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Parkervision Inc. Message Board

  • ysw362436 ysw362436 Oct 24, 2013 7:28 PM Flag

    Attempt at valuation on future earnings

    OK, rather than be all emotional over the jury verdict let's try to think rationally about the value of the future revenue stream for ongoing royalties.

    Here are my assumptions:
    1) PRKR won, QCOM is infringing and as I understand it they will be ordered by the judge to negotiate a licensing agreement for ongoing royalties.
    2) An injunction would up PRKRs negotiating leverage but even without it they will need to come to some arrangement, so this is not necessarily dependent on getting an injunction.
    3) Based on what I heard about testimony from QCOM head RF guy re: injuction, it sounds difficult to impossible (based on QCOM's own testimony) for them to just swap the PRKR tech out for some alternative.

    SO if we take the $173M award and spread it out over time to try to get to an annual number, and then look at a PE multiple based on that, that would seem to give some estimate of value. Obviously, these numbers are really rough but here's a stab...

    I think the award covers 2006 through 2012, or about a 7 year period, but QCOM revenue was not flat over that period. In 2012 it was $19B, $15B in 2011, and $10-11B/year in the earlier periods. So, if roughly 21% of QCOM revenue for that 7 year time frame happened in 2012, let's allocate 21% of the $173M to 2012...or about $36M.

    Next, assuming the ongoing royalty rate falls roughly about there, then future revenues (2013 would be about that and grow in the future in proportion to QCOM growth. Essentially, PRKR is like a derivative of QCOM.

    Now, I know that's a revenue number, not an earnings number, but there's also no real cost associated with just sitting back and collecting that income stream. So, it could all just drop to the bottom line. So, what multiple should we apply? QCOM has a P/E of 17

    $36M in "earnings" X multiple of 17 = $612M market cap (@ 92.4M shares = $6.62/share

    Sentiment: Buy

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    • I did something similar because I find that I need to break things down into parts in order to reach conclusions. I had been assuming that the lawsuit, commenced in 2011, did not include 2012 or 2013 revenues and that those would get picked up in the RRR determination. In any case, QCOM's revenues have grown very strongly since 2006 (from $7.5 billion to an expected approx $24 billion this year). If revenues from accused products grew at the same rate, I think $36 million is low.
      I allowed for 5% growth in sales going forward. I assumed that foreign infringement will be difficult to enforce and assumed that only 20% of QCOM revenue not attributable to ultimate sales in the US gets tagged at the same implicit royalty that the jury awarded. I also assumed that there are other domestic infringers and that they aggregate to a third of QCOM's accused US sales revenue (monetizing beginning in 2016). I also assumed 30% in legal expense, 33% income tax after an initial breather permitted by tax loss carry forwards. Last, I assumed a 10% risk that the appeals court reverses which is, I think, roughly in line with experience.
      The resulting cash flow I discounted at 10% per annum. The resulting value makes the current market price look fairly puny.

    • I got exactly to your $36 using a different numbers from the case.

      However, have you looked at the case law for infringers that lack non-infringing alternatives and "willful" post-verdict infringement? The precedents for upward adjustment might surprise you.

      Also, what's the $172 million minus contingent fees, plus pre-post judgment interest worth in addition to your $6.62? Have you looked at the case law as it pertains to a judge's latitude in setting pre-judgment interest based on cost of capital and missed opportunity?

      Finally, why use Qualcomm's PE? Isn't it possible that a much smaller revitalized PRKR with the QCOM receivable and other target infringers would be assumed to have increasing institutional interest and a much higher growth-rate than a mega company like QCOM? How about a PE of 25 or even 50?

      Now what's the price target?

      • 5 Replies to roundermatt
      • The way I got to a higher number than $36 was by making a series of calculations (some supported by guesses) about what QCOM creates and sells. The major check was that the calculations and guesses had to come up plausibly with what the jury did.
        Let us take 2013 for example. It looks as if QCOM revenue will end up at about $24 billion. I have been estimating that 65% of revenue comes from chips based on some scattered data from their annual reports. I assumed that 90% of their chips are in the accused classes (this was a guess). I assumed that 25% of those accused chips end up being sold in the US (2006-11 average was 24.8%), Accused revenue then looks like it would be about $3.5 billion. Doing the same estimates for the years at issue in the lawsuit, it looks as if the verdict involves an implicit royalty of about 1.95% on accused revenue. I made an assumption that the RRR will be slightly higher at 2.25% (lots of precedent for slightly enhancing rate from the jury's verdict going forward). That yields a very big number - $75 million.
        If you spot errors or have better information, especially on the guesses, I'd appreciate feedback so I can refine this.

      • Rounder, I was trying to be very conservative with my PE ratios, but you're right you can argue that it should be higher. Here are some comparison points:
        Company / Mkt Cap / P/E
        QCOM / 115B / 18
        BRCM / 15B / 30
        NVDA / 9B / 17
        ITT / 3.4B / 27

        Obviously, there'a a range here and I've gone to the low end. To the extent that urspond thinks my $36M is low, and/or the multiple is low as you suggest, then there's lot's of upside to my $6.62/share valuation. Also, I've assumed nothing for international or other domestic infringers, but neither have I discounted for possibility of QCOM success on appeal.

        I think there's still a good play here. Market may not start to realize and place an appropriate value on that until there is more definitive news about ongoing royalties and/or other suits.

        Sentiment: Buy

      • Rounder, Would you care to expand on your allusion to case law on willful post verdict infringement? Is there a possibility of an upward adjustment of the damage award, and if so how might that play out?

        Given that Q grew revenues YOY 36 percent in 2011, 28 percent in 2012, and looks to be on track to grow its top line about 30 percent this year, I think a multiple of 25 on future income from Q seems reasonable. If Q grows revenue 25 percent in 2013, and P's share of that grows proportionally, it implies a royalty of $45 million in 2014, or roughly 50 cents a share. If two thirds of that drops to the bottom line, you'd be talking a share price of more than $8 based on a 25x multiple.

        Now, is it reasonable to extrapolate the jury's damage award to the royalty P and Q will agree to? Parkervision now has a very clear understanding of the value of its technology to Q and that Q has no alternative that delivers the same performance and price. More astute observers than I can chime in, but might it be worth more than the jury arrived at using hypothetical models and reconciling the conflicting claims of the two warring parties?

        Moreover, is PRKR's share price based only on the value of the validity of its patents and the infringing Qualcomm circuits? What is the value of all the optionality implied by this verdict--the value of other (high margin) revenue streams from other infringers, future licensees, not to mention Q's international sales? Backing out the roughly $1/share cash PRKR will get from this judgment (big assumption, I know) after McKool takes its cut, the current $2.90 share price is assigning an awfully paltry value to what could still be enormous upside.

        OK, reasonable minds, tell me where I'm off here, or how you can improve on my thesis.

      • Teamrep, with all do respect, you need to look at the post from YSW I was responding to:

        The "upward revision" that is absolutely common in this fact situation is to the go forward royalty rate, as compared to one imputed from the verdict, when it is ordered by the court in place of an injunction.

        Again, look for precedents where non-infringing alternatives are *NOT* available, and thus the post-verdict infringement is sometimes then referred to in that case law as "willful post-verdict infringement" ...

        I'm sure Bibi can explain it for you, if he's feeling inclined toward fairness (as he only occasionally is when favorable PRKR)

      • Upward revision? When did they put you in the straight jacket at the funny farm? Seriously, I don't know of a single case in this industry in which a patent award was notched higher. The only time that happens is for explosive growth new business where upside in future revenues occurs. Qualcomm will fight this verdict, making it much more likely to move down than up, with it possible to be reversed on appeal altogether.

        Until that happens, PRKR can likely live on another few years by attracting more white haired millionaire funds from Jeff's Florida friends. Have another Martini to toast the new round of suckers er, investors. All is fine.

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