RPX's (RPXC) CEO John Amster on Q4 2015 Results - Earnings Call Transcript

| About: RPX Corporation (RPXC)
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RPX Corp (NASDAQ:RPXC) Q4 2015 Results Earnings Conference Call February 9, 2016 5:00 PM ET


JoAnn Horne - Investor Relations, Partner and Co-Founder of Market Street Partners

John Amster - President, Chief Executive Officer, Director

Bob Heath - Chief Financial Officer, Senior Vice President of Finance, Treasurer

Trevor Campion - Chief Executive Officer of Inventus


Jeff Meuler - Baird

Timothy Arcuri - Cowen and Company

Matthew Galinko - Sidoti


Good day and welcome to the RPX Q4 2015 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. JoAnn Horne. Please go ahead, ma'am.

JoAnn Horne

Thank you, operator. Welcome to RPX Corp's fourth quarter and full year 2015 earnings conference call. To discuss the results today are John Amster, Chief Executive Officer of RPX and Bob Heath, Chief Financial Officer. The agenda for today's call includes commentary from John, followed by a detailed review of the fourth quarter financial results and 2016 guidance by Bob and then we will open the call up for Q&A. Joining the call for Q&A will be Trevor Campion, CEO of Inventus.

This afternoon, RPX issued a press release announcing its fourth quarter and full year 2015 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 the 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 discussed today available on the IR site.

I would like to remind everyone that today's discussion will include forward-looking statements that are not historical facts but are based on the company's current expectations and beliefs. These forward-looking statements include, but are not limited to, expectations regarding the growth of the company's business and the business outlook for the year. The company'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 will be discussed during the call. Reconciliations to the most directly comparable GAAP financial measures are included in the table attached to the earnings release and on the website.

And with that, I will turn the call over to John.

John Amster

Thanks, JoAnn. It was an unusually eventful full year at RPX. So I want to provide a quick recap of Q4 and 2015 and then offer some context for the year ahead before Bob runs through the numbers.

Fourth quarter subscription revenue grew 6.5% and total revenues 7.5% to $72.8 million. Non-GAAP net income in the quarter was $11.7 million or $0.21 per diluted share. And despite some headwinds from tech mergers and in the patent market, full year revenue was up 12.6% to $291.9 million and non-GAAP net income was $54.7 million or $0.99 per diluted share.

We added 10 net new clients in Q4 and ended 2015 with 255 clients, 89 of which are insurance policyholders. We also retained a renewal rate above 90% in Q4. We are especially pleased to have done so in this environment and feel that it demonstrates that our clients recognize the value we provide and understand that there is still tens of thousands of patents issuing every year that pose risk.

In addition to renewing our core network, we also remain committed to steadily expanding our client base and we have made progress including the recent addition of our second automotive client. This is, as we had expected, about a year after we landed our first large auto industry client. We hope to continue building further on our presence in this sector.

I think it is worth noting for a couple of reasons. One, we are pleased that the dynamics we have historically seen in other verticals is now playing out in the automotive sector. And two, it underscores an important dynamic in our business. Now while NPE risk has continued and will continue to remain a multibillion dollar problem for the thousands of companies that sell these technology, it also ebbs and flows irregularly. In other words, while the market research still needs our tech solutions and is still as accurate as ever, the actual dynamic of our growth is not a steady upward increase.

Nonetheless, over the long term, we believe demand for our solutions will continue to rise, especially as more companies experience NPE litigation more consistently and painfully. And as those companies reach an inflection point, where that pain pushes them to act, RPX is where they will turn to help reduce the risk and cost. Some of the developments in 2015 support our optimism.

For example, on this call year ago, we were talking at length about the Rockstar transaction that we hade recently completed. It was a large deal, nearly $1 billion in licensing value with more than three dozen participating companies. No one else could have done it.

And at the end of the year, we played the same role in a smaller but similarly complex syndicate when we organize more than 20 companies in a deal worth more than $100 million to license the patents in the Round Rock portfolio. We said many times that we intend to build RPX into a patent clearinghouse that can eliminate the wasteful legal costs of licensing patents. Well, at this point, we have already become the de facto clearinghouse.

We also saw steady progress during the year for our insurance offering. We ended 2015, 11 policy short of our goal of 100, but we quickly met and surpassed that goal early in the new year with a single sale of our emerging risk product into a private equity portfolio. We also continued to expand our channel presence and now have brokers in 10 territories.

So we feel we ended 2015 with our core business resting on a very strong foundation. At the same time, as we have mentioned on many previous occasions, this strong market position has meant that our client and revenue growth rate could slow for a period of time and that is what we are currently predicting for 2016. The strength of our solution meant we quickly attracted almost all of the company's most deeply affected by NPE risk. Now the growth rate of our network is driven by the increase of new companies being seriously affected by NPE litigation.

Our challenge here has been to position the company for new growth in a way that would leverage our skill set and client network. We wanted to find a leader in a related growing market selling to corporate legal departments and with skills that would complement our own. To understand the process we went through, I think it's important to recognize that at RPX we don't see our core skill as patent risk management. In a broader sense, our core competency is reducing the costs associated with legal functions using data intelligence and a market oriented approach to change the way legal departments execute certain activities and generate significant cost savings.

We first basically applied this approach with patent licensing. We have been saying for eight years that NPE problem was not at heart a legal problem, it's actually a business problem, licensing exercise. RPX created a way for legal departments to execute these licenses without costly litigation and it clearly works.

We believe that there are many other areas of corporate legal spend, which is more than $100 billion every year where our approach could generate similar cost savings. So we looked for businesses that were saving corporate legal department's money and developing keep relationships with clients and we also looked for sectors and companies with strong technology offerings because we believe that RPX's data and market expertise would be even more effective for clients if we had a stronger technology foundation.

What we found is that there is one area of legal activity where technology and automation has begun to save money by reducing the need for human legal expertise. That area is discovery services. Legal discovery has traditionally been done in a fairly manual fashion with the accumulation of documents on computer disk and an assessment and tagging of each document by a human being. And every time a company underwent discovery for pending litigation, it started the process anew largely duplicating previous efforts.

As discovery became an increasingly electronic process, we had vendors that developed technology tools to streamline data collection and simplify how lawyers could access documents. But the first users to adopt these tools were law firms during the document reviews and they didn't have much impetus to leverage these tools for greater efficiency.

It was the second wave of eDiscovery tools and services that really began revolutionizing the way documents were collected, tagged and prepared for review. That's because the primary customers for these tools weren't law firms, they were the companies themselves and they were looking for ways to get more control of the process and reduce the associated costs.

Inventus was part of the second wave and it was clear to us that it was the most attractive acquisition candidate. It was a company that was focused on developing deep trusted relationships and the one most aggressively using technology to reduce waste, improve efficiency and create a competitive advantage. Inventus also shared our vision of leveraging its scale at collecting, securing and searching large amounts of unstructured data and developing proactive ways to save money beyond discovery in the context of litigations or investigations.

We will go into more detail at the Investor Day about how Inventus' technology makes the eDiscovery process simpler and more efficient for its clients. But the headline is that Inventus is introduced initiatives that are making its client engagements longer-term and its model look more like repeatable subscription revenue.

What I want to stress now is just how attractive and how complementary we found the company's advanced technology skills to be. That's important because for all our expertise with data and analysis, RPX is still primarily differentiated by its transactional expertise. We know how to get multiple users to collaborate and share cost. We know how to price and negotiate. We know how to organize large acquisitions. We know how to use the market information that results from our activities to underwrite risk for companies.

That said, we are still not a deeply technology-based company and we know that expanding our technology capabilities will be necessary to more fully leverage the power of big data software analytics to the corporate legal market. Inventus helps us make that step. They have a deep understanding of search and machine learning technologies. They know how to design automation tools and the tech environments in which those tools need to operate and they have long experience housing and managing mission-critical data for their clients.

We see these as complementary skills and in the long term, we think our market-driven transactional expertise coupled with Inventus' technology driven approach can deliver a variety of new services to save legal department's money. That's the long-term vision for our combined companies will expand our solution set and the legal sectors we can serve.

Meanwhile, in the short-term, we think Inventus represents an excellent growth investment. It serves market with $10 billion of annual nondiscretionary spend and it has more than thousand clients. The company produced adjusted EBITDA of $18.3 million last year. So they fit our model of strong cash generation. Inventus is also a proven aggregator in a very fragmented market making two successful acquisitions last year and those acquisitions were in Europe where the eDiscovery market is growing at more than 15% a year.

It's worth noting that the company also focused its automation solutions on the higher margin functions in eDiscovery and that its client revenue base is largely corporate customers. Also Inventus and RPX have very little client overlap. Each company already has deep and trusted relationships. So there is significant opportunity to cross sell our respective services into new corporate legal departments. In fact, this has already begun to happen. Lastly, the technology Inventus has will immediately enhance the technology and data user experience for RPX clients.

Last but perhaps most important, Inventus reflects the same core operating tenants RPX has had since inception. They have a highly efficient cash generating business with an emphasis on long-term customer relationships. Bob will offer more detail on the EBITDA metric we will be providing that illustrates our strong combined cash generation.

I could go on, but I will stop here and save the rest of the adventure story for Investor Day. Suffice it to say, we believe we have made an acquisition that is an ideal complement to RPX's existing business and skill set.

That will do it for me. Here is Bob with the details.

Bob Heath

Thanks John. As JoAnn noted, there is a slide deck on our Investor Relations site, which correspond to today's quarterly financial discussion. You will also find a new Investor Relations deck that provides an overview of RPX following the acquisition of Inventus last month.

As usual, I am going to focus my discussion on non-GAAP metrics, which exclude stock-based compensation and amortization of acquired intangibles other than patents and with regard to certain securities we acquired as part of the Rockstar transaction we exclude certain non-cash items that are delineated in the press release. In each case, we adjust 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.

Echoing John's comments, we had a strong 2015 and we are pleased with our progress in many areas of the business. In the fourth quarter, subscription revenue was $67.7 million, a 7% increase over $63.5 million in the year ago period. For fiscal year 2015, subscription revenue totaled $269.7 million, up 7% compared to $251.4 million in fiscal 2014.

During the fourth quarter, total revenue was $72.8 million, an 8% increase over the last year's Q4 revenue of $67.7 million. For the full year, total revenue was $291.9 million, up 13% compared to $259.3 million for the full year 2014.

We added 10 net new clients to the RPX network this quarter ending the year with 255 clients. We added 51 net clients in 2015 and ended the year with 89 insurance policyholders, nearly doubling our insurance clients during the year.

Today, we offer five types of insurance policies, including some targeting early-stage companies with relatively low risk and commensurately lower premiums. While these smaller clients have a relatively small impact on current revenue, offering them insurance expands the base of companies who see RPX as their primary means for dealing with patent risk.

Equally important, noting our presence with these companies fixed the strategy that John discussed. As we expand our offering and provide new ways for corporate legal departments to save money, we want to serve a broad network of clients to which we can sell our new products and services.

Fee related revenue contributed $5.1 million in the fourth quarter and $22.2 million to our total revenue for the full year. Fourth quarter fee revenue reflects the Round Rock syndicated licensing transaction which John discussed a moment ago. When we provided Q4 guidance in October, we included no fee revenue in that guidance as it was unclear at that time, whether Round Rock would close in the fourth quarter. This is a useful reminder that the timing of these larger deals is often uncertain even though our pipeline supports our confidence in the syndicated licensing model.

Moving down to P&L, non-GAAP cost of revenue which is primarily the amortization of our patent assets was $39.4 million in Q4 of 2015 compared to $33.5 million in the fourth quarter of 2014. The patent assets acquired during the quarter will be amortized over an average period of about 42 months. Non-GAAP cost of revenue for the full year was $148.7 million compared to $124.2 million in 2014.

We completed 13 acquisitions of patent assets during the quarter. The gross patent spend in Q4 was $137.7 million, while our net patent spend was $50.4 million. For full year 2015, net patent spend was $160.7 million compared to $136.5 million in 2014. While for full-year 2015 gross patent acquisition patent spend was $1.1 billion compared to $159.2 million in 2014, reflecting the impact of the Rockstar and Round Rock syndicated transaction.

Our non-GAAP SG&A expenses were $15.3 million in Q4 of 2015 compared to $13.3 million in the year ago period. Non-GAAP SG&A expenses for the fourth quarter include about $1.5 million in one-time expenses related to the acquisition of Inventus. For full-year of 2015, non-GAAP SG&A expenses were $57.9 million compared to $52.4 million in full year of 2014.

We added 2015 with 161 full-time employees, compared to 152 at the end of 2014. We expect our headcount will roughly double this year with the acquisition of Inventus, though we expect headcount in the patent risk management business to remain generally flat for the year.

Non-GAAP net income for the fourth quarter was $11.7 million or $0.21 per diluted share. This compares to $12.6 million or $0.23 per diluted share in the fourth quarter of 2014. Non-GAAP net income for full year 2015 was $54.7 million or $0.99 per diluted share, compared to $52.6 million or $0.96 per diluted share for the full year of 2014.

As John mentioned, we ended the quarter with our renewal rates above 90% as it has been since inception. In fact, the renewal rate as we calculated has harbored right about 90% for the last few years and it would be a few points higher excluding the impact of M&A.

Turning to the balance sheet. We ended 2015 with $326 million in cash, cash equivalents and short-term investments. Note that the Inventus transaction closed on January 22, so it's impact on cash is not reflected in the year-end cash balance. Going forward, we expect our balance sheet to reflect the continuing strong cash flow of our combined businesses. And as we disclosed last December, we are also pursuing ways to lower our cost of capital and establish additional sources of liquidity.

Our deferred revenue balance at the end of the fourth quarter with $115.7 million compared to $136.2 million a year ago and $117.4 million in Q3. The deferred revenue balance is seasonally lower than usual for the fourth quarter due to a handful of renewals that normally would occur in Q4 or were actually invoiced early in the first quarter of 2016.

During Q4, we purchased 1.3 million shares of our stock for $16.8 million at an average price of $12.56 per share. For the full year of 2015, we purchased 2 million shares for $26.2 million at an average price of $13.13 per share. This detail is included in the investor deck we just posted on our website and we have also included a slide in the deck with unaudited pro forma financial information on Inventus' 2015 results.

Now turning to guidance. With the acquisition of Inventus, we are adjusting slightly the guidance we provide. For revenue, we are providing annual guidance for three revenue lines. First, subscription revenue, which includes both membership and insurance revenue within the traditional RPX patent business. second, Inventus' discovery services revenue. And finally, fee related revenue which we breakout separately since the timing of this revenue is often uncertain.

On a quarterly basis, we will provide guidance for combined subscription and discovery management revenue with fee related revenue broken out separately. We are also providing quarterly EBITDA guidance on the combined company and full year EBITDA guidance for the patent risk management and discovery services business. We believe that EBITDA minus our net spend on patents is the best measure of pretax cash flow for the combined businesses.

So for fiscal year 2016, we are providing the following outlook on revenue, which includes Inventus from January 22. Subscription revenue of $265 million to $275 million, roughly flat with 2015, discovery services revenue of $54 million to $57 million and fee related revenue of $5 million to $15 million, yielding total revenue of $324 million to $347 million.

We are guiding to non-GAAP cost of revenue of $188 million to $194 million. Non-GAAP SG&A expense of $77 million to $82 million which includes approximately $3 million of nonrecurring integration cost associated with the Inventus acquisition. A non-GAAP net income of $39 million to $46 million, impacted largely by the increase in the amortization of last year.

EBITDA on the RPX patent risk management business for fiscal 2016 is expected to be between $202 million and $216 million and discovery services EBITDA is expected to be from $18 million to $20 million. Our guidance for the combined companies EBITDA in 2016 is therefore $220 million to $236 million.

Net patent spend for 2016 is expected to be around the $130 million. So EBITDA less net patent spend for 2016 is expected to be $90 million to 4106 million.

We estimate 53 million diluted shares outstanding on a pro forma weighted average basis for the year, including the impact of repurchase activity through February 5 and estimating the dilutive impact of restricted stock units to be issued during fiscal 2016. In this estimate, we make no assumptions about share repurchase activity through the remainder of this quarter or the full year.

In light of the Inventus acquisition, which will add meaningful acquisition related amortization expense to our GAAP income statement, I would like to spend a moment on 2016 amortization expense. In today's press release, we have included a table estimating fiscal 2016 amortization. In 2016, we will realize amortization expense of $136 million related to patents acquired by RPX through December 2015.

In addition, based on our guidance of $130 million in net patent spend for fiscal 2016, we estimate that amortization charges for patents acquired in the current year will be in the range of $20 million to $26 million. This estimate is based on assumptions that our net patent spend occurs uniformly throughout the year and that the weighted average amortization period for patent rights acquired in 2016 falls between 30 and 40 months. We remind you that the actual pattern of patent spend and the amortization periods could vary substantially from these assumptions.

Finally, we expect that acquisition related amortization expense for Inventus will be in the range $10 million to $16 million for fiscal 2016 based on our preliminary purchase price allocation.

Please remember that are non-GAAP guidance in historical measures as we provided them in the past and in this press release exclude the impact of acquisition related amortization of intangible assets.

Now on to quarterly guidance. For Q1, we expect combined subscription and discovery services revenue of $76 million to $78 million, again reflecting the inclusion of Inventus from January 22. Fee related revenue guidance for the first quarter is $1.5 million and total revenue guidance is in the range of $78 million to $80 million. First quarter non-GAAP net income is expected to be between $6 million and $7 million with 53 million diluted shares outstanding on a weighted basis. For Q1, we expect EBITDA of approximately $53 million to $54 million, again including Inventus from January 22.

And with that, I would like to open it up for questions.

JoAnn Horne

Operator, we will take questions now, please.

Question-and-Answer Session


[Operator Instructions]. We will take our first question from Jeff Meuler with Baird

Jeff Meuler

Yes. Thank you. Good afternoon. So I know there is no precise answer to this question but how do you guys think about the $130 million patent acquisition spend level I am tying it to guidance that implies at the midpoint flattish slider subscription for the legacy RPX business for 2016. So is that what you think is necessary to service and sustain this level of subscription? Do you think about their being a growth component to that? And I am trying to think how longer term, are you able to grow off at that level and get leverage? Or does it increases if you add on growth component?

John Amster

It's a great question, Jeff and one that we have been, like you said, not given a precise answer to for four or five years now. We think that is enough to continue to add clients and also maintain our client base and we have talked about this a bunch, like past investor days and things like that. If we saw a way that we could just simply budget for more and spend and it would result of growth, we would do that. But we don't see those opportunities to budget for that. We will be opportunistic. If things come up, we will be opportunistic where we see opportunities either to solidify a large amount of renewals or add clients. But we do think, based on our last couple years of experience, that $130 million-ish seems to be the appropriate level to be able to maintain our client base and continue to add clients at a level that is reasonably consistent with what we have been doing for the last couple of years.

Bob might have something to add to that.

Bob Heath

Yes. The only thing I would say, Jeff, is if you go through our investor deck or go look at the historicals, our patent spend excluding the $29 million net for Rockstar in 2015, was obviously 2013, 2014 and 2015 as we look at $127 million in 2013, $137 million in 2014 and again, excluding Rockstar about $132 million in 2015. So we have been spending at about this level. We have generated growth, albeit on a lower base, if I go back two years. So we are comfortable with that. But as John said, we will always going to be opportunistic and if we see opportunities to gain profitable growth through additional spend, we will certainly look at them just like when we did Rockstar.

Jeff Meuler

Okay. And then it looks to me like your guidance implies adjusting EBITDA margin for Inventus around 34%. I think on the Inventus acquisition call, you guys threw out a range and maybe just referring just 25% to 30%. Can you just help reconcile that? Is 34% a reasonable kind of underlying sustainable level?

John Amster

We think it's consistent with the historical pro forma for 2015 and believe it is sustainable, yes. You are right. It's a little bit higher than the wide range of guidance we gave when we announced the transaction. In part, we were being conservative at that point in time and as we have refined the numbers we have gotten a little bit more confident about it.

Jeff Meuler

Okay. And then, I guess you are saying EBITDA less patent acquisition spend is best proxy for pretax free cash flow. If I do the math on it, tax affected at 37% in the share count guidance, I get to something like a $1.06 to $1.25 per share. Is that a, Bob, reasonable free cash flow per share proxy other than I guess CapEx and walking capital factors and things like that?

Bob Heath

Yes. I think that Jeff, both RPX and Inventus have, setting aside net patent spend, have very low CapEx requirements. So again ex-patent spend, very good free cash flow conversion. As far as the working capital, we have mentioned that we do have some substantial working capital swings in our business primarily related to the changes in deferred revenue and occasionally deposits. But in my view, over the long-term reason or even over an annual cycle those working capital changes tend to net to zero. So I would agree that tax affected EBITDA minus net patent spend is the best proxy for cash flow per share.

Jeff Meuler

Okay. And then just one last for me. So, a much better job in my view of explaining Inventus and the fit through the strategic review of RPX. I don't know if this is for John or Trevor or both, just looking at an eDiscovery, can you explain your of the defensible source of competitive advantage that enables an eDiscovery business to generate good economic returns for your shareholders for a long period of time?

John Amster

Sure. So I will lead in and then I don't think it would be great if Trevor would jump in. But we obviously looked at the market pretty extensively. There is competition in the market, that's for sure, but as I mentioned in the prepared remarks, it's also an area where companies have to spend money on it. So from a long-term shareholder value perspective, we think it's, in a lot of ways, a more stable market, if you will. And we did look at a lot of other companies and we do think that the way Trevor and his team have built their offering does provide a competitive advantage.

And Trevor, I don't know if you would like to jump in and give a few examples.

Trevor Campion

Sure. Thanks John. There are a couple of different segments in the eDiscovery space. A big part of it is attorneys staffing and review and that particular faction of the business has seen some margin compression and certainly as technology continues to evolve, it has challenged some of the revenue streams associated with that service on a particular. A lot of our competitors were kind of built on those models. What Inventus, I think, has done, it's unique. We are focused exclusively on data services and analytics and the effective use of emerging technologies, which is shifting the paradigm within eDiscovery. So I think those technologies will continue to evolve and I think Inventus is really well positioned to lead the migration off of human-based manual processes and continue to take advantage of emerging technologies.

Jeff Meuler

Okay. Thank you.


[Operator Instructions]. We will go next to Timothy Arcuri with Cowen and Company.

Timothy Arcuri

Hi guys. Thanks a lot. I guess John, just first thing, you heard all the investor's position feedback on the deal and many people said you bought something that doesn't seem related to the core business right as the core business slows down. So I guess I had two questions on that. Number one, is the slowdown in the core business, is it just a temporary thing that you think as you look out to it 2017 that we should see the core business pick back up?

John Amster

I wouldn't put a time frame on it. I think the way we look at the core business is that we think that we have made a massive disruption in the patent space over the last eight years, that we are the de facto clearinghouse, that we do continue to add clients. We have now got about five fairly discreet insurance products. We are selling through the broker channels. These are things that didn't exist in the patent market a couple years ago. And we think we are well positioned to keep doing that.

What we have been saying for years, we add a similar, the cadence of new client adds has been really similar for the last couple of years and that's going to mean declining revenue growth on a bigger base. So we are not surprised by that. But in terms of when insurance will be a meaningful contributor on the revenue side, we just don't know. We think we are doing all the right things from an execution standpoint and we just need to wait and play it out.

And I think Inventus and the process that we went through to find Inventus and then decide that it was the right strategic move for us, think we saw a big strategic opportunity and as we did explore, as you would hope that we would, exploring growth opportunities, what we found is that there really has been very busy little disruption in the way that RPX has disrupted the patent space, there has been very little disruption in the broader legal market. And we think that there are a lot of areas that are ripe for that.

And combining the technology expertise, we think, is important for helping us bring our market-based solutions to some other market areas, but also really importantly, as we look at the discovery services market, that really is the one area where technology is being used and AI is being used, if you will, to avoid the need for human legal work.

And so we do think the combination of those two things is pretty powerful. But it's not because we don't think that the patent clearinghouse vision isn't still well. In fact, it is.

Timothy Arcuri

Okay. And then John, I guess so if I look at the core RPX sub revenue flat this year versus last year and I look at the new revenue from Inventus up roughly $3 million at the midpoint year-over-year, does that include much cross-selling? So I guess my question is where is the revenue growth going to come from going forward? Because if insurance is going to add revenue at a much smaller chunks and if we are getting $3 million year-over-year out of the Inventus piece, I guess I am just trying to figure out does that include cross-selling? Or is cross-selling going to start to add revenue in a much more chunkier way on the Inventus side?

Bob Heath

Tim, before John answers, let me clarify something on Inventus. I think you are comparing $52.2 million for 2015, which is the pro forma for full year 2015 to the guidance we provided for 2016, which includes Inventus for only since January 22. So you are missing 22 days or about 6% in that like-for-like price comparison. So the midpoint growth is higher by about $2.5 million to $3 million from how you are calculating it.

John Amster

And to more specifically answer the cross-selling opportunities, I would say, are not modeled in. The key to successfully bringing these two businesses together is to make sure that they both focus on what they need to do. We already do have some integration steps underway in particular on the sales side. We hope that is helpful for both businesses. But it's not something that we modeled in at this point.

Timothy Arcuri

Okay. And then just last thing Bob, I am just trying to figure out what the SG&A at or is for the Inventus piece? It seems like the SG&A for your core business was about flat this year. So the new business adds about $20 million in SG&A. Is that about right?

Bob Heath

Ours is flattish. I won't say perfectly flat. There are some incremental costs that related to including Inventus as a public reporting company, related to stocks and audit and probably some in personnel and in finance and HR. And we also have about $3 million of nonrecurring integration related SGA expense in the full-year forecasts. So if you account for that $3 million and think about flattish, you are not too far off.

Timothy Arcuri

Okay guys. Thanks so much.

John Amster

Thank you.


We will go next to Matthew Galinko with Sidoti.

Matthew Galinko

Hi guys. Thanks for taking my questions. First thing I guess, can you talk about how you see the pipeline in 2016 for fee related revenue?

John Amster

Just the fee related?

Matthew Galinko


John Amster

Yes. I would say it's basically equally strong as it has been for years. It's a pretty consistent pipeline. As you have heard us say over and over again, it's impossible to predict when something will go from being something that we constantly monitor and keep our clients informed about being something that's really actionable. And that has been the pattern is that, we do monitor things and talk to clients and that there is usually some catalyst that all of a sudden turns it into an actionable deal. But the pipeline remains very strong.

Matthew Galinko

Okay. And then, I don't think I heard any updates in your script on some of the initiatives you talked about in the past such as above rate card renewals or trying to commit part of your patent spend proactive as opposed to be reactive as you have been in the past. So can you shed any light on where you are at with this initiative?

John Amster

Matt, I am sorry. Can you repeat the first part of that question? You were muffled there.

Matthew Galinko

Very sorry. Just curious on your above rate card renewals, if that's still something that you are working on? Are you seeing any progress with that or any setback, could you share with us?

John Amster

Yes. So it's a good question. We have not have additional progress on the premium discussions that we have had. We still do think that there are clients that again, as it relates to the broader market waiting for prospects to ripen as they fish more NPE litigation or face a particularly patent problem. We believe that they will be catalyzed into joining RPX. We think there is a similar group of companies, the premium discussions where the patent reform environment has definitely created a headwind in some of those discussions.

When you look at the numbers for last year, litigation campaign were up last year over the prior couple of years .We are seeing a lot of activity. There has been recent headlines about some big verdicts. Our view has always been, you can't look at any particular quarter or couple of quarters that potential is going to swing , The more things change the more they stay the same. And we have always been facing some headwinds. We are optimistic that those headwinds are going, those wings are going to change directions and those conversations will come back. But certainly when we give guidance, that's relatively flat, we are not expecting any big clients to renew above the rate card.

Matthew Galinko

Got it. And can you share any light on how your clients see the NPE risk on a long-term basis? Do they still see the ebb and flow of NPE activity? Or do they find things that the patent reform we have seen in recent years as part of a death toll for the NPE industry? How do your clients look at that?

John Amster

It's a really, really great question, but I think it's definitely company specific. And I would say, again high level in general the companies that have had the most experience with the problem over the longest term, they would share our view, which is, hey, things might be better at the moment, there might be some really favorable licensee law out there or alleged infringer law out there, but that can change in a single decision and have a big impact. And so I think the people that have been involved in the market for the longest have that perspective and really value the services that we provide.

Those companies tend to be the ones paying us the most too. Companies that are newer and maybe if you were a pure software company or an e-commerce company, that has their first NPE a month before Alice and you haven't had one since, you are going to share a different view and I think you are going to see that the long-term trends will end up not being in your favor. Because again, there is lots of patents that issue every year and it's hard to imagine that there isn't the need for some system to better be able to license all of those patents and that's what results in litigation.

And so we think that's going to be a consistent trend until our clearinghouse vision is fully realized, right, when we were able to have those thousands of companies out there that don't pay anything for patents if we can get a good chunk of them paying us through insurance premiums, then that just solidifies our position as the patent clearinghouse. So we do think that for the most part, our existing clients do appreciate what we do but again it depends company-by-company.

Matthew Galinko

Got it. And then maybe one more, clearly you have some work do on your current acquisition, which is fairly largely, but valuations are causing are compressing to a certain extent in the market. Do you see other lines of the business that you can see adding at this point? Or is there a valuation threshold where you can see making move sooner than later?

John Amster

So I would say that the number one focus for RPX right now is to continue to execute on the RPX patent business and to continue to execute on the Inventus discovery services business. We think despite our guidance of flattish this year, we still believe in the long-term vision and we have to execute towards that. And based on the guidance we just gave you, you can see that we do think that the Inventus business has really good growth prospects for this year.

Within the context of the budget that we have for the year and the guidance that we give in terms of the expense side, we do have resources to think about what the next set of products and services could potentially be that results from this combination of RPX's market-based approach and Inventus' ability to enhance our technology expertise. So we do have what I would call, a high level set of ideas that we have budget to work on and the timing of when we have something in the market, I couldn't tell you.

But hopefully, we will see some short-term wins from the acquisition on both sides. In particular, we do think that as I mentioned in the prepared remarks, for example, that we would have some enhancements to the RPX client portal experience as a result of some of the technology that Inventus has. That's just one example. But again the primary focus is, keep the businesses running as the way they have been for the last couple of years, because that's the key to making sure that this strategy is successful.

Matthew Galinko

Great. Thank you.

John Amster

Thank you.


That concludes our question-and-answer session. At this time, I turn the call back over to our speakers for any additional or closing comments.

A -John Amster

Thank you very much for joining the call. We look forward to speaking to you next quarter.


That does conclude our conference. We thank you for your participation.

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