Mucho:
You and Ron are both correct about the employee options having a time value, and my somewhat hastily written post was wrong in this respect.
What I had in mind was that there are significant differences between the options granted by the company (and this doesn't just apply to QCOM) and those that you and I can buy on the open market.
The employee options, when granted, have an exercise price equal to the then current market price of the stock, and they are subject to a "vesting period" , i.e. the employee can not exercise them immediately. For QCOM, the options used to vest over a 5 year period at 1/60 per month, now I believe it's a waiting period of 6 months, then 10% vest, then the remainder vest on a monthly schedule, so there's a period of time where the employee can do nothing with them, and only the vested ones can be exercised (at the employee's discretion of course). Further, they have a life of 10 years from the date of grant, so the employee can wait to exercise them. Whenever they are exercised, the employee turns over the $$ for the exercise price to the company, and gets the shares in return. Now that flexibility in exercise time out to 10 years certainly has a "value", even though the employee pays nothing for it, and my post was wrong to infer that it didn't, so I apologize for any misleading impression I may have created.
Publicly traded options are somewhat different. They have an "intrinsic value" which is the current stock price minus the strike (exercise) price, just like employee options, and we have to pay for that, just as the employees do. They also have a time value, which depends on a number of factors such as the time to expiration, the stock volatility, prevailing risk free interest rate, etc., and the calculation of an appropriate "fair value" for that time value is what Black & Scholes got the Nobel Prize in Economics for. Unlike the employees, you and I have to pay for that time value, and the further out in time we want for our expiration date, the more we have to pay, and it can be a considerably premium to the intrinsic value, particularly for LEAPS. OTOH, we have flexibility that the employees don't have, in that we can cash in all or part of our option holding whenever we like.
So how to place a value on this "exercise time" flexibility that the employee options carry, and for which they pay zero? They have an "expected life" well beyond that contemplated in conventional options pricing (I've never seen 10 year LEAPS, but I there may be some). They aren't exercisable until they vest, they vest on a drawn out schedule, and they aren't tradeable prior to exercise. I guess there's another Nobel prize in there if someone can come up with a method, but in the meantime, the company estimates a "fair value" for this "exercise time" for options in the year of grant via Black Scholes as though they were conventional options, amortizes that over the vesting period, and provides an estimate of the impact on net earnings and EPS, which I posted earlier:
Message 17122785
The 1998 number came from the FY 2000 proxy, the same info is in the 10K's, so you can go back as far as you like. For 1996/19997, the impact would have been about $0.03 each year on the GAAP EPS:
If changes in GAAP come about, and an operating expense has to be charged against earnings for employee options, I would hope that something like this would be adopted, since IMO it's probably the best that can be done given the complexity of trying to arrive at a "fair value". If this comes to pass, watch out, since there are many companies for which profits would become losses, with negative impact on their stock prices. Now that would be one way to whack the Nasdaq under 1000 in a hurry!
In Qualcomm's case, the impact is not insignificant but also not devastating - as you point out, it looks worse in % terms than in $$. OTOH, if earnings are on an uptrend from this point as many of us believe, it will be of less significance as time goes on.
David T. |
