Thevalueofoptiongrants asa percentofrevenuesin the
mostrecentyearis6.39percent.AswithCisco,welowerthis
value to 3 percent over the next 10 years, reflecting our
expectation that as the firm grows, its option grants will
becomeasmallerpercentofrevenues.Thisreduction,inturn,
will push up operating margins in future years.
Theadjustmentsthatwehadtomaketogettothecorrected
operatingincomeforCiscoandGoogleprovideameasureof
how difficult it is to make these adjustments for all
companies,atleastuntilFAS123Rcreatessomeuniformity
in practicesacross companies. In2005, forinstance, some
firms were alreadyexpensingemployee optionsand others
werenot.Amongthefirmsthatdidnotexpenseoptions,some
firms showed the expenses associated with options being
exercisedasoperatingexpenses(likeGoogle)whereasothers
(likeCisco) showedthem asadjustments to bookvalue of
equity. The adjustments therefore vary from company to
company and we are largely dependent on the pro forma
adjustments that all companies are required to show for
employeeoptionexpenses.Thebiggestbenefitofforcingall
companies to follow one rule and expense options (FAS
123R)isthatwewillbeabletocompareoperatingmargins
acrosscompanies(oraveragethem)withouthavingtoworry
about comparing preemployee option expense margins for
somecompaniestopostemployeeoptionexpensemarginsfor
other companies.
Estimate Expected Stock Price Dilution from Option Issues
Theotherwayofdealingwithexpectedoptiongrantsinthe
futureistobuildintheexpecteddilutionthatwillresultfrom
theseoptionissues.Todothis,wehavetomakeasimplifying