(By Rich Bieglmeier) On August 13th, iStock wrote about Vringo Inc. (VRNG) and the potential windfall the company could receive from a pending lawsuit against Google Inc. (GOOG). To recap quickly, VRNG alleges that Google has infringed on patent technology Vringo purchased from Lycos.
Back then, we wrote:
"The patent infringement legal squabble makes the case that Google`s advertising search results 'based on content relevance and click-through rates' are covered by Vringo`s patents and this technology is Google's 'primary source of revenue'."
According to Google's most recent 10Q, "Advertising revenues made up 97 percent of our Google revenues for the three and six months ended June 30, 2011 and 96 percent of our Google revenues for the three and six months ended June 30, 2012."
Let's do some math together. The clock for the suit started on September 15, 2005. Since then, Google has done nearly $160 billion in revenue. That's roughly $153 billion using Google's 96 percent of revenue 10Q figures. The suit only covers U.S. revenue, chopping the number in half, which means somewhere around $75 billion of Google's sales are subject to back dated royalty payments, should the tech monster be on the wrong side of the decision.
From there, iStock did a little math to guestimate what sort of settlement figures could be in play using a reasonable royalty fee. Well, in a recent court filing the estimate and calculations possibly can be put to the wayside as VRNG appears to have named its price. Meanwhile, Google's lawyer does his best to negotiate the figure down.
This is probably a good spot to mention that we aren't lawyers and don't pretend to be one because we slept at a Holiday-Inn Express. What follows is just our interpretation of what we are reading. If anybody reading this is a lawyer and understands this stuff, please give us your feedback in the comment section below. We would appreciate it.
Back to the story, in the court paperwork, Vringo's "damages expert, Dr.Becker, relied upon the documents identified in Rule 33(d) in formulating his damages opinion. Dr. Becker calculated that I/P Engine's (VRNG) damage claim was $696 million, plus prejudgment."
Google's lawyer counters that the number should be $200 million less as a potential settlement based on Google's North American revenue dating back to September 15, 2005. As far as we understand, none of the numbers include royalties going forward.
Since our August article, Wall Street has taken the stock down 40 cents, or 11.7 percent. While some investors appear to be betting against a favorable outcome for Vringo, iStock still believes the potential outcome could be worth the risk for aggressive investors.
The trial starts on October 16, 2012, and is expected to last no longer than a week. That means by this time next month, the ball will have landed on black or red for VRNG shareholders.
Once again, we'll break out the trusty calculator. Using VRNG's $696 million figure, that works out to about $92 million a year, add on another three years of royalties, and a potential total settlement could be in the ballpark $972 million. Using Google's counter numbers, the total is $694 million.
We'll split the difference for the purposes of our calculations and put it at $833 million. According to MSN Money, VRNG has 58.25 million shares outstanding. Using our mid- point number, that's $14.30 per share. Compare that with the stock's $3 pricetag as we type.
Worst case scenario is Vringo goes under if they lose the lawsuit, bye-bye $3, or $3.40 if you entered on August 13th. Becoming bathroom wall framed stock cert material is unlikely as the company has purchased a bunch of patents lately and is trying to monetize some of them.
If they win, iStock believes VRNG shares will receive a premium above whatever dollar amount they are awarded. The street is likely, rightfully, to place a premium on a victory, or settlement, as it increases the likelihood of future settlements with other search engines that might be infringing on Vrnigo's technology.
With the clock ticking, a possible pre-trial settlement, and a 3:1, or more, reward to risk ratio, the time might be right for high risk investors to reconsider Vringo.