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  • Vringo's Fundamental Value 8 comments
    Nov 8, 2012 10:50 AM | about stocks: FH, GOOG, IDCC

    Vringo (VRNG) recently announced its victory against Google (NASDAQ:GOOG) and affiliated customers of Google in a patent infringement. The news of the initial awards seemed to disappoint investors at first blush. However, after further review, the win is certainly a major positive for VRNG shareholders. Here are VRNG's achievements from yesterday:

    1. Vringo's case against AOL, Inc. ("AOL"), Google, Inc. ("Google"), IAC Search & Media, Inc. ("IAC"), Gannett Company, Inc. ("Gannett"), and Target Corporation ("Target") (collectively, "Defendants") with respect to the Defendants' infringement of the asserted claims of U.S. Patent Nos. 6,314,420 (the "'420 Patent") and 6,775,664 (the "'664 Patent") (collectively, the "Patents") was a victory in terms of the Patents validity and subsequent infringement by the Defendants. This victory could pave the way for licensing arrangements which would avoid new litigation against other infringers and quickly develop cash flow.

    2. This win in court gives VRNG the credibility in terms of their legal teams' capabilities and the soundness of their intellectual property "IP".

    3. Through this litigation process, Vringo also demonstrated their ability to seize an opportunity to strengthen their balance with a direct stock sale without any extraordinary dilutive terms such as additional warrant coverage that are seen in other small companies that need cash.

    4. The process has also created a lot of volume in the name which has its advantages in further financings if VRNG should need it.

    5. VRNG can use its stock as currency to acquire new IP to bolster their portfolio. A veteran of the IP litigation world, Interdigital (NASDAQ:IDCC) has done this successfully and built a fundamentally strong cash flow earnings driven business around it.

    Ultimately the question for Vringo is how many shares are in existence and how do we calculate Vringo's fundamental value.

    First we need to look at the VRNG's SEC filings to see how many shares there are on a fully diluted basis. We think the larger share count on this basis is why the short sellers are comfortable selling this stock short right now. The most current filing is the prospectus supplement filed with the SEC in conjunction with the company's last direct equity sale described above. We copied this excerpt from the offering prospectus to show the cap chart for VRNG as follows:


    The Offering

    Common stock offered by us   10,344,998 shares
    Common stock to be outstanding after this offering   75,756,269 shares
    Price per share of common stock   $4.35
    Use of proceeds   We intend to use the proceeds from this offering for general corporate working capital purposes. See "Use of Proceeds" on page S-6 of this prospectus supplement.
    Risk factors   Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page S-5 and page 7 of the accompanying prospectus.

    The number of shares to be outstanding after this offering is based on 65,411,271 shares of common stock outstanding as of October 4, 2012. It does not include:

      9,434,660 shares of our common stock issuable upon exercise of stock options outstanding as of October 4, 2012 under our equity incentive plan as of that date, at a weighted average exercise price of $3.23 per share;
      3,123,334 shares of our common stock underlying restricted stock units outstanding as of October 4, 2012 pursuant to our equity incentive plan for employees, directors and consultants;
      6,998,333 shares of our common stock are available as of October 4, 2012 for future grant or issuance pursuant to our 2012 stock-based plan for employees, directors and consultants; and
      21,538,440 shares of common stock issuable upon the exercise of warrants outstanding as of October 4, 2012 at a weighted-average exercise price of $2.48 per share.


    Lets take the 75,756,269 shares and add in the 9,434,660 shares options which are above the strike price and we can assume they will be exercised described in the first bullet point above. Then we add the shares from the second and fourth bullets for employee restricted stock units or "RSU" and the warrants with the exercise price of $2.48. The grand total of the fully diluted shares comes to 109,852,703. also important to note here is the warrants and option being exercised will bring $53,415,331 and $30,473,951 or $83,889,282 to the company adding to it value and market cap at least dollar for dollar.

    So lets do a few more calculations to see what VRNG might be worth given a $500 million win yesterday as reported by several media outlet articles. Lets assume that VRNG has $50 million in cash today then add in the $500 million win then add the $83.9 million from warrant and option exercise and we have over $663 million. Dividing this by the fully diluted shares, we get a $5.77 per share number. This of course does not account for taxes or for future earnings which will come in licensing and litigation activities. If we take 30% off the $500 million win for taxes and divide the cash, it works out to $4.40 per share, which we believe is a base value for the stock as it sits today.

    We do think that there may be some adjustments to the jury's monetary calculations after VRNG makes their post trial filings with Judge Jackson. VRNG said it is reviewing the formulas they provided at trial which the jury may have incorrectly used in their calculations. This may add present and future royalties to the total award to Vringo. We believe this may add to the many positive developments from this litigation.

    Disclosure: I am long VRNG.

    Stocks: FH, GOOG, IDCC
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Comments (8)
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  • Centurion 9.41
    , contributor
    Comments (27) | Send Message
    Okay, but what of the multiple, I've seen 10x, on which other IP companies trade?


    Donald Stout has shown, now for a second time, the ability to win very high stakes IP cases.


    Given VRNG has bought NOK patents, and has Donald Stout, and has beaten Google, are you willing to give them a 5x multiple?


    Where would that put your numbers? :)
    8 Nov 2012, 05:19 PM Reply Like
  • ChaPaVe
    , contributor
    Comments (102) | Send Message
    Author’s reply » 10x like Acacia and IDCC, but we have to normalize the earnings, which may take time to unravel. Target price$8-10, should be at base price of$4.40 soon.
    8 Nov 2012, 05:35 PM Reply Like
  • Invictus
    , contributor
    Comments (61) | Send Message
    I tend to agree with your assessment.


    Does Vringo keep 80% or 100% of royalties? I thought it was .80.


    Pricing is set at the margin and most weak longs have been flushed. There is big block bidding around 3$, @ >$4 there is guaranteed insider selling and heavy resistance above mid $4s for many looking to still breakeven. From a pure technical perspective there is a massive wedge forming where a catalyst could cause a break one way or another. The fact that it filled the gap @$1.75 where the entire move started last March is a positive in voodoo theory.


    Sometime after Nov. 25 the PTO decision comes in for the 6 claims of the '420. Assuming all 6 are upheld there really isn't a 'smart' ad system workaround (content analysis alone is huge and why its referenced by 165 other patents). Although the mere uncertainty should cause vrng to trade at a discount. It is pure speculation to assume this is cash in the bank.


    The NOK patents have a conservative valuation of $200mm by J.P Moreno, his analysis on VHC has proven his patent valuation credibility. His timing on the release of his reports to the public after run-ups of the stocks might be questionable, but regardless he is one of the few analysts in the art of valuing patents. I see no reason why another 100mm market cap shouldn't be included and 50mm for the video ringtones business/patents.


    Besides Cohen and Stout having credibility against goog, aapl, & rimm for future suits against other giants like FB (your previous instablog post shows FB is infringing) I'll muse on where the real value lies.


    I thought modernist had a relevant forward looking view on tech so I baited him with a post filled with dis-information, he took it and placed it on his authors picks (he since took it down). He wasn't even aware MSFT had funneled freshly acquired AOL patents to FB to use against YHOO, and FB and YHOO called a patent truce as a result.


    If you follow the dynamics and undercurrents of tech or have friends in product development at big tech companies you know that the mobile revolution is inning 2 or 3 right now. Mister Softy has an intimate relationship with fb and nok. msft & apple both view goog as a threat. msft planted steven elop at nok to gain access to their patents for win mobile as well as for the maps synergy. Now nok is an extension of msft, which explains why they would dish out patents to a company going after goog. There is also future lawsuits against competitors like ZTE and CSCO. What does this have to do with FB? Will FB is testing out offering free WiFi at businesses if you check in with FB, effectively becoming foursquare and yelp. Google is supposed to provide objective results and pushing their own version of yelp ahead of yelp is part of what the FCC is investigating right now. Facebook should be exempt from that scrutiny on their platform. FB is sleeping with MSFT and sharing info (if the user doesn't opt out) and MSFT is using the data to incorporate a personalized search. What MSFT and NOK want is useful data for augmented reality and maps and if FB becomes yelp and foursquare then advantage msft in mobile personal search and augmented reality. Now there is a few pioneer companies (Wavespot and Hotspotsystem) offering businesses WiFi and letting users check in with twitter & fb currently. I'm not sure if anyone remembers the original hype with bluetooth 8 years ago??? You would walk into a store and you would/could be pushed with an ad or info on your phone; the idea never really panned out, but the concept is ripe to be implemented on smartphones. Looking through the Vringo/Nokia portfolio they have a few of the important ad patents for this type of system. I've heard criticism that only a few of acquired patents relate to 4g (unlike VHC where their price is anticipating a huge windfall from their 4g patents), but this criticism is missing the point since WiFi/WiMax/3g routers/transmitters/base stations won't disappear overnight, and there is limited wireless spectrum available to VZ and AT&T for 4g - in some markets like Chicago limits are already causing problems (this is why unlimited data might not be coming anytime soon). This is where FB can offer a business a free router and internet service if people sign-in via facebook (public notification via news feed would be optional for privacy concerns). The system would likely remember users on a future visit, the system could push a product special or discount to returning customers (phone payment systems will be here soon) or could push them a relevant ad for the free use of WiFi. Customers can write a review or rating like yelp that nokia's maps could incorporate. Bing search would sort through your facebook friends if you wanted their recommendation, thus creating a useful personalized search and eliminate astroturfing (paid bs reviews) that is plaguing yelp and google. Vringo has the patents to essentially push information to your phone screen without effort from yourself. Vringos mobile patents are not a joke of simply being video ringtones and facetones, although that will be the next recreational wave in mobile. By pulling info from facebook simultaneously with an incoming call isn't all the series of patents cover. They own the concept/process of walking into Taco Bell or Best Buy and having your phone automatically push you an ad, menu, specials, user reviews or anything else for that matter. Some of the nokia patents also deal with ads that could be inserted while you are using the free internet at the business (you could be at Starbucks on your ipad and be pushed a 30 sec ad before getting free wifi, Starbucks might even get to choose the ad or share in the revenue). Consumers like FREE even if the tradeoff is a little privacy as google and fb have amply demonstrated. The secular rise of commercial free video (netflix, az prime, dvr) means ad dollars will continue to get creative. Most importantly, whoever owns the Vringo mobile patents puts their competitor at a huge disadvantage. Android might be able to engineer a work around of sorts, but if the router in the store authenticates based on a facebook check-in (NFC/bluetooth at the door could be a trigger) they are toast relying on GPS, as too many false positives would be generated.
    The AdBlock extension is a serious emerging threat to the old fashioned search engine advertising model. Facebooks ad exchange is largely immune from any AdBlock extension since it is geared towards platforms and apps. As ChaPaVe has noted, FB still infringes on Langs patents. The walled garden future of the web has changed the relevance of the standard search engine. Google has admitted this as a huge problem, I don't know how it will be solved, but whoever builds the better ad system to monetize applications stands to reap a fortune. Either google or fb/msft will be the exchange, and would likely split any ad revenue with the app owner - just like google has successfully done with its ad system. AppHead has written a good article on takeover targets in tech and mentioned Mimvi. Mimvi and MSFT inked a partnership deal recently, mimvi is a search engine for apps, and has a good chance at playing an important role in monetizing apps. Here is his article:


    Nokia would benefit from all of the creative destruction by making the routers/infrastructure for the system. Longer-term Nokia will gain important data for its maps and augmented reality ambitions. Essentially, the three companies are forming a tripod for the future, engineered by the sleeping giant microsoft.


    Whether Vringo is just a pawn for the tripod's dirty work or a takeover target remains to be seen, but I don't see Cohen and Stout wanting to litigate all of the NOK patents for relative peanuts to them. They might litigate just enough to do serious damage to ZTE and Cisco. If they change sentiment of ZTE in Great Britain/Europe then it benefits Nokia enormously, if they deal a blow to Cisco/LinkSys in the states then Nokia benefits even more. Given Nokia has been in the top 5 companies in the world for R&D spending over the last decade. I imagine that the array of international patents Vringo possesses is worth far more than anyone has considered. Why, simply because Nokia is desperate and Cohen's name is on the front page of most of the patents (like lang/kosak was). In a strategy book I read 5 years ago it used Nokia as the most successful company in terms of doing a Houdini and re-engineering itself during times of upheaval. Nokia's ship is certainly burning again, which is why they tossed Vringo a hail mary to have Cohen use the patents as a fire extinguisher.


    While I'm not an expert in telecom & mobile or valuing patents I believe there is something bigger to the Vringo story. If they are just another troll, they have the ingredients to cause significant market upheaval. There is an undertow forming and I sense it is vastly underestimated.
    9 Nov 2012, 04:03 AM Reply Like
  • williamreese999
    , contributor
    Comments (44) | Send Message
    Quality analysis, thanks
    9 Nov 2012, 10:24 PM Reply Like
  • ChaPaVe
    , contributor
    Comments (102) | Send Message
    Author’s reply » Excellent comment, actually it warrants an instablog in its own right! Agree with many things you touch on including the coming change of ads and their delivery and the coming importance of adblock via privacy. When GOOG was buying Doubleclick, one of the comments to the FTC was that adblocking should never be outlawed, and this seems to be intact. We use which does a nice job in blocking and notifying ads and cookies. Me thinks you should be considered an expert!
    9 Nov 2012, 08:57 AM Reply Like
  • Invictus
    , contributor
    Comments (61) | Send Message
    Thanks, I think there is more pressing issues currently than to distract attention with an instablog. After things settle I will try to coherently present my thoughts.
    Ghostery is great as well, I was just highlighting the rise of new products and pondering that we might be near an inflection point where the adoption rate accelerates.
    12 Nov 2012, 06:50 AM Reply Like
  • onetimershot
    , contributor
    Comments (115) | Send Message
    This article compares VRNG to IDCC and VHC very prematurely. Both of those companies have rewarded the shareholders substantially. To date the loyal shareholder has yet to be rewarded. Let that happen first then you can put VRNG in the company of IDCC and VHC. The stock does not sit at 4.40 but at 3.40. That is a substantial difference. Will the rewards come I don't know. But what is for certain is the BOD of this directors are making bank. And if the end game is lets say 4.50 or 5.50. I would consider this a huge failure for the type of investment risk this has been. I give the company an F with maintaining shareholder confidence, but an A in legal and IP.
    10 Nov 2012, 10:22 AM Reply Like
  • ballhawker
    , contributor
    Comments (15) | Send Message
    Thanks for the nice article on VRNG valuation. I agree that it should be valued at $4.40 at least right now with the GOOG victory. However the uncertainty factor is in play right now without a final verdict from the judge (or a potential deal that may be in the works). I just cannot believe the impatience with VRNG investors. This has the potential to be a blockbuster stock, but lots of folks expected a quick double and bailed out when that didn't happen. I think now after a weekend to reflect on the victory, and another step closer to resolution, we should see this stock appreciate quite a bit over the next week or two. Either way I am in for the long haul because the true value of this company is huge, and is being misinterpreted by the market right now.
    10 Nov 2012, 12:15 PM Reply Like
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