Investors and traders are sitting on pins and needles waiting for the jury to deliver a verdict on the patent infringement case pitting upstart small cap Vringo (VRNG) against the search behemoth Google (GOOG). The verdict will likely come early next week, if not on Monday, November 5th. In the afternoon of November 1st, the jury received instructions from the judge so, as of now (Friday, November 2nd), the jury has been deliberating for one full day. I have been following this case extremely closely and I believe the jury will find Google has indeed infringed on the Lang patents held by Vringo. I am basing my belief on the Lang patents themselves, available court documents, reports from sources inside the courtroom, and jury deliberation time. The question this article will address, however, is "how much can Vringo win?" These are my thoughts and speculation on the amount of past damages and future royalties which Vringo may be awarded in its case against Google.
Computation of Past Damages
First, from S&P, below are Google's quarterly revenue numbers:
In the spreadsheet below, the first step in computing damages is to remove Motorola's revenue from Google's Q2 and Q3 revenue in 2012 (since Google bought Motorola in August 2012).
Next, we calculate that 96% of Google's revenue come from AdWords as mentioned in this article (and numerous others that I have read).
Next, in this post from Google, it states 54% of revenue in the second quarter of 2012 was from outside the United States.
Once Google began infringing on the Lang patents, it was estimated that Google's revenue immediately increased 20%, so I have added that to the spreadsheet as well.
We're almost done... the royalty rate for which Vringo is asking is 3.5%.
Finally, Judge Jackson has stated that Vringo can collect damages from September 2011 (when the suit was filed) to present day.
As you can see, when you plug in all the variables, the one-time award should come to approximately $145 million for past infringement only.
Computation of Future Royalties
Future royalties are a much easier nut to crack now that we have the above estimates. Let's assume Judge Jackson keeps the royalty rate at 3.5%. Also, in the interest of being conservative, also assume Google's forward revenue stays completely flat. This way, we can take an average of the payout from the four full quarters (above). This average is about $33.8 million per quarter.
Wow! If awarded by the judge, future royalties at a 3.5% rate, through the life of the patents, should come to a very tidy sum of $575 million.
Now, the one variable which the judge and the jury will likely manipulate is the royalty rate. Again, Vringo is asking for 3.5%. Some traders and publications feel this number could be too high. The spreadsheet below shows the award amounts should the judge and jury decide to lower the royalty rate to 2.5% or even 1.5%.
So, based on the royalty rate, total award amounts can range from approximately $308 million to $720 million if you add past damages and future royalties together. Please let me know if you see any items I have left out of this speculative estimate.
Disclosure: I am long VRNG.