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TALES OF THE TAPE: InterDigital
Gears For 3G Wireless
By DINAH WISENBERG BRIN
Of DOW JONES NEWSWIRES
PHILADELPHIA -- 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 |
