InterDigital: Risky Play with Huge Potential Upside

Vijay Nagarajan recently did a complete analysis on InterDigital that covers his speculation on Qualcomm acquiring it. Check out the posts The Infineon Alliance, Inside the iPhone, and The Apple Deal which look at how it is going to reap the benefits from the boom in the 3G market.

On February 28, InterDigital, Inc. (NASDAQ: IDCC) announced its results for Q4 and full year 2007. Q4 revenue was down 16% y-o-y to $54.9 million mainly due to lower technology solutions revenue and decrease in non-recurring revenue related to 2006 settlement with Nokia. Recurring patent license royalties increased to $50.3 million from $48.1 million in fourth quarter 2006. Net loss was $2.0 million, or $0.04 per share, compared to net income was $20.3 million, or $0.36 per diluted share. During the quarter, it repurchased 1.0 million shares for $18.5 million.

For the full year 2007, revenue declined 51% to $234.2 million, driven by the settlement of $253.0 million with Nokia in 2006. Recurring patent licensing revenues increased by $10 million to $216.1 million from 2006. Net income was $20.0 million, or $0.40 per diluted share, compared to $225.22 million or $4.04 per share in 2006. In 2007, it repurchased 5.7 million shares for $176.2 million. LG, Sharp, and NEC were its major customers and it also entered into licensing agreements with Apple, RIM, and recently Giant Electronics of China.

Operating expenses in the quarter increased to $57.6 led by $6.6 million increase in product development initiatives and a $3.3 million increase in patent administration and licensing. For the full year, operating expenses increased to $211.2 million led by $21.7 increased in costs related to product development initiatives and $16.5 million higher patent administration and licensing costs.

For the first quarter, InterDigital expects recurring revenue from its existing relationships to be between $53 million and $55 million. It is currently trading around $18 against Vijay’s valuation of $75. It hit a 52-week low of $16.47 on December 4 and its market cap is around $854 million.

If you are looking for stock ideas, at the minimum, you should take a look at the analysis on why this company is promising. That said, this stock is not for the faint of the heart, and it may take a while before all the ducks line up and the royalties start flowing in consistently. There are also inherent risks in IP Licensing business models. Finally, companies trying to move from IP Licensing to “product development” face a plethora of unfamiliar challenges which bring with them their own set of risks. Most likely, Interdigital will not be able to show a predictable stream of rosy performances, and the Street will punish it for that reason. That, very well, may be your opportunity to play the stock.

This segment is a part in the series : InterDigital