Quietly operating in the background of the industry, InterDigital Communications Corp. describes itself as a wireless think tank. And though few recognize the name or understand the business, over the course of its 30-year history InterDigital has managed to inject its innovations into the innards of hundreds of millions of mobile phones and situate itself at the forefront of wireless progress.
InterDigital’s business most closely resembles that of Qualcomm Inc., although on a much smaller scale. Like the CDMA pioneer, InterDigital invents wireless technologies, patents the technologies and then licenses the inventions to wireless equipment manufacturers for royalties. Indeed, InterDigital-which owns more than 250 patents relating to CDMA-even counts Qualcomm as a customer.
Patent licensing “happens to be something we’re very good at,” said Jack Indekeu, InterDigital’s director of strategic marketing.
Founded in 1972 and a public company since 1981, InterDigital today owns more than 1,000 patents covering everything from TDMA to CDMA to W-CDMA. The company licenses technology to virtually every mobile-phone manufacturer and wireless technology company including Nokia Corp., Sony Ericsson, L.M. Ericsson, NEC Corp., Sierra Wireless Inc. and Research In Motion Ltd. During the past 12 years, InterDigital boasts, the company has generated $500 million in patent royalty and technology licensing payments.
“We’ve earned the right to play” in wireless, InterDigital’s Indekeu said.
InterDigital’s patents cover a variety of technologies, such as “transfer station for wireless telephone distribution with time and space diversity transmission” (patent No. 6366568) and “subscriber RF telephone systems for providing multiple speech and/or data signals simultaneously over either a single or a plurality of RF channels” (patent No. 6282180). Generally, the company’s patents cover methods to improve handset battery performance, transmission efficiency and call quality. The company’s technology touches everything from mobile-phone components to air-interface links to network base stations.
“Simply, InterDigital is like the valet parking attendant at a restaurant,” wrote Independent Research Group in a recent report on InterDigital. “He doesn’t own the parking lot in front of the building, but if you want your car to remain in that lot while you’re having dinner, you will pay his going rate.”
IRG rates InterDigital as a “buy.”
Indekeu said InterDigital maintains its cutting-edge position through a combination of engineering work and standards efforts. He said the company manages a “travel team” that participates in almost every major wireless standards body, including the IEEE, the TD-SCDMA Forum, the GSM Association, the UMTS Forum and the TDD Coalition. Further, around half of InterDigital’s operating expenses-$11.4 million in the second quarter of 2003-go to its research and development efforts. Another good chunk of its expenses goes to patent administration and licensing. The company recorded revenues of $25.8 million in the second quarter.
Although it has made a name for itself in the market for second-generation handsets, InterDigital is placing its future hopes on selling licenses for 3G products. Specifically, InterDigital is selling its UMTS FDD Dual-Mode Terminal Protocol Stack, developed in conjunction with Infineon, which sits in mobile-phone baseband chips and helps to reduce power requirements. The company’s UTRA TDD Base Band Modem product supports voice and data over a single spectrum band. And its Smart Radio Resource Management product manages the flow of data to support improved call quality. InterDigital also offers smart antenna and wireless local area network products through its $11.5 million acquisition of Tantivy Communications Inc. InterDigital’s Indekeu said in the future the company plans to focus on licensing product reference designs rather than simply technology innovations.
In its detailed April report on InterDigital, IRG forecast the company would score revenues of $100 million this year and up to $300 million next year. InterDigital recorded $115 million in revenues last year. IRG said InterDigital is poised to take advantage of the growth of the worldwide handset market and the emergence of 3G networks, which will compensate for the declining sales of 2G products. IRG also cautioned investors on the contentious nature of InterDigital’s business.
“The nature of intellectual property exposes InterDigital to litigation risks,” IRG wrote.
Indeed, InterDigital is embroiled in major financial disputes with Nokia and Samsung Electronics Co. Ltd. Further, InterDigital filed a patent-infringement lawsuit against Lucent Technologies Inc. through its Tantivy subsidiary. Such battles follow previous disputes with heavyweights Ericsson and Sony Ericsson.
According to IRG, InterDigital’s disagreement with Nokia stems from its deal with the company in 1999 to co-develop WTDD W-CDMA technology. The companies agreed on licensing rights but no royalty rates, and InterDigital claims its previous agreements with Sony Ericsson and Ericsson define those rates. Nokia has taken the case to the International Court of Arbitration, where it is pending. InterDigital’s dispute with Samsung involves similar issues over TDMA products, and Samsung has asked to have its case essentially combined with that of Nokia. Last year, InterDigital scored a major licensing deal with Sony Ericsson and Ericsson following years of legal wrangling with the two companies. Under the deal, Ericsson must pay InterDigital an annual fee of $6 million for sales of infrastructure equipment, and Sony Ericsson must pay a royalty on each licensed product sold.
IRG said it expects InterDigital to wrap up its legal battle with Nokia and Samsung by next year, and that it will score a minimum of $165 million in deferred royalty payments-which represents a major portion of IRG’s forecast of $300 million in revenues in 2005. Further, IRG said it expects InterDigital to sign at least one or two new license agreements with the likes of LG Electronics Co. Ltd. or Motorola Inc.
“InterDigital has no factories or fabrication facilities that tie up large amounts of capital, and it has no inventory that ties up cash,” IRG wrote. “Revenues carry 100-percent gross margins, the company has $1.80 per share in net cash, and debt was only 1 percent of capital at December 2003.”
Not everything is rosy at InterDigital, however. Last week the company announced it would cut 8 percent of its workforce, or 25 employees. RBC Capital Markets said the move was likely due to the fulfillment of the company’s W-CDMA development deal with Nokia, but InterDigital did not respond to requests for comment.
