Initiation of Research Coverage: InterDigital, Inc. and VirnetX Holding Corporation

Friday, August 24, 2012

William Blair & Company initiated research coverage of InterDigital, Inc. (IDCC $32.80) and VirnetX Holding Corporation (VHC $24.27), two leading pure plays on intellectual property (IP), with Outperform ratings and Aggressive Growth company profiles.

In a comprehensive initiation report, analyst Anil Doradla wrote, “The rising importance of IP in shaping the global technological landscape has given rise to a specialized class of companies called nonpracticing entities (NPEs) that focus on monetizing IP assets via licensing, outright sale, or litigation. Once viewed as industry impediments, NPEs are gaining credibility with tier-1 technology original equipment manufacturers (OEMs) and original design manufacturers (ODMs) as they offer a neutral venue for partnerships and an element of protection against litigation. This industry remains one of the most-underappreciated segments of the technology world by investors, in our view, and over the next several years, we believe the strategic importance, growth potential, and financial models of NPEs will offer profitable investment opportunities.”

InterDigital is an established NPE with average annual revenue above $300 million during the last three years, Doradla said. “The company is a leader in digital and wireless technologies, with over 18,000 filed and pending patents, and has licensed these technologies to most major handset manufacturers over the past 40 years. The company has also recently embarked on a new initiative to sell pieces of its IP portfolio, including an announced $375 million patent sale to Intel (set to close in the third quarter).”

Doradla added, “VirnetX is an early-stage NPE with what we believe is a large, untapped market opportunity. The company generated only about $20,000 in revenue during 2011, but has a market capitalization of roughly $1.2 billion. This market value stems from the patents VirnetX owns that enable secure communications across the Internet. As more and more communication is done over the Internet instead of traditional circuit-switched networks, VirnetX stands to benefit because it owns technology that creates secure links between parties communicating over an Internet-based network.”

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William Blair & Company, L.L.C. receives or seeks to receive compensation for investment banking services from companies covered in this research report. Investors should consider this report as a single factor in making an investment decision.

William Blair & Company, L.L.C. is a market maker in the securities of InterDigital, Inc. and VirnetX Holding Corporation and may have a long or short position.

Additional information is available upon request.

Current Ratings Distribution (as of 07/31/12)

Coverage Universe
Outperform (Buy): 61%
Market Perform (Hold): 34%
Underperform (Sell): 1%

Inv. Banking Relationships*
Outperform (Buy): 7%
Market Perform (Hold): 2%
Underperform (Sell): 0%

* Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months.

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