Seeking Alpha
Long/short equity, special situations, deep value, tech
Profile| Send Message|
( followers)

Overview

VirnetX (NYSEMKT:VHC) encountered disappointing news last week when it lost a long run patent infringement case against Cisco (NASDAQ:CSCO) in the Eastern District of Texas. VHC's the stock went down almost 27% after the news broke and down again nearly 8% the following day. Questions have surfaced asking if this event warrants a near $600 million decrease in the market capitalization of the company. It is my opinion that investors should put the event into perspective for a better view. I maintain my long position in VHC and it would benefit investors to take advantage of the low price per share. My bullish sentiment regarding VirnetX's recent events and why investors should remain long will be explained in this article.

Let's Put It All In Perspective: Investing in The Future

The outcome of the trial with Cisco does not damage the future success of VirnetX. Investors can rest assured that VirnetX can and will file post-trial motions asking the judge to overturn the jury's decision. VirnetX will also likely appeal the jury's decision.

Cisco was being sued for $258 million by VirnetX, while Cisco argued that $6 million in damages was an acceptable amount. The midpoint of these two estimates is around $125 million, making the recent market cap loss of $600 million almost five times the midpoint estimate. It is my opinion that this large drop in VirnetX's share price is unwarranted and presents a unique buying opportunity. I expect the share price to fluctuate in the near term as a result on the trial outcome, although VirnetX's future business model remains fully in tact. The outcome of the Cisco trial does not affect the state of VirnetX's patents, the confirmations by the USTPO or VirnetX's plans for Gabriel connection technology, Secure Domain Services or 4G LTE-A licensing. VirnetX is key to the future of 4G LTE-A and Cisco is a small fry in regards to VirnetX's future revenue.

If the jury found the patents to be invalid, that would be disastrous. Although the jury found the asserted claims of the '504, '211 and '135 patents valid. Litigation is the means by which VirnetX asserts its ownership over key intellectual property that other companies use freely. The downfall of having to assert ownership against infringing companies is the risks involved with litigation. VirnetX holds the keys to securing real time communications over the internet. The main focus of investing in VirnetX should be on the future of the company, plain and simple.

4G LTE-A and Some Math

The recent loss against Cisco hurts for investors in VirnetX. Investors should be reminded that the case revolved around past infringement. This case does not exclude companies from licensing with VirnetX in regards to 4G LTE-A technology in the future. VirnetX's Secure SIP technology has been adopted into 3GPP Release 10 standards, so every player in this market will eventually have to come back and license with VirnetX for 4G LTE-A or face willful infringement.

In trading it was surprising that VirnetX's stock did not trigger a halt on the way down. The quick loss in share price is unwarranted when dissecting exactly how little the loss affects the future valuation of VirnetX. Looking at the comprehensive white paper written by Justin Moreno, reducing the Cisco damages award to $0 only reduces the price per share estimate from $132 to $130.30. Making the already $12 reduction in share price ridiculous and unwarranted. This 1.3% reduction in the future share price does not warrant the recent collapse in the share price.

This small 1.3% reduction in the future share price of VirnetX demonstrates how the stock has been drastically oversold, creating a buying opportunity for long term investors. This tiny 1.3% reduction, coupled with the more important areas of VirnetX's business, proves why investors should still be long the stock. The more important areas of VirnetX's business are 4G LTE-A licensing, Gabriel Connection technology and Secure Domain Services. Furthermore, investors should also keep in mind past victories such as the huge victory against Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT)and settlements with NEC, Siemens (SI) and Astra.

The Focus Is Still Is On Apple

VirnetX's case against Apple was monumental and should not be easily forgotten. VirnetX won a $368 million dollar award against the largest technology company in the world for past infringement in November. VirnetX is also receiving more than $330,000 per day until a settlement is reached regarding an ongoing royalty rate. If a settlement is not reached, VirnetX will file a motion to the judge who will likely set the ongoing royalty rate. This award with Apple, like the settlement with Microsoft (MSFT) and settlements with various other companies compounds the strength of VirnetX's patents in addition to the monetary awards.

The jury in the Apple case found every asserted claim of VirnetX's patents valid. The Apple verdict granted another round of defense for VirnetX's patents, much like the recent case with Cisco. Apple is a major player in VirnetX's world and past infringement by Cisco is not a significant piece in VirnetX's business model, as demonstrated by the small change in the future share price estimate. The ruling with Cisco in no way reverses the Apple decision and the clock is still ticking on Apple's post judgment damages as they discuss an ongoing royalty rate. Moreover, VirnetX has filed another case against Apple regarding infringement of newer products such as the Iphone 5 and Ipad Mini. Check out my article highlighting the Judge's order in the Apple case here.

Valid But Not Infringed

It is a disappointment for VirnetX's investors that the case against Cisco was lost over infringement. Although the jury did find the asserted patents valid. This is a key victory, since VirnetX will be making the bulk of their money from future licensing opportunities. Their patents being found valid yet again is another round of protection for the company's patents. It is of my opinion, and that of various experts, that Cisco did infringe upon VirnetX's patents just the same way other unified connections companies such as NEC, Mitel, and Siemens have in the past. The reason the latter three settled is because they were aware they infringed. Thus they settled to avoid a costly lawsuit and to negotiate a lower ongoing royalty rate. It is a huge disappointment Cisco's lawyers were able to sway the jury, but investors should keep their focus on the long term of VirnetX.

A Call To VirnetX

During a recent phone call with Mr. Greg Wood, he stated the facts as they are known to the market. These facts include the jury finding the patents as valid but not infringed. The patents being found valid is an enormous triumph, as it strengthens VirnetX's patent portfolio even more. Mr. Wood went on to state that Kendall Larson's belief, that "more than 90% of VirnetX's future revenue will come from licensing in the 4G markets". The CEO's belief is perfectly in line with long term investors. Every lawsuit holds significant risks, although the investment focus should shift back to the strong future of VirnetX.

Conclusion

The future of VirnetX as a company remains rock solid. The USTPO has denied a request by Apple and Cisco to accelerate and realign aspects of the companies' patents in recent news as well. Investors should remember that Apple and Microsoft have lost their patent infringement cases against VirnetX and Mitel, NEC and Siemens (SI) have all settled. Of course people will bash a stock with a bad news headline, although this article is meant for investors not traders. The recent case with Cisco revolved around past infringement and it actually hurts Cisco down the road and the upcoming trial with Avaya (AVYA). This is because the patents have been validated and strengthened. Although this bump in the road hurts the car, remember where your destination is, not that your car hit a speedbump.

Disclosure: I am long VHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Stay Long VirnetX In 2013 Despite The Trial With Cisco