IDCC Pt 3 How IDCC performs on the renewal of these two contracts is probably the biggest swing factor in the valuation of
the stock –
1. IDCC renews at rates contemplated in the prior deals, lifting annualized revenue to $500MM+ and
EPS to $6+. The stock is an obvious Buy under this scenario (historical multiple of 12x * $6 = $70).
2. Samsung decides to fight patent claims instead of renewing (a la LG in 2011), prompting litigation
from IDCC. With no Samsung revenue and elevated legal expenses, 2013 profitability would be in
question. Under a worst case scenario, Samsung plays out like Nokia (paid for 2G, but years of
litigation over 3G, no revenue). This could have potentially negative implications on the Apple
renewal. The stock is a clear Sell under this scenario (no earnings, negative cash flow). Valuation
probably gives the stock a floor of $18 (cash + 3x ongoing royalties ex Samsung/RIM).
Management, of course, is counting on scenario #1 to help get them to their stated goal of $800MM of annual
revenue within the next 3-5 years. We believe they are taking a very simple approach that 3G revenue today is about
$250MM annualized (current run rate less Samsung 2G paid-up amount) with the opportunity to double twice –
industry units and IDCC market share. The $200MM of headroom is for variability (mix, royalty rate, penetration
level, etc.).
We have taken a middle ground approach that Samsung and Apple get done, albeit a lower rates (trading on their
market power/unit volume to drive a lower rate). We assume
.30-
.35 per unit for Samsung and Apple in our
DCF, leading to a $38PT.
?? Nokia appeal. We continue to view the outcome of InterDigital’s appeal of its 3G case against Nokia as inherently
unknowable. Management provided little insight during our meetings, as their visibility on a decision is no better
than anyone else checking the docket. We don’t believe there are any settlement talks.