Updated January 3, 2005

Introduction

Liquidity  

Cost Containment

Catalysts for Revenue 

Acquisition Potential 

Questions and Answers

Message Board Posts & Threads Related to these Topics

Introduction

InterDigital Communications Corp. is one of the most intriguing risk to reward investing opportunities in the wireless industry today. The risk factors are discussed later in this WirelessLedger.com exclusive Focus Stock: InterDigital Communications Corp. report. This Valuations Outlook section concentrates on the potential "rewards." We present here -- in as clear and understandable a manner as we know how -- the reasons why this investment may have some of the greatest potential for appreciation in the wireless industry today.

This Valuation Outlook section examines several factors – liquidity, cost containment, revenues, and acquisition potential – that we believe positively influence the Company’s value. We describe the various potential revenue streams – "Catalysts for Future InterDigital Revenue" – in some detail.

Information here is intended, in part, to help an investor determine when it may be time to establish a position in InterDigital – and to help develop a workable "exit strategy" to reduce or close out a position in InterDigital.

There appears to be certain developments that would spark a fast and strong updraft in share price, with the share price temporarily overshooting on the upside. Traders could take advantage of this opportunity. WirelessLedger discusses these potential developments under "Entrance and Exit Strategy Ideas"

Along the way we briefly explain some of the key concepts related to InterDigital’s valuation outlook, namely the important differences between 2G and 3G technology, the new approach to setting international standards and the importance of cross licensing. At various points, we compare InterDigital with its chief "intellectual property think tank," the highly successful Qualcomm.

We will conclude this Valuation Outlook section with some Q’s and A’s like Too late to buy shares? Is "buy and hold" or "trading" better strategy? Have an "exit strategy"? How does IDCC make a profit? How important are IDCC patents?

Finally, as befits an "information co-operative" web site, we will provide some of the most informative iHub posts and threads related to these Valuation Outlook themes e.g. "risk to reward," "trading, options and exit strategies" and "acquisition potential."

Liquidity ($2 per share now - $8 potential by year end 2005)

An important factor in describing InterDigital’s Valuation Outlook is liquidity. The Company presently has significant cash reserves (well over $100 million, or $2+ per share) and has potential for extraordinary liquidity ($8 to $9 per share) in late 2005. (See: "Revenue Streams")

Assuming successful results from the current arbitrations with Nokia and Samsung, the royalty revenues that InterDigital management is projecting would result in a cash position of $400 million to $500 million within 12 months. That extraordinary liquidity would allow InterDigital to pursue a number of options: acquire particularly attractive small firms that complement InterDigital's market position; distribute dividends to shareholders; or for stock buyback programs.

The Company has indicated its preference is to make acquisitions that would significantly increase the Company's profits over time. If the Company can get a 20 percent return on cash invested in acquisitions, it would be far better than cash returning only 2 percent in a money market fund, it is generally assumed.

InterDigital’s strong liquidity is the result of effective cost containment measures and InterDigital's practice of requiring royalties to be prepaid, based on a licensee's estimated sales.

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Cost Containment ("Yield per employee")

InterDigital is known primarily for its rich patent portfolio. InterDigital’s patents focus mainly on "air interface" (g) technology (how cell phones talk to each other). CEO Howard Goldberg claims that in the important category of "yield per employee," InterDigital ranks near the top of the wireless industry. If the Company's future revenue projections are realized, even at the most conservative levels, WirelessLedger believes revenue and earnings or "yield" could approach the blistering pace set by the other premier wireless patent (IPR) treasure house, Qualcomm -- which returned immense profits to shareholders in the 1990s. Qualcomm has managed to leverage its wireless patent portfolio for immense profits over a sustained period.

Although the Qualcomm and InterDigital business models have strong similarities, one difference is in "proprietary" technology versus "open standards." Qualcomm has a "proprietary interest" in a particular form of cell phone technology called narrowband CDMA. It's 2G (g) version is a cdmaOne (g) and its 3G (g) version is CDMA2000 (g). Qualcomm owns 90 percent of the patents related to the technology. By tightly controlling the narrowband CDMA market, in part by controlling the sale of over 90 percent of the chips enabling this technology, it has managed to receive royalties of 3 percent to 6 percent. That’s very high in the industry. About 15 percent of the worldwide market uses Qualcomm's proprietary technology. Qualcomm will also receive royalties on the far more prevalent wideband CDMA (WCDMA) (g) 3G technology. Because this technology is not proprietary to Qualcomm, it's royalties will be less.

InterDigital does not control a "proprietary" technology (almost complete control of the technology) but instead cooperates actively with other firms in "open standard" technologies (where industry leaders, including InterDigital, determine the standards -- i.e. how the technology will work).

Instead of Qualcomm’s 3% to 6% royalty claims, InterDigital claims royalties of "only" .5% to 3% -- but it makes such claims on almost all cell phones and infrastructure worldwide. InterDigital expects to receive .5% to 2% royalties on almost all future 2G and 3G cell phones and related infrastructure. If a company like InterDigital with only 330 employees can capture 1% royalties on almost all cell phones (and related devices) sold worldwide, it may be more profitable, relatively, than a company like Qualcomm, with 20 times more overhead. Qualcomm’s 8,000 employees are involved in projects beyond InterDigital's scope of operations -- and Qualcomm has a far broader focus than InterDigital -- but the comparison is striking nonetheless.

(See "Understanding the Standards Setting Process" and "Introduction to Wireless Technology for NonTechies".

By being in the right place at the right time over the past decade, InterDigital has leveraged a relatively small workforce and modest overhead into an enviable place at the heart of wireless standards for all flavors of wireless mobile communications.

While the typical firm must spend lots of money in order to make lots of money (advertising, staffing, buying raw materials to make products), InterDigital is in the enviable position of possibly being able to generate huge future revenues with very little additional expenditure of capital. That fits very well WirelessLedger's definition of cost containment. The cost for developing the patents that could generate immense revenue in the remaining years of this decade has already been expensed. Future increases in royalty revenues, therefore, would move mostly to bottom line earnings.

At one time in its history, the more revenue InterDigital took in, the greater were its losses because it was selling fixed wireless systems below cost in order to be competitive. Each sale contributed to the deficit. Now the opposite is true. While overhead remains fairly constant in the coming years, the Company projects revenue to increase dramatically. Only the 38% foreign and U. S. domestic income taxes will seriously impede the flow of new licensing revenue to bottom line earnings.

Before examining the streams of revenue that could move InterDigital's profits sharply higher, the Company having successfully settled its ten-year patent infringement litigation against Ericsson, it is important to note the Company's pre-Ericsson settlement revenue and expense structure because it forms the foundation on which future profitability will be built.

InterDigital has been operating for a reasonable period of time at a small profit because of income from 2G, 2.5G (g) and 3G royalties paid by manufacturers of about 15% of the cell phones being sold worldwide, plus some income from engineering services and investment income from the $100 million the Company currently maintains in cash reserves.

Once engineers have developed the technology included in international standards, no additional engineering costs (InterDigital's biggest expense) are required and the company could at least theoretically be very profitable for several years with only a skeletal staff collecting and depositing royalty checks . However, ongoing research and development is needed for technology that will generate royalties in 2010 and beyond. The Company is regularly filing for "continuation patents" extending the life of the core technology patents it holds by patent delivering important improvements -- and getting these patented improvements embedded into the international standards. Fortunately, that level of continuing research and development expense is almost covered with the royalties the Company already was receiving prior to the Ericsson settlement.

The royalties received on only 15 percent of the worldwide market prior to the Ericsson settlement covered almost all of InterDigital's overhead. With the settlement of the Ericsson litigation, a major obstacle has been removed in InterDigital's efforts to collect royalties on the 85% of cell phones and other wireless terminal devices sold each year for which InterDigital has not yet been receiving royalties.

Obviously, if InterDigital can collect royalties on 100% of annual cell phone sales instead of 15%, the Company's revenues and earnings will soar. Except for corporate income taxes, the expense of collecting royalties on 100% of cell phones (and related infrastructure) is only marginally higher than collecting on 15% of worldwide sales.

(It would be imprudent to suggest that InterDigital will ever receive complete 100% coverage on royalties. There will always be some hold outs. But InterDigital has an immense cash reserve and very experienced legal group to apply pressure, as needed. Ninety percent coverage may be quite doable.)

The Company has been hiring additional licensing attorneys to negotiate new licensing agreements. The position of comptroller has just been filled to help monitor the expected cash influx. A position has been created to plan for future strategic acquisitions. A slight increase in expense is needed to effectively manage the huge influx of cash the company projects it will receive. Foreign and United States corporate taxes (at the rate of 38%) will offset earnings, of course. But otherwise the collecting of $300 million in royalty revenue each year would cost the Company very little more than collecting pre-Ericsson settlement revenue levels of $80 to $90 million. It is because of this cost containment factor that projecting earnings based on InterDigital's future royalty payments is fairly easy to grasp, even by new investors.

The price of InterDigital shares ($21 at this writing), up 50% since before the Ericsson settlement, may increase more aggressively over the coming months, assuming the Company’s revenue projections are fulfilled. Indeed, over the past eleven years, Qualcomm’s dramatic rise in share price of 38 times its current price (a "38 bagger" in Peter Lynch’s terminology) indicates the breathtaking potential a patent-rich wireless firm has. When Wall Street discovered Qualcomm's earnings potential, it gradually became a core holding for mutual funds and individual investors worldwide.

What developments may occur that would indicate that InterDigital is moving beyond its 15% of market royalty share toward a potential 100% of market royalty share, with resulting profits of considerable size?

There are a number of such very important developments. Some are happening as this report is written, some appear to be very likely within a few weeks, some appear likely within a year or two and some have a good chance of happening within three or four years. Not all "what if?" developments are positive, of course. 2G, the primary current source of InterDigital revenue, will decline as 3G takes its place. Fortunately, the Company believes it has an even stronger position in 3G than in 2G. (See "Market Outlook" above as well as "3G: Fact or Fiction."

The tables in the following "Revenue Streams" section help the investor use "what ifs" to determine whether InterDigital shares are undervalued -- or overpriced based on certain developments. These are important considerations for developing both "entrance" and "exit" strategies.

Catalysts for Revenue

Updated January 3, 2005

The analysts covering InterDigital provide highly detailed analysis of InterDigital's current revenue and the Company's projected revenues and earnings, based on the most conservative expectations, as befits the analyst profession. (View all publicly available analyst reports on InterDigital).

A key difference between analysts who report on InterDigital Communications Corp. is the consideration each gives to catalysts for future revenue.  For example, Frank Marsala, of First Albany Capital , consistently bases his revenue predictions (and therefore his target share price) on a discounted free cash flow methodology. Mr. Marsala takes an ultra conservative approach, limiting his revenue expectations to highly predictable sources of income.

A much different approach is taken by Scot Robertson, the Stanford Group , who believes that the catalysts for revenue for InterDigital are so compelling that a portion of their potential revenue should be factored into even conservative earnings forecasts. Mr. Robertson has one of the most insightful and comprehenesive stock analys reports WirelessLedger.com has seen. It is certainly the most insightful report on InterDigital Communications. ( Read Scot Robertson's most current analyst report. )

This is a portion of what Mr. Robertson wrote in his November 24th 2004 report on InterDigital:

"Combined with our current assumptions on the existing revenue structure, in theory, InterDigital could generate roughly $350 million in 2005 revenue (vs. a model $139 million) . . . Although extremely difficult to fully guage given all the moving parts (i.e. . sales and marketing, general and administrative, patent and licensing, and development expenses), conservatively, based on the above revenue scenarious, we estimate 2005 earnings could be in excess of $2.50 and possibly reach $3.00 per share (vs. a modeled assumption of $0.50). As one may infer from our projections, it is clear that in our opinion, the majority of this additional revenue will drop straight through to the bottom line. . . . "

"At our current price target of $29 per share, InterDigital would be valued at roughly $1.60 billion (current diluted share count of 55.3 million), which equates to roughly15.9x our modeled 2004 revenue estimate, and 10.9x our modeled 2005 revenue estimate. However, under the potential 2005 revenue scenario we illustrated above, the multiple contracts to roughly 4.6 times 2005 revenue. On an earnings basis, the company is trading at 72.5 times our modeled 2005 EPS. However, under the sensitivity analysis we detailed, where 2005 EPS could finish between $2.50 - $3.00, the multiple contracts to a range of 9.7x to 11.6x. Therein lies the difficulty of the story -- is InterDigital worth $29 in the current market given these potential catalysts? We certainly believe so. WIth a solid and growing stream of revenue from current licensees in conjunction with an incremental revenue opportunity that has the potential to finish in excess of two times our published 2005 projection, in our opinion InterDigital is one of the most compelling players in the wireless sector. . . . "

Scot Robertson concludes his report narrative:

" Under-valued relative to our 2005 sensitivity analysis assumptions. InterDigital remains our top pick in the mobile wireless sector via its broad intellectual property, solid industry relationships with leading wireless OEMs, and strong balance sheet. It is obvious to us that many on the street looking for revenue or secular earnings growth will probably be dissatisfied with this concept. However, for those who recognize the contributions InterDigital has made in various aspects of the 2G, 2.5G, and 3G air interface standards worldwide, we believe a good deal of money could be made in this stock. Clearly, we believe that the shares cold move quite suddenly in fiscal 2004 and we recommend investors establish positions in this stock now for this long-term. Clients interested in the story should not be caught empty handed if a major announcement results from the Samsung, Nokia, or Panasonic situations. Meanwhile the company continues to move forward on every aspect of W-TDD from the physical layer to the access stack. We maintain, as we have before, that InterDigital can play a seminal role in the next era of mobile communications."

" Given the revenue scenario layered with so much potential upside, we believe it would be foolish not to weave some of this upside potential into our InterDigital valuation perspective. Earlier in this report we discuss the potential revenue scenario InterDigital retains as the company enters fiscal 2005. Given our current fiscal 2005 revenue assumption does not factor potential upside from successful arbitration resolutions with Samsung and Nokia, and a patent validation process with the Japanese Patent Office (JPO), which would trigger royalty revenue from Panasonic, in our opinion InterDigital remains under-valued relative to the company's potential forward revenue scenario. Although requiring a bit of patience and some faith in the arbitration process, we believe InterDigital's future revenue opportunity is a compelling incentive to own the shares now. While quantifying the potential value of the company's forward revenue stream remains problematic given that certain assumptions must be estimated, we illustrated a scenario conservatively detaling just how much incremental revenue could be associated with the company's basket of potential catalysts. Accordingly, we reiterate our BUY rating and $29 price objective." Scot Robertson. Stanford Group Company.  Read Scot Robertson's most current analyst report on IDCC here .

WirelessLedger.com believes that the revenue catalysts identified below have the potential to produce dramatic upswings in InterDigital earnings.  Each of these catalysts is linked to some of the most informative recent posts and threads from the most useful investment message board on the Internet (it is hosted by Investors Hub). Since WirelessLedger.com is an "information co-operative"   informative messages by knowledgeable sources are especially fittting way to keep this section current.

#1 Market for 2G Handsets and Infrastructure Worldwide

The worldwide market for current generation (2G) cell phones and other mobile devices in 2004 is over 600 million units, averaging about $125 each. InterDigital claims it s patented technology essential to 80% of all 2G devices and infrastructure sold worldwide. InterDigital has licensed much of this market and expects royalties, so a brisk worldwide market is a very important catalyst for revenue. Posts and threads here provide news, reports and opinions related to the 2G market.

#2 3G launch worldwide

Posts here relate to progress of the 3G revolution in various parts of the world. InterDigital participated in the international standards-setting process for all forms of 3G. Knowledgeable observers believe that every mobile device (e.g. cell phone) or related infrastructure (base station) built in accord with standards for 3G requires the use of considerable technology patented by InterDigital. Thus the Company expects to receive royalties on all 3G devices and infrastructure. It has a huge stake in the successful launch of next generation 3G. Particularly since royalties from 2G likely will begin to slow down in 2007.

#3 New licensee potential

Although the manufacturers of most mobile devices and infrastructure are already licensed (even if royalty rates are not yet established for Nokia and Samsung), there are some notable licensing holdouts (2G and/or 3G) who manufacture tens of millions of cell phones. These include Motorola, LG Electronics, Lucent, Ningbo Bird, Kyocera, TCL Alcatel, and Mitsubishi. Posts here generally relate to InterDigital's ongoing success or failure to license additional manufacturers for both 2G and 3G.

#4 Arbitrations: Nokia and Samsung

The two manufacturers with the largest market share. Nokia and Samsung, are licensed, but the royalty rate has not yet been determined. Successful outcome of the separate arbitrations with InterDigital would generate hundreds of millions of dollars for InterDigital overnight, with a major gap up in share price. The Nokia evidentiarey hearing is scheduled for January, 2005 with a decision within 1-5 months. Samsung follows Nokia. The parties may choose to settle at any time. In most recent arbitration (Samsung) and litigation (Ericsson), the parties settled before a decision or trial was held. Posts by attorneys and others ferret out useful information related to the ongoing arbitrations.

#5 Other litigation (Lucent)

InterDigital is pursuing "rocket docket" litigation against Lucent for violation of IDCC's recently acquired Tantivy patents. Among the inventions covered by the patents are techniques for enabling switching efficiency and managing system capacity, which InterDigital believes are essentaial to CDMA2000 products. Although InterDigital has always claimed it owns patented tech essential for Qualcomm's version of 3G, CDMA2000, IDCC has beefed up that claim with the acquisition of Tantivy and all its patents. This "test case" is probably meant to prove the essential nature of these newly acquired 3G CDMA2000 patents

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#6 How will new technologies affect InterDigital?

InterDigital's patented air interface technology is essential to all current standards for 3G, ensuring royalties for the rest of this decade. But there are many proposals for enhancing current 3G (e.g. TDD, WiFi, WLAN, HSDPA, steerable antennas), or even replacing existing 3G standards for some applications. And some day there will be a 4G. Although a relatively small firm, InterDigital sits at many standards-setting tables and is deeply involved in developing patented technology for a variety of 3G enhancements. As new technologies jockey for postions, which of them strengthen and which could weaken InterDigital's long term position in the industry? Posts here describe progress on these technology developments and often comment of their potential impact on InterDigital.

#7 TD-SCDMA and the China Market

China is encouraging TD-SCDMA, a "homegrown" version of 3G, to strengthen local industry and reduce foreign royalties. But China can't go it alone. InterDigital and Siemens own the major portions of the essential patented tech (TDD) in this 3G standard and are working with the Chinese on its development. WCDMA (UMTS) and CDMA are the competing "foreign" technologies. Posts here provide news reports from China and elsewhere as well as opinion about the progress of TD-SCDMA and its likely impact on InterDigital revenue.

#8 Infineon and InterDigital share a ten year partnership for the development of chips for 3G.

If these chips prove to be popular with wireless device manufacturers, the profits could be substantial. Posts here generally deal with apparent successes or failures in developing and marketing this new Infineon-InterDigital chip technology.

#9 JTRS-MUOS military communications overhaul

InterDigital hopes to benefit significantly in its role as a subcontractor (to one of the prime contractors, General Dynamics) in this $2 billion U.S. Military wireless communications overhaul using 3G WCDMA, where InterDigital's patented technology is essential. (Joint Tactical Radio Systems - Mobile User Objective System).

#10 Japanese Patent Office (JPO)

When the notoriously inefficient and political patent office in Japan approves one or more of InterDigital's patent applications, Matsushita (Panasonic) prepaid royalties can finally be credited as revenue, bolstering IDCC's earnings. The same technology has been successfully patented elsewhere.

If the reader needs a quick brush up on 2G versus 3G -- or an introduction to the differences -- read the reference to 3G - from an InterDigital/Qualcomm perspective - in our glossary. Also see: "Introduction to Wireless for Non-Techies," "Understanding Intellectual Property Rights," "Understanding the Standards-Setting Process," "3G: Fact or Fiction," and "30 Year Evolution of the InterDigital Business Model."

See: "Important Disclaimer." Also see: Exit Strategy question in the Q’s and A’s at the end of this Valuation Outlook section.

Next: Acquisition Potential

Why do some firms acquire others?

If a firm gobbles up another firm which has great earnings (and better yet, almost certain future earnings) those earnings will go to the acquiring firm. If a large firm has $500 million in earnings and acquires a smaller firm with $250 million in earnings, the acquiring firm's earnings rises 50 percent. (Simplified, of course, to get across the point. Earnings could be more or less depending on the nature of the acquisition.)

(3) Patent portfolio. One of those characteristics is a company's strength in intellectual property rights (IPR) (g), that is, the strength of its patent portfolio.

In mobile phones, Korea-based Samsung has come from virtually nowhere to become the fastest-growing of the world's big three manufacturers (the others being Nokia and Motorola). This year Samsung expects to increase its market share to 12% of the 460 million cell phones expected to be sold worldwide. Samsung doubled its share in the world market. (Samsung is licensed by InterDigital, and in fact partnered with InterDigital to help develop BCDMA technology, a fixed wireless forerunner of WCDMA. the rate structure for royalties is currently a matter under binding arbitration). (See: "30 Year Evolution of the InterDigital Business Model")

Besides cellphone and infrastructure manufacturers like Samsung, other firms that could benefit from acquiring wireless patent rich IPR from InterDigital are those tech firms that are trying to move over from successful computer manufacturing (or chip producing) to a place in a tech industry that seems to have far more growth potential during the next two decades – wireless telecommunications. (See "3G: Fact or Fiction")

Qualcomm might want to beef up its patent portfolio related to the type of 3G favored by the Chinese government: TD-SCDMA (g).  China is the world's largest market for wireless devices and infrastructure. The Chinese government can insure a strong market share for a particular technology. It is currently doing so by allocating limited radio spectrum more favorably to TD-SCDMA than to competing technologies CDMA and WCDMA.. TD-SCDMA is considered a "home-grown" Chinese version of 3G, the reason for its being favored. The names most often associated with TD-SCDMA are Chinese Datang and German Siemens. Although not usually mentioned in news reports, a quiet American firm with a very strong patent position in TD-SCDMA is InterDigital. InterDigital, one of a very limited number of core members of the TD SCDMA industry group, the TD-SCDMA Forum. (InterDigital representatives are pictured on the TD-SCDMA web site meeting with Chinese TD-SCDMA leaders.) The "TD" of TD-SCDMA is time division. Unquestionably, InterDigital has a very strong claim to patents essential to 2G and 3G versions of TD. (See TDD and TDMA in our glossary.)

Instead of contributing toward an estimated $1 billion a year in 3G royalties when 3G becomes the dominant wireless technology, the major OEMs (like Nokia, Motorola, Samsung, Siemens, NEC, Sharp, Ericsson-Sony -- or even the Chinese Datang group) could jointly acquire InterDigital and "pay those royalties back to themselves" in investment earnings (the equivalent of cross licensing). Manufacturers who did not belong to the Symbian type cartel would pay royalties to the cartel owners of the InterDigital patents, strengthening the hand of the firms which belonged to InterDigital patents-owning cartel.

Of course, a poison pill is only intended to prevent a hostile takeover, not a friendly acquisition. Under some conditions, the Board of Directors and shareholders might welcome a friendly takeover. WirelessLedger doubts that an offer of less than $100 per share would be viewed as friendly by the Board of Directors, because of the Company's earnings potential when 3G technology becomes dominant and annual earnings of up to $1 billion might be possible.

Q. "InterDigital's share price has had an impressive run this year. Did I miss the upside?"

A. At a share price of $22 at the beginning of 2005, several analysts believe there is still much upside in InterDigital's share price, with the potential for "explosive growth" dependent on a successful outcome of the Nokia arbitration in 2005. (See "Analyst Coverage"   below.

This Valuation Outlook section attempts to provide information to help an investor decide whether InterDigital has "upside potential" -- and if so, how much. The long-term investor wants to know when to buy -- and when to sell. So information is provided here to help develop an "exit strategy" as well as an "entrance strategy."

Q. How important is an "exit strategy" for InterDigital investors?

A. Successful investors make well thought out decisions in two circumstances: establishing/increasing a position in a stock (buying) and reducing or completely closing out a position in a particular stock (selling).

Many stocks -- especially tech stocks -- have had volatile histories in recent years. InterDigital is no exception. InterDigital shareholders who were invested in late 1999 remember well (some, who failed to take any profits, would rather forget) the meteoric rise of the share price late in the year. For much of the year the stock traded in the $4 to $7 range. Then in November, two events sparked great interest in InterDigital. For seven years, InterDigital had been involved in a patent infringement case against industry giant Ericsson Telephone of Sweden. (See: "Watershed Event: the Ericsson Litigation" earlier in this report). InterDigital took a sizable risk in asking for a pause in the litigation in order to seek revalidation of the several of its most important patents. If the patents were revalidated -- InterDigital's hand in the litigation would be greatly strengthened. If, on the other hand, the U.S. patent office declined to revalidated them -- goodbye successful lawsuit and hello to great difficulty enforcing its 2G and 2.5G patents. InterDigital shareholders who followed the stock on the Raging Bull InterDigital Message Board (supplanted in late 2002 by the IHub IDDC board)  discovered the great news that the patents would be revalidated well ahead of everybody else. That came thanks to the detective work at the U.S. patent office by message board posters, who knew how to piece together bits of information. In the same time period, InterDigital's CEO Howard Goldberg made the very bold claim that the new international standards for 3G would include InterDigital patented technology as essential in every one of its flavors. Shareholders also heard that even giant Qualcomm had felt it necessary to license some of InterDigital's technology.

Investors who use technical analysis (TA) won't find much help here except for the links in the left hand column of our homepage where one can find excellent sites for free charting and technical analysis. But investors who rely on "fundamentals" like revenue, expense, earnings, market projections, management skills and company history will likely find considerable help here at WirelessLedger.com. This Valuation Outlook section of the InterDigital report provides some detailed information to help an investor make investment decisions based on fundamentals and devise an exit strategy. (Also see: "Entrance and Exit Strategy Ideas" above.)

Q. Is InterDigital best suited for a "buy and hold" or a "trading" strategy?

A. Some InterDigital investors over the past few years have done very well by maintaining a core holding of InterDigital shares while at the same time trading 10% to 50% of their total InterDigital position. Some have used options strategies (e.g. selling covered options). Occasionally, buying call options has been a winner, but with call option premiums – even those far "out of the money," as high as they are, timing is everything. Most who buy call options lose their entire investment in them.

Q. How does InterDigital make a profit -- and what is its potential for earnings in the foreseeable future?

A. During the past decade, InterDigital's earnings have seen ups and downs of some magnitude. Recently (before the March 17th 2003 watershed Ericsson agreement) InterDigital was maintaining a positive cash flow and generating earnings that have been slightly positive. The profits picture looks much brighter following the Ericsson settlement. Profits could be modestly good, very good, excellent or stupendous -- depending on a number of very important factors, which we look at in this "Valuation Outlook" section.

In "Catalysts for Revenue" above, WirelessLedger.com attempts to describe the "what if?" developments that could propel earnings -- and therefore the InterDigital share price -- sharply higher in the next 24 months.

Q. Are all of InterDigital’s contributions to the standards "essential" – or are some simply "helpful" for making a cell phone work better?

A. Manufacturers of 3G products (cell phones, PDAs, wireless laptop computers etc.) will pay royalties on two levels: "essential" technology and "commercially attractive" technology.

Twenty (perhaps many more) firms have patents on technology that is essential to the extremely complicated technology found in one or more of the modes of 3G (TDMA (g) only, CDMA 2000 (g), and WCDMA (g)).

The 3G (g) technology in all phones is extraordinarily complex. To encourage ideas from the best engineers and scientists worldwide and to prevent any one company gaining control over a design that has to be compatible worldwide, 3G has been designed by using an "open standards" (vs. proprietary model), sponsored by the United Nations.

By way of example, InterDigital has made available over 1000 patented or patent applied software ideas to the 3G standards. Over 600 of those patented ideas have been accepted and included in the standards. Only Ericsson, Qualcomm, Nokia, NEC and a few others have had as much patented technology accepted into the standards. InterDigital is the only firm that claims to have its patented technology accepted as "essential" in all five modes of the 3G standards. (See: "Understanding the Standards-Setting Process" and "30 Year Evolution of the InterDigital Business Model")

Q. How will the firms whose patented technology is included in the standards be compensated?

A. Most manufacturers with the large market share (e.g. Nokia, Motorola, and Ericsson) own patented technology essential and/or very helpful to making the devices work. These firms do not pay each other. "You don't have to pay me to use my patented technology -- and I don't have to pay you." It’s a wash. As much as two-thirds of the patented technology involved in 3G terminal devices (hand held cell phones, etc.) is owned by the major manufacturers, who cross license each other.

Some manufacturers however own very little patented technology included in 3G standards. They may be relative newcomers -- or simply did not seek patents on what they developed (at one time it was not the "gentlemanly" thing to do). (See: "Understanding the Standards-Setting Process.")These OEM manufacturers will have to pay royalties to the manufacturers who do have substantial holdings of intellectual property rights (IPR) in the standards. (See: "Acquisition Potential")

There are more than 30 (maybe as many as 100) of these patent holding firms involved in 3G. Most of these firms have one or perhaps a few "contributions" accepted into the international standards. Perhaps it is a small chunk of software that helps the antenna in a base station do a little better job of sorting out the thousands of signals it is simultaneously receiving, for example. An industry group (3G3P) (g) is organizing the claims of these firms into one so that licensing and royalty payments can be made more efficiently.

There are two firms which stand apart from the others in this category: Qualcomm and InterDigital. These two firms have so much patented technology embedded in the new standards that they have to be dealt with separately from the other firms with much smaller claims. See: ( "Acquisition Potential")

In 2007 observers believe half of the 460+ million phones sold will be 3G. Added average wholesale cost of $300 (remember these highly sophisticated devices will include features like miniature cameras), that would bring $450 million (200 million x $2.25 at .75%) to $1.2 billion (200 million times $6) in royalty revenue to InterDigital. With only 55 million shares outstanding, that amounts to $8 to $22 a share in revenue. Assuming that 60% of that revenue comes to the bottom line as earnings, InterDigital would have $5 to $13 a share in earnings from 3G cell phones and other devices in 2007. At a conservative PE of 20, that translates to a share price of $100 to $260. Infrastructure royalties, substantial income from he newly signed military communications overhaul contract, earnings from its chip partnership with Infineon as well as engineering services to others plus 2G recurring royalties will have substantial additional revenues/earnings pushing the share price even higher. No wonder InterDigital CEO Howard Goldberg used a hockey stick analogy for company profit projections begining in 2005.

InterDigital provides an excellent model of how a small firm with solutions for the design problems of particular standards working groups can work its way into the very heart of the standards setting process, even chairing standard-setting groups with members from the big name firms like Nokia, Siemens, Ericsson, NEC, and Motorola. InterDigital's chief technology officer chairs a UMTS (g) task force and another InterDigital representative co-chairs a GSM (g) task force. With this kind of credibility, it's no wonder InterDigital's voice is heard and so many of its patented solutions have been incorporated into international standards.

Some Representative Message Board Posts/Threads Related to this Topic

This section is under major reconstruction, to be completed by January 9, 2005

MAP of the InterDigital Focus Stock Report

Next: Risk Factors (includes Risk to Reward Ratio and specific risk factors)

This section is under major reconstruction, to be completed by January 9, 2005

Caution: Information presently here is out of date