InterDigital Kicks Down an Open Door

When InterDigital (Nasdaq: IDCC  ) closed the door on strategic alternatives, it didn't stay locked for long. Just one month after declaring the search for an exit strategy, the mobile patent wrangler punctuated its fourth-quarter report with a promise to start selling some patents. "As part of our expanded business plan, we also intend to generate cash flow from the sale of non-core patent assets," said CEO Bill Merritt.

That's far short of selling the entire company to the highest bidder, but a significant step in the same direction. Merritt wants to take advantage of the pockets of industry interest that showed up in the process of actually looking for all-or-nothing buyers. Whether by direct sales or joint partnerships, InterDigital wants to extract some money from small batches of patents that don't add much to the top or bottom lines today.

The income statement could use a bit of a boost. GAAP earnings fell 36% year-over-year to $0.49 per diluted share on sales of $77 million, down from $95 million a year ago. Analysts were expecting worse, so the stock is surging today. Still, the company doesn't paint a very pretty picture here.

Making matters even worse, InterDigital burned $10.8 million of free cash in the quarter and a total of $65.3 million in fiscal year 2011. Patent licenses in the red-hot mobile market may sound like easy money, but InterDigital is showing us how tough it really is to make a living this way. The stock has lagged behind the Dow Jones Industrial Index (INDEX: ^DJI  ) benchmark over the last year, save for a brief respite when the company looked like it could find a buyer.

Investors in Qualcomm (Nasdaq: QCOM  ) and VirnetX (AMEX: VHC  ) should take a good look at this object lesson. Though vastly different in size, scope, and maturity, both stocks are resting on the proven or supposed value of their mobile patent portfolios. It's not always an easy road to travel, especially if you don't have the financial safety cushion of chip giant Qualcomm.

Smartphones and tablets are building a trillion-dollar market before our very eyes, and InterDigital is desperately trying to find a foothold in that massive opportunity. Maybe the right strategy is behind another locked door, but it's hard to know until management pulls the handle. Investing in this revolution doesn't have to be difficult; some companies have already carved out their niches.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services have recommended buying shares of InterDigital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. Our disclosure policy is still looking for a decent smartphone.


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  • Report this Comment On February 23, 2012, at 4:18 PM, jonluxy wrote:

    if you want the real skinny on IDCC you should dial into their cc replay. Also they said they'd be selling non-core patents at their last cc - this is not new news. Motley almost never gets it right IMO they just need to listen to the CCs and read the reports. But then you could do that yourself. Revs down due to LG renewal agreement not done (LG is hoping for a lower Frand rate but eventually these missing revenues will arrive) and other deferred revenues not reported pending a decision. IDCC is a bargain at these prices - I am long and holding long term. It is a great company better than ever, and it will get even better. I expect it to outperform through 2015 at least (and it pays dividends).

  • Report this Comment On February 23, 2012, at 5:23 PM, sharktopus wrote:

    I am also long on IDCC, but unlike other techies I am willing to stake a large bet on (i.e. MSFT), I will keep a very small IDCC holding. I really don't think IDCC has much downside, unless my limited understanding of the encumbrance of their patents is understated. The real key here being limited understanding. I don't think IDCC has sufficient transparency for anyone to give an authoritative assessment.

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