Barclay's thoughts
Barclay's: 3Q Beat on Taxes; Outlook Strong
Stock Rating/Industry View: Equal Weight/Neutral
Price Target: USD 52.00 (from USD 48.00)
Price (30-Oct-2014): USD 48.21
Potential Upside/Downside: +8%
Tickers: IDCC
IDCC reported 3Q EPS of $0.34 (vs. our estimate for $0.28 and consensus for $0.19), with in-line 3Q revenue of ~$78mn (vs. our estimate for $78mn), as higher than expected expenses ((~12c) impact) were more than offset by a ~17c tax benefit mostly from ~$5.7mn of U.S. federal research and development tax credits. Expenses came in higher than we expected (driven mostly by Development costs and Patents Administration and Licensing) due to patent amortization tied to patent acquisitions and R&D related expenses. We note that despite 3Q being a low point relative to Pegatron, the company was still able to report $73mn of recurring revenue (up 57% Y/Y), highlighting its success in reducing earnings volatility while giving investors increased confidence in its ~$300mn annual recurring revenue expectation. Importantly, since the initiation of its $300mn repurchase program in June, IDCC has bought back 3.4mn shares of its stock, or ~8% of its shares outstanding for ~$143mn. With $150mn+ left, we see the potential for 5-10c of upside vs. our FY15E EPS of $1.82.
We highlight that Fixed Fee Royalty Revenue of ~$33mn declined from 2Q's ~$38mn as IDCC's agreement with Apple expired. Looking ahead to 4Q14 and 1Q15, we see the opportunity for per unit payments to increase $10mn+ from 3Q14's $38mn given the company's relationship with Pegatron and the iPhone 6 launch. As a reminder, 3Q shipments will impact IDCC's 4Q revenue (there is a one quarter lag). We are increasingly confident in management's ability to increase market capture beyond the current ~50% level post the Samsung agreement and recent trial ZTE win which could help drive success and faster-than-expected resolutions with Microsoft and others.
Overall, 3Q beat mostly on a tax credit (more upside for FY15 if renewed), but the company's outlook continued to improve. Going forward, we see upside to our FY15 EPS estimate of $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 are becoming more constructive on the stock given our increased confidence in the company's outlook, we see shares as already pricing in a lot of the aforementioned potential upside drivers. We maintain our EW rating.
