from march 2011 JPM report Figure 1: Worldwide Remote Access Services Software Revenue and Share, 2009
Revenue Market
($M) Share
Citrix 120.4 77.5%
LOGM 26.8 17.2%
Cisco 3.0 1.9%
NTRglobal 1.2 0.8%
Laplink 1.1 0.7%
Other (includes 01 Communique, among others) 2.9 1.9%
Total 155.4 100.0%
Source: IDC's Worldwide Remote Access Services Software 2010-2014 Forecast and 2009 Vendor Shares (December 2010).
By any measure (see Figure 2 in the sidebar), 01 is small relative to LOGM, which,
combined with 01’s competitive position, has legal implications which we discuss
later in this note. However, we point out that despite its small size (only $400k in
revenue last year), 01 does have actual products and product revenue, which
distinguishes it from a mere non participating party
Background on 01’s Lawsuit with LOGM
01’s lawsuit alleges that LOGM’s remote access products – LogMeIn Free,
LogMeIn Pro2, and LogMeIn Ignition – infringe upon 01’s U.S. Patent No. 6,928,479
(“the ’479 Patent”). Issued on August 9, 2005, the patent “relates in general to a
system, computer product and method for remotely accessing data at a private server
using a remote wired or wireless web browser”.
01’s lawsuit originally named both LOGM and Dell Inc. (covered by JPM Hardware
analyst Mark Moskowitz), although Dell eventually settled with 01 (more on this
later). As it pertains to LOGM, the lawsuit seeks past damages back to August 2005
and an injunction that would preclude LOGM from selling the allegedly infringing
products in the future. Furthermore, 01 is seeking “treble” damages (i.e., triple
whatever amount is awarded by the jury) on the basis that LOGM willfully infringed
on the ’479 Patent. By “willful”, 01 alleges that LOGM was aware it was infringing
on the ’479 Patent but, nonetheless, continued to sell its remote access products.
Assessing LOGM’s Financial Exposure
It is our understanding that two basic theories underlie damage awards in patent
litigation:
1. Lost Profit: profit that the patent holder would have earned were it not for the
infringer; and
2. Reasonable Royalty: entitlement to some amount of the infringer’s revenue from
the infringing product on both a forward looking and retrospective basis.
Lost profit
LOGM’s remote access products comprised about 45% of LOGM’s total revenue, or
$45 million for FY2010. For purely illustrative purposes, we calculate what this
Figure 2: Selected 01 Data
CAD$ in millions
FY2010 Revenue:
.4
FY2010 Net Loss: ($1.6)
Cash Balance: $4.9
Employees: 15
Source: Company Reports
might mean for LOGM in the event it is required to compensate 01 for “lost profit”
(Figure 3). Admittedly, there is no way of predicting what a jury might determine is
the lost profit 01 would have earned were it not for LOGM’s alleged infringement,
but in our two simple examples, we assume 01 would have realized the same revenue
that LOGM did in the remote access business since 3Q05, with operating margins at:
1. A constant, normalized rate of 15% in all years; and
2. LOGM’s historical reported non-GAAP consolidated operating margins.
Ultimately, the appropriate level of profitability that will apply is a matter for the
court. In the first scenario, we arrive at an after-tax net present value as of the end of
2010 of $11.4 million, or $46.5 million with potential trebling of damages. In the
second scenario, we arrive at a value of $8.9 million, or $36.4 million with trebling.
We note that trebling of damages is frequently sought, but it is our understanding that
it is rarely granted, except in extreme cases of willful infringement. Importantly,
LOGM has a strong balance sheet, with $167 million in cash and no debt as of
December 31, 2010.
Figure 3: Illustrative Analysis of LOGM Exposure – Lost Profit Analysis
$ in millions
2005 (1) 2006 2007 2008 2009 2010
LOGM Total Revenue 0.9 11.3 27.0 51.7 74.4 101.1
LOGM Remote Access Revenue 0.3 3.8 9.0 17.2 24.8 45.5
Assumed % of Total 33.3% 33.3% 33.3% 33.3% 33.3% 45.0%
Hypothetical 01 Foregone Revenues (2) 0.3 3.8 9.0 17.2 24.8 45.5
Scenario 1: Lost Profits Computed at Normalized Operating Margin
Hypothetical 01 Operating Profit 0.0 0.6 1.4 2.6 3.7 6.8
Margin % (Assuming a Normalized 15% Margin) 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
Pre-Tax After-Tax
Lost Profit (Present Value at 10% Discount Rate) $17.6 $11.4
Plus: Trebling of Damages 35.1 35.1
Total Award (3) $52.7 $46.5
Scenario 2: Lost Profits Computed at LOGM's Historical Operating Margin
Hypothetical 01 Operating Profit (4) - - - - 3.7 9.1
Margin % (Assuming LOGM's Reported Operating Margin) (174.1%) (62.1%) (25.2%) (6.4%) 14.8% 20.0%
Pre-Tax After-Tax
Lost Profit (Present Value at 10% Discount Rate) $13.7 $8.9
Plus: Trebling of Damages 27.5 27.5
Total Award (3) $41.2 $36.4
Source: J.P. Morgan estimates.
1. Assumes three months of annual revenue.
2. Assumes 01 would have earned 100% of the revenues LOGM ultimately earned in remote access.
3. Assumes lost profit damages are tax deductible to LOGM at 35%; punitive award is not tax deductible.
4. For periods in which LOGM was unprofitable, we assume
of lost profit is awarded.
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North America Equity Research
14 March 2011
John DiFucci
(1-212) 622-2341
john.s.difucci@jpmorgan.com
Reasonable royalty
If 01 is unable to prove lost profits, it would then argue for a reasonable royalty. In
Figure 4, we calculate the hypothetical impact to LOGM if it were required to pay 01
a royalty on all previous remote access sales back to 2005. Our understanding is that
royalty rates are highly variable and subject to much negotiation, but for now we
assume an 8% royalty is levied on past sales. In our example, LOGM would be
required to pay past royalties of about $6.1 million (after-tax), or $24.8 million with
trebling.
Figure 4: Illustrative Analysis of LOGM Exposure – Reasonable Royalty Analysis (2005-2010)
$ in millions
2005 (1) 2006 2007 2008 2009 2010
LOGM Total Revenue 0.9 11.3 27.0 51.7 74.4 101.1
Less: LOGM Non-GAAP COGS & Operating Expenses (2.4) (18.0) (33.1) (53.6) (61.4) (77.3)
Hypothetical Royalty to 01 =
LOGM Remote Access Revenue 0.3 3.8 9.0 17.2 24.8 45.5
x Hypothetical Royalty Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Less: Hypothetical Pre-tax Royalty to 01 (A) (0.0) (0.3) (0.7) (1.4) (2.0) (3.6)
Adjusted LOGM Non-GAAP Operating Profit (1.5) (7.0) (6.8) (3.3) 11.0 20.2
Adjusted Operating Margin (174.1%) (62.1%) (25.2%) (6.4%) 14.8% 20.0%
Pre-Tax After-Tax
Hypothetical Past Royalties to 01 at 10% discount rate (PV of (A)) $9.4 $6.1
Plus: Hypothetical Trebling of Damages 18.7 18.7
Total Award (2) $28.1 $24.8
Source: J.P. Morgan estimates.
1. Assumes three months of annual revenue.
2. Assumes lost profit damages are tax deductible to LOGM at 35%; punitive award is not tax deductible.
In Figure 5 below, we calculate a range of possible damage awards at various royalty
rates.
Figure 5: Illustrative Sensitivity Analysis
$ in millions
Royalty Rate
4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
$6.1 3.0 4.6 6.1 7.6 9.1 10.7 12.2 13.7 15.2
$24.8 12.4 18.6 24.8 31.0 37.2 43.4 49.6 55.8 62.0
After-Tax Award
After-Tax Award (Trebled)
Looking forward, if LOGM were to lose the case but continue to use the technology,
LOGM would be required to pay 01 a similar royalty. However, we would expect
LOGM to modify its remote access solutions so that they were not infringing on the
said patent in such a case. Though the former scenario in such a situation is less
likely in our opinion, we calculate its impact for completeness (Figure 6). If LOGM
were found to be infringing on the ’479 patent and decided to continue to pay a
royalty, this would likely reduce its operating margin by about 4 percentage points
(assuming an 8% royalty rate). Based on our DCF, this would reduce its free cash
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North America Equity Research
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John DiFucci
(1-212) 622-2341
john.s.difucci@jpmorgan.com
flow (after-tax) by 10%, reducing the NPV of its free cash flow by $106 million. The
reduction in cash on the balance sheet and reduction in NPV of future free cash flow
would result in an intrinsic value of $42 per our calculations, versus our current price
target of $47.
Figure 6: Illustrative Analysis of LOGM Exposure - Reasonable Royalty Analysis (2011-2012)
$ millions
2011E 2012E
LOGM Total Revenue 119.6 145.8
Less: LOGM Non-GAAP COGS & Operating Expenses (91.0) (109.3)
Hypothetical Royalty to 01 =
LOGM Remote Access Revenue 53.8 65.6
x Hypothetical Royalty Rate 8.0% 8.0%
Less: Hypothetical Pre-tax Royalty to 01 (4.3) (5.2)
Adjusted LOGM Non-GAAP Operating Profit 24.3 31.2
Adjusted Operating Margin 20.3% 21.4%
Source: J.P. Morgan estimates.
A Permanent Injunction is the Worst Case Scenario, But
Unlikely
The possibility exists that LOGM will be enjoined altogether from selling its remote
access products (as currently engineered) in the future, which would eliminate almost
half of the company’s revenue. However, it is our understanding that injunctions are
more likely to be issued in cases where the patent holder is a true competitor of the
infringer’s. In this case, we believe 01’s immaterial standing in remote access, all
other things being equal, makes it less probable that it would win an injunction.
Litigation is Likely to Play Out Over Many Years
Although this case is being adjudicated in the Eastern District Court of Virginia
(known in legal circles as the “Rocket Docket” for its expediency), patent lawsuits
tend to be long, drawn out affairs. Even if the worst case scenario plays out for
LOGM – treble damages and an injunction from selling its remote access products as
currently constituted – the company would likely appeal the verdict and request a
stay of the injunction until the appeal can be heard. The appeals process, which
would be brought in the Federal Circuit, could extend the case an additional two
years or more. Furthermore, if the Federal Circuit declines to overturn the Virginia
court’s decision, LOGM can then request an appeal to the Supreme Court.
01 Communique’s Litigation History
In February 2006, 01 filed suit against Citrix (rated Neutral) on the basis that CTXS’
GoToMyPC and GoToMeeting allegedly infringed upon the ’479 Patent (i.e., the
same patent being contested in 01 vs. LOGM). The CTXS case was stayed in
March 2008 while the ’479 Patent was re-examined by the U.S. Patent & Trade
Office (“USPTO”) at CTXS’ request. Although the USPTO initially found, upon reexamination,
that the ’479 Patent was valid, CTXS subsequently exercised a Notice
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North America Equity Research
14 March 2011
John DiFucci
(1-212) 622-2341
john.s.difucci@jpmorgan.com
of Appeal with the USPTO’s Board of Patent Appeals and Inferences. Court
documents filed in connection with the LOGM case indicate CTXS’ appeal may not
be adjudicated for at least two years, and it would not be without precedent for it to
take ten years: in one court filing, Judge Claude Hilton cites a case involving Novell
Inc. in which “…after many rehearing requests and appeals, the PTO’s findings were
not confirmed until ten years after a reexamination was initially requested.” While
we think it is unlikely in any event that the USPTO’s ruling will be overturned, the
appeal requested by CTXS adds to the uncertainty and complexity around the lawsuit
against LOGM. In other words, the very patent LOGM is alleged to be infringing
may ultimately be ruled to be invalid, or at least somewhat different from what is
being contested in 01 vs. LOGM.
In September 2010, both LOGM and DELL were named as co-defendants in the
patent infringement lawsuit filed by 01. DELL would later settle with 01 in
December 2010, agreeing to discontinue Dell Remote Access Products and Services
and pay a settlement amount that 01 described in filings as “not material to either
company”. That the settlement amount was not material to a company the size of 01
is an interesting result. Although Dell never disclosed how big Dell Remote Access
Products and Services was, we believe it was small, one data point being Dell’s
absence altogether from IDC’s remote access services software market share
rankings.