INVESTEC MPG CAPITAL - Equity Research
Joel W. Achramowicz
Scott C. Robertson
February 15th, 2002
InterDigital Communications Corporation
(IDCC - $9.85)
Rating: STRONG BUY
INVESTEC PMG Reiterates STRONG BUY Rating on IDCC shares; $17 target price
* IDCC's 4Q2001 quarterly revenue and loss per share were significantly below our expectations for the quarter due to lower 2G handset sales mainly in Japan; but, the company's operating cash flow for the year was positive despite the lower revenue.
* And due to the recent NEC settlement, at least $32.4 million more in cash should hit the books this quarter, further improving the company's already solid balance sheet.
* Meanwhile, we still expect to see closure of the Ericsson situation shortly, and we believe this could be quite positive for the company.
* Additionally, IDCC's patent portfolio continues to increase and now represents 4,100 patents issued and pending worldwide; and, the company continues to add scientists and engineers at a rapid pace.
* In short, despite this disappointing quarter from a revenue perspective, it's clear to us that IDCC common stock is still worth at least $17 a share. With the pullback in the price recently, the upside in this issue remains quite compelling and thus, it warrants our highest rating for the year ahead.
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Market Capitalization (Mil.) $548.6
Average Daily Trading Volume 186,000
Shares Outstanding (Mil.) 55.7
Float Shares (Mil.) 50.0
52-Week Range (NASDAQ) $16 - $5
Institutional Holdings 16%
LT Debt to Total Capital NIL
Projected 5-Year EPS Growth Rate 30%
New 2002 Estimates:
March ($0.13)
June ($0.11)
September ($0.08)
December ($0.04)
Fiscal Year EPS ($0.36)
Fiscal Year Revenue $58.1 million
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IDCC's 4Q2001 quarterly revenue and loss per share were significantly below our expectations for the quarter due to lower 2G handset sales mainly in Japan; but, the company's operating cash flow for the year was positive despite the lower revenue. Revenue of $8.4 million was $5.1 million lower than our target for the quarter and this was down from $14.5 million last quarter and $15,8 million during the same quarter a year ago. The loss per share of $0.18 was seven pennies higher than our projection. Operating expenses of $18.3 million were about $1.0 million higher than expected for the quarter. Of the $8.4 million in revenue, $6.0 million was from recurring royalties and this was down 50% from our projection of $8.0 million for the quarter. The rest of the revenue resulted in payments by Nokia for the joint work in which the two companies are engaged. We were looking for $4.5 million in strategic partner revenues. For FY2001 overall, the company posted revenue of $52.5 million, which was actually up comparably from FY2000's $51.2 million revenue, excluding obsolete product sales. The loss per share for the full year, FY2001, was $0.36 and this compared with a profit of $0.10 per share during FY2000.
Due to the recent NEC settlement, at least $32.4 million more in cash should hit the books this quarter, further improving the company's already solid balance sheet. According to the recently completed NEC agreement, IDCC will receive $19.5 million as an advanced royalty payment for 3G sales. And an additional $13.3 million in cash will be paid as well for 2G royalties and this will be recognized throughout the year. Every six months, NEC will pay thereafter another $13.3 million in cash to the company until the $53.0 million settlement for 2G sales has been satisfied. These 2G deferred revenues will be recognized through FY2005 on the P&L. In addition to the NEC settlement, IDCC struck deals during the year with Matsushita, Sharp, Japan Radio Corp., and a 10-year joint cooperative development relationship with Infineon. All of these deals represent inevitable 3G royalties for the company in addition to the inevitable Nokia royalty arrangement we're expecting soon.
Meanwhile, we still expect to see closure of the Ericsson situation shortly, and we believe this could be quite positive for the company. Our reviews of the pacer legal site reflect continuing activities on the part of the court and the parties in the dispute, IDCC and Ericsson. It's our understanding that the mediation process is still underway. On January 22, 2002, 10 documents were filed under seal regarding this case, one in particular which was an opposition response by plaintiff Ericsson to InterDigital's amended motion for judicial notice and brief in support. Another document was filed under seal on February 6th, 8 on February 11th, and 1 on February 12th, 2002. It seems obvious to us that the companies continue to work through various issues; indeed, we believe this process is coming to a close and that perhaps we may hear from the court shortly regarding disposition of the various issue under discussion. In the wake of the NEC settlement, IDCC certainly seems to be in an aggressive position to resolve this situation with Ericsson in an acceptable manner for the company, in our opinion. And as we've said before, the company is probably also considering additional efforts to enforce its IPR with other major players in the industry in the months ahead.
Additionally, IDCC's patent portfolio continues to increase and now represents 4,100 patents issued and pending worldwide; and, the company continues to add scientists and engineers at a rapid pace. Today, IDCC has about 320 people on the payroll, 270 of which are scientists and engineers. Over the last year, headcount in the lab has increased from 185 at the end of 2001. With Alan Briancon on board from Motorola, a new spirit of innovation and creativity has been injected into the company. Leading this vast group of technologists is a daunting task; but Briancon is extraordinarily talented with many patents to his name and many, many contacts in the wireless industry. It seems too, that InterDigital's patent filing efforts have accelerated under his tenure with 650 applications granted and filed during the past year. We would expect that this pace under Bill Merritt, President of InterDigital Technology Corporation, will continue into FY2002 as the industry converges toward worldwide deployment of 3G data transmission by 2003.
In short, despite this disappointing quarter from a revenue perspective, it's clear to us that IDCC common stock is still worth at least $17 a share. With the pullback in the price recently, the upside in this issue remains quite compelling and thus, it warrants our highest rating for the year ahead. It's obvious to us that many on the Street looking for revenue or secular earnings growth will probably be dissatisfied with IDCC stock. But for those who recognize the contributions the company has made in the various aspects of the 2G and 3G air interface standards worldwide, we believe a good deal of money could be made in this stock. When we embarked on coverage of this stock about a year ago, the stock was at a similar price and we issued a STRONG BUY rating with a $17 target. That was prior to the NEC agreement, movement in the Nokia relationship, the opening of the Montreal facility and prior to the company joining the TDD Consortium and the Chinese TD-SCDMA working group. In our opinion, there is no doubt that InterDigital is a more valuable enterprise today then it was when we initiated our coverage of the stock. Clearly, we would expect that these shares could move quite precipitously this year and we ascribe to the thought that it's best to establish position in this stock for the long-term at this price. Clients interested in the story should not be caught empty-handed if a major announcement results from the Ericsson situation. If InterDigital could exact $72.6 million from an erstwhile licensee recently, it's quite conceivable that the company could demand anywhere between $100-$200 million in upfront payments from a settlement with Ericsson, in our opinion. Adding this to the balance sheet would increase the intrinsic value of this enterprise significantly. Meanwhile, the company continues to move forward on every aspect of W-TDD from the physical layer to the access stack. We maintain as we have before that IDCC can play a seminal role in the next era of communications. Thus, clients interested in wireless communications - and especially those with positions in Qualcomm, Ericsson and Motorola - should consider hedging themselves with IDCC.
Lastly, guidance with regard to the top- and bottom-lines going forward from the company remains scant. This company does feel confident it can grow revenues and post continuing cash flow increases on an operating basis in FY2002. However earnings will have to wait until 2003. We're now looking for $11.3 million and a loss per share of $0.13 for 1Q2002; this compares with our earlier targets of revenue of $14.0 million and a loss per share of $0.10. For the full- year, FY2002, we're now looking for revenue of $66.1 million, down from $71.1 million and a loss per share of $0.36 versus our earlier target of $0.20. But these numbers can change very quickly in this elastic industry. What's important in our minds is IDCC's integral position in wireless mobile communications. In our opinion, the company continued to get stronger - all the more reason to establish or add to positions at this lower price. IDCC remains one of our top pure-plays in wireless transmission technology. As such, it commands a STRONG BUY rating and a $17 target price. |
