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Friday, May 30, 2003 7:15:24 AM
HEARD ON THE STREET
May 30, 2003
Tech-Bubble Reminder?
InterDigital Shares Soar
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
In mid-March, InterDigital Communications Corp., which designs and develops wireless technology that it licenses to telephone-handset makers, announced settlement of a longstanding patent-infringement dispute with Ericsson Inc. and Sony Ericsson Mobile Communications AB.
Since then, the stock has been on a tear, as bullish investors have extrapolated positive resolutions for InterDigital in continuing disputes with other handset makers that use the company's technology. In 4 p.m. Nasdaq Stock Market trading Thursday, shares of the King of Prussia, Pa., company fell 18 cents to $24.74 each -- from $6.22 a share in August. Champions say the price could go as high as $40.
But should it?
With the backdrop of a Nasdaq Composite Index that is up 17% so far this year, some critics say InterDigital is more proof the technology bubble may be swelling again. They say unrealistically optimistic expectations support an overvalued price for the shares. Moreover, they point out, some insiders seem to be cynical about the future. During the past 12 months, 15 insiders have sold more than 615,000 shares, with more than half of that coming during the 44% rally since the Ericsson settlement. The company says those sales represent "a modest percentage" of what executives hold.
Still, to the critics, InterDigital is a story that involves more hype than substance, a story more appropriate to 2000 than 2003.
The pact giving rise to the euphoria involves how much InterDigital is owed for technology embedded in the handsets sold by Ericsson and Sony Ericsson, units of Telefon AB L.M. Ericsson and Sony Corp. Counting an upfront payment of $34 million, it gives InterDigital a possible $100 million over four years, according to Rip Tilden, the company's chief operating officer. With a $20 million first-quarter revenue boost from the settlement, the company showed a nearly 80% increase in revenue to $37 million from $21 million a year earlier.
Citing the expectation of similar pacts with other licensees, the company's announcement of the Ericsson pact suggested it "could" receive $200 million in royalties from Nokia Corp. Soon after the mid-March agreement, Tom Carpenter, senior technology analyst with Louisville, Ky., securities firm Hilliard Lyons, wrote that Ericsson, Nokia and Samsung Electronics Co., another licensee, "will generate hundreds of millions in licensing revenue for IDCC in the near term." (Mr. Carpenter owns shares of the company but his firm doesn't.)
Frank Marsala, an analyst with research and brokerage firm Halpern Capital Inc. of Bay Harbor Islands, Fla., who rates InterDigital a "buy," expects the shares could fetch $30 or $35 each after reaching agreement on royalties with Nokia and Samsung sometime this year. He also says InterDigital will have additional royalty revenue once handset makers start making mobile phones incorporating third-generation technology, which he believes could take the share price to $40. Fans also note handset sales hit 116 million units industrywide during the first quarter, higher than estimates, which is good news for InterDigital because royalties are paid on the basis of handsets sold. (Neither Mr. Marsala nor his firm hold shares in the company; nor do investment-banking business with it.)
Ericsson and Sony Ericsson won't comment on the InterDigital estimate of $100 million, noting the pact commits them to an annual fee of $6 million and per-handset royalties. Skeptics point out that Nokia paid $31.5 million in royalties to InterDigital between 1999 and 2001, so an increase to $200 million during the next four years, when the licenses expire, seems steep. Mr. Tilden says the company can't disclose the royalty rate because of confidentiality agreements, but he also adds the company's estimates are conservative. Nokia declines to comment.
Similarly, Samsung Electronics paid $17 million in royalties from 1996 to 2001, making it seem unlikely to bears that it would be willing to pay the $70 million during the next four years that InterDigital anticipates it "could" receive. Mr. Tilden responds that his estimates reflect a different (albeit undisclosed) formula and increased Samsung sales. Samsung representatives couldn't be reached for comment.
Some critics also point to financial-statement matters. Since last year, the percentage of deferred revenue on the company's balance sheet relative to total revenue has fallen, according to research firm Center for Financial Research and Analysis Inc., Rockville, Md. Deferred revenue is a balance-sheet account reflecting upfront royalties paid by licensees, but InterDigital can recognize this revenue on its income statement only when the licensees sell handsets and any other products covered by the licenses, a company spokesman says. "When deferred revenues decline as a percentage of revenues, CFRA raises concern that future revenue growth may slow or that the company has begun to more aggressively recognize revenues that had been previously deferred," a recent research-center report reads.
The company says it was forced to recognize some previously deferred revenue because two Japanese licensees had withdrawn from the business. Mr. Tilden says accounting rules dictate when deferred revenue must be recognized as current revenue.
"The company has been very clear about where things have been booked and why," Mr. Marsala says.
Write to Henny Sender at henny.sender@wsj.com
05/29 2:00P (DJ) =DJ TALES OF THE TAPE: InterDigital Gears For 3G Wireless
Story 4797 (DJDAY, ERICY, IDCC, NOK, Q.SSE, S.ERC, Y.NOK, FI0009000681...)
By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES
PHILADELPHIA (Dow Jones)--Wireless technology company InterDigital Communications Corp. (IDCC), with the settlement of an important patent dispute behind it, aims to build on its position as the industry looks toward next-generation technology.
The company and analysts believe the resolution of the decade-long case against Swedish cellular-phone giant L.M. Ericsson Telephone Co. (ERICY) is a potentially transformative event that could help InterDigital, which patents inventions used to transmit cellular phone calls, to strengthen its position
in the industry.
Despite a large run-up in the stock since the agreement in March, the two analysts who follow the $1.3 billion market-cap company deem InterDigital a worthwhile investment with room to grow............
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