InterDigital Inc (IDCC)

[blueskywaves]

INTERDIGITAL (IDCC) 
 PSR@Different Sales Growth Rates 
 2003-2007 
 . 
 . 
 . 
  
            15%       PSR@    20%     PSR@     25%     PSR@ 
            p.a.    $1.42B    p.a.   $1.42B    p.a.   $1.42B 
 .               
 2002(A)   $ 88M     16.1    $ 88M    16.1    $ 88M    16.1  
 2003(E)    200M      7.1     200M     7.1     200M     7.1 
 2004       230M      6.2     240M     5.9     250M     5.7 
 2005       265M      5.4     288M     4.9     313M     4.5 
 2006       304M      4.7     346M     4.1     391M     3.6 
 2007       350M      4.1     415M     3.4     488M     2.9 
 . 
 Assumption:  2003 Sales baseline is $200M 
 

It now appears that the new accounting rule change
regarding option expensing will either go into effect
in 2004 -- a presidential election year -- or 2006
-- congressional mid-terms.

The expected hit on S&P 500 earnings ranges from
10%-20%. There are 75 technology companies in the
S&P 500. The expected hit on tech company earnings
is expected to be much higher -- up to 60%-70%
according to some estimates -- although everybody
understands that those numbers include the
illusory costs of underwater options.

However, expensing options is expected to change
corporate behavior, particularly compensation
policies as part of the larger issue of corporate
governance. That takes time so many PE-oriented
valuation approaches will suffer from the lack of
"comparables." It will probably take at least
4 quarters for PE-based valuation approaches to be
meaningful again once the new rule goes into effect
in 2004 or 2006.

My hunch is more people will rely on cash flow and
PSR analysis until the new PE numbers settle down.
I don't think it will affect an emerging growth
company like IDCC all that much.

If cash flow is the one constant in the valuation
of a company from start-up to maturity then
IDCC's PS is more important than PE at this early
stage of IDCC's growth when earnings are still
immature (read: unpredictable). PE becomes more
important later on when IDCC's earnings power start
to mature (read: predictable and easier to model
according to various discounted cash flow methods).