Seeking Alpha
Special situations, deep value, growth, momentum
Profile| Send Message| ()  

On June 12, 2013, we were notified that Vringo (VRNG) had filed its first lawsuit against ZTE in Australia. ZTE Corp. (OTCPK:ZTCOY) is China's second-largest maker of phone equipment and the world's 4th largest mobile phone manufacturer and growing as a global technology leader in Europe. The other four lawsuits were filed in the United Kingdom (2), France (1) and Germany (1).

It's apparent that Vringo, who won a lawsuit against Google (GOOG) last year and recently settled with Microsoft (MSFT), is launching a "Global Campaign" against one of China's largest suppliers in smartphones, who is estimated to be shipping a record number of handsets in 2013. Worldwide patented technology is the key to any global leader like ZTE.

On June 11, 2013 ZTE announced the following:

Dolby Laboratories, Inc. (NYSE: DLB) has announced that ZTE Corporation (ZTE) has taken a worldwide patent license for Dolby's portfolio covering High-Efficiency Advanced Audio Coding (HE AAC).

"ZTE's leadership in the mobile market depends on innovation and intellectual property," said Mr. Kan Yulun, Corporate Vice President of ZTE Corporation and CTO of the ZTE Mobile Device Division. "As a standard-bearer for Chinese companies operating around the world, we are committed to accelerating innovation through collaboration and support for intellectual property rights.'

We couldn't agree more about ZTE's statement(s) that patented innovations are vital and essential. So, it only makes sense for ZTE to eventually come to the table like they are doing with Dolby and agree to pay Vringo licensing fees to use its "essential" patents too.

More ZTE notes:

  • Additionally ZTE settled with Ericsson for $647MM
  • ZTE ranked #1 in patent applications for a second straight year - This tells us: 1) That they are somewhat late to the game because applications take years to get final approval and
    2) They must respect the viability of patents as it relates to smartphones due to their increase in filings.

Remember, Vringo holds over 500 patents [in the Nokia (NOK) patent portfolio] with 124 of them being known as, "standard essential." This is huge for a small (relatively new) company to own the rights to technology that is growing faster in Europe than it is in the U.S.

Looking Further Into The ZTE Case:

In reviewing a recent "term sheet" that was taken from the Vringo website and dated May 15, 2013, investors should review the following:


(Click to enlarge)

According to "Fair, Reasonable, and Non-Discriminatory" licensing terms, Vringo is looking to license all of the essential patents for $2.50 for each smartphone made or sold by ZTE. They are also asking for $1.20 for all other Subscriber Units sold by ZTE, and 1.50% of its Infrastructure Revenues.

Extrapolating the ZTE Numbers:

According to news released by ZTE Corp, it plans to boost smartphone shipments by 50 percent this year with a focus on high-end phones that run on fourth-generation, long-term evolution, networks. Furthermore, ZTE's smartphone shipments more than doubled to 35 million units last year (2012), from 15.8 million in 2011, according to Lu Qianhao, global marketing director at ZTE's handset division.

Just looking at smartphone handsets:

$2.50 x 52.5MM units (35mm x 50% incr. for 2013 est.) $131MM per year and growing YOY

Calculating this over several years, Vringo could very well be looking at $600MM - $800MM in licensing fees with the average life of the patents being 6 years.

Investors are being reminded that as much as a company would like to disclose everything that is going on internally or behind the scenes, the reality is that Vringo probably can't. What? Well why not? Honestly, because it is in litigation mode. It's obvious that their hands are tied at the moment. So, as much as we may not want to hear it, full disclosure regarding intricate and sensitive details that we as investors are clamoring for from management may not be as forthcoming as we would like it to be. This lack of clarity only helps the shorts and is a reason that I believe the stock is being held at the present time. Well, at least until the appropriate time comes when the company can talk more.

I hope that everyone following Vringo's cases can see that it is building momentum and a solid foundation to work from. It really only starting with a couple of key internet search patents about a year ago with the merger with IP/Engine. Also, it added the 500 Nokia patents, and is also adding another six Microsoft patents.

Yes, I know, while the true value of its overall patents portfolio (in which I believe is trading at a big discount here) is not clear today. It should become more apparent as time progresses with more detailed news. I do suspect that more of the pieces of the puzzle will come together very soon.

Remember that day to day, we cannot control the market swings that take our emotions up and down. What we can do is put the moving pieces of the puzzle together and to estimate a reasonable range of its intrinsic value with regard to the Google case, the recent Microsoft settlement and the four ZTE lawsuits. Not to say that there won't be more imminent suits coming in the following weeks. I believe there will be many more.

In the meantime, think about it this way; a single piece of lumber or a wood board is not as valuable by itself until it's made into a finished product that may eventually be used to build a house or furniture. So, as in most cases, "single" raw materials are not as valuable as a final structure built from many parts. One example is the long awaited final ruling against Google involving a RR% is due out by Judge Jackson too. I suspect it will run between 5% - 7% since the infringement is currently willful until proven otherwise. For this reason, a higher RR% should be granted by the judge.

I suspect that once the patents are transferred from Microsoft to Vringo, investors should expect some kind of detailed presentation or disclosure. In the meantime. one might infer that these six Microsoft patents are more valuable than what lies on the surface. So far, nothing concrete has been disclosed by the company at this point.

Currently, I believe that Vringo is trading at a discount. With all of the positive news and the depth of its patent portfolio, the stock should be worth more than $3.00 per share. I think that a valuation of $5.00 is more in line right now based on its; pile of cash (approx. $49MM), No debt, portfolio of over 500 patents, with 124 being "essential patents," a patent portfolio from quantumStream Systems Inc. and Sprout IP LLC., and $1MM coming in from Microsoft in a few days.

In Summary:

I still think investors could see additional momentum in the stock that could very well lead to the $7 - $8 level or even higher sometime in the next 6 months based on projected cash from settlements, RR% and ongoing litigation in 2013. Management's track record of success is sold and is already established with the Google win and the Microsoft settlement in the past several months. Don't lose sight that Vringo is bringing in the "big guns" to enforce its patents. Vringo's David Cohen was senior litigation counsel at Nokia during Nokia's patent dispute against Apple (AAPL). Nokia was awarded over $700 million. Also, Vringo's Don Stout also has a huge win against RIMM's BlackBerry (BBRY) for over $600MM while at NTP.

Investors are with a winning team. More success should follow. Lastly don't forget that the Russell rebalances its indexes every year in June to reflect the changing market. On June 14, Preliminary additions and deletions to the Russell Global, Russell 3000 and Russell Microcap Indexes will be published. Vringo is expected make the cut. This alone will bring in more strong buying into the stock near term.

Source: Extrapolating How Big The Vringo Cases Are Becoming