INTERDIGITAL, INC.
Monetizing Wireless Innovation
We are initiating coverage on wireless intellectual property innovator InterDigital with a
1-OW rating. The company is well positioned to capitalize on mass market adoption of
3G devices as well as the transition to 4G through the licensing of its standards based IP
portfolio. As this summer’s Nortel auction is likely to heighten focus on wireless IP as a
vital and differentiating asset, we consider InterDigital a leading play in the industry.
Intellectual Property is a Core Wireless Asset: Ongoing litigation among virtually all
industry participants and acquisitions highlight that intellectual property is a core and
differentiating wireless asset. IDCC’s portfolio of internally developed IP and a licensee
base of ~80% of the 2G and ~50% of the 3G market validate its leadership position.
Rising Adoption and Expanding Markets Provide Incremental Growth: Mass market
3G adoption, the shift to 4G, and broader integration of wireless technologies in nontraditional
devices (e.g. tablets, etc.) all serve as drivers expanding IDCC’s addressable
market. We estimate that the company has close to $3 billion in aggregate incremental
revenue opportunities in 3G and 4G handsets alone over the next five years.
Attractive Asymmetric Licensing Model: Given IDCC’s position as an NPE, the
company’s license business is high margin, as incremental sales effectively fall to the
bottom line. While fixed fee/prepayments make cash flow lumpy, normalized over time
we consider IDCC’s cash generation capabilities attractive.
Price Target of $56 Leads to a 1-OW Rating: Our 2011 and 2012 EPS estimates of
$2.24 and $2.40 exclude benefits of the LG renewal. LG could add another $0.70-$0.80
per year. Our price target of $56 equates to ~14x our 2012 LG adjusted EPS estimate of
~$3.16 plus ~$12 a share in net cash, and is supported by our SoTP analysis. Given
potential upside from current levels, we initiate with a 1-Overweight rating.
IDCC: Quarterly and Annual EPS USD
2010 2011 2012 Change y/y
FY Dec Actual Old New Cons Old New Cons 2011 2012
Q1 N/A N/A 0.54E N/A N/A 0.62E N/A N/A 15%
Q2 N/A N/A 0.55E N/A N/A 0.59E N/A N/A 7%
Q3 N/A N/A 0.54E N/A N/A 0.58E N/A N/A 7%
Q4 N/A N/A 0.61E N/A N/A 0.61E N/A N/A 0%
Year N/A N/A 2.24E N/A N/A 2.40E N/A N/A
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