blueskywaves, in an effort to get real...
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.
As I understand IDCC’s management’s staffing plan, they completed the ramp up and are staffed fully at the present time. Of course, if a quality person comes along I assume we’d make the effort to pursue them, but I do believe we have plenty of options still available for that eventuality.
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?
I don’t think so, because people are going to license with us based on what we have in patents, not what we might do in the future. It would increase our leverage in the future, or give us new patents to license but not for quite a while. Again, we have plenty of options remaining if this comes up, and at that time management could come back for additional stock, explaining that the previously approved shares were unexpectedly used for this purpose.
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?
A cash infusion is not a bad thing, but a company that is flush with cash and not anticipating cash flow problems for years to come does not need to sacrifice to gain cash flow. A company that is expecting the price to go up should use cash rather than stock. If they need cash in the future they can generate more later by selling the higher priced shares they did not issue earlier. If management feels the necessity of increasing cash, let them put out warrants to all the existing shareholders so we can fill the coffers and keep their relative share of the company if they chose. Might be a tough choice for management, as they are used to buying at prices below market when they exercise.
IDCC has a tax loss carryforward, but that is not relevant to this discussion. That is there regardless of what we do. The issuing of options instead of cash payments is tax neutral or a tax detriment. If an ISO is exercised and held for over a year, the company does not get any deduction for the salary compensation paid, so they end up paying more tax than if they had used cash compensation. If the option is non-qualified or there is a disqualifying sale of an ISO, then the company does get a write off equal to the difference between the value of the option and the exercise price.
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?
Assuming this includes $220M from the exercise of 10M shares I’d say (using rough numbers)
$200M/60M shares O/S x PE of 20 plus est cash above operating requirements of (700M-100M)/60M sh, which equals ~ $66.67 + $10.00 = $76.67 per share
Assuming no option exercise, instead using $10M cash to pay/bonus in place of options, I come up with
$190M/50M shares O/S x PE of 20 plus est cash above operating requirements of (700M-100M -220M-10M)/60M sh, which equals ~ $76.00 + $7.40 = $83.40 per share, about 8.7% more per share.
To me, this shows again why we want to pay in cash, not stock.
4) A larger cash balance would also allow IDCC more M&A options since it can sweeten any bid by increasing the cash component.
I’d rather IDCC focus on their core business rather than M&A activity. Quite a few well run companies have lost a lot of money on M&A over the past few years – ask QCOM. Cash in the pocket gives them the ability to go into areas beyond their expertise. Personally, I’d prefer a stock buyback if there is no ongoing business need for the cash because I think IDCC is a great investment. I am not selling stock to pay bills personally because I believe I will be better off holding the stock. I wish my company had the same view.
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.
Generally when small companies are entering their growth stage they do not have cash and cash flow tends to be a big issue. It is important to conserve cash to insure that they can survive any bumps in the road to last until the revenue from the expected growth comes to fruition. IDCC does not have that problem. Stock (dilution) is used to conserve cash. Employees accept options because the expected value of the stock is greater than the cash. Otherwise, why would they accept options in place of cash?
I am really confused about your opinion that dilution is not an issue. I can’t imagine how owning 1,000/50,000,000 shares could not result in a better per share price that owning 1,000/60,000,000. As far as mid-cap funds staying away because of the float, split the shares or sell warrants, don’t give away a rapidly appreciating asset at current values. If one is not optimistic about the future of IDCC, stock options could make sense for the owners. But if one believes this stock is going to experience double digit growth over the next 5 years as I do, using options instead of cash is detrimental to your interests as a stockholder.
