NETWORK-1 SECURITY SOLUTIONS 3NSSI
October 01, 2010 - 1:16pm EST by
jon64
2010 2011
Price: 1.39 EPS $0.00 $0.00
Shares Out. (in M): 24 P/E 0.0x 0.0x
Market Cap (in $M): 34 P/FCF 0.0x 0.0x
Net Debt (in $M): -20 EBIT 0 0
TEV (in $M): 14 TEV/EBIT 0.0x 0.0x

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Description

"Disclosure: We and our affiliates are long NSSI, and may buy additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of NSSI."
 
Thesis:      I think that NSSI is a buy b/c they have settled their litigation against Cisco, et al. and conservatively should trade 58% higher just on this. There is additional upside based upon licenses the remaining players in the industry and future patents they might acquire and monetize in the future.

       In a simple form, it's a $34 million market cap company that has $20-25 million in cash and will likely get $8 mil a year for the balance of the decade. A sizable NOL will shield a good portion of this from taxation. That's cheap. Trades at an EV of 1.5 years of royalties, but will get 9-10.

Description:

  • The principal business of Network-1 Security Solutions is the acquisition, development, licensing and protection of its intellectual property that it has acquired over the years. The Company currently owns six patents, but focuses its Patent Portfolio on licensing its remote power patent (U.S. Patent No. 6,218,930) covering the control of power delivery of Ethernet cables.
  • On July 20, 2010, Network-1 announced that it agreed to settle its patent litigation against Cisco, Adtran, Enterasys, Extreme Networks, Foundry Networks and 3Com Corporation.
  • As part of the settlement each Company agreed to enter into non-exclusive licenses for the Remote Power Patent.  Under the terms of these licenses, the Companies agreed to pay to Network-1 an aggregate upfront payment of approximately $32 million and have also agreed to license the Remote Power Patent for its full term, which expires in March 2020.
  • Cisco agreed to pay royalties (beginning in 2011) based on its sales of Power over Ethernet products up to maximum royalty payments per year of $8 million through 2015 and $9 million per year thereafter for the remaining term of the patent. We believe the cap will likely be hit in almost every year.
  • There are other players in the industry, e.g. 3Com, now part of HP, that are not covered by this license and represent additional upside to the cash flows.

 A DCF analysis based on the facts above gets to around $2.20 a share. A few key items to keep in mind. The company has a material NOL that will shield them form taxes for many years, however the share count will increase due to a large number of dilutive options.

Catalyst

The company's plan to return the cash to the shareholders.
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