Tuesday, January 18, 2005
[ANALYST REPORT] Frank Marsala (First Albany Capital) reiterates Neutral rating and $21 price target and comments on the Nokia arbitration
First Albany IDCC: Arbitration Hearing Will Likely End Shortly; Par
Frank Marsala, CFA, Principal
Arbitration Hearing Will Likely End Shortly; Current Price Looks Appropriate
Key Points:
* On Thursday of last week, InterDigital disclosed that Nokia has filed a
complaint against InterDigital stating that the current arbitration
involving Nokia (NOK-$15.24-Not Rated) and InterDigital does not involve 3G
products.
* InterDigital's stock sold off about 11% on this news, leading us to believe
that investors had been pricing in some probability that Nokia and
InterDigital could settle their arbitration and include a 3G rate agreement
in the settlement.
* Prior to this claim being filed by Nokia, we would have expected four
possible outcomes. They were: 1) IDCC outright win, 2) Nokia outright win,
3) Compromise agreement for 2G/2.5G, only, and 4) Compromise agreement
between the companies, including 3G as well as 2G/2.5G.
* Given that the complaint by Nokia likely rules out the possibility for a
compromise agreement between the parties that includes 3G, we found the task
of assigning values and probabilities to the eventual outcome a bit easier
and so we took a stab at doing just that. In our analysis, we conclude that
the market has efficiently priced IDCC shares at this time and that an
outright win by IDCC at its originally expected amounts could provide for
some upside potential.
* We could have an ruling very shortly, as it appears that the final
arbitration hearing was scheduled for January 17, 2005.
Valuation:
We value IDCC shares based on a discounted free cash flow methodology. Our
estimates reflect current paying licensees and also include Nokia and Samsung
starting in 2005 at the low end of the amounts expected by the company. The
result of our discounted cash flow model is an end of 2005 valuation of $21.
Our DCF valuation is based on our forecast of the company's performance
through 2010, assumes a 3% terminal year growth rate, and discounts cash flows
back at a discount rate of 15%.
Discussion:
On Thursday of last week, InterDigital disclosed that Nokia has filed a
complaint against InterDigital stating that the current arbitration involving
Nokia and InterDigital does not involve 3G products. We were somewhat confused
by this complaint by Nokia, as it was clear to us that the subject of the
current arbitration proceeding was intellectual property for 2G/2.5G. We spoke
with a company representative who was not able to tell us what motivated Nokia
to file this complaint.
InterDigital's stock sold off $2.23, or about 11%, on this news, leading us to
believe that investors had been pricing in some probability that Nokia and
InterDigital could settle their arbitration and include a 3G rate agreement in
the settlement.
Prior to this claim being filed by Nokia, we would have expected four possible
outcomes, as follows:
1) IDCC outright win.
2) Nokia outright win.
3) Compromise agreement (by arbitrator or between the companies) for 2G/2.5G,
only.
4) Compromise agreement between the companies including 3G as well as 2G/2.5G.
In this case (which we believe investors had partially priced in until the
filing of Nokia's complaint), we believe InterDigital's stock price would have
shown significant appreciation, as it would have likely come to reflect not
only the expected value of Nokia's 3G agreement, but also a discounted value
of the entire 3G addressable market.
Given that the complaint by Nokia likely rules out the possibility for a
compromise agreement between the parties that includes 3G, we found the task
of assigning values and probabilities to the eventual outcome a bit easier and
so we took a stab at doing just that.
Scenario 1 " IDCC Wins. We believe our current model generates a valuation for
IDCC shares under a scenario in which IDCC wins the arbitration against Nokia.
We do so, however, at the low end of the amounts suggested by InterDigital,
which the company disclosed upon the announcement of its settlement with
Ericsson (ERICY-$30.20-Not Rated). The valuation given by our discounted cash
flow model is $21 per share at the end of 2005. If we were to assume
InterDigital were to win amounts equal to the upper end of its disclosed
ranges, the valuation would increase by $1, to $22. So for the "IDCC Wins"
scenario we will assume a valuation of $22.36 in order to reflect the upper
end of the company's stated range. We believe this is a fairly high
probability event and have assigned a probability of 25% to this outcome. It
is important to note that this valuation includes only our forecast for
current licensees for 2G/2.5G and assumes no new 3G licensees.
Scenario 2 " Nokia Wins. When we go into our model and zero out the Nokia and
Samsung revenues from our model (remember Samsung's arbitration comes up later
in 2005 and is largely dependent on the Nokia outcome, in our view), we get a
valuation of $3.37 per share, which is probably low, as it does not reflect
the value of additional licensees. Given our belief that InterDigital will
likely win something from Nokia (and therefore from Samsung) in this
proceeding, we assign a probability of only 5% to this outcome.
Scenario 3 " Compromise Settlement. For the compromise settlement we assigned
a rate that would give InterDigital 70% of what it disclosed. Under this
scenario, we value IDCC shares at $16.06 per share. We assigned a probability
of 70% to this outcome.
Doing the math ((25% x 22.36) + (5% x $3.37) + (70% x $16.06)), we arrive at a
value for IDCC shares of approximately $17.00. Again, we believe it would be
reasonable for investors to assign additional value to IDCC, as there would
likely be additional licensees for its 3G portfolio plus potential licensees
for other patents it holds (such as smart antenna technology).
Given this analysis, we conclude that the market has efficiently priced IDCC
shares at this time. An outright win by IDCC at its originally expected
amounts could provide for some upside.
Frank Marsala, CFA, Principal
Arbitration Hearing Will Likely End Shortly; Current Price Looks Appropriate
Key Points:
* On Thursday of last week, InterDigital disclosed that Nokia has filed a
complaint against InterDigital stating that the current arbitration
involving Nokia (NOK-$15.24-Not Rated) and InterDigital does not involve 3G
products.
* InterDigital's stock sold off about 11% on this news, leading us to believe
that investors had been pricing in some probability that Nokia and
InterDigital could settle their arbitration and include a 3G rate agreement
in the settlement.
* Prior to this claim being filed by Nokia, we would have expected four
possible outcomes. They were: 1) IDCC outright win, 2) Nokia outright win,
3) Compromise agreement for 2G/2.5G, only, and 4) Compromise agreement
between the companies, including 3G as well as 2G/2.5G.
* Given that the complaint by Nokia likely rules out the possibility for a
compromise agreement between the parties that includes 3G, we found the task
of assigning values and probabilities to the eventual outcome a bit easier
and so we took a stab at doing just that. In our analysis, we conclude that
the market has efficiently priced IDCC shares at this time and that an
outright win by IDCC at its originally expected amounts could provide for
some upside potential.
* We could have an ruling very shortly, as it appears that the final
arbitration hearing was scheduled for January 17, 2005.
Valuation:
We value IDCC shares based on a discounted free cash flow methodology. Our
estimates reflect current paying licensees and also include Nokia and Samsung
starting in 2005 at the low end of the amounts expected by the company. The
result of our discounted cash flow model is an end of 2005 valuation of $21.
Our DCF valuation is based on our forecast of the company's performance
through 2010, assumes a 3% terminal year growth rate, and discounts cash flows
back at a discount rate of 15%.
Discussion:
On Thursday of last week, InterDigital disclosed that Nokia has filed a
complaint against InterDigital stating that the current arbitration involving
Nokia and InterDigital does not involve 3G products. We were somewhat confused
by this complaint by Nokia, as it was clear to us that the subject of the
current arbitration proceeding was intellectual property for 2G/2.5G. We spoke
with a company representative who was not able to tell us what motivated Nokia
to file this complaint.
InterDigital's stock sold off $2.23, or about 11%, on this news, leading us to
believe that investors had been pricing in some probability that Nokia and
InterDigital could settle their arbitration and include a 3G rate agreement in
the settlement.
Prior to this claim being filed by Nokia, we would have expected four possible
outcomes, as follows:
1) IDCC outright win.
2) Nokia outright win.
3) Compromise agreement (by arbitrator or between the companies) for 2G/2.5G,
only.
4) Compromise agreement between the companies including 3G as well as 2G/2.5G.
In this case (which we believe investors had partially priced in until the
filing of Nokia's complaint), we believe InterDigital's stock price would have
shown significant appreciation, as it would have likely come to reflect not
only the expected value of Nokia's 3G agreement, but also a discounted value
of the entire 3G addressable market.
Given that the complaint by Nokia likely rules out the possibility for a
compromise agreement between the parties that includes 3G, we found the task
of assigning values and probabilities to the eventual outcome a bit easier and
so we took a stab at doing just that.
Scenario 1 " IDCC Wins. We believe our current model generates a valuation for
IDCC shares under a scenario in which IDCC wins the arbitration against Nokia.
We do so, however, at the low end of the amounts suggested by InterDigital,
which the company disclosed upon the announcement of its settlement with
Ericsson (ERICY-$30.20-Not Rated). The valuation given by our discounted cash
flow model is $21 per share at the end of 2005. If we were to assume
InterDigital were to win amounts equal to the upper end of its disclosed
ranges, the valuation would increase by $1, to $22. So for the "IDCC Wins"
scenario we will assume a valuation of $22.36 in order to reflect the upper
end of the company's stated range. We believe this is a fairly high
probability event and have assigned a probability of 25% to this outcome. It
is important to note that this valuation includes only our forecast for
current licensees for 2G/2.5G and assumes no new 3G licensees.
Scenario 2 " Nokia Wins. When we go into our model and zero out the Nokia and
Samsung revenues from our model (remember Samsung's arbitration comes up later
in 2005 and is largely dependent on the Nokia outcome, in our view), we get a
valuation of $3.37 per share, which is probably low, as it does not reflect
the value of additional licensees. Given our belief that InterDigital will
likely win something from Nokia (and therefore from Samsung) in this
proceeding, we assign a probability of only 5% to this outcome.
Scenario 3 " Compromise Settlement. For the compromise settlement we assigned
a rate that would give InterDigital 70% of what it disclosed. Under this
scenario, we value IDCC shares at $16.06 per share. We assigned a probability
of 70% to this outcome.
Doing the math ((25% x 22.36) + (5% x $3.37) + (70% x $16.06)), we arrive at a
value for IDCC shares of approximately $17.00. Again, we believe it would be
reasonable for investors to assign additional value to IDCC, as there would
likely be additional licensees for its 3G portfolio plus potential licensees
for other patents it holds (such as smart antenna technology).
Given this analysis, we conclude that the market has efficiently priced IDCC
shares at this time. An outright win by IDCC at its originally expected
amounts could provide for some upside.
