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So you don't need a rational basis for comparing executive compensation? LOL.
My point has been and is still is the increase and release of too many options vs the productivity released by the company
Boy, are you stubborn. Again, what's your basis for saying that IDCC has issued too many options?
RMBS needed to dilute nearly 100M+ shares to get to the $100M licensing revenue level. ARMHY needed to dilute 330M+ shares to get to the $200M-250M licensing revenue level. IDCC only needed to dilute, what, 60M-70M shares to get to the $200M licensing revenue level.
That's excessive??? No wonder you're drowning in the shallow waters of your subjectivity!
Perfect, just perfect! LOL. Thanks.
How 'bout them Blazers!!! BTW, have you seen reallymightylakers around?<g>
Many of the people like you who complain about the twin issues of dilution and executive compensation don't seem to have a very rational basis for comparison. That's because the IP operating model is very, very difficult to execute.
As an exercise, name one, just ONE company that has ever generated more than $7 per share in cumulative royalty income from the start of its corporate life to 12/31/2002.
Then name one, just ONE company that has a shot at generating more than $7 per share in cumulative royalty income during the next four years.
See what I mean?
Regarding dilution, compare IDCC (55M shares) with RMBS (98M shares) and ARMHY (338M shares) to see the flimsiness of this claim. At their respective peaks in 1999, ARMHY had a market cap of more than $5B, RMBS had a market cap of more than $25B while IDCC had a market cap of more than $1B. Needless to say, insider selling at IDCC, ARMHY and RMBS also peaked in 1999.
Regarding executive compensation, the only person to come up with a rational framework for judging the level of executive compensation was Ronny, but his analysis was flawed by the use of Fortune 500 levels of compensation as a starting point when other companies with significant royalty income like ARMHY, RMBS and even QCOM were available for comparison.
As an example, here's a comparison of C-level salary and bonus levels (excluding options) at IDCC vs RMBS circa 2002.
RMBS IDCC
.....
.....
Chairman of the Board -- --
CEO $ 616K --
President 577K $ 659K
COO -- 339K
CFO 441K NA
General Counsel 365K $ 354K
Note: Rambus has a CEO and President while IDCC has a President and a COO (Chief Operating Officer).
Rambus has TTM revenue of $102M, 98M shares out and most of its major litigation (patent and anti-trust) in front of it.
IDCC has TTM revenue of $88M, 55M shares out and most of its 2G litigation behind it. As a result its revenue is expected to go from $88M in 2002 to $150M-$200M in 2003 and its cash/investment account is expected to go from $88M in 2002 to a projected $400M+ in 2003.
Lastly, compare the annual returns of both companies during each of the last 5 years, a period of time that includes the blow-off market top in early 2000 and the probable market bottom in mid-2002.
Now tell any rational person that IDCC's compensation policies are excessive compared to its peers in the IP business.
Count me among those country boys, Art. Ooops, you just reminded me that I have to tend to my working farm in...............Brooklyn.
LOL. Have a good weekend!
Thanks, teecee. Fortunately for us, the change of hands continues from weaker individual hands to stronger institutional hands......have a good weekend!
Question: Can you quantify the cost/benefits of the Schilling acquisiton? What did we 'pay' for the deal in cash and or stock? Other than the $5M settlement from QCOM, what has IDCC and it's shareholders reaped from this original Schilling deal up until now?
I don't have the details handy, but I'm sure there are other people here who can provide that information.
One way to look at the Schilling CDMA patents is that they provide a foundation for IDCC's CDMA patent portfolio which they keep on updating every year. This foundation goes all the way back to the mid-80s when Jacobs, Viterbi, Schilling and others started working on CDMA after the Department of Defense released this wireless technology to the public domain.
IDCC already has several 3G deals that allow us to start quantifying the value of this patent portfolio. Start is the operative word since 3G keeps on getting pushed out.
Have a good weekend.
However, based on the enormous world wide sales by Ericy, I never even thought that the past usage figure could possibly be settled for less than a nine digit figure. I actually believed that 250 mil on a pay out with 2-3g licensing going forward would be a low, but acceptable result do to the present condition of the parties.
This explains why your expectations about the ERICY
settlement were so high that you were bound to be seriously disappointed by any settlement.
After all the work you did in understanding the patent issues, you ended up just speculating on a percentage of "the enormous worldwide sales by ERICY."
Well, you have no one but yourself to blame for being wrong.
You conveniently left out the fact that IDCC's litigation risks severely hampered its ability to compete for talent or raise capital. Sure it is so easy now to look back and second guess, but the fact of the matter is that IDCC had to sweeten the pot to get the employees to secure and support the Nokia engineering contract and to keep on updating its patent portfolio to improve its 3G negotiating position. The latter point is often misunderstood by people who think that all patents are created equal.
Unfortunately, it seems that some people don't even bother to look at the changing composition of this stock's ownership base between individual investors and institutional investors.
Generally speaking, individual investors tend to be driven more by emotions driven than institutional investors who tend to be driven more by financial milestones like recurring royalties, cash/investments, sales, etc.
There are also different types of institutional investors. Hedge funds of all persuasions are the latest additions to a breed that includes microcap funds (<$100M in market cap), small-cap funds (<$1B in market cap), mid-cap funds (>$1B to <$5B), big-cap funds (>$5B) and pension funds of all stripes.
Naturally, as a company grows it will have to cater to different types of individual investors and institutional investors. In IDCC's case, the change of hands continue between emotional-driven individual investors and empirically-driven institutional investors.
Also, your logic that it is OK for any company to do something they know will not be allowed next year is astounding. The implication is that your type of thinking is a huge part of the reason why this economy has been in so much pain for the last few years.
Once again you're suffering from a lack of pespective and distorting my views in the process.
When the politicians dissuaded FASB from expensing options in 1994 they effectively created the equivalent of a government incentive for technology companies to get into the business of selling equity especially since the bull market was effectively paying a premium for cash flow generation and effectively discounting the resulting dilution. Again, pay attention to how the exercise of a stock option creates a cash infusion, a tax benefit and dilution.
That government incentive is now being phased out. You now think righteously that IDCC shouldn't even try to take advantage of that government incentive before the new rules go into effect in early 2004.
The questionable quality of that viewpoint stands on its own. LOL.
IDCC would be a less attractive stock today if not for M&A. IDCC was a TDMA-only IP shop until they merged with Schilling's CDMA-only IP shop in the early 90s. At that time, the wireless industry was still making the transition from 1G (analog) to 2G (digital) and carriers were still choosing between the heavily favored GSM, a TDMA variant, and CDMA, the US underdog.
The rationale for this merger was sound. Schilling's CDMA-only IPR would enhance IDCC's ability to generate income from its TDMA-only IPR while allowing IDCC to hedge a CDMA future. Litigation, of course, sidetracked IDCC for much of the 90s.
Regarding buybacks, I disagree. I think that IDCC has to keep on improving the liquidity of its stock so more institutions can establish larger positions. As has been discussed many times before, institutions will continue drive most of this stock's sustained appreciation now that the 2G litigation risks have been removed.
IDCC would be a less attractive stock today if not for M&A. IDCC was a TDMA-only IP shop until they merged with Schilling's CDMA-only IP shop in the early 90s. At that time, the wireless industry was still making the transition from 1G (analog) to 2G (digital) and carriers were still choosing between the heavily favored GSM, a TDMA variant, and CDMA, the US underdog.
The rationale for this merger was sound. Schilling's CDMA-only IPR would enhance IDCC's ability to generate income from its TDMA-only IPR while allowing IDCC to hedge a CDMA future. Litigation, of course, sidetracked IDCC for much of the 90s.
Regarding buybacks, I disagree. I think that IDCC has to keep on improving the liquidity of its stock so more institutions can establish larger positions. As has been discussed many times before, institutions will drive most of this stock's sustained appreciation now that the 2G litigation risks have been removed.
Thanks for the effort. I understand that you're somewhat of a purist regarding options, but you don't seem able to relate the role of dilution to IDCC's struggle to finance its operations and retain talent after the 1995 Motorola debacle and before the 3/14/03 settlement.
You still haven't answered the question of where you got 40M and 60M. The math should be relatively easy for you.
I realize that you're obsessing about dilution, but why don't you put it some useful context like the role of dilution in IDCC's operations before and after the 3/14/2003 settlement.
For example, after the 1995 Motorola debacle and before the 3/14 ERICY settlement, IDCC had to scramble to finance its operations and present a strong negotiating position.
Oh please, another armchair CEO getting lost in abstractions.
Get real, will you?
1) Until the current system is changed in early 2004, IDCC can still use its option program to attract engineering talent. True, there is a general glut of engineers in the marketplace but there is always a shortage of talented wireless engineers.
For instance, Sony/Ericsson, Nokia and Samsung all plan to increase their CDMA chipset engineering effort this year after years of unproductive work. If IDCC somehow manages to attract a productive group of engineers from QCOM with its options program, wouldn't that increase its 3G negotiating leverage with Sony/Ericsson, Nokia and Samsung?
2) The exercise of an option results in a cash infusion, a tax benefit and stock dilution. IDCC has tax-loss carryforwards of around $150M that should come in real handy now that it is starting to make real money.
3) Again, the exercise of an option results in a cash infusion, a tax benefit and stock dilution. What's wrong with adding more cash to IDCC's balance sheet from the exercise of options? 10M shares @$22 per share would add $220M. 10M shares@$30 per share would add $300M. 10M shares@$40 per share would add $400M. Catch my drift?
How long do you think it will take IDCC to collect royalties of that magnitude? 2-4 years? Consider also how the market would value IDCC if it exits 2003 with at least $200M in sales and $600M-$800M in cash/investement?
4) A larger cash balance would also allow IDCC more M&A options since it can sweeten any bid by increasing the cash component.
5) It seems that many people think that dilution is inherently bad, but what is true for large established companies is not necessarily true for small companies just entering their high growth stage. Dilution is not yet a problem for IDCC. I even think that the tight float is actually preventing more mid-cap funds from establishing larger positions or from even opening new positions.
There is nothing confusing about IDCC's business model, Loop. In fact, it is even more attractive than a software business.
The question is how IDCC intends to use its high quality cash flow to finance sales growth. Related to that question is the question you keep on avoiding: why can't you see that IDCC does not have a dilution problem YET and it should try to take advantage of the interim period before the accounting rule change in early 2004 to improve its balance sheet so that it can improve its 3G negotiating position and increase its M&A war chest.
I certainly thought that the trial was riskier than you thought especially since the November 2000 Festo case decision at the CAFC level was very unfavorable to IPR holders like IDCC. Specifically, I thought the CAFC's decision on Festo in November 2000 weakened IDCC's negotiating position and strenghtened ERICY's position.
Since I thought that the trial was riskier than you thought, I actually had very modest expectations about the settlement even after the Festo was overturned by the US Supreme Court in May 2002. In fact, my focus since late 1999 was on the recurring royalty number because I thought that was the key to making IDCC attractive to more people and institutions. Needless to say, I adjusted my positions accordingly depending on those kinds of developments.
Here's a brief summary of the implications of Festo.
http://216.239.53.100/search?q=cache:hiykrAly440C:www.derwent.com/ipmatters/features/festo.html+fest...
Now I ask you in return, what was the basis for your excessive optimism about ERICY vs IDCC?
Next, in one sentence you say that you have gotten over the disappointment over the settlement, but then in the next sentence you immediately assume that the 5M shares are going to management. Which is it? Obviously, you don't know.
But even if we assume that all the 10M shares go to management/employees on a 20/80 basis, can't you even concede that the cash inflow of $220M (assuming $22/share exercise price) would sweeten IDCC's balance sheet and improve its 3G negotiating position?
You're getting confused, Loop. This is what you originally said:
The price should be based on reasonable and predictable bottom line 2004 forecasts
You referred to BOTTOMLINE which means earnings. And I pointed out that sales growth is more important at this stage of IDCC's development. Your use of earnings imply that people will just project those margins and earnings into the future, discount the projected cash flows and thus pay a higher multiple of projected earnings. Again, margins are useless if sales don't grow.
Why do you think IDCC is trading at more than 5x projected 2003 sales already?
I'm sorry, Loop, but your sense of timing regarding 3G is even worse than your previous sense of the ERICY settlement. Both Nokia and ERICY just disclosed that their network businesses were suffering because carriers kept on pushing out their upgrade plans. That means 3G is going to take longer than expected which means that licensing agreements are also going to take longer than expected. That's fine by me because many people here were wrong to write off IDCC's 2G earnings potential in the first place.
Again, the issue is how IDCC can take advantage of the interim period B-E-F-O-R-E the accounting rule change in early 2004. Assuming IDCC issues all 10M shares, for example, at an exercise price of $22, they stand to generate an extra $220M in cash without running it through their income statement. That's like a secondary offering.
Get over it, Loop. You, Mickey and many others set yourselves up for a fall by expecting too much from the settlement and you're still allowing that disappointment to color your judgement about executive compensation and dilution.
By the way, you do realize that the options that issued before the 3/14/03 ERICY settlement buttressed IDCC's balance sheet and improved its negotiating position, right? And a stronger balance sheet will also improve its 3G negotiating position, right?
Get real, loop. A high margin business is not worth very much if it doesn't have a credible plan for making sales grow.
You seem to think that all IDCC has to show is very good 2004 numbers and a bidding war will erupt. That's naive. They still have to show how they intend to build on their recurring royalty income to make sales grow.
20 million shares ISO out of 60 million shares total is getting a bit silly don't you think?
You're being silly. Where did this number come from?
Your rant about options is nonsense because FASB is already in the process of expensing options in early 2003. The issue is how IDCC can benefit from the interim period before the new rule goes into effect.
Your point about stock splits has some merit in terms of increasing the float but IDCC is still in the process of making its numbers settle down so that it can show how its operating model can generate sustainable growth from a baseline year. That includes a credible plan for making sales go beyond the $250M, $500M, $750M and $1B milestones, btw.
You're being simplistic. That's why you're trying to outshout everybody. Your rant about options is mooted by the fact that FASB is already in the process of implementing the option expensing rule change early next year. The issue is how IDCC can take advantage of interim period before the rule change goes into effect. Remember that even with the weighty litigation risks hanging over the stock, IDCC was still able to prop up its cash flow with option exercises during the lean years and IDCC's solvency and liquidity were keys to its bargaining positions.
The fact is that each exercise of 1M shares at an average of, say, $22 per share generates $22M in CASH and a tax benefit. The higher the actual exercise price, the greater the cash inflow for IDCC. The downside is dilution.
However, dilution is not yet an issue for IDCC since it is still in its high-growth stage and is valued more by its P/S ratio or price to sales ratio than its EPS or earnings per share. In fact, I repeat the argument that IDCC's stock float of 55M shares is still too tight for many mid-cap institutions, forcing many funds to take smaller positions that they would otherwise take if IDCC had something like, say, 100M shares.
Keep your feet on the ground now. Nobody is saying that IDCC should issue 45M shares to management and employees. It should come as no surprise, however, that one of the first decisions made after the 3/14 settlement was to promote its M&A guy, who has 20 plus years of venture capital experience. I figure that the ERICY settlement gave IDCC a merger and acquisition war chest of at least $1B in cash and stock-as-currency in a technology industry that is plagued by overcapacity in many areas. In other words, it's a buyers' market in many areas inside the wireless industry or outside the wireless industry.
The price should be based on reasonable and predictable bottom line 2004 forecasts
I disagree. Most companies typically have to adjust management teams and operating models several times on their way to the $100M, $500M and $1B annual revenue milestones. In these high-growth stages, PS (price to sales) is preferred over PE (price to earnings) because a small company has to keep on reinvesting its cash flow in its growth strategy otherwise it won't get growth multiples.
Have you ever heard of a small company sacrifing growth for margins because it wants to earn value multiples instead of growth multiples?
that tall girl in the mini-shirt with the German accent and those cute Garmisch hiking boots.
Aha! Another Germanophile hiding in the weeds. LOL.
Very good point! One of the intangible benefits of the 3/14 ERICY settlement is that it gave IDCC a fresh start at shedding its reputation as a patent house especially now that it has the financials to match. It's no surprise that IDCC is trying to exploit the situation by sweetening its options program to recruit more technical and management talent at a time when most tech companies have option programs that are perenially underwater like so much swampland.
The other angle is M&A. In terms of pre-revenue companies, the IPO market is practically dead so it's a buyers' market for pre-revenue companies that have no chance of reaching an IPO and that would probably be more amenable to accepting IDCC stock as currency.
No problem, Art. Some people are just born to whine......
And Rambus is still mired in serious litigation!! Some of the gripers are really going to pop some serious arteries when they find out that QCOM insiders, as another example, have already sold more than $500M in stock since mid-2002 despite creating absolutely no shareholder value whatsoever since the start of 2000. IDCC remains the best performing stock of 2003 year to date -- after being the best-performing wireless stock in 2001 and 2002 -- yet we still have people fixating on less than $7M or $8M in cumulative insider sales after the ERICY case was settled.
That's what a lack of perspective can do to obsessive-compulsive types. LOL.
Jim, every technology company is closely watching FASB's move to expense options since that accounting rule change will force every technology company to change their compensation policies including options.
FASB now expects that this accounting rule change will be implemented in early 2004 so the 2003 ASM is actually IDCC's last chance to get approval for any option-related proposal.
I don't think that's the only reason, but that may account for the timing.
The Global IP business went from less than $5B in 1990 to more than $100B in 1999, the last year that data is available.
Most companies, however, do not have a pure IP model.
Here is a partial list of companies which generate significant royalty income and which are at various stages of maturity.
IBM - TTM revenues of $83B, TTM royalties of around $1.2B-$1.5B
QCOM - TTM revenues of $3.8B, TTM royalties of around $800M+
INGR - TTM revenues of $502M, recent victory vs Intel currently on appeal so royalty run rate estimates are still too soft.
ARMHY - TTM revenues of $241M, TTM royalties/license fees of around $241M
RMBS - TTM revenues of $102M, TTM royalties/license fees of around $102M
The problem with that statement is that nobody in the debate over option accounting is talking about eliminating employee ownership. On the contrary, current option accounting reform aims to reflect the economic reality that options are compensation expenses. And that is really the proper starting point for improving employee ownership without creating the massive misallocations of capital that happened during the 90s.
See what I mean about a lack of proportion?
$1.4B may be a nuisance settlement to you but the significance to Wall Street is that the larger the settlement with the regulators, the larger the settlement with the plaintiff bar. As it stands now, Wall Street would be extremely lucky to keep its private lawsuit settlements down to 3x the regulatory settlement or a global settlement of around $4.5B. One lawyer said the global settlements could go up as high as 10x the regulatory settlement or around $14B. The legal profession only grossed something like $37B last year.
Secondly, Jack Grubman was considered the standard for analyst compensation during the last bull market. At his peak, Grubman was making $20M-$25M a year, certainly not the billions you cite.
Lastly, you digressed from the original point that the option accounting controversy and the sell-side research controvery are NOT comparable because the latter involves different types of FRAUD while the former involves a social policy that has outlived its usefullness.
That's correct, Ronny, but most of those royalty revenues were of the paid-up variety and one-time in nature. As you yourself pointed out, recurring royalty was only $1.5M. If I remember correctly, IDCC exited 1998 with only $52M in cash/investments and it was, at that time, excluded from the market controlled by Ericsson, Motorola and Nokia or approximately 60%-70% of the market.
IDCC exited 1998 with a positive cash flow of $30M after exiting 1997 with a negative cash flow of $24M. Entering 1999, it wasn't all that clear where IDCC's cash flow was going to come from after all the paid-up royalties that came in 1998.
What the brokerage houses did was NOT illegal at the time they did it in the sense that you are critical of them (and technically is not illegal even now).
Huh? You mean they just paid $1.4B to settle actions that were not illegal? Of course not. They settled because regulators were threatening to use an entire arsenal of existing laws about fraud to go after them. Consider that after this settlement, Wall Street now has to deal with private lawsuits that could involve settlements up to $14B. All that for actions that are not legal? Don't be ridiculous.
Another way to look at the current option accounting rule is to look at it as a type of subsidy, a subsidy that is being phased out. Is it really bad for IDCC to receive this type of subsidy before it is phased out? Keep in mind that IDCC has used option exercises to finance its cash burn after the 1995 Motorola debacle. In fact, IDCC wouldn't have exited 2002 with $88M in cash/investments if not for the fact that they were able to use the cash infusion from option exercises to prop up cash flow. Do you really think IDCC would have gotten the deals it got after the Motorola debacle if it had a weaker balance sheet?
Reasonable people can disagree about the level of executive compensation, but the fact of the matter is that there aren't that many wireless companies making a living out of IP royalties so what's the proper basis for comparison?
That's a bad analogy because this is not a question of right or wrong. Remember that the Clinton administration and a bipartisan group of lawmakers ACTIVELY worked to dissuade FASB from expensing stock options in the mid-90s. That effectively makes the status quo a social policy issue. Since companies COMPETE for capital, it would be foolhardy for any company not to try to take advantage of this policy while others are doing so.
But, that's not even the main point because FASB now has greater political backing to expense options in an effort to change corporate behavior.
Here's the latest WCDMA outlook from ERICY. ERICY is the leading wireless infrastructure vendor. This cautious outlook should temper some people's excessive expectations about IDCC's 3G potential which only serves to obscure the fact that IDCC's 2G income stream is going to be quite impressive in its own right.
Ericsson Cautious On Outlook For 3G Systems Sales
Tuesday April 29, 10:29 am ET
STOCKHOLM -(Dow Jones)- Telefon AB LM Ericsson doesn't expect equipment for third-generation WCDMA mobile networks to account for a growing percentage of its overall systems revenue through the remainder of the year, Chief Financial Officer Karl-Henrik Sundstroem said Tuesday.
Speaking to analysts after Ericsson released first-quarter financial results, Sundstroem said sales of WCDMA gear should account for about 12% of its mobile systems sales this year, with the share growing to about a third of mobile systems sales by 2005.
http://biz.yahoo.com/djus/030429/1029001122_1.html
Note that around 67% of ERICY's mobile system sales in 2005 will still be 2G/2.5G!!!!!
Chill out, DD. I don't disagree with you about options. Read this to get an idea of why I think the proposed change in option accounting is positive.
http://www.investorshub.com/boards/read_msg.asp?message_id=959164
However, I don't think you understand the window of opportunity that is opening up for IDCC to increase its cash position as a result of the WAY that accounting changes are implemented. In your rush to generalize, you don't seem to understand that this is strictly a one-time opportunity.
Isn't it curious that the same people who were incessantly griping about insider selling are the also the same people griping about options? The same thing will probably happen too....you keep on showing the data that shows that IDCC was the best-performing wireless stock in 2001 and 2002 despite all the insider selling that occurred and they still keep on griping.......LOL.
You're wrong, DD.
More than 70% of the Fortune 500 have one person holding the positions of Chairman of the Board and Chief Executive Officer. Less than 30% have two persons holding those two positions.
The Fortune 500 companies that have two different people holding the COB and CEO positions typically divide the work this way: the COB handles strategic matters while the CEO handles strategic (in coordination with COB) and operational matters.
By suggesting that the COB is only a part-time position because the board meets only 6 times a year is just uninformed.
To me and most people who fully understand it, that is a BFD when you look at the fact that as recently as 1998, there were less than 50,000,000 shares outstanding.
Excuse me, but IDCC was a financial basketcase in 1998 before the Nokia deal in early 1999. If you know how to read cash flow statements then you would know that IDCC was able to finance its cash burn in part because of the cash it generated from the exercise of options. In fact, the argument can be made that access to this type of equity financing allowed IDCC to project a stronger balance sheet which, in turn, allowed it to present a stronger bargaining position.
Also, I am NOT in favor of expensing stock options as proposed by FASB. Rather, I am in favor of more informed shareholders that understand and REJECT needless DILUTION of their stock investments.
You're worried about dilution but you're not in favor of expensing stock options??? You're contradicting yourself. It is precisely because companies don't have to expense this type of compensation that they are encouraged to issue them generously since it makes their profit margins look better and it increases cash.
Like I said, you need to get a better sense of proportion. IDCC is not a Fortune 500 company. IDCC is a small company that still has to generate $100M in quarterly sales. As such, it will most likely have to adjust its operating model many more times to achieve those type of milestones. Why limit its flexibility to reach those financial milestones?
Lastly, dilution is NOT yet a problem for IDCC. Period.