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Bull of the Day

Wireless communications are changing the way we live and how the world communicates on a daily basis.  These communication devices are not typically created in one factory, rather many components are made by individual companies and then put together for the final product.  With this in mind, we have singled out one such company as the Zacks Bull of the Day, InterDigital Inc. (IDCC - Snapshot Report) .  This company has significantly reduced costs, and has just signed a huge royalty deal with Huawei Technologies.  

This Zacks Rank # 1 (Strong Buy) develops and markets advanced digital wireless telecommunications systems using proprietary technologies for voice and data communications and has developed an extensive patent portfolio related to those technologies.

Recent Earnings

In early August, the company announced Q2 16 earnings where they beat the Zacks Consensus Earnings estimate for the sixth consecutive quarter, and they met the Zacks Consensus Revenue estimate (IDCC has met or beat the revenue estimate for four consecutive quarters).  Specifically, on a year over year basis, net income rose +22.7%, operating expenses declined by -12%, cash flow from operating activities jumped to $191.4 million (ahead of the previous year’s mark of $25.3 million), and free cash flow improved from $17 million to $182.5 million.  Lastly, at the end of the second quarter the company held $813.9 million in cash and short-term investments.

Management’s Take

According to President and CEO William J. Merritt, “The company delivered another very solid quarter. While recurring revenue declined from first quarter, that decline was driven by expected seasonality in phone sales and has no impact on our confidence in our ability to drive the annual royalty platform for our core terminal unit licensing business to between $500 and $600 million. We also continued our strong work around expenses this quarter, taking some significant steps to lower our tax burden and drive higher profitability. Lastly, our engineers and scientists continued to drive substantial new innovation at the company, including making numerous contributions into the developing 5G standard. InterDigital was among the leaders in driving 3G and 4G innovation and we are working to drive a similar position for the company in 5G, where the opportunity to innovate is substantial and the technology needs are right in our wheelhouse.”

Price and Estimate Consensus Graph

As you can see in the graph below, both the stock price and future earnings estimates have been rising and are expected to continue to rise into 2017.

Price and Consensus

Increasing Estimates

Due to the company’s cost cutting, recurring royalties, and larger R&D relationships, the earnings estimates for Q3 16, Q4 16, FY 16 and FY 17 have all seen significant upgrades over the past 30 days.  Q3 16 rocketed up from $0.40 to $3.06, Q4 16 improved from $0.71 to $0.87, FY 16 leaped up from $3.01 to $5.80, and FY 17 rose from $3.32 to $3.52.

Bottom Line

In the early part of September InterDigital received a $200 million advanced payment by Huawei Technologies Co. (a Chinese multinational networking and telecommunications equipment and services company) as part of the two company’s royalty agreement.  Further, the two companies are also working towards a joint R&D relationship.  

It is expected that this initial royalty agreement with Huawei will create future opportunities with other manufacturers, and other original equipment manufacturers (OEMs).  Currently, there are three additional companies that are looking to discuss royalty agreements in the second half of 2016 (with the expectation of finalizing the new deals in early 2017).

Lastly, management has a stock repurchase program that repurchased 0.3 million shares in Q2 16, and has repurchased a total of 6.7 million shares since its inception. The company authorized a total of $400 million to repurchase shares and still has $86.3 million remaining in the program.  

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