Vringo’s (VRNG) key assets are its patents, and the team supporting its patent litigation. With negative equity and high liabilities, we believe it will be very difficult for VRNG to raise cash if it loses its litigation battle. We recommend VRNG for those investors who have a very high risk appetite. We believe that the hype around the ‘VRNG vs. Google’ (GOOG) case is justified, and its strong team gives it a good chance of winning the case or squeezing out a settlement. However, due to the high risk and uncertainty involved, we will not recommend it for conservative investors.
In March 2012, the Delaware-based Vringo merged with Innovative/Protect. Prior to this merger, Vringo was primarily involved in creating software application platforms for mobile social and mobile video services. It was most recognized for its Facetone application, which allows video ringtones to link pictures from social networking sites, such as Facebook (FB). The video ringtone application works using VringForward technology. Vringo has four distinct software application platforms i.e. Reality TV/Fan Loyalty, Video Ringtones, Facetones and Video ReMix. The company has approximately 24 patent applications in process for this segment, including three that have been granted in the U.S.
Innovative /Protect Inc was an intellectual property company before its merger with Vringo took place. The company has a portfolio of eight patents acquired from Lycos. Lycos was at one point in time, in the early-to-mid 1990s, one of the largest search engine companies in the world, and therefore a pioneer in search technology. This merger makes Vringo a stakeholder in two of the most profitable technology segments, i.e. mobile and intellectual property.
We believe VRNG should be considered an intellectual property company, which has a smaller software business on the side. In a short period of time, the company has gathered an impressive portfolio of patents. The company’s website classifies its patent portfolio into three segments i.e. Internet Search, Telecom Structure and Mobile. The teams behind these patents are worth mentioning as well. The Lycos patents were originally with I/P, co-founded by Andrew Lang, who is Vringo’s Chief Technology Officer and the driving force behind Vringo’s lawsuit against Google, which is based on Lycos patents.
The company has collected a valuable set of patents from Nokia (NOK). The troubled Finnish technology giant agreed to sell Vringo 500 patents and patent applications. Nokia has been selling off its assets to ensure enough liquidity to remain operational, while waiting for a Lumia-driven comeback. The key individual behind this purchase is David L. Cohen (Head of Litigation, Licensing and Intellectual Property at Vringo). He was one of the primary forces behind Nokia’s successful litigation of Apple Inc (AAPL).
The company went on jury trial for its first major litigation, that too against software giants, Google and AOL Inc. (AOL). AOL has partially settled (Confidential Settlement) with Vringo, but still remains a defendant in a major part of the litigation. In terms of business model viability, apart from the Google and AOL trials, there is not much to write home about. The company has entered into litigation against ZTE. The tech company had refused to license patents under Vringo ownership. It is too early to tell if the ZTE trial will be material to the future of this company. According to information provided in the most recent financial statement, VRNG’s P/B ratio is currently negative. The company has assets worth $3.7 million and liabilities worth $5.1 million; equity is in negative figures. Therefore, we believe VRNG has little liquidation value, therefore if it loses the trial, it will become very difficult for the company to raise enough money to pursue more patent litigation. The company has recently raised $45 million from private placement of equity.
We have analyzed different scenarios on the outcome of the Google vs. Vringo trial. There are different estimates on what the potential outcome of the trial will be, but it’s nothing more than speculation. Patent infringement cases are very hard to predict, let alone reach a settlement amount. As a downside, investors should anticipate that in case of a loss, the share price will go below one (pre-February valuations). The results of a positive outcome for Vringo can lead to investor returns in the range of 90% to 470%. In the table below, our main assumption is that the current share price reflects the outcome of Google vs. Vringo. Thus, only the return above the current share price should be considered. However, if the company does win this lawsuit, a higher success probability will be linked to its other patents as well.
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A very weak balance sheet will make it nearly impossible for Vringo to raise cash if it is on the losing side in the VRNG vs. Google case. It will also reduce the possibility of other parties agreeing to sign up for licensing. The excellent litigation team makes VRNG a strong contender for victory, but due to the high risks, we do not recommend the stock for conservative investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.