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RPX Corporation (NASDAQ:RPXC)

Q3 2013 Earnings Conference Call

October 29, 2013 05:00 PM ET

Executives

Joann Horne - Investor Relations

John Amster - President and CEO

Ned Segal - Chief Financial Officer

Analysts

Daniel Amir - Lazard Capital Markets

Danielle Coker - Stephens Inc

Tim Quillin – Stephens, Inc

Adam Carron - Barclays Capital

Eric Ghernati - Bank of America

Jeff Meuler - Robert W. Baird

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the RPX Corporation Third 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, October 29, 2013.

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

Joann Horne

Thank you, operator, and good afternoon, everyone. And welcome to RPX Corporation’s third 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 third quarter 2013 financial results, which is available on the company’s website at www.rpxcorp.com. The 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 contains 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 those forward-looking statements. Please refer to the company’s SEC filings for detailed information.

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

Now, I’ll turn the call over to John.

John Amster

Thanks, Joann and good afternoon everyone. I am going to give my usual quick overview before handing it to Ned for the details. Going into this year validation was a key theme at RPX. Validation of the market opportunity for our unique form of patent risk management of the value of our transaction data and of our ability to build on that data to execute efficient acquisitions, add and renew clients, continue to convince key clients to pay us more and build the foundation of a successful insurance business.

Given these goals this was another quarter of validation on our way to a solid year of 20% plus growth. Revenues grew 24% year-over-year and net income was $11.4 million or $0.21 per pro-forma diluted share. We expanded the network with three net additions to finish the quarter at 160 members 23 of whom are insurance clients. Our pipeline remains very strong and our renewal rate remained about 90%. These solid results represent a continuation of the progress we have seen since RPX signed its first client a little more than five years ago.

We are proud of what we’ve accomplished in those five years. For instance we’ve acquired more than $700 million worth of patents comprising what we estimate to be nearly 10% of the open market buying activities since our founding in 2008. Preemptive buying on that kind of scale has helped our clients avoid what we believe are thousands of NPE litigations and more than $1 billion in legal costs.

At the same time our ability to intervene in active litigations has resulted in more than 400 dismissals since the inception of the RPX network, that’s 22% of our client’s dismissals in that period. Today our network represents many of the largest technology enabled businesses in the world and through our open market and litigation activity, we believe we have reduced their aggregate NPE risk by about 40%.

That success is reflected in our renewal track record. We have had more than 80 renewal events in our history, stock renewals beyond our control M&A bankruptcy. At the end of this year we will only have had three non-renewals of any significant size out of those 8, we’d only one of them in 2013.

We feel that these numbers approved that RPX’s network is the single most affective way to quantitatively and consistently reduce NPE risk. We estimate this to be around the $10 billion cost every year for operating companies. We believe that the numbers show that any company dealing with NPE litigation will benefit from being an RPX member. And that is our goal to build a broad based network of all affected companies that will serve as a clearing house for all for very nearly off risk in the patent market.

And that will be the ultimate validation of our vision. Those of you who were at our Investor Day in this spring, they will remember the presentation on how much capital do it actually requires to clear all the key patents every year. It is in $10 billion we think it’s more like $1.5 or $2 billion. The RPX network has shown it can be done and that scale is the key to success.

So our long term vision continuous to take shape. We are providing large scale risk mitigation for a large number of companies and the value proposition and clearing house opportunities with the RPX network gets more compelling everyday.

That’s a good thing because the problem NPE litigation is still large and growing. In Q3 for example nearly 750 unique companies remained in NPE suits, more than 500 of which are in our current market sectors. Of those 500, more than 450 are not yet RPX clients. There are also more companies being sued multiple times. In our market sectors alone, there were nearly 120 companies sued more than once in Q3 and more than half of them are not yet part of our network. As the NPE activity grows and more companies experience repeat assertions our ability to help them clear risk and avoid the cost of litigation becomes more and more attractive.

We have a comprehensive actuarial model that has done a good job predicting our clients’ experience. We have established a robust pipeline to validate our underwriting methodology and we have had enough clients to build and test our processes. So we are very pleased with the process we’ve had on the insurance front. And we have begun to integrate a traditional reactive business product and insurance policy with our unique model for proactively eliminating risk through market intervention.

Getting 23 policies on our books before the end of the year is quite an accomplishment for the insurance team. We aren’t going to run, before we’re ready, but our progress makes me think we’ll get there pretty soon.

Despite the current small size of the business, given uniqueness of our approach and success relative to other patent insurance efforts repeat the interest of others. Beyond our current reinsurance partners, we’ve had interest from larger carriers and are in multiple conversations to explore ways for us to collaborate and enhance the insurance product.

We remain very proud of where our direction has been and equally confident about where the company is going. We have five years of data on multiple fronts, acquisitions litigations, dismissals, renewals and our actuarial model that validate RPX approach. We believe RPX is on its way to establishing the broad based clearing house of operating companies that can and will effectively remove a major portion of risk in the patent market.

That will do it for me. I will now hand it over to Ned to give you a closer look at the numbers.

Ned Segal

Thanks, John. Similar to last quarter you’ll see a slide deck on our IR site that corresponds to our financial discussion here today. I am going to focus our financial results today on non-GAAP metrics which excludes 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 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 third quarter revenue totaled $58.6 million, a 24% increase over last year’s Q3 revenue of $47 million. Subscription revenue for the quarter was $57.8 million, up 23% over the year ago period. We added net 3 clients to the RPX network this quarter ending the quarter with 160 clients. Both the new core and insurance clients were consistent with our historical average sizes. With two core clients well north of the average.

In insurance we're up to a total of 23 insurers. We're pleased to have achieved our goal for the year. As a reminder all of our insurance clients are also members of the network.

Fee related revenue contributed $725,000 to our total revenues in the third quarter. These transactions are an important element of the RPX value proposition as they allow us to leverage our unique trusted position in the market and our expanding network of clients. They also deliver value to our clients and prospects while adding incremental high margin revenues to the income statement. While the timing of these transactions is unpredictable, we're starting to see a cadence to them that suggests we can consistently deliver substantial fee revenue over any given multi-quarter period.

As we move down the P&L, the non-GAAP cost of revenue which is primarily the amortization expense from our patent assets, it was $29.7 million in Q3 of 2013 compared to $21.9 million in the third quarter of 2012. Expressed as a percentage of total revenue, non-GAAP cost of revenue was 51% in Q3 compared to 47% in the year ago period. This is higher than we expected and is driving an increase in our guidance for cost of revenues for the full year.

The increase largely reflects the fact that we have recently made some patent acquisitions that have much shorter than normal amortization periods. While this has not been typical, these kinds of acquisitions can’t and will happen periodically. We will continue to prioritize relevance of the patent start network and overall patent spend over accounting statement when we evaluate opportunities to clear risk.

This quarter that approach let us to acquire patents that will be amortized over 30 months on average, remarkably shorter than our historical amortization period of about 45 months or a bit less. As a matter of fact, some of these short-lived assets will be all the way through the P&L by the end of the year, but they will drag down the average amortization period for Q4 as well.

Although we don’t think patent amortization will trend in a 30 month range, hopefully this color helps you understand our philosophy and it illustrates how we continue to manage the business for the long-term and not quarter-to-quarter.

We’ve said earlier in the year that the second and third quarters were important renewal periods and we’re pleased that we ended the quarter with our renewal rate again above 90%. Average renewal term was 1.9 years consistent with the historic norm.

It’s worth reminding all of you of two concepts we often mention. First, our business although highly predictable over the long-term can be variable. And on a quarterly basis, the timing of signing new clients or non-renewals will impact our results. For the second concept, let’s examine the non-renewals now that we’re through a period you all knew was a heavy one for us. There are three ways we can lose a client. One way is due to bankruptcy. So far these have been small companies. Second, we can lose a client to M&A. Fortunately we are able to see those that fall in the bankruptcy and M&A bucket well in advance and we are able to forecasting guys with them in mind. Lastly, we can lose a client if they decide not to renew their contract. We’ve been pretty accurate in our ability to forecast those as well. And as John pointed out, non-renewals by choice has been the rare exception.

Turning to insurance, our new insurance customers included one cross-sell to an existing RPX core member. Echoing John’s comments, we are very pleased with our progress in insurance. And as the business becomes the more significant portion of our financial results, we will look for ways to provide additional information and break out the results to help you understand the growth trajectory and the impact on the overall business.

Moving on to patent acquisition activity, we completed nine acquisitions of patent assets during the quarter. Our gross patent acquisition spend in Q3 was $20.6 million and our net acquisition spend was $17.6 million. Three quarters through the year, we are about $86.2 million into our previous $120 million to $125 million spend guidance and we are comfortable with our acquisition pace relative to that guidance. Spend will continue to be lumpy quarter-to-quarter as we don’t want to pick assets based on a use it or lose it approach.

Our non-GAAP SG&A expenses which exclude stock-based compensation and the amortization of acquired intangibles were $11.3 million in Q3 of 2013 compared to $10.3 million in the year ago period. Our operating expenses which are largely tied to employee costs were below our expectations, but were attracting very qualified high quality candidates which allowed us to grow total headcount at the end of Q3 to 136.

Non-GAAP net income in Q3 was $11.4 million compared to $9.4 million in the year ago quarter. Looking at pro forma earnings per share, non-GAAP net income for pro forma diluted share was $0.21 for the third quarter, up from $0.18 in the year ago period. For the quarter, non-GAAP effective tax rate was 36%. We expect that 36% tax rate for the fourth quarter and for the full year as well.

Turning to the balance sheet, we ended Q3 with $277.6 million in cash, cash equivalents and short-term investments, that’s up $18.3 million this quarter. Although we have not guided the cash flow, we do expect our cash balance to bounce around from one quarter to the next as we collect fees from our clients, acquire patents and complete structured transactions and in ways that do not always correspond to a quarterly reporting period, but are in the best long-term interest of our business.

Having said that, the cash flow of the last few quarters suggests we are at the stage where the business should generate meaningful cash amounts over a period of multiple quarters and our cash generation also grow overtime as our business grows.

Our deferred revenue balance at the end of the quarter was $105.2 million compared to $98.7 million a year ago and $117.6 million in Q2. As a reminder, our deferred revenue balance is not just the function of the timing of signing new clients. In fact more significantly, it’s a function of the billings of existing clients from the previous five years, which makes it a difficult metric to read anything into it.

As we’ve said on previous calls, 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. Put another way, our deferred balance could be up in the quarter where we add few new clients and down in the quarter where we add many.

Looking ahead for the fourth quarter of 2013, our current expectations are as follows. Subscription revenue in the range of $57.8 million to $58.2 million, fee-related revenue of $2.4 million which represents completed transactions, total revenue in the range of $60.2 million to $60.6 million, non-GAAP net income in the range of $9.2 million to $10 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 of $224.6 million to $225 million from $219 million to $225 million previously, fee-related revenue of $12.8 million from $10 million to $11 million previously, total revenue of $237.4 million to $237.8 million from the previous range of $229 million to $235 million, non-GAAP cost of revenue of $110.7 million to $111.1 million from the previous range of $103 million to $105 million, SG&A of $44.8 million to $45.3 million from the previous range of $46 million to $48 million, non-GAAP net income of $52.2 million to $53 million from the previous range of $50 million to $53 million, 53.6 million diluted shares outstanding on a pro forma weighted average basis for the year from 53.7 million shares. Lastly on the acquisition front, net spend is unchanged from the previous range of $120 million to $125 million. To sum it up, we are very pleased with our progress year-to-date and the company continues to make strong progress on all fronts.

With that, we'd like to open it up for questions.

Joann Horne

Operator we’ll take questions now please?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Daniel Amir with Lazard Capital Markets. Please go ahead.

Daniel Amir - Lazard Capital Markets

Great. Thanks a lot and congratulations on good quarter and good guidance. A couple of questions here, first of all on the insurance side, you've certainly showed here significant traction here in the past couple of quarters. I mean is it due to the innovation of the product, is it due to the compelling arguments that companies are seeing to use your insurance, I mean it seems like it might be tracking even ahead of your expectations and we just want to get a little more clarity on that? Thanks.

John Amster

Thanks. I would not say it’s tracking ahead, it’s tracking well right. We're very pleased that we have more than 20 clients before the end of the year when we started the year 20 to 40 was what we wanted to have exiting the year. So I guess we're a little bit ahead if you think about it that way. And the reason we wanted that numbers because we thought like that was a decent and manageable number in order to be able to build the appropriate infrastructure that we need, call it a walk phase of the building process on the insurance front.

I think from the very beginning we've seen a lot of demand which is why we've been talking about it. I know it might be frustrating that the walk phase takes some time. But just a reminder, it’s really important for a number of reasons. One, we want to get experience with doing actual claims. We want to have a reasonable number of clients that we do a claims process for, claims adjustment process for. We want to be able to back test over a reasonable period of time, with a reasonable number of clients our actuarial model to make sure that our underwriting process is appropriately predicting what the claims are going to be.

And so all of the metrics that we’re seeing right now are really good, there is definitely demand for it and we would just say that we expect continued evolution of our thinking and of the product and we’re just hoping that will be in the moving from the walk to run phase at some point in the reasonably near future.

Daniel Amir - Lazard Capital Markets

So in terms of verticals in the past you’ve commented a bit in your prepared remarks on potential new verticals and where the new clients came from. Can you comment a bit about some of the verticals that you’ve talked about in previous quarters that you are seeing as an opportunity like the financial services and things, and some of the automotive stuff that you are talking about, where do we stand right now and any more clarity would be great? Thanks.

John Amster

Sure. As a reminder, a lot of reason we keep updating the numbers on NPE activity is that in our core markets what we define is information technology probably defined. There is plenty of pipeline left. Certainly we would like to make progress in other vertical markets as those become right. As between financial services and automotive, our focus is definitely more on financial services because that's where there is an increasing trend on NPE litigation. It’s also an area where there have been some companies that are based and recently big payouts as opposed to automotive where companies really haven’t.

So we’re not sure exactly how right automotive is. There are a number of campaigns in that area. But today we would say that our focus is much more on financial services. I think on the last call or maybe it was two calls ago we talked about the timeframe for moving from anchor tenant and getting further penetration into a market and like with the Altitude/Digitude transaction and the cable industry, we thought it would be somewhere around 12 to 18 months. We expected something similar in the financial services space. We have made additional progress during the course of this year, nothing as quite big brand name as we announced last year, but we’ve made really good progress and we feel like we continue to have good momentum in that area.

Daniel Amir - Lazard Capital Markets

And my last question is just on your fee-based business, it looks like it’s coming a little bit ahead of your expectation which was previously 10 to 11 year and it’s maybe 20% higher. Is there anything to look into that, is it more just people are starting to use you more in terms of potential being brokering and providing a speed to this or is this more about to do with just larger size deals and therefore the numbers look a little bit better?

John Amster

Thanks Daniel. So we started thinking we see $7 million to $10 million in fee related business and we are really pleased to have a deal over $12 million for the year. It’s definitely an indication of a couple of things. One is that we are seeing more opportunities to help our clients with more different and there it’s also an indication of the fact that they are increasingly comfortable paying us beyond what the rate card suggested that they should if there are things that we can up come with. There are a variety of ways that we can help clients that show up in the fee related businesses and we’ve seen a breadth of them throughout the year.

Daniel Amir - Lazard Capital Markets

Great, thanks a lot.

Operator

Our next question comes from the line of Danielle Coker with Stephens Inc.

Danielle Coker - Stephens Inc

Good job on the quarter and thank you for taking my questions. So we cover a couple of other patent companies and we get the sense that operating companies are getting more and more resistant to settlement. Are you noticing this as well and can you comment on how that would affect your business?

John Amster

Yeah, I think that you are referring to one or two very specific companies and I don’t think that’s an overall trend. I think that directly relates to, you have to look at it on a case by case basis. And we are not seeing anything like that with respect on our business. And in fact, we are consistently involved in settling on behalf of our clients and doing transactions that result in litigation settlements for our clients. As I mentioned historically it’s been about 22%. Our settlement activity are the rights transactions that we do. We haven’t seen any meaningful difference in it.

Danielle Coker - Stephens Inc

Okay. And then even though your past both of your renewals for the year, do you know of any large non-renewals in the fourth quarter and 2014?

John Amster

Sure, Danielle. So I think we mentioned that there have been three non-renewals at the client selection, A, of any reasonable size in the company’s history and that one of them would occur in 2013. Beyond that, it probably doesn’t make sense to share a whole lot more that certainly more than we share with folks in the past but we thought it’s appropriate to get people a sense for the magnitude of the issue as we lead this big renewal period for us, but we wouldn’t give the number if we thought it would change before the end of the year.

Danielle Coker - Stephens Inc

Okay. And then do you know how many clients are coming up for initial renewals in 2014?

John Amster

We do, I think it's just too early for us to talk about 2014, Danielle.

Danielle Coker - Stephens Inc

Okay. Thank you for taking my questions.

Operator

Our next question comes from the line of Tim Quillin with Stephens, Inc. Please go ahead.

Tim Quillin – Stephens, Inc

Thanks for taking my follow up to Danielle's question. And I understand that because it would be hard to predict any non-renewals you have in those for good reasons or obviously very, very rare based on which you laid out. But I'm just wondering if you know, I guess M&A is kind of a natural headwind to your business or can be a natural headwind to your business. And I'm wondering as there was in 2013, is there anything we should be thinking about in 2014, that's kind of a natural, will be natural headwind to the business, because one of your clients was acquired by another client.

John Amster

Sure. So a couple of things on that, Tim. First of all, one of the nice things about clients when they get acquired is that we can see it coming a long ways in advance, because they typically would pay us and so the contract ends. So you could have clients paying for years and see them along with invest.

The second is that if you think about the size of technology companies that typically get acquired, you could glean from that, although that they may be larger in number than they are in dollar impact to the business. So, it all shows up in that 90% renewal rate that we talked about. And so that's where you see it.

Tim Quillin – Stephens, Inc

Right, okay. And do you have any -- just lastly, do you have any targets in terms of insurance policyholders in 2014 that you can share here?

Ned Segal

I think this is too early for us to talk about 2014 right now. We're thrilled that three quarters through the year that we've got about 20 to 40 range that we talked about beginning of the year that was really important to us from a validation perspective and to be able to have enough clients that we could see all the various parts of the insurance process as John described.

Tim Quillin – Stephens, Inc

Great. Well, great year, great quarter. Thank you.

Operator

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

Adam Carron - Barclays Capital

Just a quick one for you Ned just in terms of the way to think about the cost of revenues going forward, I know you’re going to touch upon it in terms of the amortization period, maybe shorter but you also said that some of that could be kind of cycle through by the end of the year. I mean what should we think of is kind of the average length of the portfolio I guess over the medium term so to speak?

Ned Segal

Sure. So the stuff that we had acquired before this quarter and we showed that has historically been and so it was in the mid 40s, but that much for going into Q3. In Q3, we mentioned that everything was amortized over a 30-month period. And we mentioned that what we acquired in Q3, some of it would have cycled always through by the end of the fourth quarter. So I am (inaudible) as I discussed be lower in the fourth quarter than it typically has been.

We don’t think there is a trend. We wouldn’t be drawing a straight line necessarily from where it was at the beginning of the year. So where it is now we certainly wouldn’t extend the trend from there. We recognized that kind of (inaudible) you guys having a built-in model and we don’t mean to be have earlier about it, but we’re just going to have to continue to prioritize at the total spend and relevant to the portfolio. If we were plugging a number and we probably wouldn’t plug in the number from this past quarter, we probably wouldn’t plug-in where it was 18 months ago either.

Adam Carron - Barclays Capital

Okay. I appreciate that and then just in terms of the additions. I mean somewhat a little bit lighter this quarter I know, we should be looking at it on a dollar value not just an athlete number. I mean, I think you guys have traditionally talked about the third quarter kind of potentially being somewhat softer from a seasonal perspective. Is there anything there to really call out there in terms of that three in terms of net addition?

John Amster

No, I think it’s consistently variable quarter-to-quarter and that’s why we see that much going, but that’s just a reality. We’re happy with the progress that we are making on all these different fronts and might be said, we’re not focus on the net number, we’re focused on the overall health of the business.

Adam Carron - Barclays Capital

Alright. I appreciate it thanks guys.

John Amster

Thanks, Adam.

Ned Segal

Thank you.

Operator

Thank you. Our next question comes from the line of [Nick Theders] with Robert W. Baird. Please go ahead.

Unidentified Analyst

Yeah. Thanks for taking the question. This is Nick on for Jeff. Could you

John Amster

Hey Nick.

Unidentified Analyst

Hey guys. Could you just talk about the current regulatory environment, think on the last quarter, last quarter you mentioned that you wanted really seeing an impact from the NPE initiative discussed earlier this year, if could just comment if that’s still the case?

John Amster

Yeah, it’s still the case. We are not seeing an impact. I think just to reiterate I think it’s very likely that during the next three years during -- before the end of this term of presidency there is going to be some more patent reform. There is lot of activity on the hill. We are supportive of our clients effort in that regard. With that said we don’t think there is any silver bullet that’s going to eliminate the ability for investors to buy patent assets and insert them. And so we think there is going always a rule for RPX and our market based approach to eliminating patent risk to go along with the legislative.

Unidentified Analyst

Okay thanks. And then just looking at headcount for 4Q I think there was a sequential ramp in 2012 would you expect something similar this year?

Ned Segal

If you look at OpEx that we’ve guided people to for the full year and you just back out of it, the first three quarters you get to an increase in the fourth quarter. And so interested in that is it we hope to have more folks here at the end of the quarter than we did at the beginning of the quarter. And we started the year with a goal to have headcount of 160 people, we are certainly not going to get there, but we do expect it to be higher than 136 we left the quarter.

Unidentified Analyst

Okay, great. Thanks nice quarter.

Ned Segal

Thank you.

Operator

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

Eric Ghernati - Bank of America

Yes. Hi. Thank you for taking my question. Ned, I mean I do understand that billings can vary every single period of time. And you said last time and you said it’s for better lay, should not look at it as an indicator, but the last two quarters, have your billings last quarter was down 24% on a sequential basis and it’s down again 19% on a sequential from my math. Can you just, why shouldn’t this be viewed as a trend and reflection of the fact that your clients adds in general if you just take out insurance additions have been very, very slow. Thank you?

Ned Segal

Eric, I am just thinking for your question. If you look at how we add clients, and if you look at the base of it historically, you see that the net client add number has bounced around from one quarter to the next. For all kinds of reasons that chief among them is that our sales cycle just didn’t correspond well to the quarterly reporting cycle. And we are not going to do things that are not in the best interest of our network and our shareholders at the end of the quarter, just to have a number that we think might make people happy on a superficial level.

I think you are referring to the deferred, I am not sure about the math that you are going through, but we have seen various before where to deferred even on a trailing four quarter basis has been down from one period to the next. And I think that is just indicative of how the math works on the deferred where the activity in any one period can be overwhelmed and it typically is overwhelmed by the cumulative effect of adding clients over five years with no particular cadence of them over any point in the year. Does that help a little, Eric?

Eric Ghernati - Bank of America

A little bit, I guess my other question is with respect to your cost of goods sold next year. Since your amortization schedule now is - can you actually disclose your amortization that now on a blonded basis?

John Amster

So we haven’t talked about 2014 yet Eric. We have tried to give a little bit of color around the amortization period, not just for this quarter but for next. Hopefully that helps a little bit.

Eric Ghernati - Bank of America

Nothing on 2014 year because you know just from the trend line in Q4, it's a meaningful increase versus everybody's [malls] [ph] before?

John Amster

So Eric, I think we're trying to make sure that folks understand that we wouldn't be drawing a line between these two points and extrapolating from it, number one. Number two, keep in mind we’re really focused on the patent spend and the amortization is just an output of over what period of time we can amortize the asset and it varies from one portfolio to another typically between 24 and 60 months or sometimes much, much less than that. And so, I don't think you or anybody else wants us buying the wrong patent just so they close through the P&L in the right way and people want us search things that’s in the best interest of our network and our prospects and our shareholders.

Eric Ghernati - Bank of America Merrill Lynch

Thanks.

John Amster

Thanks Eric.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Daniel Amir with Lazard Capital Markets. Please go ahead.

Daniel Amir - Lazard Capital Markets

Just a follow-up here, just to better understand, what would the gross margins in Q3 and Q4 be if we would have cap just to 45 months and not the change of the, into the 30 months. Just to see what the impact was?

Ned Segal

It's interesting. It's not math that I've got in front of me, Daniel. And maybe that's indicative of how we think about it. Again, we don't want to be cap a year about the accounting impact or the impact to the P&L buying short-lived assets. The good news about it is that when we do buy that like the ones that we bought recently that they are through the P&L by the end of the fourth quarter. So it means that things that, if our cost of revenues is elevated in one period, it actually could mean that it’s lower in the next period as a result of that.

Daniel Amir - Lazard Capital Markets

Got you. Okay. Thanks.

Operator

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

Jeff Meuler - Robert W. Baird

Let me jump on. The client that you referenced that was of size, but did not renew at the client discretion was that during Q3 the one that occurred during 2013?

John Amster

It’s probably best to not talk about the period where it happens, but I think what we wanted to make sure people understood was that when we leave this year, they’ll just have been one of them over the course of this year. And hopefully the fact that would give you a sense of difference, three of them tells you that, in the company’s history tells you that this is the exception and not the rule.

Jeff Meuler - Robert W. Baird

Okay. And then just, it sounds like you’re not overly concerned on the three net debt that number this period and are attributing it to just kind of normal quarterly volatility. I guess just any comments on how the pipeline looking for perspective new adds?

Ned Segal

Sure. We feel good about the pipeline. We feel good about a lot of the different activities that are going on in the business that we think can lead us to achieve the goals that we want to achieve for growth going forward. So the really important thing I will continue to focus on is that are the numbers on what we're delivering for our clients. And we look at that coupled with the market opportunity and we think we can deliver that service for a much broader group of companies and that’s where we're focused on.

Jeff Meuler - Robert W. Baird

Okay. Thank you.

Ned Segal

Thanks.

Operator

Thank you. There are no further questions at this time. I’d like to turn the call over to John Amster for closing remarks.

John Amster

Thank you, all for joining us. We look forward to talking to you in three months.

Ned Segal

Thanks everyone.

Operator

Ladies and gentlemen, this concludes the RPX Corporation third quarter 2013 earnings conference call. We thank you for your participation. And at this time, you may now disconnect.

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