InterDigital Communications Corp.

Ticker: (AMEX: IDC)
Phone: 610-878-7800
Web site: www.interdigital.com
Price (1/21/2000): $37

By Paul Larson (TMF Parlay)

How Did It Double?

Every once in a while, a stock comes along and acts so wild that we can't help but take a closer look. Such is the case with InterDigital Communications, a company taking advantage of the wireless craze. Between early 1997 and November 1999, InterDigital's stock was fairly tame and generally fetched between $4 and $8 per share with little volatility and moderate trading volume. But that all changed on November 17 when Wall Street's most recognizable name in the wireless industry, Qualcomm (Nasdaq: QCOM), filed its annual 10-K report with the SEC.

In that report, Qualcomm disclosed that it had licensed patents from InterDigital essential to its own code division multiple access (CDMA) technology. One of the reasons Qualcomm has been one of the hottest stocks over the past several months is because it is largely seen as the one holding the purse strings to the patents concerning CDMA, and CDMA is a vital technology and digital standard in today's wireless industry. In other words, Wall Street woke up to the fact that Qualcomm is not the only wireless company that has the potential to receive high-margin royalty income from its wireless patents.

With this realization, the volatility in InterDigital's stock has gone through the roof. On November 17, InterDigital was trading at $5 7/16 and typical trading volume on the stock was approximately 200,000 shares per day. The next six weeks after the patent licensing news saw the stock skyrocket on impressive volume. On December 30, a mere 6 weeks after Qualcomm's disclosure, InterDigital's stock went as high as $82 with 12.6 million shares trading hands in a single day.

While InterDigital is down significantly from those blow-off highs made near New Year's, those who have held the stock more than two months have seen their shares double in value several times over.

Business Description

InterDigital Communications can be best described as a wireless research company. The company develops digital wireless telecommunications technology and systems for voice, data, and high-speed multimedia access. While the company does make mobile phones and related equipment, it is a small and withering part of the business. The lion's share of InterDigital's revenues comes from technology development, transfer, and licensing, as well as related engineering services. In the most recent quarter, revenue from licensing and strategic partnerships accounted for more than 95% of InterDigital's sales.

InterDigital is currently working with Texas Instruments (NYSE: TXN) to complete an advanced chip utilizing its Broadband Code Division Multiple Access (B-CDMA) technology for use in wireless applications. InterDigital also has an alliance with Nokia (NYSE: NOK) to develop advanced wireless Internet access technology.

Financial Facts

Income Statement
12-month sales: $96.2 million
12-month income: $42.9 million
12-month EPS: $0.88
Profit Margin: 44.6%
Market Cap: $1800.1 million

Balance Sheet
Cash & Equivalents: $80.3 million
Current Assets: $93.1 million
Current Liabilities: $12.6 million
Long-term Debt: $2.7 million

Ratios
Price-to-earnings: 42.0
Price-to-sales: 18.7

How Could You Have Found This Double?

InterDigital has been around for a long time and had patents on various wireless technologies years before Qualcomm and today's wireless titans became all the rage on Wall Street. People who got excited about Qualcomm's prospects for achieving significant royalty income on its wireless patents probably would have done themselves a favor to look around at some of the other companies in the industry with similar technologies and business models.

Where to From Here?

While InterDigital has been public for a long time (the company was founded in 1972 and came public in 1982), it has a shoddy record of creating shareholder value. This can be seen when looking at the company's balance sheet, where InterDigital's accumulated deficit, which is essentially the sum total of the company's losses over the years, stands at a tall $134.9 million. Plus, the company only had three profitable years in the 1990s (1994, 1998 and, when the books are closed, most likely 1999). While the issues now facing InterDigital are slightly different from what it has faced in the past, the spotty historical profitability should give pause for thought.

It should especially give pause since the company's business model remains relatively unchanged. The company has been researching and developing wireless patents for years in the hopes of licensing those patents and sitting back and collecting the easy money of royalties. It's a model that can work and can bring phenomenal high-margin returns, as Qualcomm has recently shown. However, attaining and keeping the proper patents is no easy task, especially with today's litigious atmosphere and so many other companies working on the same or similar technologies.

The exact strength of InterDigital's patent portfolio remains an open question. The Qualcomm news is certainly a positive indication that some of InterDigital's patents related to CDMA have at least some validity. The terms of Qualcomm's agreement with InterDigital have yet to be fully disclosed, which is no small factor in InterDigital's wild volatility of late. It is still a mystery whether the royalty stream from Qualcomm will come rushing in like a river or be only a trickle.

Looking beyond the CDMA standard, InterDigital has also chosen some potent friends to develop next-generation wireless technologies. The company has partnered with Texas Instruments to build its wireless chips, and TI is an extremely strong semiconductor company. Plus, InterDigital's relationship with Nokia gives InterDigital a partnership with one of the largest and most dominant makers of wireless products. In other words, InterDigital looks to have as good a shot as any at cornering the patents on the so-called 3G standard. However, the wireless field is crowded, and betting on the outcomes of legal and standards battles is always a crapshoot.

So, what does all this mean for current and potential InterDigital investors? About the only certain thing about InterDigital at this point is that it has a highly uncertain future, both in the short and long term. The company could very well be "the next Qualcomm," or it could end up where it was in the past -- with plenty of red ink and disappointments. Either way, InterDigital is a company worth keeping on the radar and investigating further.

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