Worth a repeat:=DJ TALES OF THE TAPE: InterDigital Gears For 3G Wireless
By Dinah Wisenberg Brin Of DOW JONES NEWSWIRES (This article was originally published Thursday.)
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.
"I think there are a number of things on the horizon that are going to bode very well for the company," analyst Frank Marsala of Halpern Capital said.
Those events include resolution of talks with two other leading cell-phone companies, Nokia Corp. (NOK) and Samsung Electronics Co., possibly as soon as this summer, to determine their financial obligations to InterDigital for certain licenses - a process set in motion by the Ericsson settlement and expected to bring InterDigital hundreds of millions in revenue in the next few years.
Analysts also note that mobile phone sales have been strong this year, a positive development for a company that gets paid royalties for many of the handsets sold, and should receive more assuming it reaches agreements with Nokia and Samsung. The anticipated Nokia and Samsung deals "will be worth something to this company in terms of the stock price," as the market hasn't yet fully priced the potential agreements into the shares, Marsala said. Marsala, who initiated coverage in April, said he doesn't own the shares and his firm doesn't perform investment banking for the company, based in King of Prussia, Pa.
The big near-term risk to the stock would be resistance from Nokia and Samsung that would push those agreements into 2004, Marsala said, but he does expect the agreements to materialize.
Licensing agreements related to InterDigital's next-generation technology are also possible this year, and the market has only partly valued them into the stock price, Marsala said. He values InterDigital shares at $30 to $35.
"They do have acknowledged 3G technology that is patentable intellectual property. That's a big one. That will be the next big one after Nokia and Samsung play out," Marsala said.
Analyst Tom Carpenter of Hilliard Lyons, who rates the stock a buy, has a 12-month price target of $25 to $31 on the shares, but said that goal could prove conservative if the company finalizes its royalty levels with Nokia and Samsung before the second half of the year. Carpenter holds a position in the stock but said his firm doesn't do investment banking for the company.
InterDigital shares, which closed Wednesday at $24.92, reached a 52-week high of $27.50 May 14, and set a low of $6.22 Aug. 5.
InterDigital estimates it could have a potential $360 million to $430 million in aggregate cash flow from Nokia, Samsung, Ericsson and Sony Ericsson over 12 months as a result of the recent Ericsson settlement, which covers its intellectual property used in the current generation of wireless technology. That estimate assumes the agreements will be reached with Nokia and Samsung.
For a company with less than $88 million in revenue in 2002, the potential agreements with Nokia and Samsung alone "could make a large impact on their revenue and income statement," analyst Carpenter said.
Growth Potential
Settling the royalty issue with Nokia and Samsung should further validate InterDigital technology, helping the company sign other licensees for current and next-wave patents, Carpenter said. That's significant, as InterDigital and observers see growth potential as the industry adopts more advanced technology.
InterDigital has licensed it technology for a majority of the mobile phones now in use globally. The phones use "second-generation," or 2G, and more advanced 2.5G technologies that carry voice and limited data.
The company is working on intellectual property and products for third-generation, or 3G, which has started to emerge on a limited basis. This advanced, higher-speed technology, which requires new infrastructure equipment and phones, is expected to enable transmission of video and other data-rich services, as well as voice.
"We think they've got some great intellectual property in the wireless communications area and they're really just starting to capitalize on it," said Joseph Garner, buyside research director at Emerald Asset Management, which has a stake in the company. Carpenter said InterDigital will be "a leading beneficiary" of the switch to 3G.
InterDigital President and Chief Executive Howard Goldberg, noting the company's big stake in 3G patents, said in a recent phone interview that the technology is "an important part of our position moving forward."
Besides licensing its patents to others, the key source of revenue now, InterDigital plans to incorporate its intellectual property into a variety of advanced, 3G wireless products to be used in handsets and infrastructure to sell to industry players. The company plans to start selling some products next year, and is working with a partner on handset chips.
The timing for wide deployment of 3G services remains uncertain, however, and the technology has experienced delays. Morgan Stanley issued a note recently expressing concerns that 3G won't take strong hold in major world markets until 2005. But InterDigital already has 3G licenses with several handset makers and believes the evolution is under way. A company spokesman said InterDigital has always been conservative in its view of 3G rollout, and wants to market its products early. Analysts say full adoption is a matter of time.
Wireless carriers consider the more advanced technology a way to generate higher revenue per customer, Carpenter said. He gave a "realistic" estimate of common usage by the second half of 2004, with mass market use by 2005.
"Yes, it has been delayed, but the carriers have sunk so much money into licenses that they want to see it happen," he said.
Meanwhile, InterDigital has licensed about 70% of the 2G market, and has the cushion of those royalties for the next four-and-a-half years, he said.
"If 3G doesn't come to fruition or it's not as extensive as it's envisioned to be, that will have an impact on the future earnings of the company," Emerald's Garner said. He added, however, that "3G seems to be something that's going to happen. It's a question of when."
Halpern's Marsala said in a note that he expects the technology to emerge over the next two years, but cautioned that it could take longer.
Earlier this month, InterDigital reported first-quarter net income of 45 cents a share, compared with a break-even first quarter a year earlier, and a 78% increase in revenue to $37.3 million. The increase was largely due to royalties from the new patent license agreements with Ericsson and spin-off Sony Ericsson.
The company hasn't given financial guidance for this year because of "a lack of visibility into the marketplace" on a number of events, but officials feel good about the company's position, CEO Goldberg said.
Goldberg cited the Ericsson settlement as a milestone for the company.
"Settling that litigation, getting the recognition that's accorded by a meaningful licensing agreement going forward is very important to the licensing momentum," he said.
InterDigital is involved with the bodies that set the standards for wireless technology, and some of its inventions have been incorporated into those standards.
Goldberg said the Ericsson settlement, while covering current technology, should help InterDigital build relationships that could facilitate future royalty agreements connected to 3G, including further agreements with Ericsson, an industry infrastructure leader.
(Dinah Wisenberg Brin covers the Philadelphia area for Dow Jones Newswires.)
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com
(END) Dow Jones Newswires
05-30-03 0730ET
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