More 3G: Interdigital Comm
(from Market Guide)
Most investors know QUALCOMM, but few heard of Interdigital Comm. (IDCC). But Nokia knows all about IDCC, and Wall Street may follow as 3G, the broad technical framework for wireless internet, moves ahead.
A Source Of Essential Wireless Technology
Interdigital Communications (IDCC) develops technologies for wireless telecommunication. In light of some recent strategic shifts, the company's future revenue stream will come from royalties received from licensing technology and fees received for developing technologies. The royalty business model won't necessarily involve signing contracts and cashing checks. IDCC expects to work closely with manufacturers as they develop comprehensive solutions for wireless transmission.
So much for the basics. Now, for the interesting aspects of IDCC. It already has a portfolio of "essential patents" within the W-CDMA segment of 3G (third generation). This is a mouthful, so here's a quick summary for those who you haven't yet focused on the evolving world of wireless communications.
The first generation of wireless was analog. The second generation (2G) was digital.
Broadly speaking, 2G comes in two flavors, TDMA and CDMA, two different methods of sending packets of voice data over the airwaves.
TDMA is based on "time division". Think of it like takeoff and landing slots at large airports. Time slots are assigned to individual voice messages determining which time slot they get, during which time, they get to move through the bandwidth. GSM, which is used in Europe, is in essence a version of TDMA.
CDMA is based on "code division." Each voice message is assigned a unique code and sent on its way. Many messages from many different conversations go through the bandwidth simultaneously. Each receiver recognizes the codes attached to the voice messages it's supposed to receive, pulls the messages in, and puts the "conversation" back together.
It seems generally accepted that CDMA is best suited to 3G, the third generation, which will be capable of rapidly transmitting data as well as voice (thereby enabling wireless internet), since it uses bandwidth more efficiently. QUALCOMM (QCOM) is recognized as the key player in CDMA.
3G CDMA comes in various flavors, with two, CDMA2000 and W-CDMA, being most recognizable in the investment community.
QCOM owns essential patents and will make lots of money licensing with either standard, but would probably prefer to see CDMA2000 predominate, since it will likely get a bigger share of licensing and chip market share there. And CDMA2000 products will probably be widely available more quickly. Even so, it appears W-CDMA is gaining momentum largely because it represents an evolution from TDMA/GSM and thereby facilitates backward computability.
Now, it gets complicated. You really can't say "I'm going to build a W-CDMA system, call the owner of the patent, license it, and get to work." What you really say is "I'm going to build a W-CDMA system, there are lots of ways I can do it, the system I want is going to use all these different technologies and methods, so now I'm going to have my lawyers roll up their sleeves and figure out how many patents are involved and who owns them, and then I'm going to have them negotiate all the licenses I need."
QCOM maintains one won't be able to properly assemble the intellectual property they need to make W-CDMA a reality without licensing its intellectual property. It'll probably be years before non-engineers can assess this issue with full certainty, but so far, court decisions have been supporting QCOM's position. So present-day investment decisions that assume QCOM can be bypassed would have to be seen as carrying very high risk.
Now, things gets interesting. It also appears that even if everyone absolutely must come to terms with QCOM, it seems, at least from today's vantage point, unlikely anyone will have to go to QCOM for each and every single piece of intellectual property they need.
I realize I digressed, but now, we can readily see where IDCC fits into the picture. QCOM sees itself as the gatekeeper of W-CDMA, saying it has essential patents. IDCC doesn't claim gatekeeper status, but does also claim to have essential patents. And in the real world, both claims can be accurate.
IDCC did not appear on any of the screens I use to find investment opportunities. It was called to my attention by a Market Guide user who accurately noted the existence of controversy surrounding QCOM's role in W-CDMA and wondered if IDCC might offer an alternative way to get W-CDMA without having to deal with QCOM and the high license fees it allegedly seeks. Based on what I've learned to date, I'd would not want to say IDCC is a QCOM alternative. But it does seem reasonable to view IDCC as one company, among others, well positioned to play a significant role in and profit from a mass buildout of W-CDMA.
In the 7/20/00 second quarter conference call, IDCC CEO Mark Gercenstein (no relation to me except that the spelling of his last name matches the way telemarketers usually mispronounce my name) listed the company's essential W-CDMA patents as being in the following areas: "the use of a common pilot channel, methods for transporting packet data, multi-code transmission, power ramp-up and call establishment, techniques for bandwidth allocation, power control, soft handover techniques, and channel access and coding techniques." Mr. Gercenstein went on to add that IDCC "also invented, and will continue to invent, attractive technology that will not be technically essential to the standard but that will be commercially desirable."
IDCC is particularly focused in two key "air interface" protocols, TDD (Time Division Duplex) and FDD (Frequency Division Duplex). TDD is very useful for internet, where bandwidth demands are asymmetrical (i.e., the typical user may need high bandwidth for downloading, but much less for uploading). It's also good for congested areas with many users are competing for radio spectrum, such as office buildings or corporate campuses. FDD handles large transmissions with equal flows in both directions. One example is video conferencing. IDCC hopes to spur development of multimode chips featuring TDD and FDD to provide comprehensive 3G solutions that can interact with existing GSM systems.
Assessing Investment Merits
IDCC is financially healthy. But aside from that, it's hard to build an investment case based on the numbers. Comparisons will be obscured for a while by an important accounting change (more below). But this is hardly the first time investors have encountered that. Interestingly, IDCC stands as a nice illustration of the approach one can take when looking at any new economy stock.
The overriding consideration is whether IDCC participates in a business that's likely to be far bigger and more profitable in the future than it is today. As a provider of technology that's key to wireless internet, we can easily answer this one in the affirmative. The problem: we can do likewise for many other companies today. How can someone who lacks an engineering degree decide whether or not this one has merit?
There's nothing we can do now that will let us know for sure. But there are some clues out there.
IDCC wasn't born yesterday. Investors haven't focused as intently on who's behind what technology in 2G as is the case with 3G because the latter is seen as a bigger, longer-term opportunity. But the technical community obviously is aware of the 2G players, and in that sphere, IDCC is well known, as its TDMA technology is included in most current wireless systems. The company currently has 23 licensees including major names such as Toshiba, NEC (NIPNY), Mitsubishi, Kyocera (KYO), Siemens AG (SMAWY), and Sharp (SHCAY). The company has also been very active in getting its technologies included in formal ITU standards applicable to 3G. That doesn't mean everything was always perfect. There is some pending TDMA-related patent litigation between IDCC and Ericsson (ERICY). But the controversy doesn't seem broad enough to impact IDCC's overall status as a significant factor in 2G technology.
Nokia (NOK), one of the most well known and respected names in wireless, knows who IDCC is and is choosing to work very closely with it to develop 3G technology. Specifically, on 2/1/99, NOK and IDCC inked a multi-year contract pursuant to which IDCC is currently developing TDD applications for NOK. At the end, IDCC will retain the intellectual property and be able to license it to others.
As of the latest available data, there were no analysts covering IDCC. Some investors will be turned off by that. But it wasn't all that long ago that I mentioned Yahoo! (YHOO) to some colleagues (securities industry professionals who liked to buy tech stocks) who responded "What's that?" Although no analysts have published reports yet, 111 institutional investors did their own homework and as of the latest available data, owned 14.46% of the common. And in response to a question asked on the conference call, management indicated that there are analysts currently examining the company.
Quntitative issues may currently be inhibiting initiation of coverage. The accounting change noted above will distort income statement comparisons for a while. But ultimately, the change is something shareholders should like. In the past, IDCC booked up-front fees from licensing agreements, along with related expenses, when they were received. Effective 1/1/00, the company will recognize these revenues and expenses gradually as they are "exhausted" by licensees' product sales.
The retroactive adjustment produced a big non-cash second quarter charge. But going forward, the switch gives IDCC a much higher quality of earnings. In other words, the company's actual cash flows will periodically be far better than you might expect by looking just at EPS. Also, IDCC's earnings pattern will be more "smooth." That could be noteworthy, since analysts are very uncomfortable with companies whose results are impossible to predict because of there's no way to assess the timing of large revenue and expense items.
In the June quarter, IDCC reported a $0.02-a-share deficit on revenue of $11.6 million. More licensing revenue streams are likely to commence later in the year, but these are expected to start mainly in the fourth quarter. So look for another loss in the September period. The 6/30/00 balance sheet has $94.3 million in cash, $.4 million in short-term debt, no long-term debt, and $91.8 million in shareholder equity, and $33.9 million in deferred revenue, representing existing deals for which revenue and expense will be gradually booked as per the above accounting change.
Putting It All Together
Is there enough here to justify investment in IDCC? It depends on your goals, your investment style, and your risk/reward tolerance.
I don't suggest for one minute that my grasp of the IDCC's existing and potential patent portfolio is where I'd like it to be, even by non-engineer standards. Readers should understand that analytically speaking, IDCC remains, for me, a work-in-progress. And I do intent to continue learning more about the company.
That might seem like a no-go conclusion. And for many investors, perhaps most, that's the answer.
On the other hand, those who have new economy shareholdings may want to take a moment to review their positions. Do you know more or less about the technologies and competitive positions of those companies, especially those in internet (and especially in infrastructure or B2B) and biotech?
Next, look at the new economy numbers available to you. Biotech firms tend to get erratically timed cash inflows from venture partners, so focus more on internet. How do those balance sheets compare with IDCC? How about the Price/Sales multiples? Numbers aside, do the companies have relationships with established partners comparable to the one between IDCC and NOK? (For biotech, the answer will often be "yes." It gets harder with internet.)
Ultimately, at this moment, the still-incomplete state of my knowledge of the company and exactly where it fits in the 3G wireless world remains an issue. But in new economy, particularly internet, many investors put considerable money into numerous stocks based on far less. Many got burned since new economy shares got hit earlier this year. In assessing the odds of further losses as hype peters out, consider that the price of IDCC stock, which had some up and down hype earlier this year, presently reflects no analyst-driven hype. |
