InterDigital Inc (IDCC)

[blueskywaves]

Just by looking at the frenzied postings of the usual suspects, it's either the issue of executive compensation or the issue of dilution that is gnawing away at them. Let's take another look at the issue of dilution.

Again, the useful question to ask is why do these naysayers lack the intellectual honesty to compare the dilution rate of IDCC with its peers?

The pure IPR operating business model is a very high margin but very high friction business. It is very, very difficult to implement, much less finance on a stand-alone basis.

Most companies actually follow the IBM model where the royalty business is a byproduct of years of R&D investments. IPR companies like QCOM, IDCC, RMBS and ARMHY are actually the exceptional cases so a closer examination of the dilution rates of these companies is necessary if someone wants to discuss the issue of dilution productively.

1) QCOM diluted its stock from a split-adjusted 313M shares in 1992 to 809M shares in 2002 to partially finance its growth from $108M in sales in 1992 to $3.0B in 2002.

2) RMBS diluted its stock from a split-adjusted 23M shares in 1995 to 97M shares in 2002 to partially finance its growth from $7M in sales in 1995 to $97M in 2002.

3) Using ADRs for comparison, ARMHY needed to dilute its stock to the tune of 313M shares to reach the $70M sales level in 1998. After its 1997 IPO, it then proceeded to dilute its stock from 313M shares in 1998 to 338M shares in 2002 in order to partially finance its growth from $70M in sales in 1998 to $243M in 2002.

4) IDCC diluted its stock from 24M shares in 1992 to 47M shares in 1995 to 56M shares in 2002 to partially finance its growth from $40M in sales in 1992 to $85M in 1995 to $88M in 2002.

The common denominator of these IPR companies is that they all invested heavily in R&D to get into a position where they can now generate recurring licensing streams. In other words, they wouldn't have been able to advance from point A to point B or from point B to point C (here and now) of their respective business plans since the R&D arms race continues to be very option-intensive.

IDCC spent more than $210M in R&D from 1995 to 2002. Recurring royalties have increased and patent production has increased, particularly in the last 2 years. The 2003 MIT Technology Patent Score Card provides some idea of just how wisely IDCC spent all those R&D dollars.

http://www.technologyreview.com/scorecards/index.asp

QCOM ranks 6th out of a telecom field of 65, but is far and away the most prolific royalty collector in the wireless industry in absolute dollar terms - $3.4B in royalties collected since 1992 or $4.20 per share).

IDCC ranks 25th out of the same telecom field of 65, but is far and away the most efficient collector of royalties in the
wireless industry in cumulative royalties per share -- $485M in royalties collected since 1992 or $8.66 per share. It is also one of the smallest companies in that list.

Was all that dilution really in vain?

Of course not.