Replies to post #23857 on InterDigital Inc (IDCC)

[0nceinalifetime]

Rmarchma, you have obviously walked all over Blyskywaves suspect arguments using facts, impeccable logic and a generous flourish of style and class as you illuminated the gaping holes in his logic. I thank-you for taking the time to do so. I would have done it myself but I figured my time was better spent on other matters since it didn't look like anyone was truly buying his arguments anyway. But you never know what some may believe so it's good that you finally put his arguments to bed properly.

Once

[Corp_Buyer]

"IDCC..directors..TWICE as valuable as..BIGGEST 200 U.S. corporations" ...

Ronnie,

Thank you for your references confirming what many of us have believed for a long time. Your data is also consistent with the related comments of Bill Siedman yesterday on CNBC to wit:

* Management compensation has become excessive (e.g. Grasso who is apparently raking in $10M per year);
* He faults weak outside directors;
* The solution is for SHAREOWNERS to become more active in "limiting" management compensation.

His remarks and your data are very timely, given the upcoming shareholder vote on 5M additional ISO for IDCC employees on top of an already generous ISO plan including recent increases just last year and generous wages.

The Company's proposal to increae ISO shares at this time is a real slap in the face (and wallets) to shareholders. I hope Proposition #2 is solidly defeated by shareholders with a "NO" vote on Proposition #2.

Regards,
Corp_Buyer

[blueskywaves]

Your post is too long so I'm going to break it down in more digestible parts so I have more time to address each part.

Let me start by demolishing your central premise.

It’s impossible to draw any valid conclusions from such a small sample............If you could come up with about 10 or so small-cap IPR technology companies with similar revenues to IDCC, like Rambus and ARMHY, then I would give much more credence to your study and conclusions.


LOL. I don't think you realize it but you just proved my point. The reason the sample is small is because very few companies have actually succeeded in making the licensing model work!

QCOM, for example, already generates more royalty income ($954M) than the entire global hardware IP industry (logic, memory, analog) which only generated $757M in licensing revenues in 2002.

http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18920523

Outside of IBM, QCOM IDCC, ARMHY and RMBS, only Intergraph and Lucent have any credible shot at building a significant royalty business in the next 3-4 years. There are many patent houses like Timeline and Storage Computer, but their data is misleading because these patent houses typically consist of 2 lawyers and a manager of first impressions (sexy receptionist).<g>

Now just because very few companies succeed in the licensing business -- high litigation risks, high margin rewards -- doesn't mean that you have keep on using misleading metrics.

[blueskywaves]

You make a lot over IPR companies having much more “litigation risks”, which is inherent in any company and more so with product-based companies. Therefore I don’t understand how a pure IPR company without any product liability has more litigation exposure, and thus has to pay more compensation than anyone else.

You're quibbling over this point? Unlike most product companies with insurance, a pure IPR company that loses its patent cases usually goes out of business.

Why should a wireless engineer work for a company with high litigation risks for anything less than above average market compensation. Higher risks, higher rewards, remember?

I understand your excessive compensation thesis forces you to skew the data a certain way, but try to get some distance and use common sense. Keep in mind that IDCC was forced to scramble to finance its operations and recruit talent after the 1995 Motorola debacle - the Survival stage.

[blueskywaves]

Then you claim I used “flawed data” regarding executive compensation at IDCC and thus draw invalid conclusions thereon. First my compensation data came from IDCC’s proxy material mailed in 2002. Four of the five highest paid IDCC executives in 2001 had total compensation packages of over $1 million when the value of granted options were factored in. Almost every reasonable businessman would conclude that is way too much compensation for a company the size of IDCC. The total 2001 compensation of these five highest-paid executives of $5,458,000 represented over 10% of IDCC’s total revenues of $52.5m in 2001. I don’t have to compare IDCC to any other company to know that this was excessive.

Of course you do. For example, your use of the 2001 $52.5M sales number completely ignores the fact that under the 1999 Nokia deal, Nokia was contractually obligated to start paying recurring royalties in early 2002 subject to MFL provisions.

The larger point is that executive packages are measured over a period of time (3-5 years) to encourage them to balance short-term goals with medium-term and long-term goals. Taking one transition year out of context hardly reflects well on you.

From 1995 to 1998, IDCC generated more revenues from paid-up licenses and engineering contracts than recurring royalties. It exited 1998 with a recurring royalty stream (pre-SAB 101) of $1.5M for the entire year!

From 1999 to 2002, IDCC still generated more revenues from paid-up licenses and engineering contracts than recurring royalties at the start of the Nokia contract, but it managed to exit 2002 with a recurring royalty stream of more than $20M (post-SAB 101) in the 4th quarter alone!

The quality of IDCC's pre-settlement revenue stream was already improving before the 2003 settlement! I realize that this type of qualitative assessment tends to get drowned out by your type of rigid quantitative approach, but clearly this company is being run by risk-takers, not management by numbers types. That's why they've created more than $1B in market capitalization during the last 5 years!

An individual owner did a study of 17 small-cap technology companies. His findings were that IDCC’s salary and bonuses were significantly more than the other companies, even though these comparable market-cap company’s average revenues were twice that of IDCC.

Like I said this data is misleading. There is nothing to stop you from using this data alongside the basket of IP companies I provided to get better perspective. The reason you won't even do that is because it doesn't support your excess compensation thesis.

Consider that the basket of IP companies I mentioned have higher compensation levels than the original basket of 17 small-cap companies. And consider that IDCC's packages, while higher than the 17 small cap companies, are actually at the bottom of the range compared to other IP companies like ARMHY and RMBS.

That undercuts your claims. Period.

[blueskywaves]

You just brought out some new information that I was not aware of regarding restricted shares.

Oh no, you don't get away with this.

IDCC's restricted stock authorization is 3.5M shares. Outstanding is 900k+ shares. 2.5M+ shares are still available. You have been adding this 2.5M+ share number to a pool of options/rs/rsu/w to get a 5M+ number that you and others claim are still available for grant to support the argument that they don't need 5M more. That's misleading.

Removing this 2.5M+ restricted shares available reduces your estimate of available options/rs/rsu/w by more than half. Does that make your argument against the additional 5M options only half as relevant also?<g>

Remember that restricted stock and restricted stock units are currently considered as compensation and charged to earnings. Options are currently not.

[blueskywaves]

The following will let you compare IDCC's outside directors with those of the top 200 U.S. companies. Obviously, IDCC views their directors as more than TWICE as valuable as those at the BIGGEST 200 U.S. corporations. In 2001, IDCC outside directors got an average of 42,000 options plus the $15,000 retainer plus expenses. The options and retainer, using the Black-Scholes options pricing for 2001 of $8.16 per share from IDCC's 10-K, were worth $357,720. Directors at the TOP 200 U.S. companies got an average total compensation of $152,626 in 2001. What a sad joke on us as shareholders.

I have nothing against people who take outsized risks getting outsized rewards. Even before the 1995 Motorola debacle, IDCC was a risky career move and business association because bankruptcy was always a real possibility. Again, common sense should apply here. Higher risks, higher rewards.

 
 IDCC's Board of Directors 
 First Year at IDCC  
 .... 
 .... 
 Campagna - 1994 
 Bolgiano - 1974 
 Goldberg - 1993 
 Colson - 1995 
 Clontz - 1998 
 Roath - 1997 
 

Will somebody please stop this crack crew of do nothing con artists from fleecing IDCC of $2.14M a year!!! Who knows? After creating more than $1B in shareholder value from 1998 to 2003, they might do the unconscionable and create more shareholder value in the next 2 years than anybody has managed to create in the last 22 years.

Is this really a problem?