Barclay's: IDCC Conference Feedback
StockRating/Industry View: Equal Weight/Neutral
Price Target:USD 52.00
Price (08-Dec-2014):USD 51.39
PotentialUpside/Downside: 1%
Tickers:IDCC
At this year’s Barclays Global Technology Conference wehad the opportunity of hosting a fireside chat with Bill Merritt, President& CEO, and Rich Breszski, CFO of InterDigital. Below are our key takeaways:
What’s Incremental
IDDC has captured ~50% of the wireless handset market,giving the company a base of recurring revenues of ~$300mn. We expect IDCC to be able to acquire 80-90% of the market over time. Post the agreement with Samsung and the recent ZTE ruling, we see this capture as a matter of when and on wha tterms vs. a question of “if”. I nan attempt to rank order the company’s opportunity here we list Lenovo and Huawei as the largest expected incremental contributors followed by ZTE and LTE.
Given the one quarter lag between Pegatron’s Apple related shipments and IDCC’s recognition of licensing revenue combined with recordbreaking iPhone sales with the recent iPhone 6 and 6-plus launch, we expect F1Q15 to be a stand-out quarter for the company driven by Pegatron.
On capital allocation, the company continues to be aggressive in returning capital to shareholders with ~50% of its float having been repurchased since its IPO. We continue to expect the company to use dividends, share repurchases, and special dividends to return capital to investors while keeping an eye out for value-add M&A opportunities. We point out that IDCC has $700mn+of cash on its balance sheet, yet we estimate a ~$200mn target in terms of a safety net to both run the business and effectively litigate.
Looking beyond 4G, we note that IDCC has been investing in R&D around 5G and Machine to Machine (M2M) related technology with a focus around both connectivity (as seen in the past) and also data. We expect M2M to be a large opportunity for IDCC and representative of the next “wave” of revenue for the company beyond its $500-$600mn 4G related opportunity that it currently has captured ~$300mn or ~50% of.
What to do with the stock
Going forward, we see upside to our FY15 EPS estimate o f$1.82 and the Street from: 1) Pegatron driven by iPhone 6 sales 2)litigation/arbitration tied to Microsoft, ZTE, Huawei, and more; 3) buybacks;and 4) tax rate.
While we see shares as already pricing in a lot of the aforementioned potential upside drivers, we are becoming more constructive on the stock given our increased confidence in the company’s outlook. That said, pending further evidence of these further conversions, we maintain our EW rating at this time.
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