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Undervalued Vringo's $100M Victory Against Google

http://seekingalpha.com/article/1644202-undervalued-vringos-100m-victory-against-google?source=email_rt_article_readmore

Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

In the past, the IP Engine v. Google (GOOG) trial has received a lot of publicity. However, I want people to see estimates of monetary damages that Vringo (VRNG) may receive. For those that have no familiarity with the case, VRNG was awarded $30.5 million for past damages on November 6, 2012 when the jury came back with a jury verdict in their favor. The $30.5 million accounted for past damages, but the Judge has recently agreed that VRNG is entitled to supplemental damages and interest. However, the most recent document filed on Public Access to Court Electronic Records (PACER) is the Judge's Order on Miscellaneous Relief, Pacer Document #963.

There are two major issues ruled on in PACER 963:

VRNG is entitled to an Ongoing Royalty for Continued Infringement and the Appropriate Royalty Base is 20.9%.
First, the award of an Ongoing Royalty and a Royalty Base of 20.9% is a major victory for VRNG. GOOG argued in their post trial motions that the damages should be a lump sum amount rather than a running royalty. Additionally, they stated that if there is a running royalty, the base should by 2.09%. GOOG's arguments did not stand and the judge went with VRNG on this issue. The 20.9% base is attributable to the majority of GOOG's revenue because the majority of GOOG's revenue comes from advertising.

To be more precise, GOOG reported first quarter revenue in their 10-Q. More specifically, total advertising revenue was $11,902,000,000 (almost $12 billion). Also in their 10-Q, GOOG reported that 45% of their revenue was revenue from within the United States. Therefore, total US revenue from advertising was $5,355,900,000 from the three months including January 1, 2013 to March 31, 2013. In VRNG's post trial motions, they argue for a royalty somewhere between 3.5-7%. They argue that the royalty should be enhanced because of the parties' new positions including as an adjudicated infringer and willful infringer.

Just to put into perspective how much money this includes, I have performed the following calculations. I took the $5,355,900,000 attributable to US Advertising Revenue and multiplied that by the 20.9% the Judge just awarded as a royalty base. You are left with $1,119,383,100.

$ 1,119,383,100 $ 1,119,383,100 $ 1,119,383,100
x 3.5% x 5% x 7%
$ 39,178,408.50 $ 55,969,155 $ 78,356,817

I want to remind you that these numbers would just be the amount paid to VRNG each quarter (if the numbers stayed equal to what the numbers were in the first quarter). Also, the Judge stated in this Order that the payments would be made quarterly. From these calculations, you can see that VRNG would get nearly $40 million per quarter on the low end if 3.5% is awarded going forward. This number will only rise with GOOG's growth.

Additional Discovery and Briefing is Necessary to Resolve Ongoing Royalty Rate and Duration.
The Judge also stated that additional discovery and briefing will take place. One main reason for this additional discovery is because of GOOG's claimed work-around. I will leave the technical dissection of the workaround to the more technical people. For informational purposes, the new schedule is as follows:

August 25, 2013 - Production of documents relevant for determining whether New AdWords is colorably different from the adjudicated iteration
September 25, 2013 - Expert witness reports due
October 15, 2013 - Expert rebuttal reports due
October 30, 2013 - Parties file Briefs on any supporting evidence
November 10, 2013 - Responsive Briefs due
Evidentiary Hearing if the Court deems it necessary
GOOG claims that they implemented their workaround on May 11, 2013. To look at the worst case scenario, let's take that date as absolute and the ultimate end of infringement. We already calculated that VRNG will receive $39,178,408.50 from the first quarter of 2013 if the court awards the lower end of the royalty rate (3.5%). If you include the time after the verdict until year's end and the time from the end of the first quarter until May 11, 2013, you have roughly one quarter. For the purpose of this exercise, I am going to use the same numbers as the first Quarter and simply multiple that by 2 (representing about two quarters of a running royalty of 3.5%). For roughly two quarters of infringement ending May 11, 2013, VRNG would receive about $78,356,817. Adding in the $30,500,000 that the jury already awarded in past damages, the total amount VRNG will receive is $108,856,817. This number only gets bigger if the Judge is to award a higher royalty rate of 5% or 7%. Just for reference, if the Judge awards 5% as a royalty rate, the damages from the approximate two quarters plus past damages equates to about $142,438,310. These estimates were low end estimates and the time frame would even be slightly greater than 2 quarters because the jury verdict only included GOOG's revenues until October 1, 2012. So, there is roughly another month of damages missing in my calculations. I just wanted the reader to get a basic idea of how large the numbers are that we are talking about.

Conclusion

The main point I want people to see from this piece is the amount of damages that a running royalty rate will encompass. Also, I want people to see an estimate of what VRNG will receive in the case that GOOG is successful in implementing a workaround. I do not believe that GOOG's workaround is colorably different from the system they used, but I want people to see the worst case scenario award from the District Court.

Therefore, even with the worst case scenario of VRNG being awarded 3.5% and GOOG's implementing a successful workaround, VRNG still is awarded over $100 million, over a third of their current market cap. For the aforementioned reasons, I believe VRNG offers a great opportunity when you weigh the risks and rewards. With interest and GOOG's growth, these numbers will only get higher. By looking at the amount VRNG will get each quarter (until 2016 when the patents expire), the investor can get a better idea of what VRNG is really worth. That is why I believe VRNG is undervalued as an investment.

Source: Undervalued Vringo's $100M Victory Against Google
Additional disclosure: This analysis uses estimates based on Google's 10-Q from the first Quarter of 2013 and is a rough estimate analysis of the damages Vringo may receive. Other risks include Appeal, Risks with the USPTO, and the Judge awarding some lower royalty rate.
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