Thursday, April 07, 2005
[ANALYST COMMENTS] Susquehanna Financial Group comments on InterDigital
09:52am EDT 7-Apr-05 Susquehanna Financial Group (Briere, Stacey 610-617-2686
Story 1947 (B/SZ, C/CEU, C/CFE, C/CFI, C/CJP, C/CNA, C/CSW, C/CUS, ERICY...)
+/+/+/+ Susquehanna Financial +/+/+/+
MARKET INSIGHT: INTERDIGITAL COMMUNICATIONS CORPORATION (IDCC: NOT COVERED)
Stacey Briere: Phone No. 610-617-2686
MARKET INSIGHT: INTERDIGITAL COMMUNICATIONS CORPORATION (IDCC: $16.37 OPEN; NOT
COVERED)
Other companies mentioned: Nokia (NOK: $15.28 OPEN; Not Covered), Ericsson
(ERICY: $28.07 OPEN; Not Covered), Lucent (LU: $2.57 OPEN; Not Covered);
Matsushita Electric Industrial Co (MC: $15.11 OPEN; Not Covered); NEC
Corporation (NIPNY: $5.96 OPEN; Not Covered); Sony Corporation (SNE: $40.00
OPEN; Not Covered)
Stacey Briere - 610-617-2686 - briere@sig.com - Chief Options Strategist
Jen Bullard - 610-617-2856 - bullard@sig.com - Chief Research Strategist
CONCLUSION
IDCC is currently involved in a patent dispute with NOK that is expected to be
resolved by May 31, 2005. Using option prices, the marketplace is currently
implying there is approximately a 22% chance of IDCC trading to the $20 level by
June expiration. When one considers the royalty obligations approximated by
IDCC, in addition to the stock's reaction to previous settlements with ERICY and
NIPNY, it seems reasonable that IDCC could reach that level in the event of a
favorable resolution.
For those who believe that a stock price of $20 or more is the appropriate
impact to IDCC's stock in the event of a favorable outcome to the NOK dispute,
and that the likelihood of this happening is greater than 22%, the June 17.50/20
call spread may appear inexpensive.
BACKGROUND
IDCC is currently involved in a patent arbitration with NOK, the outcome of
which remains a topic of ongoing market speculation. The dispute relates to
claims brought by IDCC regarding NOK's royalty obligations to the company for 2G
GSM/TDMA and 2.5G GSM/GPRS/EDGE products. Specifically, IDCC claims that the
patent license agreement it signed with ERICY and Sony Ericsson in March 2003
defined the financial terms that should be applied to NOK's royalty obligations
for 2G/2.5G product sales from January 1, 2002 through December 31, 2006. NOK
disputes IDCC's claims and is seeking a determination that its royalty
obligation is not defined by IDCC's agreement with ERICY and Sony Ericsson. An
evidentiary hearing was held before an arbitration tribunal regarding this
matter in January 2005, and IDCC has stated that, absent an earlier resolution
by the parties involved, it expects a final award decision from the
International Court of Arbitration on or by May 31, 2005.
The exact impact on IDCC's stock upon resolution of this dispute is difficult to
predict and there appears to be no clear Street consensus. Figure 1 attempts to
put the dispute into some context. The information provided in Figure 1 reflects
IDCC's estimates for royalty obligations owed by NOK and Samsung Corporation (a
separate, but similar dispute). For example, IDCC claims that NOK's royalty
obligations totaled approximately $100 mln-$120 mln in 2002 and $80 mln-$90 mln
in 2003. In aggregate, we calculate the royalty obligations owed by NOK between
2002 and 2004 to be in the range of $244 mln-$295 mln based on claims made by
IDCC. This equates to a rough cash value of $4.44 to $5.37 per share of IDCC,
which may or may not already be partially reflected in IDCC's stock price.
We caution readers that IDCC's estimates were provided in March 2003 and are
based on its assumptions of NOK's and Samsung's sales mix, ASPs, and market
share at that time. Our rough calculations do not adjust for any market factors,
including changes in currency rates, ASPs and market share. We believe that,
assuming the arbitration panel does award IDCC a settlement payment, it would be
more prudent to estimate an award amount towards the lower end of IDCC's claims
(if not even lower). We also note that the $244 mln-$295 mln alleged obligation
does not consider any potential royalty amount that NOK may be required to pay
for 2G/2.5G product sales in 2005 and 2006 or resolution of a separate dispute
with NOK related to 3G technology.
Figure 1. Estimated Royalty Obligations Owed by Nokia and Samsung as provided by
IDCC
Refer to chart on First Call web.
Most recently, IDCC said that the tribunal presiding over the arbitration
expected to submit an internal draft award to the International Court of
Arbitration of the International Chamber of Commerce (ICC) on or before March
31, 2005 (as an approximate date). We confirmed with IDCC's investor relations
department that the companies will not likely be privy to the content of the
internal draft award. Absent an earlier settlement by the two parties, the ICC
has set May 31, 2005 (before June expiration) as the last date for rendering a
final award decision.
For historical and comparative purposes, we highlight the impact on IDCC's stock
price upon announcement of dispute resolutions with NEC Corporation (NIPNY) and
ERICY/Sony Ericsson in 2002 and 2003, respectively.
* Settlement with ERICY and Sony Ericsson: Shares of IDCC rallied 42% on March
17, 2003 (from $13.76 to $19.54) when the company announced a settlement
agreement with ERICY and Sony Ericsson in a similar patent dispute. The
settlement with ERICY and Sony Ericsson comprised of a $34 mln payment for
sales through 2002 plus a $6 mln annual fee for infrastructure equipment and
royalty rate or prepayment option on handset sales from 2003 to 2006.
* Settlement and 3G licensing agreement with NIPNY: Shares of IDCC rallied
26.2% on January 16, 2002 (from $9.46 to $11.94) when the company announced a
$53 mln settlement relating to a 2G licensing dispute with Japan's NIPNY. The
company also announced a royalty-bearing licensing agreement with NIPNY for 3G
and narrowband CDMA products.
We acknowledge that IDCC is facing several other patent related matters, such as
a pending decision from the Japanese patent office relating to the company's
agreement with MC's Panasonic and a separate patent litigation against LU (see
important dates below); however, we believe that investors will be most focused
on the outcome of IDCC's arbitration with NOK over the next few weeks and
months.
IMPORTANT DATES
* By March 31, 2005 - Arbitration panel to submit an internal draft award to
the International Court of Arbitration of the International Chamber of
Commerce (ICC) regarding IDCC's arbitration dispute against NOK.
* Early May 2005 - Estimated timing of IDCC's 1Q05 earnings release.
* May 2005 - Markman hearing (for claim construction) regarding IDCC vs. LU
patent litigation. The companies are currently in the discovery phase of the
litigation.
* By May 31, 2005 - Final award decision expected from the ICC regarding
IDCC's arbitration dispute against NOK.
* June 2, 2005 - IDCC Annual Shareholder Meeting.
* June 2005 - Evidentiary hearing regarding the IDCC arbitration dispute
against Samsung Corporation. Similar to NOK, Samsung is seeking a
determination that its royalty obligations are not defined by IDCC's patent
agreement with ERICY and Sony Ericsson. According to IDCC's 2004 Form 10-K
filing, Samsung argues that it has succeeded to all of NOK's license rights,
including its 3G license. As a result, resolution between IDCC and NOK will
likely serve as a basis for a license agreement between IDCC and Samsung.
* September 2005 - Trial commencement regarding IDCC vs. LU patent litigation.
OPTIONS INSIGHT
Given that a resolution to this dispute is expected by May 31, 2005 (either in
the form of a decision from the ICC or an earlier settlement by the parties), we
looked at June options, which expire shortly after this date (6/18/05). IDCC
June implied volatility is trading at 3-month highs, around 91% vs. 74-day
realized volatility of approximately 42%. While this data may appear to suggest
the sale of volatility, we do not think this is a wise strategy given the
implied movement priced in the options and IDCC's historical movements following
previous patent litigations.
The June 15 straddle is currently offered at $5.40 vs. a stock price of $16.27
(note: all prices were taken from the close on April 5, 2005). The breakeven
point of this straddle is $20.40 to the upside (26% increase in stock) or $9.60
to the downside (41% decrease in the stock). As noted previously, shares of IDCC
rallied 42% on March 17, 2003 (from $13.76 to $19.54) when the company announced
a $34 mln payment plus $6 mln annual fee settlement agreement with ERICY (and
Sony Ericsson) in a similar patent dispute, and IDCC shares rallied 26.2% on
January 16, 2002 (from $9.46 to $11.94) when the company announced a $53 mln
settlement relating to a 2G licensing dispute with Japan's NIPNY. Both of these
settlements were for lower monetary value than what IDCC claims NOK owes for
royalty obligations, so we believe it is difficult to conclude that the straddle
is expensive and should be sold. While the probability of the move and overall
magnitude cannot be implied from the straddle price alone, it does support that
the stock increasing to $20 is a reasonable assumption.
STRATEGY
Using our assumption that $20 is a reasonable approximation of an upside move
based on previous movements, the June straddle and the "back of the envelope"
estimates of IDCC's royalty claim for NOK, we looked at the derived implied
probability from the marketplace of the stock to increase $20 or higher. As of
yesterday's close, the market is implying approximately a 22% probability of the
stock increasing to $20 or above. Investors who believe an increase to at least
$20 is reasonable and the probability of a settlement that would incur that
movement is greater than 22% may find the June 17.50/20 call spread inexpensive.
Depending on the investor's opinion of the magnitude of the potential move and
the probability of a resolution in IDCC's favor, there could be more
advantageous strategies than the one we note. When deciding what strategy to
use, an investor should overlay his or her opinion of the implied movement in
the stock with that of what the marketplace is suggesting.
Prices are subject to market fluctuations and availability. As with all option
strategies, deviations from the reference prices due to market price
fluctuations may affect the ability to execute at stated prices and could cause
returns to be different from those illustrated.
BREAKPOINTS AND RISKS
For this section, we assume that the customer executes the strategy at $0.85
(closing price bid to offer on April 5, 2005).
* If the stock finishes below $17.50 and no options are exercised or assigned,
then the investor will lose the initial premium of $0.85.
* If the stock finishes between $17.50 and $20, and the June 17.50 calls are
exercised while the June 20 calls are not assigned, then the investor will be
long 100 shares at a net price of $18.35.
* Finally, if the stock finishes above $20, and the June 17.50 calls are
exercised and the June 20 calls are assigned, then the investor will have no
stock position and a profit of $1.65.
COMPANY DESCRIPTION
InterDigital Communications Corporation is focused on the design, development
and delivery of advanced wireless technology platforms. The company is
headquartered in King of Prussia, Pennsylvania.
SFG employs the following rating system:
Net Positive: The data points compiled and the analysis conducted by the
research analyst sum up or "net" out to an overall positive view. This is not a
net positive for the company, but a net positive for the stock, meaning the
information and analysis contained in the report are not reflected in the
current stock price and could reasonably be expected to have a positive or
appreciating effect (when widely available to the public) on the current stock
price.
Net Negative: The data points compiled and the analysis conducted by the
research analyst sum up or "net" out to an overall negative view. This is not a
net negative for the company, but a net negative for the stock, meaning the
information and analysis contained in the report are NOT reflected in the
current stock price and could reasonably be expected to have a negative or
depreciating effect (when widely available to the public) on the current stock
price.
Net Neutral: The data points compiled and the analysis conducted by the research
Continued On Part 2
Copyright (c) 2005 Susquehanna Financial Group, LLLP. All rights reserved.
First Call Corporation, a Thomson Financial company.
All rights reserved. 800.347.7822
Additional Codes ( ERICY.O, I/CMT, I/ELE, I/NOI, IDCC, LU, LU.N, MC, MC.N,
NIPNY, NIPNY.O, NOK, NOK.N, S/OPT, SNE, SNE.N)
Story 1947 (B/SZ, C/CEU, C/CFE, C/CFI, C/CJP, C/CNA, C/CSW, C/CUS, ERICY...)
+/+/+/+ Susquehanna Financial +/+/+/+
MARKET INSIGHT: INTERDIGITAL COMMUNICATIONS CORPORATION (IDCC: NOT COVERED)
Stacey Briere: Phone No. 610-617-2686
MARKET INSIGHT: INTERDIGITAL COMMUNICATIONS CORPORATION (IDCC: $16.37 OPEN; NOT
COVERED)
Other companies mentioned: Nokia (NOK: $15.28 OPEN; Not Covered), Ericsson
(ERICY: $28.07 OPEN; Not Covered), Lucent (LU: $2.57 OPEN; Not Covered);
Matsushita Electric Industrial Co (MC: $15.11 OPEN; Not Covered); NEC
Corporation (NIPNY: $5.96 OPEN; Not Covered); Sony Corporation (SNE: $40.00
OPEN; Not Covered)
Stacey Briere - 610-617-2686 - briere@sig.com - Chief Options Strategist
Jen Bullard - 610-617-2856 - bullard@sig.com - Chief Research Strategist
CONCLUSION
IDCC is currently involved in a patent dispute with NOK that is expected to be
resolved by May 31, 2005. Using option prices, the marketplace is currently
implying there is approximately a 22% chance of IDCC trading to the $20 level by
June expiration. When one considers the royalty obligations approximated by
IDCC, in addition to the stock's reaction to previous settlements with ERICY and
NIPNY, it seems reasonable that IDCC could reach that level in the event of a
favorable resolution.
For those who believe that a stock price of $20 or more is the appropriate
impact to IDCC's stock in the event of a favorable outcome to the NOK dispute,
and that the likelihood of this happening is greater than 22%, the June 17.50/20
call spread may appear inexpensive.
BACKGROUND
IDCC is currently involved in a patent arbitration with NOK, the outcome of
which remains a topic of ongoing market speculation. The dispute relates to
claims brought by IDCC regarding NOK's royalty obligations to the company for 2G
GSM/TDMA and 2.5G GSM/GPRS/EDGE products. Specifically, IDCC claims that the
patent license agreement it signed with ERICY and Sony Ericsson in March 2003
defined the financial terms that should be applied to NOK's royalty obligations
for 2G/2.5G product sales from January 1, 2002 through December 31, 2006. NOK
disputes IDCC's claims and is seeking a determination that its royalty
obligation is not defined by IDCC's agreement with ERICY and Sony Ericsson. An
evidentiary hearing was held before an arbitration tribunal regarding this
matter in January 2005, and IDCC has stated that, absent an earlier resolution
by the parties involved, it expects a final award decision from the
International Court of Arbitration on or by May 31, 2005.
The exact impact on IDCC's stock upon resolution of this dispute is difficult to
predict and there appears to be no clear Street consensus. Figure 1 attempts to
put the dispute into some context. The information provided in Figure 1 reflects
IDCC's estimates for royalty obligations owed by NOK and Samsung Corporation (a
separate, but similar dispute). For example, IDCC claims that NOK's royalty
obligations totaled approximately $100 mln-$120 mln in 2002 and $80 mln-$90 mln
in 2003. In aggregate, we calculate the royalty obligations owed by NOK between
2002 and 2004 to be in the range of $244 mln-$295 mln based on claims made by
IDCC. This equates to a rough cash value of $4.44 to $5.37 per share of IDCC,
which may or may not already be partially reflected in IDCC's stock price.
We caution readers that IDCC's estimates were provided in March 2003 and are
based on its assumptions of NOK's and Samsung's sales mix, ASPs, and market
share at that time. Our rough calculations do not adjust for any market factors,
including changes in currency rates, ASPs and market share. We believe that,
assuming the arbitration panel does award IDCC a settlement payment, it would be
more prudent to estimate an award amount towards the lower end of IDCC's claims
(if not even lower). We also note that the $244 mln-$295 mln alleged obligation
does not consider any potential royalty amount that NOK may be required to pay
for 2G/2.5G product sales in 2005 and 2006 or resolution of a separate dispute
with NOK related to 3G technology.
Figure 1. Estimated Royalty Obligations Owed by Nokia and Samsung as provided by
IDCC
Refer to chart on First Call web.
Most recently, IDCC said that the tribunal presiding over the arbitration
expected to submit an internal draft award to the International Court of
Arbitration of the International Chamber of Commerce (ICC) on or before March
31, 2005 (as an approximate date). We confirmed with IDCC's investor relations
department that the companies will not likely be privy to the content of the
internal draft award. Absent an earlier settlement by the two parties, the ICC
has set May 31, 2005 (before June expiration) as the last date for rendering a
final award decision.
For historical and comparative purposes, we highlight the impact on IDCC's stock
price upon announcement of dispute resolutions with NEC Corporation (NIPNY) and
ERICY/Sony Ericsson in 2002 and 2003, respectively.
* Settlement with ERICY and Sony Ericsson: Shares of IDCC rallied 42% on March
17, 2003 (from $13.76 to $19.54) when the company announced a settlement
agreement with ERICY and Sony Ericsson in a similar patent dispute. The
settlement with ERICY and Sony Ericsson comprised of a $34 mln payment for
sales through 2002 plus a $6 mln annual fee for infrastructure equipment and
royalty rate or prepayment option on handset sales from 2003 to 2006.
* Settlement and 3G licensing agreement with NIPNY: Shares of IDCC rallied
26.2% on January 16, 2002 (from $9.46 to $11.94) when the company announced a
$53 mln settlement relating to a 2G licensing dispute with Japan's NIPNY. The
company also announced a royalty-bearing licensing agreement with NIPNY for 3G
and narrowband CDMA products.
We acknowledge that IDCC is facing several other patent related matters, such as
a pending decision from the Japanese patent office relating to the company's
agreement with MC's Panasonic and a separate patent litigation against LU (see
important dates below); however, we believe that investors will be most focused
on the outcome of IDCC's arbitration with NOK over the next few weeks and
months.
IMPORTANT DATES
* By March 31, 2005 - Arbitration panel to submit an internal draft award to
the International Court of Arbitration of the International Chamber of
Commerce (ICC) regarding IDCC's arbitration dispute against NOK.
* Early May 2005 - Estimated timing of IDCC's 1Q05 earnings release.
* May 2005 - Markman hearing (for claim construction) regarding IDCC vs. LU
patent litigation. The companies are currently in the discovery phase of the
litigation.
* By May 31, 2005 - Final award decision expected from the ICC regarding
IDCC's arbitration dispute against NOK.
* June 2, 2005 - IDCC Annual Shareholder Meeting.
* June 2005 - Evidentiary hearing regarding the IDCC arbitration dispute
against Samsung Corporation. Similar to NOK, Samsung is seeking a
determination that its royalty obligations are not defined by IDCC's patent
agreement with ERICY and Sony Ericsson. According to IDCC's 2004 Form 10-K
filing, Samsung argues that it has succeeded to all of NOK's license rights,
including its 3G license. As a result, resolution between IDCC and NOK will
likely serve as a basis for a license agreement between IDCC and Samsung.
* September 2005 - Trial commencement regarding IDCC vs. LU patent litigation.
OPTIONS INSIGHT
Given that a resolution to this dispute is expected by May 31, 2005 (either in
the form of a decision from the ICC or an earlier settlement by the parties), we
looked at June options, which expire shortly after this date (6/18/05). IDCC
June implied volatility is trading at 3-month highs, around 91% vs. 74-day
realized volatility of approximately 42%. While this data may appear to suggest
the sale of volatility, we do not think this is a wise strategy given the
implied movement priced in the options and IDCC's historical movements following
previous patent litigations.
The June 15 straddle is currently offered at $5.40 vs. a stock price of $16.27
(note: all prices were taken from the close on April 5, 2005). The breakeven
point of this straddle is $20.40 to the upside (26% increase in stock) or $9.60
to the downside (41% decrease in the stock). As noted previously, shares of IDCC
rallied 42% on March 17, 2003 (from $13.76 to $19.54) when the company announced
a $34 mln payment plus $6 mln annual fee settlement agreement with ERICY (and
Sony Ericsson) in a similar patent dispute, and IDCC shares rallied 26.2% on
January 16, 2002 (from $9.46 to $11.94) when the company announced a $53 mln
settlement relating to a 2G licensing dispute with Japan's NIPNY. Both of these
settlements were for lower monetary value than what IDCC claims NOK owes for
royalty obligations, so we believe it is difficult to conclude that the straddle
is expensive and should be sold. While the probability of the move and overall
magnitude cannot be implied from the straddle price alone, it does support that
the stock increasing to $20 is a reasonable assumption.
STRATEGY
Using our assumption that $20 is a reasonable approximation of an upside move
based on previous movements, the June straddle and the "back of the envelope"
estimates of IDCC's royalty claim for NOK, we looked at the derived implied
probability from the marketplace of the stock to increase $20 or higher. As of
yesterday's close, the market is implying approximately a 22% probability of the
stock increasing to $20 or above. Investors who believe an increase to at least
$20 is reasonable and the probability of a settlement that would incur that
movement is greater than 22% may find the June 17.50/20 call spread inexpensive.
Depending on the investor's opinion of the magnitude of the potential move and
the probability of a resolution in IDCC's favor, there could be more
advantageous strategies than the one we note. When deciding what strategy to
use, an investor should overlay his or her opinion of the implied movement in
the stock with that of what the marketplace is suggesting.
Prices are subject to market fluctuations and availability. As with all option
strategies, deviations from the reference prices due to market price
fluctuations may affect the ability to execute at stated prices and could cause
returns to be different from those illustrated.
BREAKPOINTS AND RISKS
For this section, we assume that the customer executes the strategy at $0.85
(closing price bid to offer on April 5, 2005).
* If the stock finishes below $17.50 and no options are exercised or assigned,
then the investor will lose the initial premium of $0.85.
* If the stock finishes between $17.50 and $20, and the June 17.50 calls are
exercised while the June 20 calls are not assigned, then the investor will be
long 100 shares at a net price of $18.35.
* Finally, if the stock finishes above $20, and the June 17.50 calls are
exercised and the June 20 calls are assigned, then the investor will have no
stock position and a profit of $1.65.
COMPANY DESCRIPTION
InterDigital Communications Corporation is focused on the design, development
and delivery of advanced wireless technology platforms. The company is
headquartered in King of Prussia, Pennsylvania.
SFG employs the following rating system:
Net Positive: The data points compiled and the analysis conducted by the
research analyst sum up or "net" out to an overall positive view. This is not a
net positive for the company, but a net positive for the stock, meaning the
information and analysis contained in the report are not reflected in the
current stock price and could reasonably be expected to have a positive or
appreciating effect (when widely available to the public) on the current stock
price.
Net Negative: The data points compiled and the analysis conducted by the
research analyst sum up or "net" out to an overall negative view. This is not a
net negative for the company, but a net negative for the stock, meaning the
information and analysis contained in the report are NOT reflected in the
current stock price and could reasonably be expected to have a negative or
depreciating effect (when widely available to the public) on the current stock
price.
Net Neutral: The data points compiled and the analysis conducted by the research
Continued On Part 2
Copyright (c) 2005 Susquehanna Financial Group, LLLP. All rights reserved.
First Call Corporation, a Thomson Financial company.
All rights reserved. 800.347.7822
Additional Codes ( ERICY.O, I/CMT, I/ELE, I/NOI, IDCC, LU, LU.N, MC, MC.N,
NIPNY, NIPNY.O, NOK, NOK.N, S/OPT, SNE, SNE.N)
