9 Jan 2014

Limited Downside, Major Upside - Various Scenario Valuations of Vringo's Case Against Google



The intent of this article is to mainly run through some of the possible valuations and scenarios that seem evident for Vringo’s approaching expected final verdict against Google on January 22, 2014. It is also to hopefully help provide an idea of what sort of returns could be expected from specifically just the Google court case. This analysis does not include the cases against ZTE, ASUS or any other and those would only add to the total potential value.

I would like to point out that I am not a professional and do not currently hold any designations in the financial industry. I do not claim to understand the situation in its entirety and have no experience in the NPE or Non-Performing Enterprise segment or the legal system. I am merely a physics turned finance student interested in patenting companies and an individual investor with limited experience. With that being said, I have tried to be as diligent as possible and I may be wrong in some of my assumptions or analysis, of which I hope others will kindly point out if any. I will also try to state most of the important assumptions needed to understand where I am coming from.

I will go through the critical assumptions in my analysis, followed by a scenario summary. I will then give a valuations matrix summary on the 9 different most probable outcomes to see what 2 different associated valuations may be in each. Please be advised that I do not address the risk of the company or situations presented and none of the information is to be misconstrued as recommendations despite giving my own opinion at the end that the stock seems to be substantially undervalued and seems to have limited downside. All information was solely presented for discussion and informational basis. Always use your own due diligence in all research and investing matters.


Assumptions used in analysis:

Adword% of Rev
97.00%
Avg US AdWord %
45.00%
Rev base %
20.90%
RR 1
3.50%
Total % of Rev
0.32%
RR 2
5.25%
Total % of Rev
0.48%
RR 3
7.00%
Total % of Rev
0.64%

Scenarios Payout Summary

1st Scenario – Workaround is found valid
This seems unlikely to me considering the rhetoric on the matter and the opinions given by other knowledgeable authors here on SA. It is still possible that the judge finds the Workaround (WA) to be valid, thus ending any royalties on May 10, 2013. This would mean that the royalties should be paid as follows.


2nd Scenario – WA found invalid
This scenario is basically to see what the valuation would be like given that the original workaround is invalid, but Google may come out with another workaround right away. This would leave the RR payments to be calculated from November 20, 2012 to January 1, 2014.


3rd Scenario – WA found invalid and Google pays until patent expiry
This scenario uses the present value of the projected Google revenue at their average revenue since infringement and a [0.41%,4] or [2%,1] discount rate. This scenario also uses the same assumptions as Scenario 2.




Valuation Summary
VRNG Current Market Info
Price
3.11
Market Cap. ($mil)
$262,470,000
Shs Out
84,125,738
Diluted Shares Out
86,102,000
Revenue
$370,000
Price to Rev
716.21
RevPS
0.01482
P/S
212.56
EV
$221,350,000
Price to EV
1.1972
BV
$130,090,000
BVPS
1.5460
Price to BVPS
2.0180

Since a portion of the expected revenue generation from patents in this case is probably already baked into the price, as can be seen from their incredibly high P/S or P/E ratio, I tried to flatten out the huge potential payouts by using the average Rev/yr for the infringing period to see how the price would react to the favourable outcomes. Using the above information and assumptions given, I built a company comparison table given here.

In the comparison, I disregarded the few outlier values, namely those from VHC and WDDD, to normalize the values calculated. For the valuation I decided to look at the EV/S multiple because of the different capital structures of the comparable companies and the P/S multiple method. It should be noted though that EV actually becomes negative for VRNG in many of the more lucrative outcomes and I used the current EV to potential average revenues generated per year for the infringing periods as a basis. Using the comparison table I found the mean or average of the P/S and EV/S ratios and used those to calculate the multiples and target prices given below in the matrix. If I had more time, I would have liked to see some results from other valuation types. If you think there are other valuations you feel are more appropriate, I invite you to write an article too.

Conclusion

It seems from the abundant articles of varying opinion and the number of people shorting the stock, that it is a highly contested one. Though if you have the conviction to go long on this one, it seems from the matrix above that even at what I believe to be the ‘worst’ outcome, there is limited risk at current prices.


Appendix:

History and Timeline of Major Filings

Sept 15, 2011 - I/P Engine filed a complaint against AOL, GOOG et al. for infringements on 2 of its patents, ‘420’ and ‘664’. Patents filed after June 8, 1995, expire 20 years from the earliest filing date. This make the expiration of the patents Apr 4, 1996. However, Patent 664 also has an extension under 35 U.S.C. 154(b) by 467 days, extending the expiry to July 15, 2017. I have however used the expiry of both patents as the April 4, 2016 date in my analysis.

November 6, 2012 - The jury reached a verdict finding that the Defendants had infringed,
and awarded $30,496,155 for past infringements, which did not include interest, and also awarded a running Royalty Rate (RR) of 3.5%.

November 20, 2012 - The formal judgment of the Court was entered into the record

May 10, 2013  - Google allegedly found a proposed Workaround, referred to as the ‘New AdWords’ 5 months and 21 days after the November 20, 2012 Judgement day.

August 14, 2013 – Judge Jackson (JJ) states the Workaround is not colourably different but up to VRNG to prove on an ongoing basis.

Jan 3. 2014 - Judge Jackson provides a firming statement that RR is 3.5% on revenue base of 20.9% should be upheld, but also finding pre-judgement interest of $536,707, and supplementary damages of $16,784,491 without supplementary interest should be awarded. He also defers post-judgement interest and supplementary damages interest and asks for a recalculation.

Various Major News PACER documents

https://drive.google.com/file/d/0B2RRPwEO9xz4LWFXbS1fMGVlVHM/edit?usp=sharing
https://drive.google.com/file/d/0B2RRPwEO9xz4MXY1Z3lTbDQtWWs/edit?usp=sharing
https://drive.google.com/file/d/0B2RRPwEO9xz4ZWt5T0FpcjVtUFk/edit?usp=sharing
https://drive.google.com/file/d/0B2RRPwEO9xz4ZXpGSWZvcElFczA/edit?usp=sharing
https://drive.google.com/file/d/0B2RRPwEO9xz4cm9naVY1WkRaSzA/edit?usp=sharing

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