Data, Here's the new Investec report that came ot today. It wouldn't post on the Bull.
Jim
02:14pm EST 26-Dec-02 Investec Inc (Scot Robertson 610-260-6428) IDCC
Investec: Samsung Arbitration Concluded; Revenue Scenario Bright; Reiterate BU
Story 0354 (B/8W, C/CNA, C/CUS, I/CMT, I/ELE, IDCC, S/COM)
Investec Investec Investec Investec Investec Investec
Investec Inc. Equity Research
InterDigital Communications Corp. Scot C. Robertson 610-260-6428
(IDCC - $15.85) scot.robertson@investec.com
Rating: BUY December 26, 2002
Investec: Samsung Arbitration Concluded - Forward Revenue Scenario Remains
Bright -Reiterate BUY Rating and $25 Price Objective
* We view InterDigital's arbitration resolution with Samsung as a positive.
* Given a revenue scenario layered with so much potential upside, we believe it
would be egregious not to weave some of this upside into our InterDigital
valuation perspective.
* We reiterate our BUY rating and 12-month price objective of $25 on shares of
IDCC.
* We continue to place InterDigital on our Near-Term Focus List.
Symbol(s) IDCC & Date
Market Cap (M) $846.4 52-Week Range (NASDAQ) $19.50- $6.22
Avg. Daily Trading Volume 589,000 Institutional Holdings 22%
Shares Out. (M) 53.4 Total Debt to Total Capital NM
Float Shares (M) 48.0 Proj. 5-Year EPS Growth Rate 25%
FY 2001A FY 2002E FY 2003E
OLD OLD
March ($0.04) $0.00A ($0.01)
June ($0.05) $0.04A $0.01
September ($0.09) ($0.11)A $0.05
December ($0.18) ($0.09) $0.09
FY EPS ($0.36) ($0.15) $0.14
FY P/E NMF NMF 113.2x
FY P/S 16.1x 11.2x 8.2x
FY Rev (M) $52.5 $75.5 $103.4
Note: An explanation of ratings and disclosures can be found at the end of this
report.
We view InterDigital's arbitration resolution with Samsung as a positive. Upon
review of this morning's press release and after speaking with the company, we
are very encouraged in the resolution InterDigital has struck with Samsung.
After sifting through what we believe is a confusing explanation regarding
royalties on 2.5 and 2G based TDMA handsets, here is our interpretation. We
know that Samsung has made a pre-payment to InterDigital in the amount of $18.7
million. From that $18.7 million, the company has recognized roughly $11.5
million, leaving roughly $7.2 million in pre-payment. From the recent
arbitration, we now know that InterDigital will recognize another $0.5 million
in the current quarter, which will leave roughly $6.7 million of the original
pre-payment unrecognized thus far. Yes, the prior royalty credit of $18.7
million has been reduced to $6.7 million, but it has been through InterDigital
already recognizing $12.0 million of the total and not the arbitration panel
reducing the obligation as the press release may lead some to believe. At first
blush this seems neutral at best as it appears InterDigital was awarded no
additional royalties based on past under-reporting by Samsung. However, we view
the news slightly different. Further in the release it was explained that
pursuant to Samsung's election regarding the Nokia patent license agreement
under its MFL rights, that its royalty obligations for sales of 2G and 2.5G TDMA
based wireless products commencing January 1, 2003, will be determined in
accordance with the terms of the Nokia patent license agreement. So what does
this mean? Essentially, Samsung has indicated that the company does in fact owe
InterDigital royalties, but the rate has yet to be decided. Or put another
way, Samsung has struck a new agreement with InterDigital (the old agreement is
out and the new agreement is the Nokia deal). It is basically the exact
situation InterDigital is in with Nokia. While some may argue that it is a
negative that InterDigital did not get a large settlement payment on what was
speculated to be under-reporting by Samsung, in our opinion a good deal of this
anticipated amount will in fact come in to InterDigital, it will just be under
the "new" Samsung agreement that is hitched to resolution of a Nokia rate
settlement. While it is hard to determine the magnitude of this amount, we
believe Samsung will represent roughly 8% of total phone market in 2002, which
we believe will finish somewhere around 400 million units. Moreover, Samsung
handsets tend to be high on technology and therefore command healthy ASPs. We
believe an ASP of $200 across Samsung's entire portfolio of phones is
conservative. Thus, if you assume Samsung will sell roughly 32 million handsets
in 2002 and factor that by an assumed royalty rate (we believe this could fall
between .005 and .0075) on an $200 ASP, in our opinion the 2002 revenue
contribution from Samsung could be anywhere from $32 million to as high as $48
million. To us the single most important outcome of the resolution is Samsung
recognizing InterDigital's right to collect royalties and putting an agreement
in place to that effect tied to Nokia. With 2.0 and 2.5G agreements in place,
InterDigital can now focus all its efforts on securing a 3G agreement with
Samsung.
Given a revenue scenario layered with so much potential upside, we believe it
would be egregious not to weave some of this upside into our InterDigital
valuation perspective. Recently we issued a note discussing the potential
revenue scenario InterDigital retains as the company enters fiscal 2003 (see
First Call note dated 11-13-02). Given our current fiscal 2003 revenue
assumptions do not factor potential upside from successful resolutions with
Ericsson, and a royalty rate assignment with Nokia, which will determine a rate
assignment with Samsung in the process, all three which we believe are likely,
in our opinion InterDigital remains undervalued relative to the potential
forward revenue scenario. Although requiring a bit of patience and some faith
in the legal system, we believe InterDigital's revenue opportunity in fiscal
2003 remains a compelling incentive to own the shares now. While quantifying the
potential value of the company's forward revenue stream remains problematic
given certain assumptions must be estimated, we illustrated a scenario in a
November 13th note conservatively detailing just how much incremental revenue
could be associated with the company's basket of potential catalysts. We
estimated potential incremental revenue in fiscal 2003 could start at $167
million. Combined with our current assumptions on the existing revenue
structure, in theory, we proposed InterDigital could post as much as $270
million in fiscal 2003. At that revenue level, our $25 price objective assumes
a multiple of 5x forward revenue. While some may argue that 5x forward revenue
may be too high of a multiple, investors must remember that we have also not
included any revenue from full year 2002 Nokia and Samsung handset sales that
could hit in any quarter in 2003, or any settlement from Ericsson. While the
Ericsson settlement is entirely too subjective for us to issue a credible award
expectation, the Nokia and Samsung expectation can be realistically estimated.
On a very conservative basis we estimate this could be roughly $146 million
($114 million from Nokia and $32 million from Samsung). In our opinion this
cash should be valued at 1x, leaving around $1.2 billion as the valuation level
of the forward revenue to reach our price objective of $25 (so in essence we are
really valuing the forward revenue at more like 4.4x rather than 5x). Although
InterDigital will recognize an additional $0.5 million in Q4 we are choosing to
leave our model static until we can get a handle on where the Nokia rate will
flush out. Again we believe the revenue contribution will be significant but at
present we are only accounting for this scenario in our sensitivity analysis
rather than our published model. Therefore, when these royalty rates are
settled our numbers will change very quickly. As such, we reiterate our BUY
rating and $25 price objective on shares of InterDigital and would be aggressive
buyers under $17.
We continue to place InterDigital on our Near-Term Focus List. Similar to the
NEC agreement announced in April, although to a much larger degree, any
favorable announcement on either the legal and licensing front could drive
shares of IDCC precipitously. Given our expectation that Ericsson will settle
its case with InterDigital sometime before being forced to trial in early
February, which will facilitate the Nokia and Samsung rate assignment, or that
Nokia will settle its rate assignment in front of the Ericsson trial (and
thereby Samsungs rate will also be assigned), we believe clients should
establish positions now and not risk being caught empty-handed when the first of
a cascading series of announcements hits the newswires. It is our belief that
this is not a story investors should attempt to time at this juncture.
Company Description: InterDigital Communications Corporation specializes in the
design and development of technology content and system solutions for advanced
digital wireless communications applications. Over the course of its nearly
thirty-year history, the company has amassed a substantial and significant
library of know-how and patents related to digital wireless technology.
InterDigital market its technologies and solutions capabilities primarily to
telecommunications equipment producers and related suppliers for embedding into
products targeted for the following applications: mobile phones, personal
digital assistants, mobile computing devices, base stations and other
infrastructure equipment, other terminal-end wireless devices.
Explanation of Ratings
Buy (B) - Expected 12-month absolute performance of +20% or greater from the
price at the time the rating was initiated.
Hold (H) - Expected 12-month absolute performance of +20% to -20% from the price
at the time the rating was initiated.
Sell (S) - Expected 12-month absolute performance of -20% or less from the price
at the time the rating was initiated.
Distribution
Coverage Universe Count Percent Investment Banking Count Percent
Buy (B) 48 54% Buy (B) 8 67%
Hold (H) 36 41% Hold (H) 4 33%
Sell (S) 5 5% Sell (S) 0 0%
Notes: Ratings distribution reflects coverage as of the last day of the prior
month. Investment banking distribution includes companies for which Investec
Inc. has received or is entitled to receive compensation for investment banking
services in the past 12 months.
Additional information is available on request.
Investec Inc.
www.investec.com
Four Falls Corporate Center West Conshohocken, PA 19428-2961
Tel. 610-260-6200 / 800-338-2778
This communication is neither an offer to sell nor a solicitation of an offer to
buy any securities mentioned herein. The information contained herein has been
obtained from sources that we believe to be reliable but we do not guarantee
its accuracy or completeness. Any opinions expressed herein are statements of
our judgment on this date and are subject to change without notice. Investec
Inc. and/or its affiliates may have a position in the securities described
herein. Available information supporting this recommendation will be furnished
upon request. This report is not directed to, nor intended for distribution to
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banking services for the companies mentioned herein. As is the case with all
employees, analyst's compensation is impacted by overall firm profitability,
including revenues from Retail Sales, Institutional Sales and Investment
Banking. Note that analyst compensation is determined based upon services
intended to benefit the investor clients of Investec Inc. and its related
companies. Investec Inc. and its related companies may make a market in
securities mentioned. Investec Inc. and/or its affiliates usually make a market
in IDCC. Investec Inc. and or its employees may sell or buy IDCC from
customers on a principal basis. Investec Inc. has received compensation for
investment banking services from IDCC in the past 12 months. Investec Inc.
expects to receive or intends to seek compensation for investment banking
services from IDCC in the next 3 months. |
