Foolish Forecast: InterDigital at the Tipping Point

Two top-tier license deals could push the company over the top.

It's time for wireless-technology developer and Motley Fool Stock Advisor recommendation InterDigital Communications (NASDAQ:IDCC) to call in with its third-quarter earnings on Wednesday. We'll call ahead, though, and mull over what's expected from the company.

What analysts say:

Buy, sell, or waffle? A small contingent of six Wall Street analysts follows InterDigital, with five of them rating the stock a buy, while one recommends holding. In our Motley Fool CAPS investor database, more than 709 of our 70,000 total users have rated the stock. Overall, it gets a big thumbs-up with a five-star rating, the highest possible.
Revenue. On average, analysts look for revenue to come in 17% below the same quarter last year at $56 million.
Earnings. The average analyst expects earnings of $0.10 per share for the quarter.

What management says:
InterDigital knows that investors like to see stable, ongoing revenue streams, not erratic, one-time payments. For this reason, management has been ardent in pointing out a growing base of recurring revenues from InterDigital's base of licensees, particularly from newer, third-generation (3G) technologies. In the past quarter, Chief Financial Officer Scott McQuilkin commented, "...We expect solid recurring royalties in the third quarter 2007 from our diverse base of licensees as the sales of 3G products by our licensees continue to grow."

What management does:
Looking beyond the effect of the huge, $253 million gain from a Nokia (NYSE:NOK) settlement mostly recognized in the second quarter of 2006, the most recent quarter still shows solid margins, although net margins have declined because of increased investments in R&D.

Margins	03/06	06/06	09/06	12/06	03/07	06/07
Gross	73.1%	88.4%	89.2%	89.4%	88.7%	76%%
Operating	21.9%	66.9%	68.7%	70%%	68.5%	34.2%
Net	38.2%	53.7%	54.8%	46.9%	46.3%	21.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Both InterDigital and fellow technology licensor Qualcomm (NASDAQ:QCOM) have made a lot of money off patented wireless inventions in second-generation (or 2G) technologies. But companies such as Nokia, Samsung, and Broadcom (NASDAQ:BRCM) don't want to write any more fat checks to these companies for the 3G technologies now spreading globally. Dozens of lawsuits and trade complaints are pending, including a case Nokia is currently arguing against InterDigital in Great Britain.

But InterDigital has shown some strong momentum in its licensing business by securing recent deals with Apple (NASDAQ:AAPL) and Research In Motion (NASDAQ:RIMM). Both agreements cover 3G devices globally, including future iPhones and the latest Blackberries, giving InterDigital a strong argument against license holdouts like Nokia that the market has validated the contributions of its innovations.

More Foolishness:

InterDigital is one of dozens of stocks recommended to Motley Fool Stock Advisor subscribers. To see all the stocks that have helped Tom and David Gardner thrash the market by 43 points on average, take a free 30-day trial.

Fool contributor Dave Mock is often reminded that gravity is non-negotiable. He owns shares of Qualcomm and is the author of The Qualcomm Equation. The Fool's disclosure policy leaps tall buildings in a single bound.