John A. Amster

I’m glad you asked the question, because we haven’t been asked that much about it since the Investor Day. We really get a new concept, we’re trying to get across to people is that we’ve always worked with respective clients to understand what their risk profile was. We’ve already based our dialogs of the rate card and we still do, but what we have now is we have 5.5 years of working with clients, the significant amount of transactional data, a significant amount of actual company data, and we’re able to utilize that to better manage our pipeline in terms of understanding what the price level is that we really can’t deliver a good ROI for a client and how that relates to the rate card. We always look at that ratio of what we think somebody spends on patent risks to what our rate card is. Now we actually, I’d say “No” before we walk into the dialog. So it’s just something that’s become more formulaic.

Jeffrey P. Meuler – Robert W. Baird & Co.

Okay, thank you.

John A. Amster

Thanks.

Ned Segal

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Eric Ghernati with Bank of America. Please go ahead.

Eric A. Ghernati – Bank of America Merrill Lynch

Hi, thank you for taking my question. Sorry I joined the call a little later. I don’t know if you’ve covered this, but can you disclose how much of your total net client as of 11 new insurance customers?

John A. Amster

Sure, Eric. what we did say was that of the 11 net ads that there were eight new insurance policies and of the eight new insurance policies, the two were with existing clients. Does that help?

Eric A. Ghernati – Bank of America Merrill Lynch

Yeah. And last quarter, what was that number again?

John A. Amster

Last quarter, we added six, we had five policies sorry.

Eric A. Ghernati – Bank of America Merrill Lynch

Okay, all right. And then again, I apologize if you covered this. but, just look at your deferred revenue down-ticked on a sequential basis, and give a sense of what happened there?

John A. Amster

Sure, Eric. We can catch up I believe after the call, but I’ll just point out briefly the fluctuation in deferred revenue can be an indicator of a lot of things and just in case that anybody else that they are on the call as well. So I’ll say it again. Just the finding of our billing of existing clients can impact the deferred revenue as much or more than the new billings from new client ads. And so without getting into details on what might cause it in any one period, I’d just point out, we’re taking our deferred revenue at a single point in time, not from 90 days to the next 90 days. It doesn’t necessarily tell you much given how many different clients are moving through the financial statements at any given time and we’re being built for any amount of time at any given amount of dollars.

Eric A. Ghernati – Bank of America Merrill Lynch

Do you think looking this case like your billings number for this quarter is not a good indicator over the underlying trends of the business?

John A. Amster

Eric, I think I’ll just point you back to our earlier comments, we said we felt really good about the quarter, about the first half and about the visibility that gave us into the guidance that we’ve given to allow us to tighten the ranges to the higher ends or even above the higher ends of the guidance that we’ve given before, and probably we did that.

Eric A. Ghernati – Bank of America Merrill Lynch

Okay, thank you.

John A. Amster

Thanks, Eric.

Operator

Thank you. Our next question is a follow-up question from the line of Tim Quillin with Stephens, Inc. Please go ahead.

Timothy J. Quillin – Stephens, Inc.

Hi, thank you for taking my follow-up. Do you have any known non-renewals in the third quarter? In other words, has any client already told you that they do not plan to renew?

Ned Segal

Yeah. It’s probably better for us to not get into details like that. but I feel that could happen in any given period it could be, because that somebody just didn’t want to stay as a part of the network, but it also could be, because somebody was getting acquired and let’s say we might know about it years in advance of when their contract ends, but probably better not to get into the specifics of any given period or any given client.

Timothy J. Quillin – Stephens, Inc.

Yeah, no problem. And what is your new headcount goal for the end of the year if you have one?

John A. Amster

I think we focus more on the dollars than on the heads, Tim. It’s certainly more than where we are now. and if we were to spend more in Q3 and then yet more in Q4, we would send that SG&A range we’ve given a $46 million to $48 million, you could certainly see adding tens of people and still being within that range, but I think I’d focus more on the dollars than on the heads.

Timothy J. Quillin – Stephens, Inc.

And when you get to that level at the end of this year, is that going to be a level of SG&A or of people that you can leverage for the next several years that you won’t have to grow or how do you think about that?

Ned Segal

Well, there are a lot of things that play in that, right. There’s the core business and there is any spend that might be associated with growth opportunities where we might not be recognizing revenues yet or where they might not be mature yet, insurance being the best example of that today, but there certainly could be other examples of that overtime. So I think it’s clear that we’re seeing economies of scale and real leverage in the core business, but that might not always bear itself out in the P&L, because of other investments that are at play.

So that’s probably the best way to explain that, Tim.

Timothy J. Quillin – Stephens, Inc.

Okay. And then lastly, are there any syndication opportunities in the pipeline right now or are there any – you have any to staff side to your guidance on the non-subscription revenue?

Ned Segal

We’re always working on staff, Tim. I think you guys will be disappointed if weren’t, but as been the case of the last few quarters, I think what we want to do is, we want to tell you about things when they’re staring us in the face, especially on the fee-related revenues, as those although more variable are really profitable and we don’t want to guide the hypothetical things, we want to guide the things that we can really see there.

Timothy J. Quillin – Stephens, Inc.

Got it. Thank you very much.

Ned Segal

Thank, Tim

John A. Amster

Thank, Tim

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today. At this time, I would like to turn the conference back over to Mr. Amster for any closing remarks.

John A. Amster

Thank you very much. Thank you for joining us today, and I look forward to talking with you guys over the course of the next couple of weeks.

Ned Segal

Thanks, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes the RPX Corporation second quarter 2013 earnings conference call. Today’s call will be available for replay, and if you would like to dial in and listen, you can do so by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 4628430 followed by the pound sign. We thank you for your participation. You may now disconnect.

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