What to Look for When InterDigital Reports Earnings

By Markets Fool.com

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Image source: InterDigital.

InterDigital's (NASDAQ: IDCC) shares are up over 40% since its last earnings report, which showed improving profitability and a bright outlook, especially surrounding the company's 5G network development. Its third-quarter results are due before the market opens on Oct. 27. As you parse through the numbers and comments from management, here is what you should be focusing on.

Good news already in the books

During the second quarter, InterDigital saw revenue fall 36% to $75.9 million. However, earnings per share increased 28% on falling costs of doing business and a tax benefit. In September, the quarterly dividend was increased 50% to $0.30 per share.

Finishing off the round of good news was the company's revenue guidance for the third quarter. InterDigital expects a big jump over last quarter's performance with total revenue coming in between $200 million and $225 million. Management expects the figure to be driven by recurring revenue between $80 million and $85 million and past sales revenue between $120 million and $140 million.

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Paired with efforts to curb costs and free up cash flow, the big expected jump in revenue both year-over-year and from the last quarter are the primary reasons the stock has notched big gains in recent months.

IDCC data by YCharts

InterDigital's plan for the future

The company is in the business of engineering and designing mobile technology solutions and systems. Revenue is generated off of patent royalties and fees from the systems it designs for its various clients. Simply put, developing technology we will use years down the road is the name of the game for InterDigital.

While the company continues to survive off of past accomplishments and continuing work for current technology, designing a 5G mobile network is the big plan for the future. The company is betting on the next-gen network as the future driver of growth for business.

InterDigital cited a recent survey by Telecoms.com Intelligence that indicates the company could be on the right track. According to survey results, 82% of industry professionals polled see the Internet of Things being a major driver behind 5G network deployment, and 86% see rollout by the year 2020 or earlier.

In years past, new mobile network development was centered on increasing speeds and enabling data transfer primarily for consumers. Faster speeds and new network abilities like ultra-high-definition video streaming are still important for 5G developers, but other needs like a network that can handle billions of connected devices, reliability of ultra-sensitive data transmission, and traffic prioritization for machine communications are challenges facing the engineers at InterDigital.

Investors may hope for a massive boom of growth, however, it is worth noting that 68% of those polled also see a slow and gradual rollout of 5G network availability rather than an all-at-once changeover.

Short-term exuberance vs. longer-term trends

With potential revenue from current research and development still a ways off, is InterDigital's recent stock advance sustainable? That will be an area to focus on when the next earnings report comes in. As increasing free cash flow and profits provided the most recent bump in share value, investors should look for signs that expense cuts continue and are sustainable, especially with the big quarterly revenue jump expected.

Developments in 5G network technology will also be important when figuring for future business growth. Keep an ear out for progress and possible new revenue opportunities from 5G this Thursday.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.