3 Things to Watch With InterDigital

InterDigital (Nasdaq: IDCC  ) develops and patents technologies that enable and enhance wireless communications. InterDigital currently has a portfolio of approximately 18,000 patents ranging from 2G, 3G, 4G LTE, and IEEE-802 related networking solutions.

Today, let's look at three things investors should be watching regarding InterDigital, as they will provide us better insight into the company.

1. Patent development and sales
With no tangible products, InterDigital is a royalty and licensing machine. Its approximately 18,000 patents are licensed out to wireless providers and incorporated into wireless connectivity products like cellular phones, tablets, notebooks, and digital PDAs.

In addition to consistently adding to its patent portfolio, InterDigital is looking to maximize shareholder value by unloading patents if it gets a fair price. Recently, InterDigital sold roughly 1,700 patents, mostly 3G, 4G LTE, and 802.11 technologies, to Intel (Nasdaq: INTC  ) for $375 million, or approximately $221,000 per patent. The amount paid per patent was actually at the low end of the recent range we've witnessed for patent sales as a consortium led by Apple, Microsoft (Nasdaq: MSFT  ) , and Research In Motion purchased Nortel's portfolio of 6,000 patents out of bankruptcy court for a pricey $750,000 each.

Understanding the going price for patents (i.e. whether they're rising or falling) and keeping an eye on the amount of time it takes for InterDigital to replace those patents or licenses is a key to understanding InterDigital's cash flow.

2. Lawsuits
Unsurprisingly, with patents and licensing comprising InterDigital's entire lifeline, ensuring that its technologies are well protected is essential. Last week, for instance, the U.S. Court of Appeals for the Federal Circuit revived a previous lawsuit InterDigital brought against Nokia (NYSE: NOK  ) for violating its wireless cellular technology. With the court ruling that the International Trade Commission erred in its ruling, the case will be reopened with the possibility of a monetary victory in the cards again for InterDigital.

Patent lawsuits don't translate into long-term recurring revenue as Foolish analysts Austin Smith and Andrew Tonner discussed last week, but they can provide huge one-time pops. VirnetX Holdings (NYSE: VHC  ) , which supplies wireless 4G LTE security licenses and patents, won a $106 million lawsuit against Microsoft for its unlicensed use of a pair of patents in 2010. Microsoft ultimately agreed to a total of $200 million in payments a few months later to utilize all 46 of VirnetX's patents.

Keeping a watchful eye on which companies InterDigital is suing and vice versa is imperative to owning this company.

3. Shareholder value actions
The final factor worth keeping an eye on with InterDigital is what actions it's taking to enhance shareholder value. Given that InterDigital has no tangible products, InterDigital will occasionally turn to patent sales and has, at one point, actually put its entire company up for sale (unsuccessfully, might I add).

In addition to selling patents and licenses, InterDigital recently used $100 million from the $375 million it received from Intel to double the size of its authorized share buyback program to $200 million. Personally, I would rather have a dividend any day than a buyback because companies are often poor predictors of when their stock is at an attractive valuation, but it's at least a step in the right direction. It's also worth noting that InterDigital's $328 million in net cash gives it ample buying power to itself turn into an acquirer if need be.

Understanding what InterDigital is doing with its cash in order to boost shareholder value is the final piece of the puzzle.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze InterDigital's successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on InterDigital, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Intel, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Intel, Apple, and Microsoft, as well as creating a bull call spread position in both Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 10, 2012, at 11:19 AM, drbldr wrote:

    First, investors need to understand that you can't simply put a $/patent value on this or any other company. Every patent is different in it's ability to command royalty payments, which ultimately is what any buyer will use to determine a value or purchase price. This also doesn't consider how many of the 1,700 patents Interdigital sold are unique instead of duplicate patents in other countries. There are also deal points in the Interdigital sale that we weren't given, such as any cross licensing terms that were included that might allow Interdigital future use of the technology. Again, without full disclosure and understanding of all the details, a $/patent is not an accurate indicator of a company's value. The other point this article doesn't seem to understand is that patent lawsuits can result in long term royalty payments, or the equivelant thereof. When Microsoft paid an additional $96 million to VirnetX on top of the court award, no doubt that was for the use of VirnetX's patents for a specified time period. This is very typical to see royalty payments made in lump sum(s), just as Apple and Samsung have done with Interdigital. A successful lawsuit not only secures royalties from the losing party for future use of the patents, but it also strengthens the patent holders ability to obtain agreements with other potential licensees and avoid additional court battles. Overall, a successful patent lawsuit helps long term royalties immensely.

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