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WIKI ANALYSIS
InterDigital, Inc. (NASDAQ:IDCC) develops technologies for use in digital cellular phones, mobile wireless devices, and IEEE 802 standard Wi-Fi devices and base stations. InterDigital markets these technologies primarily by licensing their patents to the manufacturers of wireless devices and components. [1] InterDigital technology is found in many of the leading brands of cellular phones including Research in Motion (RIMM), Apple (AAPL), Nokia (NOK), LG Electronics, and Kyocera (KYO) as well as in the Intel (INTC) Centrino integrated wireless platform for notebook computers. [2] InterDigital was a pioneering developer of the original CDMA technology still used in the Sprint Nextel (S) and Verizon Wireless networks in the United States. According to the company, nearly one-third of all 3G cellular devices contain technology licensed from InterDigital. [3]
Recently, the company has also developed and licensed technology for use in mobile broadband devices. This technology has been incorporated into products that provide consumers internet access at broadband speeds from cellular devices and through peripheral wireless modems.
Company Overview
Business and Financial Metrics
The vast majority of InterDigital's revenue comes from the licensing fees and royalties collected by the company from equipment manufacturers for their usage of patents and other intellectual property held by InterDigital. The chart below shows a breakdown of the sources of revenue for FY2007, revenue classified under "Technology Solutions" is primarily revenue from engineering services and software (as opposed to hardware) licenses.
Key Trends and Forces
InterDigital Derives a Large Fraction of its Revenue From a Small Number of Customers
In 2007, InterDigital's largest three customers accounted for approximately 58% of revenue, broken down as follows.[6]
| Customer | Revenue Fraction |
| LG Electronics | 25% |
| NEC Corporation | 14% |
| Sharp Corporation | 19% |
This makes InterDigital especially vulnerable to the success or failure of these companies in the wireless communications industry. Since a large proportion of InterDigital's revenue is derived from royalties paid on a per-unit-sold basis (See "Business Financials"), the popularity of products produced by LG Electronics, NEC Corporation and Sharp Corporation has the potential to greatly impact InterDigital's bottom line.
InterDigital is Highly Invested in CDMA and CDMA-derivative Technology
InterDigital was one of the pioneering developers of CDMA (code division multiple access) wireless technology. As a result they claim they hold essential patents that any company creating products that incorporate either of those standards or their derivatives, such as WCDMA (wideband code division multiple access), are required to license patents from InterDigital. [7] Since 2006 CDMA and WCDMA based devices have taken an ever increasing market share of the wireless device market. The company projects that through 2012 these technologies will become the dominant standards in the wireless industry, taking away from the current market-dominant technology, GSM (Global System for Mobile communication). The graph below reflects InterDigital's internal projections for market share of CDMA and CDMA-based handsets in the global market.
(1) Source: Strategy Analytics, Inc. July 2007. Data for 2007 through 2012 represents estimates of handset sales.
(2) Includes: WCDMA/HSPA, LTE, and TD-SCDMA.
(3) Includes: cdma2000 and its evolutions, such as EV-DO.
(4) Includes: GSM/GPRS/EDGE and Analog, iDEN, TDMA, PHS and PDC. LOGO
InterDigital Provides Essential Technology for the IPhone
Although the actual hardware inside the 3G IPhone is manufactured by companies such as Infineon Technologies AG (IFX), TriQuint Semiconductor (TQNT), and Broadcom (BRCM), InterDigital has been cited as a key contributor of patent licenses for both the original IPhone and its 3G successor. In September of 2007, InterDigital filings with the SEC indicated that it had signed a contract with Apple (AAPL) for as much as $20 million in per-unit patent licensing fees related to the iPhone from Apple (AAPL), retroactive to the release date of the original iPhone (June 29, 2007 "iPhone day") and continuing for seven years.[9] [10] The filing was not specific as to particular technologies or patent licenses or the financial terms of the agreement.
The form 8-K filing read: "Under the seven-year license agreement, effective June 29, 2007,InterDigital granted a license to Apple (AAPL) under InterDigital's patent portfolio covering the current iPhone(TM) and certain future mobile phones, if any."[11]
Most of InterDigital's Customers are Based in Japan
Approximately 79% of InterDigital's recurring revenues recognized in FY2007 came from customers based in Japan, include two of the company's three larges customers (NEC Corporation and Sharp Corporation). This makes InterDigital highly vulnerable to currency fluctuations in the Japanese Yen, Japanese taxation rates and tariffs as well as general economic conditions in Japan. [12]
Competition
InterDigital licenses unique patents that it has the sole intellectual property rights to. As the holder of essential patents for technologies necessary for the development of all CDMA and CDMA-based wireless technologies, it has no direct competitors in this field.
Other companies developing CDMA chips and circuitry designs, some of which license technology from InterDigital, include Alcatel-Lucent (ALU) and QUALCOMM (QCOM).
References
- ↑ 2007 Annual Report, "General," 1
- ↑ Company Website, "Patent Licensing"
- ↑ 2007 Annual Report, "Patent Licensing," F
- ↑ http://www.sec.gov/Archives/edgar/data/1405495/000119312508043723/d10k.htm#rom92338_2 2007 Annual Report, "Results of Operation," 48
- ↑ 2007 Annual Report, "Results of Operation," 48
- ↑ 2007 Annual Report, "Geographic/Customer Concentration," 69
- ↑ 2007 Annual Report, "General," 2
- ↑ 2007 Annual Report, "Global Handset Sales by Technology," 40
- ↑ CNET News, "Apple Signs iPhone Patent Deal With InterDigital," September 7. 2007
- ↑ Seeking Alpha, "3G iPhone's Top Five Component Beneficiaries," July 20, 2008
- ↑ Form 8-K September 6, 2007
- ↑ 2007 Annual Report, "Risk Factors," 23
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