Docstoc

Mpartners morning note 2011 7 25

Document Sample
Mpartners morning note 2011 7 25 Powered By Docstoc
					                                                                                                                      MORNING NOTE
                                                                                                                                              July 25, 2011

INTERDIGITAL INC. (IDCC-Q)                                                                                                                Rating: Buy
                                                                                                                            New Target Price: $118.00
NEW PERSPECTIVE: INTERDIGITAL AS A WEAPON                                                                                     Old Target Price: $65.50


MARKET INFO: IDCC-Q                                                THE VALUE OF INTERDIGITAL FROM AN ACQUIRER’S PERSPECTIVE
Closing Price                                             $72.96
                                                                     To date, we have valued InterDigital on its ability to deploy resources to monetize
Quarterly Dividend                                         $0.10
                                                                     its assets (basically its inventions). We have attempted to reflect this capability in
Annualized Yield                                           0.55%     the share price target.
Target Price                                             $118.00
Potential ROI                                              61.7%     On July 19th management announced that it “initiated a process to explore &
52 Week Range ($)                               $22.81 / $82.50      evaluate potential strategic alternatives for the company, which may include a sale
Market Cap ($mm)                                     $3,309.25
                                                                     or other transaction” and we now believe that it is an appropriate time to derive a
                                                                     valuation from a potential strategic acquirer’s perspective.
Cash (mm)                                                $738.93
Debt (mm)                                                $211.91     Recently, it has become apparent that valid patents within the mobile ecosystem are
Enterprise Value (mm)                                $2,782.23       being used to affect long-term margin rates for consumer mobile devices. Based on
Shares o/s (mm)                                             45.4     current and projected sales volumes and the estimated mean price point, 1% of
Avg Volume (previous 3 months)                       1,297,460       margin could represent between $3.3B and $3.6B/annum. And this excludes
FYE: Dec 31               FY2010A         FY2011E    FY2012E         machine-to-machine (M2M) devices.
Revenue (mm)                     394.55     395.98        483.56
                                                                     Depending upon the device manufacturer, we estimate that between 5% and 15%
EBITDA (mm)                      263.80     255.20        344.00     of the costs of a mobile device are budgeted for patent royalties. Companies with
EBITDA margin (%)                66.9%      64.4%          71.1%     the most patents and/or of the highest quality tend to budget the lowest royalty
EPS                               $3.48      $3.05         $4.26     rates because they can cross-license their patents with rivals. Recently, patent
FD EPS                            $3.43      $3.01         $4.21     holders have begun to go beyond cross licensing to demand royalties, effectively
VALUATION                 FY2010A         FY2011E    FY2012E         deriving incremental earnings from competitors while also forcing rivals to price in
EV/Sales                           7.1X       7.0X          5.8X     higher costs. And this is where “war” has been declared. Here is a pictograph of
EV/EBITDA                        10.5X       10.9X          8.1X     the situation in October of 2010.
P/E                               21.3X      21.3X         17.3X
Source: Capital IQ, M Partners




       Published LTE Royalty Rates
       Qualcomm                                 3.25%
       Nokia                                    1.50%
       Ericsson                                 1.50%
       Nortel                                   1.00%
       Huawei                                   1.50%
       ZTE                                      1.00%
       Motorola                                 2.25%
       Source: Company Reports
                                                                                             Source: The Guardian and New York Times

                                                                     InterDigital retains approximately 8,800 patents issued and 9,700 patents pending
                                                                     for a total of approximately 18,500. Many of the parties in the infograph above are
                                                                     IDCC licensees, or are in negotiations to become licensees. Proven licensing is an
                                                                     important component of the value proposition for a potential acquirer.




Member of the Investment Industry Regulatory Organization of Canada (IIROC)                          Analyst: Ron Shuttleworth         Associate: Kelsey Lobsinger
Participating Organization – Toronto Stock Exchange and Toronto Venture Exchange                           416.603.7381 x250                   416.603.7381 x228
Member – Canadian Investor Protection Fund (CIPF)                                                             rs@mpartners.ca                     kl@mpartners.ca
                                                                                                                                 MORNING NOTE
                                                                                                                                                       July 25, 2011

    With its proven licensing capabilities, we believe that the current IDCC portfolio could represent a 0.8% per annum swing in margin for an
    acquirer. Based on industry projections of 3G devices and tablets sold until 2015 and 4G/LTE devices sold until 2013, we have estimated
    the NPV of 3G and 4G/LTE licenses discounted by 18% after-tax per annum to be worth approximately $9.0B, or $193.50 per fully-diluted
    share. This assumes that an acquirer can extract royalties from, or cross-license with, all manufacturers. We believe that our 18%
    discount rate mitigates some of the potential licensing risk. We have also assumed an annual decline in licensing cash flow of 10%
    beginning in our terminal year. Based on a potential acquirer licensing 85% of the market, we derive a per share value of approximately
    $167.00.
    Our fully-diluted per share count assumes that all options and warrants are exercised and all restricted stock units vest.


                         Total Shipments (MM)                            2012E        2013E        2014E         2015E        2016E Terminal Value
                         4G/LTE                                           21.0         47.0        110.0         200.0        350.0
                          Growth                                          90.9%       123.8%       134.0%         81.8%        75.0%
                          ASP                                              $400         $375         $350          $325         $300
                          Licensing %                                      1.1%         1.1%         1.1%          1.1%         1.1%
                         Tablets                                         108.2        160.0        220.0         294.1        350.0
                          Growth                                          55.1%        47.9%        37.5%         33.7%        19.0%
                          ASP                                              $400         $350         $300          $275         $250
                          Licensing %                                      1.1%         1.1%         1.1%          1.1%         1.1%
                         3G                                              725.0        843.0        955.0       1,031.4      1,083.0
                          Growth                                          22.9%        16.3%        13.3%          8.0%         5.0%
                          ASP                                              $400         $300         $250          $225         $200
                          Licensing %                                      0.7%         0.7%         0.7%          0.7%         0.7%
                         Total 3G, Tablet & 4G/LTE Sales ($Bs)         $341.68      $326.53      $343.25      $377.94      $409.10
                         Avg. IDCC Licensing %                             0.8%         0.8%         0.8%          0.9%         0.9%
                         IDCC Licensing Fee ($Bs)                         $2.60        $2.58        $2.82         $3.23        $3.63
                         Less Taxes @ 36%                                 $0.94        $0.93        $1.02         $1.16        $1.31
                         Operating Cash Flow                              $1.66        $1.65        $1.81         $2.07        $2.33       $2.09
                         NPV ($Bs)                                       $1.41        $1.19        $1.10         $1.07        $1.02        $3.27
                         Total NPV                                                                                                         $9.04
                         Source: IHS iSuppli: Mobile Handset Q4 2010 Market Tracker, Gartner (April 2011), Company Reports, M Partners




    If we assume that Apple paid $2.0B out of the $2.6B it contributed to the Nortel auction for outright ownership of the 4G/LTE patents,
    this would infer that the value of InterDigital’s 4G/LTE patents would be worth approximately $53.00 per fully-diluted share based on a
    33% premium. Third-party research from Ocean Tomo, Tech IPM LLC and Informa all rank IDCC patents either #1 or #2 in size and
    quality among 4G/LTE essential patents versus Nortel, which is typically ranked 6th to 8th. We believe that potential acquirers may find the
    IDCC patents to be worth more than the 33% premium we have applied, which we provided seven reasons for in our latest note.
    Notwithstanding, the new value of LTE patents plus cash plus the current value of the 3G patents implies a target of $96.00 per fully-
    diluted share. However, our estimate of IDCC’s 3G patents was based on only 50% of the market being licensed. If an acquirer can
    license or cross-license 85% of the 3G handset and tablet market, this adds an additional $22.00 per fully-diluted share to the value of
    the 3G patents, increasing the potential share price value to $118.00.
    As a result, from the perspective of a potential acquirer, the value of InterDigital could range between $118.00 and $167.00 per fully
    diluted share, and we use the low end of that range as our new target price.
    Based on the $4.5B winning bid for the Nortel patents, the consortium led by Apple paid an average of $750,000 for each of Nortel’s
    6,000 current and pending patents. Our new target price values the portfolio at an average or approximately $280,000 per patent and
    patent pending. The upper end of our range implies an average value of approximately $415,000 per patent and patent pending.
WILD CARDS, RISKS AND UNKNOWNS
     We do not include the potential value of the video compression inventions that are currently being trialed with leading mobile operators
     in North America. Considering the importance of HD video for the future of mobile, these patents could be very valuable.
     We do not know how the process will play out and the company does not expect to make any announcements regarding progress, so
     there will be limited visibility. The company has confirmed that they have left open the possibility of multiple strategies including a share
     sale, an asset sale, or a partial asset sale. Variations to the approach could have dramatic impact on the share price and the appropriate
     valuation methodology.
     We are not valuing the pipeline of inventions currently being created by IDCC’s 200+ engineers.
     Patent reform could alter the economics associated with patent royalties in a way that would impact the NPV calculation.
     The accumulation of essential patents may become subject to antitrust rulings that could alter the potential NPV, and could ultimately
     impact the approach taken to auctioning the company.




Member of the Investment Industry Regulatory Organization of Canada (IIROC)                                   Analyst: Ron Shuttleworth         Associate: Kelsey Lobsinger
Participating Organization – Toronto Stock Exchange and Toronto Venture Exchange                                    416.603.7381 x250                   416.603.7381 x228
Member – Canadian Investor Protection Fund (CIPF)                                                                      rs@mpartners.ca                     kl@mpartners.ca
                                                        M|PARTNERS                      Toronto Dominion Centre
                                                                                        Canadian Pacific Tower
                                                                                        100 Wellington Street West
                                                                                        Suite 2201, P.O. BOX 320
                                                                                        Toronto, Ontario M5K 1K2
                                                                                        Main line: 416-603-4343
                                                                                        Fax:       416–603-8608

                                                                                        Contact Information

                                                                         Research
                                                                         Alan Breuer                    ab@mpartners.ca
                                                                         David Buma                     db@mpartners.ca
                                                                         Marc Johnson                   mj@mpartners.ca
                                                                         Michael Krestell               mk@mpartners.ca
                                                                         Kelsey Lobsinger               kl@mpartners.ca
                                                                         Ryan Roebuck                   rr@mpartners.ca
                                                                         John Safrance                  jsafrance@mpartners.ca
                                                                         Ron Shuttleworth               rs@mpartners.ca
                                                                         Ingrid Rico                    irico@mpartners.ca
                                                                         Tom Varesh                     tv@mpartners.ca


                                                                         Trading
                                                                         Ben Gelfand                    bg@mpartners.ca
                                                                         Steve Isenberg                 si@mpartners.ca
                                                                         Cameron Loree                  cl@mpartners.ca
                                                                         Kyle Maister                   km@mpartners.ca
                                                                         Jeff Maser                     jmaser@mpartners.ca
                                                                         Tommy Matthews                 tm@mpartners.ca
                                                                         Garett Prins                   gp@mpartners.ca
                                                                         Jeff Zicherman                 jz@mpartners.ca
                                                                         Helen Spasopoulos              hs@mpartners.ca


                                                                         Advisory
                                                                         Christopher Dingle             cd@mpartners.ca
                                                                         Richard Goodman                rg@mpartners.ca
                                                                         Kelly Klatik                   kk@mpartners.ca
                                                                         Thomas Kofman                  tk@mpartners.ca
                                                                         Daniel Lee                     dl@mpartners.ca
                                                                         Jason Matheson                 jm@mpartners.ca
                                                                         Michael McIntosh               mm@mpartners.ca
                                                                         Thupten Samchok                ts@mpartners.ca

As a full-service investment bank, M Partners’ first priority lies in the financial satisfaction of its clients. In keeping with the firm’s self-imposed high standards, M Partners’ approach to investment is anything
but standardized. Aiming to create new opportunities and ideas for clients rather than steering them towards typical investment outlets, M Partners has adopted a keen strategy of focused and relevant
research. Such knowledge-driven efforts, coupled with the ample skills of the firm’s management, produces successful services ranging from account management to advisory engagements.

M Partners received Investment Industry Regulatory Organization of Canada (IIROC) approval on April 14th 2005 and trades under broker number 97. The team currently has 23 members of varying degrees
of financial experience, including principals Thomas Kofman and Steve Isenberg, who have a combined 35 years of financial experience and are well known in the field. This backbone of strong leadership will
help chart the firm’s course into the future. In the coming months and years, M Partners will be focusing on a number of verticals, including environmental and infrastructure, real estate, mining,
merchandising and consumer products, and other special situations.

M Partners has strong financial backers who have extensive capital markets experience. The firm is a member of IIROC, a participating member of the Toronto Stock Exchange, The TSX Venture Exchange
and the Canadian Investor Protection Fund (CIPF).

M Partners does not make a market in an equity or equity related security of the subject issuer.

Disclosure
The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and
interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein.
In accordance with Policy 3400 of IIROC, M Partners hereby confirms as of the date of this report:




                                                                                                  InterDigital Inc.


Does M Partners or its affiliates collectively beneficially own 1% or more of any class
of equity securities of the company which is the subject of the research report.                         No

Does the analyst or any associate of the analyst responsible for the report or public
comment hold shares in the company.                                                                      No

Has M Partners or a director or officer of M Partners or any analyst provided services
to the company for remuneration other than normal investment advisory or trade
execution services within the preceeding 12 months, (may seek compensation for
investment                                                                                               No


Is any director, officer, employee or research analyst an officer, director or employee
of the company, or serves in an advisory capacity to the company.                                        No


Has the analyst has viewed the material operations of the company. We define
material operations as an issuer's corporate head office and its main production facility
or a satellite facility that is representitive of the company's operations.                             No
Did M Partners provide investment banking services for the company during the 12
months preceding the publication of the research report?                                                 No
Has the analyst preparing the report received compensation based upon M Partners
investment banking reveneus for this issuer?                                                             No

Dissemination
All final research reports are disseminated to institutional clients of M Partners simultaneously in electronic form. Hard copies will be disseminated to any client that has requested to be on the distribution list
of M Partners. Reproduction of this report in whole or in part without permission is prohibited.

Research Analysts
The Research Analyst(s) who prepare this report certify that their respective report accurately reflects his/her personal opinion and that no part of his/her compensation was, is, or will be directly or indirectly
related to the specific recommendations or views as to the securities or companies. M Partners compensates its research analysts from a variety of sources and research analysts may or may not receive
compensation based upon M Partners investment banking revenue.

Rating System
Buy: price expected to rise
Sell: price is inflated and expected to decrease
Hold: properly priced
Speculative Buy: price expected to rise; material risk to the investment exists
Under review: not currently rated

Summary of Recommendations
As of June 30, 2011


                                                                                                              M|PARTNERS
Buy                                                         40            95%
Sell                                                         1             2%
Hold                                                         1             2%
Total                                                       42           100%
                                                                                                 Research • Trading • Advisory

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:477
posted:7/25/2011
language:English
pages:3
palmoni palmoni
About