Who can forget the big 3G wireless land grab of 1999, when people first began to realize that Qualcomm (Nasdaq: QCOM) had carved out for itself a pretty sweet position as a toll taker for upcoming generations of wireless communications, particularly CDMA?
Soon, other companies jumped into the fray, declaring their own intellectual property and demanding they be paid royalties as well. To this day, InterDigital Communications (Nasdaq: IDCC) has ongoing or impending arbitration with powerhouses Nokia (NYSE: NOK) and Samsung, and successfully completed the same in the past with NEC (Nasdaq: NIPNY).
In what is fairly common in this realm, where IDC is locked in a legal struggle with Nokia in one area, the companies are cooperating in another as they co-develop Wideband Time Division Duplex (WTDD) technology together.
Defending and claiming intellectual property rights in high technology is nasty business, as folks from Qualcomm, IDC, and Rambus (Nasdaq: RMBS) can all attest. Frankly, when IDC first came into public consciousness with its claims, I dismissed it as an opportunist, claiming intellectual rights in an opportunistic fashion in the same way that British Telecom (NYSE: BTY) tried to claim rights over the hyperlink. I was wrong, and IDC has survived some fairly grim times in the interim.
Its revenues for the most recent quarter exceeded $26 million, more than 90% higher than the same period last year. This jump attests to the added licensing revenue from companies such as NEC and Sharp, as well as some increase in the demand for mobile handsets in aggregate. For the quarter, the company managed to earn $0.06 per basic and diluted share, though it should be noted that its stock price rise has exposed each additional dollar of earnings to more dilution, as diluted share count exceeds basic by more than 7%.
IDC's management in its conference call (courtesy of CCBN) were justifiably proud of the company's survival and revenue growth, noting that it has grown from little more than $1 million for all of 1998, an increase of more than 10,000%. As we've seen with similar companies, including ARM Holdings (Nasdaq: ARMHY), the royalty model has the benefit of having negligible costs of goods sold -- in IDC's case, there are none. In fact, the vast majority of IDC's expenses in any form come from research and development; in the most recent quarter, R&D accounted for about 50% of total operating expenditures, or 42% of total revenues.
There are a few things that make me believe that the stock price -- at more than 10 times annualized sales -- is well overdone. First came a comment from CEO Howard Goldberg that the company's royalties are not based on unit sales, rather they are price-based. So Sony-Ericsson, which is rapidly increasing its handset unit sales, didn't account for a higher level of revenues for IDC, which may be due to price discounting by Sony-Ericsson. Several pundits, including Fred Hickey, have pointed out that there is evidence of massive handset gluts, particularly in China. On the other hand, with the advent of wireless number portability in the U.S. starting later this month, we can perhaps expect a spike in sales.
We'll certainly see, but IDC's priced as if it's going to be smooth sailing for some time to come.
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