The Bittersweet Victory for VirnetX (VHC)

November 7, 2012 11:15 AM EST
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Earlier in the session, VirnetX (AMEX: VHC) said it won a decision against Apple (Nasdaq: AAPL) over infringement on four patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151) and was awarded $368 million. Shares of VirnetX are higher amid the good news, rising as much as 30.5 percent on the session to a new high.

Amid the delight of investors is a bigger issue: VirnetX only got about half of what it wanted. According to a report yesterday following Vringo's (AMEX: VRNG) victory over Google (Nasdaq: GOOG), AOL (NYSE: AOL), and others, we expected that VirnetX wouldn't be awarded nearly what it was after. Prior reports had VirnetX seeking about $708 million from Apple, but the jury granted just $368 million, or 52 percent of what was asked.

Fast forward to Wednesday. Maxim Group issued new commentary on Vringo's victory, saying that about $500 million or so should be coming the Company's way over the next few years given the 3.5 percent royalty run rate. That means that Vringo will end up with more than the $493 million it was asking for when it initially filed the suit many years ago. Of course, Google may appeal the decision (and is likely to do so).

Still, similar language wasn't given with VirnetX's release, meaning its stuck with only 52 percent of its total request. That's a failing grade in most American classrooms.

The addition of $368 million will boost VirnetX higher, dumb logic pegs a per-share addition of $8 or $9 from Tuesday's close of $26.29. In the long run, VirnetX will have to do a little more to get back to its 52-week high of just under $42. Shares are up about 20 percent Wednesday morning.

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Andy Elliott on 2012-11-09 13:37:10
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The writer does not seem to grasp, or does not want to for some reason, the fact that VHC will indeed be receiving forward revenues on Apple sales. They were not part of the verdict, they are however most certainly a part of the final settlement. This award only compensates, and was only intended to compensate, VHC for Apple's transgressions up until now. Future royalties are a certainty, not a probability, and Apple's appeal will be useless, just like all appeals against judgments in this judge's court have been in the past. He runs a clean trial and there will most certainly not be a reversal nor a reduction in the award.

Calling the reduction in their current award versus their ask a "failing grade" because it represents "only 52%" is just plain stupid. The value of the forward royalties will far exceed the value of the award, and the writer, had he done ANY research on the subject, would know that.

Appropriately, he concludes that VHC shares should only be worth a few bucks more than prior to the victory, but specifies that he's just using "dumb logic." Yes, I'd say so. He fails to comprehend that this validation of the necessity of VHC patents will push other companies who have not alread settled with them to do so, including Cisco. VHC valuation is all about the future value of the expected royalty stream that will ensue now that VHC patents are indisputably essential patents for 4G LTE, VPNs, and other secure connections, not about the value of awards for past infringement. This technology is new. Growth is explosive and will continue to be. Royalties will ensue for all companies, it is now only a matter of time. Do the math. Dumb logic, indeed.

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