INTRA-DAY NOTE

August 15, 2011

Rating: Buy
12-Month Target: $118.00

INTERDIGITAL INC. (IDCC-Q)

DEMAND TENSION RATCHETS UPNOT DOWN

GOOGLE ACQUIRES MOTOROLA MOBILITY - THE RATIONALE EXPLAINED

MARKET INFO: IDCC-Q

Closing Price

$59.67

Quarterly Dividend

$0.10

Annualized Yield

0.67%

Target Price

$118.00

Potential ROI

The reason implied by Google management for the acquisition is three-fold: 1) they
see Motorola as a high growth manufacturer which also provides better insight into
the mobile stack for Android, 2) Intellectual Property and 3) home networking
technology.

During the call, Motorola disclosed that it has a total of 17,500 patents, and 7,500
patents pending. It did not reveal the percentage of those that are essential to
broadband standards. Google intends to use the essential patents in the portfolio as
protection against litigation from AAPL or MSFT, and the non-essential patents as
competitive tools for design.

Ocean Tomo ranks Motorola essential 4G/LTE patents behind those of Nortel
Network, which, according to reports, were acquired for about $2B. Ocean Tomo
and multiple other third-party evaluators rank IDCC patent portfolio 2nd or 3rd along
with those of Qualcomm.

$22.81 / $82.50

Market Cap ($mm)

$2,711.64

Cash (mm)

$701.11

Debt (mm)

$192.60

Enterprise Value (mm)

$2,203.13
45.4

Shares o/s (mm)

1,724,700

Avg Volume (previous 3 months)

FY2010A

FY2011E

FY2012E

Revenue (mm)

394.55

396.86

483.56

EBITDA (mm)

263.80

258.88

344.00

EBITDA margin (%)

66.9%

65.2%

71.1%

EPS

$3.48

$3.14

$4.26

FD EPS

$3.43

$3.11

$4.22

VALUATION

Earlier today Google announced that it was acquiring Motorola Mobility for $12.5B
cash, which is a 63% premium to the closing share price on Friday.

97.8%

52 Week Range ($)

FYE: Dec 31

FY2010A

FY2011E

FY2012E

EV/Sales

5.6X

5.6X

4.6X

EV/EBITDA

8.4X

8.5X

6.4X

17.4X

17.4X

14.2X

P/E
Source: Capital IQ, M Partners

WHAT ABOUT THE DEMAND FOR INTERDIGITAL PATENTS?

Based on the reaction of the stock this morning, investors appear concerned that
the Google acquisition of Motorola Mobility implies that: 1) it is not interested in the
InterDigital essential patent portfolio, and 2) by not being interested, the
InterDigital patents are not worth anything incremental to the current fair value of
the operating company, which we have previous published to be $65.50. The
market reaction is incorrect, and this is an excellent buying opportunity for the
following reasons:
o

InterDigital management disclosed that the process is moving along as

planned and that there are multiple bidders. As a result, there is a market and
demand tension remains.

Google bought Motorola Mobility for multiple reasons and was probably
working on this for a while, likely in parallel to the Nortel patent bidding
process. Ultimately, we do not believe that MMIs patents were central to
Googles acquisition. Alternatively, we believe that IDCC remains a significant
IP alternative to the Nortel patents that Apple outbid Google for in June. At
the end of the Google conference call management implied that it was not
done buying patents and we believe them. We do not think Google is out.

Member of the Investment Industry Regulatory Organization of Canada (IIROC)

Participating Organization Toronto Stock Exchange and Toronto Venture Exchange
Member Canadian Investor Protection Fund (CIPF)

Analyst: Ron Shuttleworth

416.603.7381 x250
rs@mpartners.ca

Associate: Kelsey Lobsinger

416.603.7381 x228
kl@mpartners.ca

INTRA-DAY NOTE

August 15, 2011

Although Android partners expressed enthusiastic support regarding Googles commitment to defending the Android ecosystem
by acquiring Motorola Mobility, we think that it is pale support because the quality of the essential 3G/4G portfolio is relatively weak
with Nortels zombie patents considered to be worth more by patent evaluators. We believe that manufacturers such as Samsung
and HTC feel as exposed today to IP litigation from Apple and Microsoft as they did yesterday.

DEMAND TENSION REMAINS AND MAY ACTUALLY INCREASE

InterDigital is regarded by most patent experts as retaining the best quality essential patent portfolio for 3G/4G/LTE remaining on the
market and there are many mobile broadband device manufacturers exposed to IP royalties without the benefit of cross licensing. Other
than Qualcomm, the InterDigital patents could have the biggest impact on future gross margins, which we calculate to be worth $3.5B
per 1% of margin annually.

Over 50% of the current 3G market is already under license with InterDigital, with a mean rate of 0.8%. As well, it has already started
licensing 4G/LTE patents with Acer and Pantech. 3G licensees include Samsung, Apple, RIM, HTC, Kyocera, and Sharp among others.
Unlike the Motorola patents, InterDigital patents are already being monetized.

A LIKELY VALUATION SCENARIO

We think Google paid fair enterprise value for Motorola Mobile based on projected discounted cash flows. At a 9.5% discount rate and a
terminal growth rate of 3%, the Present value of the enterprise calculates to $9.32B, versus what is being offered at $9.45B.
Fundamentally, this was not a patent deal.
Value of MMI Operations - DCF
EBITDA
Less CAPEX
Less Taxes
After-tax Free CF
Present Value
Total PV
Google Offer
Less Operating Business
Less Net Cash
= Value of Patents
# of Patents & Patents Pending
Value per patent ($000s)

Q3'11
93.4
(37.9)
25.0
80.4
78.6
9,324.0

Q4'11
228.7
(47.2)
(18.4)
163.1
155.9

2012E
748.8
(176.4)
(66.4)
506.0
462.1

2013E
976.8
(210.4)
(152.4)
614.1
512.1

65.97
27.9%
18.37

200.21
33.2%
66.43

454.38
33.5%
152.35

TV
1,006.1
(216.7)
(156.9)
632.5
8,115.3

12,500.0
(9,324.0)
(3,049.0)
127.0
25,000
5.1

Source: CapitalIQ, Company Reports

Net Income (GAAP)
Effective Tax Rates
Taxes

-46.54
53.6%
(24.95)

Source: CapitalIQ

Discount Rate
Terminal Growth Rate

9.5%
3.0%

The Nortel bidding process was a patent deal, and IDCC represents a more valuable alternative opportunity to companies in the mobile
ecosystem that need valid intellectual property to protect future margins.

We believe that IDCCs patent portfolio is worth substantially more to a manufacturer exposed to aggressive IP litigation than the
fundamental capability of management to license. As stated before, InterDigital cash flow from current licensing strategies is worth
$65.50 per share. To an acquirer using the InterDigital IP as a weapon, the portfolio is worth between $118 and $167. We have a BUY
recommendation and a $118.00 share price target.

The InterDigital share price reaction to the Google acquisition of MMI is misplaced and disconnected from the value of the portfolio.

Member of the Investment Industry Regulatory Organization of Canada (IIROC)

Participating Organization Toronto Stock Exchange and Toronto Venture Exchange
Member Canadian Investor Protection Fund (CIPF)

Analyst: Ron Shuttleworth

416.603.7381 x250
rs@mpartners.ca

Associate: Kelsey Lobsinger

416.603.7381 x228
kl@mpartners.ca

M|PARTNERS
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Contact Information
Research
Alan Breuer
David Buma
Marc Johnson
Michael Krestell
Kelsey Lobsinger
Ryan Roebuck
John Safrance
Ron Shuttleworth
Ingrid Rico
Tom Varesh

ab@mpartners.ca
db@mpartners.ca
mj@mpartners.ca
mk@mpartners.ca
kl@mpartners.ca
rr@mpartners.ca
jsafrance@mpartners.ca
rs@mpartners.ca
irico@mpartners.ca
tv@mpartners.ca

Trading
Jennifer Burke
Ben Gelfand
Steve Isenberg
Cameron Loree
Kyle Maister
Jeff Maser
Tommy Matthews
Garett Prins
Helen Spasopoulos
Jeff Zicherman

jb@mpartners.ca
bg@mpartners.ca
si@mpartners.ca
cl@mpartners.ca
km@mpartners.ca
jmaser@mpartners.ca
tm@mpartners.ca
gp@mpartners.ca
hs@mpartners.ca
jz@mpartners.ca

Advisory
Christopher Dingle
Richard Goodman
Kelly Klatik
Thomas Kofman
Daniel Lee
Jason Matheson
Michael McIntosh
Thupten Samchok

cd@mpartners.ca
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kk@mpartners.ca
tk@mpartners.ca
dl@mpartners.ca
jm@mpartners.ca
mm@mpartners.ca
ts@mpartners.ca

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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 firms 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 firms 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,
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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).
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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

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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
Buy

40

95%

Sell

2%

Hold

2%

Total

42

100%

M|PARTNERS
Research Trading Advisory