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Vringo (NASDAQ:VRNG) investors are anxious to know what to expect in terms of future price-per share (PPS), and hence their return-on-investment in the short term. A recent Seeking Alpha article sort of addressed this issue, but as several people pointed out, the analysis wasn't the most thorough. Here I present a more quantitative analysis of the current and future PPS, and discuss some likely alternative scenarios going forward. I also address why the market desperately wanted a one-time, large lump sum payment instead of running royalties, irrespective of how high the running royalty rate turns out to be.

The first goal I had in mind was to understand the current price per share. Specifically, I needed to know the multiple the market is presently applying to generate the current market price of $3.57. Given that Vringo's facetones business does not generate revenue that one can consider 'material' in regards to affecting PPS, I decided to use a non-GAAP method. Specifically, I used Vringo's income from net financing activities per their 3rd Quarter 10-Q to calculate earnings per share (EPS). This amount is listed in the first table below, and this approach is used for other tech companies.

This analysis shows that the market is presently applying a multiple of 7 to VRNG on a fully diluted (worst case) basis. As you can see, a multiple of 7 on fully diluted non-GAAP earnings give us exactly the after hours price of VRNG shares on Friday, November 16th, 2012. Thus, I consider this to be an excellent basis to derive alternative scenarios for the first Quarter of 2013.

Briefly, I am not concerned about the 4th Quarter of 2012 because the company has made it clear that they don't expect the final verdict to be entered until at least the end of the year. Thus, I expect the stock to trade in a tight range until the final verdict is announced, and that is the primary concern of this analysis (i.e., where we are headed after the final verdict). In essence, VRNG is in a holding pattern until the final verdict is rendered.

Current Valuation (Non-GAAP)

Shares

Revenue Q 3

EPS

P/E

PPS

Basic

48790819

29717000

0.61

7

4.26

Fully Diluted

58227100

29717000

0.51

7

3.57

Before launching into future PPS projections, I need to address a couple of issues so readers better understand my logic going forward. Firstly, the market does not care about the cost of revenue (i.e., the contingency fees paid to Dickstein Shapiro), but only gross revenue. If you don't believe this is true, check out the financial reports of LinkIn (NYSE:LNKD), Amazon (NASDAQ:AMZN), etc, etc…). LinkedIn, for example, actually has a negative cash flow because their cost of revenue is so high from investing activities, yet the PPS only continues to go higher and higher. Secondly, if you believe the market will not apply a multiple to VRNG, then you are denying the current PPS (reality), and the history of the stock market as a whole. In fact, a multiple of 7 is only half of the historic multiple (14) of the S&P 500, and nearly 1/3 of that for most tech stocks today. I address these issues upfront because there have been a number of people of late suggesting that VRNG's cost of revenue will negatively impact PPS (it won't), and the market will not apply a multiple (it currently is and will continue to do so). So with that out of the way, here are the valuation models…

The first and most likely valuation scenario, in my opinion, is one in which Vringo recognizes the lump sum payment for past damages and a quarterly payment on the running royalties in the 1st Quarter. For the accounting pedants out there, yes, I rounded each of these figures to $31 million for a total of $62 million. So yes, this is slightly off, but the differences are immaterial to the big picture theme of this article. On a fully diluted basis, this scenario thus yields a PPS of $7.45 going forward.

Projected 1st Quarter Valuation with Past Damage and Royalty Award

Shares

Revenue Q 1

EPS

P/E

PPS

Basic

48790819

62000000

1.27

7

8.89

Fully Diluted

58227100

62000000

1.06

7

7.45

The second scenario is the most dreaded for Vringo investors, and the market is behaving like this will be the case. Under this scenario, Judge Jackson wholly denies a running royalty rate, and Vringo only receives the past damages for infringement. This leads to a PPS of $3.76 on a fully diluted basis, north of Friday's closing price however. So that's actually not that bad if you bought most of you shares at current levels.

Projected 1st Quarter Valuation with Past Damage Award but no Royalties

Shares

Revenue Q 1

EPS

P/E

PPS

Basic

48790819

31000000

0.63

7

4.44

Fully Diluted

58227100

31000000

0.53

7

3.76

The most enlightening scenario is indeed the last. Under a scenario where the parties come to a settlement, something magical happens. If Vringo gave Google (NASDAQ:GOOG) a 50% discount on the projected award of $600 million, and took a one time lump sum payment of $300 million, the PPS is projected to skyrocket to $36 per share on a fully diluted basis. Here is where it gets interesting. On July 19th, 2012, Donald Stout and H. Van Sinclair both signed a lock-up agreement to not to sell their shares until the PPS reaches a minimum of $30. I believe this lock-up agreement telegraphed Vringo's magic number for a settlement, which is $300 million. A lump sum payment is considerably more advantageous to investors and the Vringo Board of Directors in terms of PPS because it would cause the EPS to go through the roof, forcing the market to radically re-value VRNG, if only on a short-term basis. The running royalty by contrast gives VRNG a stable, yet markedly unimpressive, EPS going forward (see tables above). To reach this magic $30 per share with the running royalty in place, Vringo will have to locate yet another substantial revenue stream to boost the EPS. Perhaps ZTE is that source, but a settlement now with Google in the best interest of everyone, including Google.

Projected 1st Quarter Valuation with a 50% discounted lump sum award

Shares

Revenue Q 1

EPS

P/E

PPS

Basic

48790819

300000000

6.14

7

43.0

Fully Diluted

58227100

300000000

5.15

7

36.0

I hope this article has helped investors understand why VRNG is trading at its current PPS, and why the lump sum payment is preferable for us all.

Source: A Quantitative Valuation For Vringo