The Motley Fool's Rich Smith had the opportunity to dish with William Merritt, CEO of Stock Advisor recommendation InterDigitalCommunications (NASDAQ:IDCC). The company might not be a household name, but if you've used a cell phone, you've used InterDigital's technology. Check out what this behind-the-scenes company has planned for its patents as the high-tech arena faces increased convergence.
Rich Smith: Many of InterDigital's clients -- Ericsson (NASDAQ:ERIC), Sony (NYSE:SNE), Research In Motion (NASDAQ:RIMM), and I understand Nokia (NYSE:NOK) is on board now -- are famous, "brand name" companies. But InterDigital isn't exactly a household name. Introduce your company and, if you could, tell us how the ordinary consumer might first encounter your products.
William Merritt: The easiest way to think about InterDigital is that we develop and sell the technology that allows users of cell phones or other terminal unit devices to send and receive signals. We have a saying that when you press the "send" button, we take over. While not being a known consumer brand name, InterDigital is well known in the wireless industry for our pioneering legacy and ongoing innovations, contributions to the wireless standards, and large patent portfolio. InterDigital's patent portfolio consists of thousands of U.S. and foreign patents and patent applications. Our successful patent licensing program has generated close to $1.5 billion to date.
To our customers, which are typically original equipment, design, or semiconductor manufacturers, we offer -- or plan to offer -- our technology in three different forms. First, we offer rights under our patents, which cover some of the key inventions used in cell phones, to manufacture equipment that incorporates our inventions. Second, we offer a form of technology we call "know-how," which typically encompasses detailed designs, software, and other information allowing manufacturers to create the integrated circuits used in cell phones. Manufacturers use this information to build ASICs (commonly referred to as chips) and cell phones. Third, we are exploring embedding all that software and innovation into a "fabless" component or a chip that we would have manufactured and then sell to customers.
While it is difficult to describe in a few sentences the types of inventions and technology we have created, many of our inventions are used when your cell phone receives and sends information. So, whether it is controlling the transmitting power of your phone, handing off your phone's signal from one base station to another, or adapting the data flow between voice and, for instance, a web page, InterDigital's technology is there.
RS: Another company licensing IP to major telecom players has become very well known. How does a "back office" company like InterDigital become prominent in the way that Qualcomm (NASDAQ:QCOM) did?
WM: I understand your reference to being a "back office." However, we would like you to think of InterDigital as being a "front office" company. As a digital wireless pioneer, we are always developing solutions far ahead of the market, often 10 to 15 years ahead, before the products reach broad adoption and commercialization. Our capabilities in system knowledge and our focus on the development of air interface and modem technologies that go into the inner workings of every mobile device sets us apart in our ability to define a wireless system.
As far as prominence is concerned, achieving that is based on a combination of technology leadership and strong financial performance. As I mentioned earlier, we have long been a technology leader for wireless. More recently, we have dramatically improved the financial performance of the company. Five years ago, our annual revenues were nearly $53 million; this year, all quarters to date have topped that figure. We ended 2001 with a market capitalization of about $500 million and as we approach the end of August 2006 we are around $1.5 billion. Over the past year, we have set out a goal of deriving revenue from every 3G terminal unit sold. We are executing against this goal and if we continue on this track the InterDigital name should become much more prominent.
RS: Ballpark figure, when I buy a cell phone for $100, how much money would InterDigital make off that purchase?
WM: Many of our patent licensing deals are tailored to the particular licensee. For example, certain licensees have running royalty deals where the licensee pays a royalty on each product sold. Some of these deals allow for volume and/or pre-payment discounts, royalty caps and the like. Other licensees have fixed payment deals where the licensee pre-pays royalties covering a certain amount of products to be sold, taking on the performance risk that it may not sell the amount of products for which it has pre-paid royalties.
Nokia paid a fixed amount of $253 million based upon royalty rates determined after a lengthy arbitration process. That payment covered Nokia's sales of single mode 2G products for the period 2002 through 2006 and for 3G products sold through April 2006.
RS: Is InterDigital a company that can essentially rest on its laurels and collect royalties on past engineering achievements from now to eternity?
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Rich Smith does not own shares of any company mentioned. Fool rules are here.
