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CAGR: 5.5%
210.2 197.4 179.5 167.1 194.3
218.5
2005
2006
2007
2008
2009
2010
CAGR: (0.8%)
CAGR: (0.8%)
2011
2012
2013
2014
2015
With the developed world struggling, the Emerging Economies are set to take Center-stage as evident from the sales forecast
Source: Euromonitor International Note: Computers and Peripherals include desktops, portable computers, laptops, netbooks, tablets, monitors, printers and otherperipherals
CAGR: 12.2%
166.9
Smart phone market is poised to see some major upheavals as Wireless mobile access will continue to impact all aspects of consumer behaviour and high-speed connectivity becomes a requirement of both business and personal use Feature phones category is expected to continue to decline over the forecast period, as OS-based smartphones become the industry standard
Source: Euromonitor International
CHALLENGES
Under-penetration in emerging market . Seeks foray in Chinese and Indian markets Mired by patent infringement Dependence on third party IP and digital content Looking at geographical leaders in design and distribution
Hardware Tablet
Smart phone
6% 13%
32%
14%
10% 15%
Korea
44%
31%
Other Asia
'000
16,000
24%
32%
13%
Millions
United States
700
Target 3: A8 Music
COMPANY OVERVIEW
Digital music service provider Focus on music business which consists of music content, distribution channel and music service rendered to users Based on research data from Ovium, global market size of digital music will reach $20bn by 2015 Mobile internet market in China, with a market size of RMB20.25 billion which represents a YoY growth of 31.1% Holds original music contest and positions A8.com as an online theme collection platform to gather music contents Provides B2B and B2C content platform Strategy to focus on various end user devices focusing on cloud computing Plans to expand cooperation with domestic handset manufacturer
7% 23%
23%
5 4 3 2 1 0
47%
Other
Millions
Target 4: TiVo
COMPANY OVERVIEW
Live television, Internet video, and Video of Demand services under one package Generates revenues through consumer service (direct subscribers), developing technology for television service providers and media services Advertisement solutions including interactive advertisement and audience measurement services Detailed anonymous aggregated reporting on actual viewing and screen by screen interaction by consumers Owns around 200 patents, 370 patents pending Big spender in R&D ($81.6 mn), and wants to continue the spend despite losses ($84.5 mn) in the last quarter Outsource manufacturing of their products to third-parties
Volume 80 70 60 50 40 30 20 10 0
Millions
Smart phones
Tablet
42%
ASSUMPTION
BENEFITS
Plexonix will save on licensing fees (based on assumption) Offset patent assertions by competitors Better chances of winning litigations License to competitors with favorable terms for Plexonix
Most major smart phone and tablet players license patents from IDCC List includes: HTC, Samsung, RIM, Apple IDCCs top 3 customers by revenue: Samsung: 34% RIM: 15% HTC: 15%
187
Number of engineers
500
9 DMS, IIT Delhi
I P R
Has emerged as an asset class Large chunk of revenues from licensing Patent acquisitions changing landscape Large corporate consortiums hunting patents IPR lawsuits proliferating The more the patents, stronger the fight Wireless IPR Market very competitive Many players to eat from the pie
30th Jun, 2011 Bankrupt Nortels patent bid war Patents on 3G, wireless networking, semiconductor Winning bid ($4.5bn) from a consortium including Apple, Microsoft and RIM
Samsungs license renewal $100mn per annum 3G renewal with IDCC in 2012 Renewal more damaging if rivals (Apple, Google) take over IDCC
Apples license renewal Apple 3G renewals in 2014. Competitive acquisition might lead to punitive renewal
OTHER ACQUISITIONS
8th April, 2011: Novell Provides network operating system, system management solutions and collaboration solutions Acquired by a software holding company, The Attachment Group for $2.2bn 882 patents to be sold to CTPN holdings (a consortium of Microsoft, EMC, Apple and Oracle) 27th Oct, 2011: Mosaid A patent licenser in semiconductor and communication technology Mosaid turned down a$500.6mn bid ($42 per share) hostile takeover bid by rival patent house Wi-Lan Acquired by Sterling Partners for $590mn
Source: Company press release
20%
As of December 31, 2010, 49% of the global 3G handset market (Samsung, Apple, LG, RIM, HTC) was under license by IDCC 13% of the market which belongs to regional and local players contains companies under the 3G license base of IDCC The company targets to license 100% of 3G market The 3G/4G market would present a 1.2 bn unit , hence licensing opportunity by 2015 for which IDCC is in a good position to handle.
STRONG POSITION IN LTE GIVES IDCC THE EDGE OVER OTHER COMPETITORS
400 300 200 100 0 2007 2008 2009 2010
2007
2008
2009
2010
Significantly bigger opportunity in LTE as more devices available (tablets, e-readers, etc.)
Source: IDCC Investor Presentation Note: UMTS and E-UMTS stand for Universal Mobile Telecommunications System and Evolved Universal Mobile Telecommunications System, respectively. Some patents and applications have been declared to ETSI by InterDigital for both UMTS and E-UMTS and therefore are included in both the UMTS and the E-UMTS data above. The data above has been adjusted to reflect withdrawals of, and corrections made to, declarations of patents and applicationsasof October 27, 2010.
Financial Considerations
CAPITAL STRUCTURE
Senior Convertible Notes Market Value of Equity
1
OVERVIEW
Net revenues 450 400 350 300 39% 29% Net Margins 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 9% 11% 15.0% 10.0% 5.0% 2007 2008 2009 2010
$mn 2500
2000
1500
91.3%
1000
LIQUIDITY ANALYSIS
500 The company has cash and cash equivalents worth $409.7mn as of September 30, 2011. In addition, it also had $280.9mn in short term investments The senior convertible notes ($190.6mn) which were issued in April 2011 would mature in March 2016 Licensing Contracts give rise to a predictable revenue stream and hence the cash flows to accrue in future years
Source: IDCC 10Q 30/09/2011 1 Market value of equity as of 08/11/11 Note: Net Margins represent net income applicable to common shareholders divided by revenues
BROKER RECOMMENDATION* 60% 50% 40% 30% 20% 10% 0% Buy Hold Sell
TARGET PRICE Mean 64.6 Median 66 High 118 Low 26
Brokers
ANALYST COMMENTARY
M Partners, Nov 9, 2011: We reiterate our BUY recommendation and our takeout share price target of $118.0 The outlook for IDCCs patent is positive as the report goes on to say, Essential patent royalties are long lasting, consistent and guaranteed revenue streams that can benefit a patent holder in one of two ways for many years. First it can be used to offset patent assertion made by competitors. Secondly, FRAND royalties can be used to bleed Competitors of gross margin, while at the same time enriching earnings. Barclays Capital Equity Research, 27 Oct, 2011: We believe that the companys asymmetric licensing model supported by its rigorous internal R&D processes is well positioned to capitalize on the mass adoption of 3G devices, the transition to 4G and the broader adoption of wireless technologies by Non-traditional devices. It has been given a stock rating of overweight which implies the stock is expected to outperform the un-weighted expected total return of the sector coverage universe over a 12 month investment horizon.
Source: Equity Research, Thomson First Call *Total no. of brokers: 5
Effective tax rate Credit Spread Debt Cost Pre Tax Debt Cost Post Tax
Share Price Shares Outstanding (Diluted) Market Capitalization Total Debt Total Capital EV Capital Structure (% Equity) Capital Structure (% Debt)
WACC Terminal Growth rate Discounting Model Year Count PV of FCF Terminal Value NPV Intrinsic Value
7.7% 1.75%
1.5 68
2.5 103
3.5 103
4.5 91
5.5 127
6.5 134
7.5 119
8.5 110
9.5 132
Source: Company reports, Note: The data is just a sample of one pair of values of Beta and Terminal growth rate. Please refer to the excel sheet for the entire valuation
Sensitivity Analysis
Terminal growth rate 0.65 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 78.6 81.3 84.1 87.3 90.8 94.6 0.75 71.1 73.2 75.5 78.0 80.8 83.8 Beta 0.85 64.7 66.5 68.3 70.4 72.6 74.9 0.95 59.3 60.7 62.3 63.9 65.7 67.6 1.05 54.6 55.8 57.1 58.4 59.9 61.5 1.15 50.5 51.5 52.6 53.7 55.0 56.3
The values denote the intrinsic share price of the company. FINANCIAL METRICS @ ACQUISITION PRICE Low Share Price Market Value Enterprise Value P/E EV/EBITDA 62.3 2,791.4 2,625.4 21.0 11.3 High 70.4 3,154.0 2,988.0 23.8 12.9 DEAL DYNAMICS With $10.2bn of cash and cash equivalents and another $13.1bn in short-term marketable securities, the deal should be an All-Cash deal with Plexonix buying out the entire stake the projected share price represents a premium of 9% 23% to the average price of Interdigital over the last 3 months The premium reflects the inherent value of the patents of IDCC. The premium also reflects the tug of war between various technology companies for acquiring IPR assets
Source: Company reports, Capitaline Note: The P/E and EV/EBITDA are forward multiples. They represent the FY12 ie December12 multiples
(#)
Acquiror
Sterling Partners Google Apple, Microsoft, RIM, Sony, EMC, Ericcson CPTN Holdings
Date
October, 2011 August, 2011 July, 2011 April, 2011
2,625.4 138,177
Source: Company filings for the respective transaction, Equity Research for the Demand Scenario Note: The acquisition price range is the mean Enterprise value calculated using DCF method keeping Beta at 0.85 and 0.95 and terminal growth rate at 1.00% and 1.25% respectively 1TCurrent EV is as of 08/11/2011
(#)
Age Designation 60 Chairman of the Board 52 President & CEO 56 Chief Financial Officer
50 EVP - Research and Development EVP - Intellectual Property & Chief IP 52 Counsel; President of InterDigital Patent Holding Sub 38 VP, Chief Accounting Officer, Controller VP, Strategic Engineering, Chief 52 Technology Officer 51 Chief Administrative Officer 55 General Counsel, Secretary
RISK FACTORS
Challenges related to the companys ability to enter into new license agreements could cause the revenue and cash flow to decline Revenue may be impacted by the deployment of 4G or other technologies in place of 2g and 3g technologies or by the need to extend or modify certain existing license agreements to cover additional later patents Royalty rates could decrease for future license agreements Revenues are derived primarily from a limited number of customers. Delays in renewing or an inability to renew existing license agreements and challenges in defending and enforcing patent rights could cause the revenue and cash flow to decline The wireless IPR industry is subject to rapid technological change, uncertainty and shifting market opportunities. The technologies created by the company may not be adopted by the market or widely deployed
Source: Company Filings, proxy