WellsFargo: IDCC: Wireless Patent Play: Windfall or Bust;
07:07am EST 26-May-04 Wells Fargo Securities, LLC (Casey Ryan) IDCC MOT QCOM NO
Since 1999, InterDigital has focused its technology and product
development on WCDMA. WCDMA comprises two duplexing methods, FDD and TDD.
With FDD transmission, communications signals are transmitted in two
separate radio bands of equal size. With TDD transmission, communications
signals are sent in alternate directions, often asymmetrically, in a
single radio channel. While global market demand for FDD products is
growing in tandem with emerging market demand for 3G, the company expects
deployment of TDD products to trail the emergence of FDD products.
FDD Technology Products
Since 2001, InterDigital and Infineon Technologies have been engaged in
the implementation of FDD protocol stacks to interface with existing GSM/
GPRS hardware and software that support Infineon's 3G baseband processor
and that are portable to other baseband processors. InterDigital and
Infineon are offering the FDD protocol stack solution to 3G mobile phone
and semiconductor producers such as Huawei Technologies and DBTel in
China. We believe that InterDigital could receive up to $0.25 per chip
sold to these vendors. The company is developing the next generation of
FDD: HSDPA (High Speed Downlink Packet Access).
TDD Technology Products
In 1999, InterDigital entered into a strategic technology development
agreement with Nokia to develop and validate standards that were
compliant with WTDD technology, concluding in 2003 with final
verification, testing, and acceptance by Nokia. In 2002, the company
became a council member in the TD-SCDMA Forum, a body focused on the
application of TD-SCDMA (Time Division Synchronous CDMA)-a form of TDD.
Smart Antenna Technology Products
With the acquisition of Windshift, InterDigital added smart antenna
technology to its portfolio. In general, smart antenna technology seeks
to improve the ability of a wireless device to acquire and hold a radio
signal.
Radio Resource Management Solutions
As part of the TDD development effort, InterDigital created the radio
resource management solution, offered under the service mark SmartRRM,
which allocates radio resources to suit the character of wireless
traffic, optimizing network stability, connection reliability, system
capacity, terminal battery consumption, and overall quality of service.
Management
Howard E. Goldberg is president, CEO, and director of InterDigital. Prior
to joining the company, Mr. Goldberg served as an attorney in various
capacities, including an appointment as special counsel of international
corporate finance with the SEC.
Richard J. Fagan is an EVP and CFO of InterDigital. Prior to joining the
company in 1998, Mr. Fagan held a series of financial management
positions with Quaker Chemical in Conshohocken, Pennsylvania.
Dr. Alain Brian on is an EVP and CTO of InterDigital. Prior to joining
the company, Dr. Brian on was VP and general manager of Motorola's
advanced services applications platform.
William J. Merritt is an EVP and director of ITC, InterDigital's IP
subsidiary. Prior to joining the company in 1996, he served as assistant
general counsel with the Long Island Lighting Company in Hicksville, New
York.
William Charles Miller is InterDigital's SVP of engineering and program
management. Prior to joining the company in 2000, Mr. Miller was VP of
programs at Telephonics, a technology company specializing in wireless
and audio products.
Charles Tilden is an EVP and COO of InterDigital. Prior to joining the
company in 1996, Mr. Tilden was VP of corporate affairs at Alco Standard.
Valuation
We believe that InterDigital's revenue and earnings stream could be
significantly improved by favorable outcomes of the Nokia and Samsung
arbitrations. Given the uncertainty of the outcomes of these legal
proceedings, we must rely on the company's existing licenses to forecast
revenue and earnings and to develop our valuation analysis. We believe
that the best valuation comparisons for InterDigital are with other
technology companies that generate significant portions of their revenue
from royalties (at least 30% of the total), such as QUALCOMM and ARM
Holdings, Ltd.
InterDigital currently trades at 51x our current FY05 EPS estimate of
$0.32, versus an average multiple of 43x for its technology royalty
peers. We believe that at current levels, InterDigital is fully valued,
and investors who are paying current share prices are assuming a
successful conclusion to the company's pending litigation. Given the
uncertainty, we are initiating coverage of InterDigital shares with a
Hold rating. In our view, current share prices are too high for us to
recommend purchase without knowing how the arbitrations with Nokia and
Samsung will conclude.
Risk
* Wireless technology trends. InterDigital derives most of its revenue
from licensing IP. Any material unexpected change in the deployment,
pace, and growth of wireless technology-especially 3G and wireless data
services related to InterDigital's IP-could greatly affect the
company's financial performance.
* Customer wins. InterDigital depends on wireless manufacturers and OEMs
to monetize its IP. If InterDigital were to lose current customers or
were unable to gain new customers (due to competition or risk to R&D),
the company's financial success could be greatly affected.
* Royalty collection. There is no guarantee that InterDigital will be
able to collect royalties under existing license and settlement
agreements or derive revenue from patents. The company is particularly
vulnerable to nonpayment outside the United States and Europe.
* Legal risks. InterDigital could lose its lawsuits against Nokia or
Samsung and would therefore be unable to receive either past or future
royalty obligations. InterDigital would be especially affected if it
were to lose to Federal Insurance, with the potential loss of payments
equivalent to one quarter's sales.
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