Earlier today IP legal group Xenith IP Group Ltd (ASX: XIP) announced its results for 2016. The shares were up 1.4% in early afternoon trading. Here are some of the key takeaways:

  • Pro forma revenue of $32.2 million, up 19% on 2015 and 8% on prospectus forecast
  • Pro forma net profit after tax (NPAT) of $6 million, up 71% on 2015 and 28% on prospectus forecast
  • Pro forma earnings-per-share (EPS) of 18.2 cents, up 71% on 2015 and 27% on prospectus forecast
  • Final fully franked dividend of 7 cents
  • Net cash position of $0.9 million

These are impressive results but they were assisted by the company’s switch to billing in US dollars and subsequent favourable currency moves. Prospectus forecasts assumed an average Australian dollar to US dollar exchange rate of 0.76 for the year but actual rates came in at 0.73.

It is hard to know how much of Xenith’s strong performance is driven by currency given the company does not split out these effects in its results. This is in contrast to larger peer IPH Ltd (ASX: IPH) which reported flat revenue and an 11% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) in its Australian business before currency impacts.

Xenith recorded EBITDA margins of 33.6% in 2016, up from 24.2% in the prior year which the company said demonstrated “the significant operating leverage in the business”. IPH’s Australian arm is almost twice the size of Xenith and recorded EBITDA margins of 45.4% in 2016 supporting the view that there are significant scale advantages in this type of business. Perhaps this also indicates that Xenith has more scope to improve margins than IPH as it grows in size.

Xenith is likely to deliver continued growth in 2017 due to the acquisition of Watermark Group announced on 23 August 2016. Xenith will pay $19.5 million for the business which it expects to generate sustainable EBITDA of $2.5 million. Around half of the consideration will be paid in cash with the rest paid in equity.

An attractive feature of IP firms is that they earn long-term recurring fees throughout patent and trade mark lifetimes which can be many years. They also carry little work in progress on their balance sheets and so cash flows are healthy. Xenith’s operating cash flows for 2016 were $6.6 million representing 86% of EBITDA.

Xenith is actively targeting Chinese clients filing patents under the Patent Cooperation Treaty (PCT). Such applications have grown 21.2% per year on a compound basis since 2001 and Xenith has opened a China desk in its Sydney office staffed by Mandarin speaking Chinese nationals.

As technology continues to pervade our lives, the value of IP continues to rise and demand for IP protection services is likely to follow on. The trend is more pronounced in developing countries and so I prefer IPH as an investment to Xenith due to its greater exposure to South East Asia.

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Motley Fool contributor Matt Brazier owns shares of IPH Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.