Updated Vringo Analysis - I/P Engine v Google

Vringo Inc (VRNG) received an order on Friday afternoon in their IP Engine v Google case.

http://ia600702.us.archive.org/11/items/gov.uscourts.vaed.271949/gov.uscourts.vaed.271949.1081.0.pdf

On 11/6/2012 a jury reached a verdict finding the defendants infringed IP Engine's patents and awarded $30M in damages.  Vringo asked for interest and post verdict infringement.  The court ordered that IP Engine is entitled to damages for the period of 10/1/2012 - 11/20/2012, the period where the damage calculations at trial stopped and judgment was entered by the court.  The order provided new information that provides further clarity on the investment thesis for Vringo in their case against Google.

Honorable Judge Jackson ordered that the revenue base would continue to be 20.9%, which Vringo asked for in their motions.  Google argued for 2.8%, which was denied.  The total ongoing royalty for 10/1/2012-11/20/2012 is $16.1M.  The total for all defendants and interest was $17.3M.

Vringo has also moved for ongoing royalties for the life of the patents, through the end of 2016.  Google has proposed a workaround that they claim no longer infringes.  The court will decide if the workaround is colorably different or not.  The proposed workaround date is 5/10/2013 leaving another 6 months of ongoing revenue owed to Vringo.  I used the $441,308 per day number as it is a reasonable estimate for the future.  The numbers can be backed into as follows (Credit Caution1st from vringo.freeforums.net):

$75,463,706 Pre-Work Around Revenue (3.5% rate) Revenue per day works out to $441,308
$17,321,198 Supplemental + Interest 10/1/12-11/20/12
$30,496,155 Jury Award
$123,281,059 Total Through 5/10/2013
 
I fully expect the rate to be increased based, but will play it conservative as a base number.  Vringo has asked for 7%, but I see it somewhere at a midpoint (5.5-5.75%), which would be a fantastic number.  To play it safe I will continue to use the 3.5% number for the potential ongoing royalties owed to Vringo over the life of the patents through 4/4/2016.  The numbers will be able to be revised upward as further motions are ruled on and more clarity is provided.  The model assumes zero revenue growth or decline from Google's US advertising operations.  The model also does not account for continued interest owed, other defendants, or the Microsoft licensing agreement:

The combined numbers represent roughly $600M in ongoing royalties and back damages that could be owed to Vringo.  Worst case scenario, Google does have a non-infringing workaround and will not pay ongoing royalties after 5/10/2013.  Vringo would stand to collect the $123M outlined above.

The last topic of interest was the language Honorable Judge Jackson used related to Vringo proving the royalty base (20.9%) in court utilizing their experts, which can be found on pages 2 and 3 of the order.  It is my opinion that Judge Jackson realizes that the jury made a calculation error and is signalling the Appeals Court that a change should possibly made and Vringo would receive roughly $115M in additional past damages.

The order Friday removed a substantial amount of risk and doubt with the investment as it concerns the I/P Engine v Google case.  Management and their experts have done a fantastic job guiding the company through each step of the legal system this far.  It is my opinion the investment is substantially undervalued compared to the likely revenue streams that Vringo will secure in the future.  As each event passes, further negotiating leverage is obtained that will eventually culminate in a patent settlement and license.  A reasonable value is over $5, where the investment traded before the final jury verdict.

Disclosure: I am long VRNG.  The information above is not meant to be construed as investing advice.  I did not receive any compensation preparing this blog post.  If there are factual errors please email iphawk@outlook.com.