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IDCC: A Controversial Stock Not Worth The Risk

Jul. 23, 2013 2:58 PM ETInterDigital, Inc. (IDCC)8 Comments
Mike the PhD profile picture
Mike the PhD

There has been a lot of talk about patent reform, litigation, and patent trolls in the media and in Washington of late. Given the endless patent wars between Apple (AAPL) and Samsung, the multi-billion dollar patent portfolio purchases from firms like Microsoft (MSFT) and Google (GOOG), and the generally increasing time and expense of getting even a single patent, it's easy to get the feeling that the patent process in this country is largely broken. While Washington politics and lobbying from special interest groups are likely to prevent patent reform for the time being, eventually it is a near certainty that the US will have to reform its patent system.

Based on this risk, I believe that $1.6B market cap IP holding company Interdigital Inc. (NASDAQ:IDCC) is too expensive at current levels, and does not adequately reward investors for taking the risk of holding its stock.

If you believe that such reform is all but inevitable in this country eventually, then it follows that patent holding companies (derisively called patent trolls in the media), should be paying out large amounts of their free cash flow to investors in the form of dividends. Much as tobacco companies pay out large amounts of cash to investors in order to help take the target off their backs, one would think IP companies would do the same thing.

Yet IDCC pays only a 1% dividend and seems to be spending the vast majority of its incoming cash on new patents. While shareholders should always be looking for a company to reinvest in its business, in this case the company seems to be banking very heavily on the continuation of the status quo - something that may not be wise given that patent litigation has not achieved much in the way of results for either Samsung or Apple, and given that

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Mike the PhD profile picture
I have a PhD in Finance, a Masters in Economics, and a B.S. in Industrial Engineering. All three of my degrees have largely been focused on data analysis, and that’s what most of my work experience has dealt with. I’m a professor at a major US university now where I teach classes on data analysis and do research on the financial markets, but before that I worked for a major Wall Street bank as a bond trader, and before that I worked for a hedge fund as a quant developing investment strategies.

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Comments (9)

IDCC closed at $38.82 the day you wrote your article, I still think it's worth twice that amount. However, everyone is entitled to their own opinion.
Patent News profile picture
idcc is not that risky
There is no question that the political, legal and regulatory forces have created a degree of uncertainty over the patent landscape. While this creates a risk factor that should not be taken lightly with respect to an investment in Interdigital, in your efforts to drive home your point I think you are a bit excessive in painting a picture of doom and gloom for Interdigital.

I will pull some quotes from your article:

1. "investors in this firm are literally risking everything they invest on the rulings of a few judges."

By "risking everything" it appears that you are implying that IDCC will go to zero in the event of an ITC defeat. Not a chance. Interdigital has over $500 million in net cash and a significant existing revenue stream. Due to the current heightened legal activity, Interdigital has been running approx. $20 million a quarter in litigation expense. Litigation expense will be greatly reduced upon completion of the ITC proceedings, and their existing revenue stream will remain. The ratcheting down of legal expense, win or lose, would contribute to the bottom line. Their mountain of cash would remain a mountain of cash should they lose at the ITC.

2 "Without favorable court treatment, the majority of IDCC's "assets" have no value."

Not accurate at all. Interdigital has signed the vast majority of its license agreements without the need for litigation. And many of those license agreements were obtained subsequent to their ITC loss to Nokia in 2009. Interdigital also suffered a loss to Motorola back in the mid-90's, and subsequently went on with a successful licensing program. Fast forward to 2013, Interdigital holds more cash (a significant asset) than it has ever held in its history, and is participating in a mobile device market that dwarfs the markets of the mid-90's and 2009. It would remain one of the top holders of patents essential for the LTE standard.

3. "it is entirely plausible that it could very well find itself out of business in a few years"

Ridiculous. Interdigital is an incredibly efficient, well managed little company. Again, it's sitting on over a half billion net cash. It's primary business expenses are R&D and litigation, and they have less than 300 employees. Those expenses are easily controllable under your doomsday scenario. Even in a worst case scenario where political, legal, and regulatory forces would create an environment where a Non-Practicing Entity business model would no longer be viable, Interdigital would likely have many opportunities to partner, merge, or sell to product oriented companies who would salivate over the prospect of having the Interdigital portfolio or parts of it as a defensive patent arsenal, just as Intel did last year, purchasing IDCC patents to the tune of $375 million.

One other thing about the prospects of an ITC loss, which concerns just a few patents of Interdigital's 20,000 plus patent portfolio. People don't consider the fact that even in the event Interdigital does not prevail at the ITC, these OEM's, despite being victorious, would still like to be licensed to the Interdigital portfolio. In addition to the appeals process which would follow, the OEMs don't want to see the Interdigital portfolio splintered and sold off in pieces, creating a situation where these OEMs are going to be facing lawsuits in every direction concerning multiple patents from multiple owners. They don't want to see the portfolio going to a competitor, which would allow that competitor to increase their negotiating leverage in an eventual OEM cross-licensing deal. The Interdigital portfolio will remain a going concern for these OEMs until licensed.

It should be noted that Interdigital has three separate ITC cases. The 613 ITC investigation could be decided at any time, and comes on the heels of an Interdigital CAFC victory last August, which defined the patent claims exactly as Interdigital had argued. Your article refers to a judge's ruling against Interdigital. That was not a "ruling" at all, but an Initial Determination by the ALJ in the 800 ITC case, to which Interdigital argues that the ALJ, in pouring over thousands and thousands of documents, made a critical "glaring" claim construction error which is not consistent with how a related patent's claims were defined by the Federal Court of Appeals. This case needs to go to the full Commission for a Final Determination. I'm not suggesting that this is a slam dunk, but this ALJ initial decision is far from over. Finally, Interdigtal has a third case at the ITC, the 868 investigation, to which no decisions have yet been made. Should IDCC lose all three cases, IDCC would still have the appeals process.

4. "Further investors who are currently long the stock should be looking for a way to get to the exit ASAP!"

This is a silly comment and the excessive and urgent doom and gloom nature of this article concerning a very financially stable and efficient company suggests an underlying financial motivation for this article.
23 Jul. 2013
Notwithstanding ;your ommmission of the $1.50 special dividend last year I think you are correct with respect to warning about investing in IDCC. Some might think the patent system is broken, I think it works exactly the way large company's and their law firms desire. It's only when they find themselves in dispute with each other does the system appear broken. If a small company like Interdigital attempts to enforce their IP rights then the process is completely fair. lol
I think the system works exactly as those in power wish it to work.
It's very good for the law firms , judges and the government agencies .
I wouldn't call IDCC controversial.
I would just say that its management stinks.
Its pretty pathetic, when you develop patents for 4g, have them incorporated into the standards by the standards committees and declared essential, then several years later these patents get wasted by the ITC.
What is wrong with IDCC ?
Take your pick. poor management, poor patents, poor licensing strategy, poor lawyers.
Qualcomm had their major infringers for 4g signed 5 or 6 years ago.They are now using those recurring revs to develop more patents, improve earnings, and grow the company. their r&d grows yearly, while idcc is on this famous 10 year plan, to sit around, spend 200 million on legal fees instead of r&d, give early outs to engineers, and stay the same wannabe it has been .
There is a great deal to know about patents, wireless development and IDCC's role in this over the last thirty years.

At the moment, the "broken patent system" to which you refer has placed no risk premium on refusing to take a license for a patent on reasonable terms, thus the rise in litigation to force compliance.

That is, in the long run, a dangerous and expensive path for the infringers, and IDCC receives tens of millions each year from manufacturers who voluntarily comply. The cash they keep on hand includes what they need to sustain the company through its rather long payment cycles, remain viable in enforcing its rights against infringers and reserve prepaid license sums for future operating expenses.

They have a fairly good record of success in navigating the legal process, which can take more than 10 years (their current entanglements with Nokia are almost that old) but the accruing rights are very valuable. The spike in share price in your chart was a speculative rise as the company considered whether it should sell itself two years ago.

Since their payment cycle is elongated, your focus on the rather minor dividend - 1% is common in tech companies - is misplaced.
23 Jul. 2013
So IDCC is not worth the risk because of Apple, Samsung, Google, Microsoft is fighting? I don't agree with that at all. IDCC is not a troll company. A patent holding company that actually invents technologies and solutions is not a troll. There may be allot of people in the stock that bought it for the wrong reasons, or people that should not be in the stock from the beginning. Allot of them probably left in the 15% drop, I guess, and that's a good thing I think. I still believe in IDCC.

But, still. Thank you for an interesting read.
You did not mention that IDCC sold a bundle of patents last year and rewarded shareholders with a $1.50 special dividend on top of it's regular dividend, so it's not surprising that you failed to mention that the CEO has stated that negotiations are currently in place to close on another bundle of patents this year.

I do agree with you that Washington needs patent reform, I just don't see that happening on Obama's watch. I do not agree with you about buying puts, I would be selling out of the money puts as a cheap way to acquire more shares of IDCC, or at least collecting the premium for those sales.
Mike the PhD profile picture
Thank for the comment. I agree IDCC is making changes. I just think they could be doing much more for investors. They should implement a much more substantial regular divdident to start.
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