Neonode (NEON) announced on 9/3 that it is are exploring "strategic alternatives" for its User Interface (UI) subsidiary, which most prominently contains at least a few extremely-disruptive patents, including the famed '879 patent.
Most importantly, this announcement implicitly indicates the Quinn Emmanuel's independent assessment of Neonode's patents (prior art, claims, and infringement) … must have come back with flying colors.
Even though Neonode's prior art (exhibited on its N1 and N2 "touch only" smartphones between the years of 2004-2008), had already invalidated Apple's (AAPL) "Slide to Unlock" patent (#EP20080903, the European counterpart to Apple's U.S. Patent #7,657,849), it was not know until today if NEON's '879 user-interface patent had sufficient claims, and prior art "cleanliness", sufficient to assert against the likes of Apple, Samsung (SSNLF.PK), HTC (HTCCY.OB), and Motorola/Google (GOOG).
Considering that Neonode just announced its intent to unlock the value of these patents (most logically via a tax-free spinoff), Quinn Emanuel must have concluded that there is more than enough reason (and substantial likelihood of success) to assert these UI patents against at least a few deep-pocketed infringers.
Moreover, considering that the primary defense of Samsung, Motorola, and HTC, against Apple's "Slide to Unlock" patent, has been to "look at Neonode", it seems likely that NEON's '879 patent reads (quite well) on all of them.
So what does this mean for NEON shareholders? How much value will be unlocked and what is the IP's present value for NEON's shareholders?
To get to my $9 per share calculation, I am focusing on the following metrics:
· Apple has sold 345M iPhones from 2010 through 2Q13. I expect they will sell another ~400M through 2015, when a patent infringement trial should be completed.
· Samsung has sold 474M smartphones from 2010 through 2Q13. I expect they will sell ~920M through 2015, when a patent infringement trial should be completed.
· HTC has sold 115M smartphones from 2010 through 2Q13. I expect they will sell another ~62M through 2015, when a patent infringement trial should be completed.
· Motorola/Google has sold 63M smartphones from 2010 through 2Q13. I expect they will sell another ~58M through 2015, when a patent infringement trial should be completed.
· Thus, by my calculation, there are at least 2.4B smartphones that will have infringed upon Neonode's user-interface patents from 2010 through 2015, by which time patent infringement suits against the above 4, will have been completed.
· Neonode has announced publicly, on many occasions, that their established average royalty rate is ~$1 (the basis of my calculations), although NEON's royalty rate can eclipse $3 for automotive applications, and I imagine it should about $2 for smartphones, tablets, and PCs.
· If I risk-adjust these suits by 50% (which is below the 60%+ rate utilized by most patent trolls), assume contingency litigation costs will account for 35% of the risk adjusted winnings, and assume that Neonode shareholders will retain 80%+ of the NewCo spin-off (in order for it to be a tax-free spin, the parent shareholders must retain at least 80% of the shares), the future value of these suits will easily eclipse $630M.
· I further assume that the spinoff will take 9 months to take place, the first four patent infringement lawsuits will be filed within 3 months of a spin, and the trials/appeals will be fully concluded in 4 years from now (includes trials, CAFC appeals, and U.S. Supreme Court reviews).
· Finally, if I assume a 19% Cost of Capital, and discount the future value (~$630M) to today, I get a risk-adjusted present value of $315M, which equates to about $9 per NEON share.
In conclusion, while this exercise is imprecise, I believe my $9/SH calculation it is still extremely conservative, for I am not including:
· Likely trebling of damages due to willful infringement … which there can be little doubt that they (AAPL, HTC, Samsung, and Motorola/Google) would be guilty of.
· I am not counting the billions of infringing smartphones that will be sold by these 4 OEMs during 2016 and 2017.
· I am not counting the millions of ongoing license fees (post trials), which will create a recurring revenue base.
· I am not including the likely "swipe to unlock" violations for other Apple devices, like its iPad and iPod Touch.
· I am not including the hundreds of millions of smartphones that sold prior to 2010.
· I am not including all the likely Android smartphone and tablet infringers
The bottom line is, this announcement is amazing news for Neonode shareholders, for this seemingly-dormant user-interface IP was likely receiving little/no value in NEON's current share price. Considering that Neonode management is laser-focused on friendly licensing of its core optical touch technologies, and does not have the time, means, expertise, and wherewithal to assert these patents from within … this announcement is a welcome sigh of relief. Essentially, Neonode management and its Board are acknowledging that they have an amazing asset, whose value can be best unlocked outside its core business, and that they are prepared to make that difficult-yet-prudent step.