Vringo: The Next Catalyst

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Vringo expanded its litigation against Chinese telecommunication giant, ZTE. If the company is successful, according to Reuters, investors should expect $210 million in 7 years. My calculations show that if we calculate the NPV of these payments, it comes down to a per share value of approximately $1.60. The stock is trading at $3.15 and investors can expect half to that to come from the ZTE trial. The Google/AOL final verdict is also on its way and it will also act as a catalyst. Therefore, I believe Vringo has finally turned from a short term bet, to a long term investment.

Vringo

Vringo (NASDAQ: VRNG) has been a patent success story. The company won its first lawsuit against Google (NASDAQ: GOOG), AOL (NYSE: AOL) & co. last month. According to the jury, Vringo was successful in proving that defendants have engaged in infringement and that the defendants failed to prove by clear and convincing evidence that the asserted claims of the patents are invalid by anticipation. Vringo got exactly what it had hoped for in terms of future royalty but failed to get its $696 million past damages claim. The jury verdict gave the company a mere $30 million in past damages. This $30 million was divided as follows:

  1. Google: $15,800,000
  2. AOL: $7,943,000
  3. IAC: $6,650,000
  4. Gannett : $4,322
  5. Target: $98,833

As the list shows, AOL and Google were penalized the most.

The suit has been discussed extensively and I believe all aspects of the decision are already priced in. Whether the jury made a mistake in calculating past damages, the 3.5% royalty is too high or what will be the revenue base for future damage award; are all questions which cannot be answered until Judge Jackson presents his final ruling. One thing is certain, Vringo has come true on its promises and companies which Vringo sues now, will seriously consider settlement. With the credibility of successfully suing Google in the bag, Vringo can go on to further explore its patent portfolio. The next major target for Vringo is ZTE; the company has already filed multiple lawsuits against ZTE.

ZTE

ZTE (Zhongxing Telecommunication Equipment Corporation) is a Chinese multinational, involved in the manufacturing of telecommunication equipment. The company is currently the world s 5th largest telecommunication equipment manufacturer. The major products of ZTE include, wireless, optical transmission, data telecommunication gear, mobile phones, exchange, etc. The company also acts as an OEM (Original Equipment Manufacturer), manufacturing products for other retail brands. The market is expecting ZTE sales of $15 billion for 2012 and $18.1 billion for 2013.

Vringo vs ZTE

Recently, Vringo announced that it is going global with its IP enforcement efforts by suing ZTE in UK, the company has recently sued ZTE in Manheim, Germany. After its famed victory against Google and AOL, Vringo is in a better position to push companies towards settlement. It is also possible that Vringo can go as far as filing an injunction against ZTE. An injunction if successful will prohibit ZTE for length of the trail, from manufacture or sale of products under infringement consideration.

This can be used as a major tool in pushing companies towards settlement. According to Thompson Reuters, UK courts are much faster and can order an injunction within a short period of six months. This swiftness of justice is the primary reason Vringo is suing ZTE in Germany and UK. This very year, ZTE chose settle a lawsuit against Ericsson, for the mammoth amount of $646 million and an annual royalty worth a significant $194 million.

ZTE is being sued by using patents, which Vringo purchased from Nokia (NYSE: NOK). These patents are related to handsets, base stations, base station controllers, and mobile switching centers. If Vringo is successful, it can collect up to $210 million, according to Reuters. This has been calculated with a royalty rate of 1% and patent expiration period of 7 years, on $3 billion annual sales. This amount doesn't not account for the any past damages, which the court my charge to ZTE.

ZTE will also be well aware that the key Vringo executive behind this litigation is none other than David L. Cohen (Vringo's Head of Litigation, Licensing and Intellectual Property). Mr Cohen was a major force behind Nokia's successful litigation of Apple (NASDAQ: AAPL). In June, Nokia won a major patent victory over Apple, when it was able to prove that the Apple’s iPhone was infringing on Nokia’s patents. The details of this settlement have not been disclosed, but analysts estimate past damages payment to Nokia of around $300-$600 million and a substantial future royalty on iPhone sales.

Mr. Cohen’s experience in patent infringement and in-depth expertise on the patent portfolio acquired from Nokia, make Vringo’s legal team very formidable. I have calculated below, the net payment per share from the successful outcome of this Vringo vs. ZTE trail, according to estimates given by Thompson Reuters:

$(millions)

 

 

 

Expected Payment

$ 30 million for 7 years

 

 

 

RRR

14.80%

 

 

 

NPV

$125.57

 

 

 

No of Shares (million)

80

 

 

 

Payment Per Share

$1.57

 

 

 

** No of shares used for Calculation are 80 million. The RRR has been calculated using MRP (6%), RF (1.6%) and beta (2.2).

Conclusion

The next catalyst for Vringo is its case against ZTE. If Vringo wins, investors should expect the company to get payment of $210 million, which comes down to $1.57 per share. It should be noted that there will be a tax deductions. The share is trading at $3.15, which seems to a bargain price, considering Google decision on the way and ZTE cases going to trail. I believe Vringo has transformed from a one off bet, to a long term investment.


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