Neonode Awarded Key Flush-Design Patent; Should Be Huge Catalyst At Samsung And LG

Oct.17.13 | About: Neonode, Inc. (NEON)

On October 8th, the US Patent & Trademark Office (USPTO) awarded Neonode (NASDAQ:NEON) a groundbreaking patent (# 8553014), which is entitled "Optical Touch Screen Systems Using Total Internal Reflection".

Based on a further reading of the patent and its numerous diagrams, it is clear that this patent is for Neonode's flush (bezel-free) cover-glass technology.

Until now, Neonode could not at-all address the top-tier smartphone and tablet markets, which are dominated by capacitive touch (requires a cover glass) and only employ flush bezel designs. This is because Neonode's optical solution (shoots invisible infrared light above the screen) required a bezel height of at least 0.4 millimeters (tiny but not insignificant), which was ~3x taller than capacitive-touch smartphone bezels (insignificant and flush to the naked eye).

However, this ground-breaking solution, which management first developed and discussed in early 2013 (and is expected to be commercially ready by 2014), allows Neonode to offer its customers everything: i.e., either a bezeled solution (ideal for laptops, autos, childrens tablets, printers) or bezel-free flush-design (preferred in smartphones, tablets, and flexible displays).

Neonode's new flush solution sends the LED's invisible infrared light through a super-thin (and flexible layer of) cover-glass, rather than above the screen (which requires some bezel for the plastic light guide). According to management, Neonode is partnering with a Japanese glass OEM, who manufactures super-thin (<0.5mm) roll-able and flexible glass, which sounds very much akin-to Corning's (NYSE:GLW) Willow glass.

Since both Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) pretty much control the large smartphone and tablet markets, and dictate the industrial design requirements, flush designs have become the status quo (and a prerequisite).

With Neonode recently landing both Samsung and LG (NYSE:LPL) as licensees, and with Samsung in a bit of legal hot water due to its August 24, 2012 patent suit loss to Apple, the timing of this patent grant and recent licensing announcement could not be more fortuitous.

Remember that a Northern California jury found that Samsung violated Apple's IP (the '381 "bounceback" patent, the '915 "pinch-and-zoom" patent, and iPhone's design and trade-dress) and awarded Apple $1.05B.

According to most IP infringement experts, the trade dress loss is pretty scary for Samsung, and could have major ramifications for all "me too" smartphone competitors, like Motorola/Google (NASDAQ:GOOG) and LG.

However, now that Neonode has a patented flush-design for its optical touch technology, which beautifully compliments it critical user-interface and optical patents, it would make sense for Samsung and LG to seriously harvest its new licensing relationships with Neonode. Not only will Neonode's technology offer best-of-breed price/performance, but it can also provide significant "IP cover" (something that Samsung knows plenty about).

The same would apply for Google/Motorola and HTC (OTC:HTCKF), who are not yet licensed, even though both used Neonode's prior "user-interface" art (along with Samsung) to defeat the Apple's swipe-to-start patent in 3 different European courts (London, Netherlands, and Germany).

Now that Neonode's famous '879 user-interface patent (the real patent behind "swipe to start/unlock") is likely going to be asserted against its numerous infringers (since it was issued on January 10, 2012) in both the tablet and smartphone sectors, both investors and potential licensors should pay more attention to Neonode's increasingly-substantial IP.

Since Neonode's '879 user-interface patent (that famously includes the swipe-to-start gesture) was granted in January 2012, there have been:

  • 116M+ tablets shipped in 2012 (~65.7M from Apple)
  • an estimated 160M tablets will ship in 2013 (~74M from Apple)
  • 622M+ smartphones shipped in 2012 (~136M from Apple; ~212M from Samsung)
  • an estimated 820M smartphones will ship in 2013 (~150M from Apple and 300M from Samsung).

With an established licensing rate of $1+ and an infringement-base potential of 1.7B+ infringing devices, Neonode has plenty of value to unlock, when it either spins-off, sells, or outsources the assertion of its UI patent assets to companies like Acacia (NASDAQ:ACTG).

More importantly, with Samsung shipping about 160M feature phones and 300M smartphones annually, along with LG who ships about 15M feature phones and 50M smartphones per annum, Neonode has plenty of incremental licensing potential now, especially with its newly patented bezel free solution.

My 12-month price target of $15 is based on a sum-of-the-parts analysis of the core operating business ($13 per share) and the User Interface patents ($2 per share).

My conservative 2015 earnings estimates for Neonode are revenues of $65M (Printers = $20M; PC = $15M; Auto = $10M; White Goods = $5M; Children's Tablets = $5M; eReaders = $4M; Handset = $3M; Android Tablet = $2M; NRE = $1M), operating expenses of $20M, pretax income of $45M, taxes of $10M, net income of $35M, EPS of $0.87, and a PE of 15x. This equates to a 12-month target of $13 for the core optical touch licensing business.

With regard to the UI patents, I believe the amount of potential infringement exceeds $1.7B, using a $1 per unit licensing baseline.

Assuming that there is a 65% chance of litigation success, prevailing IP-acquisition discounts are 10%-15% of target damages, while pre-Markman settlement rates hover in the 10-cents-per-dollar range, it seems like a $2 per share valuation ($80M) for the UI unit is reasonable.

As a result, I would be buying NEON shares before a potential UI spin-off, and ahead of the upcoming ramps of new non-eReader revenues (printers, laptops, children's tablets, and auto).

Disclosure: I am long NEON. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.