Posted: Aug. 9, 2004

Two nonrecurring events subtracted US$3.6 billion from Microsoft's FY'04 profits: a Dec. 2003 plan under which Microsoft offered to buy "underwater" stock options from employees and an Apr. 2004 legal settlement with Sun Microsystems.

This chart is based on slides shown by Chief Financial Officer John Connors at the 2004 Financial Analysts Meeting. The first three columns show the operating profit or loss (P&L) for each business in FY'02 and FY'03, and the P&L for each business in FY'04, not including the cost of the Sun settlement and the option buyback program. This gives a clear picture of the growth trajectory of each business based on day-to-day operations. (For a brief description of each business, see "Seven Businesses Push into FY'05".)

The fourth and fifth columns show how Microsoft allocated the cost of the Sun settlement and option buyback program among the seven businesses. The final column shows the actual reported FY'04 P&Ls for each business, including the costs associated with these nonrecurring events.

In FY'05, expenses from nonrecurring events will probably be much smaller. However, Microsoft could still face FY'05 antitrust settlements with RealNetworks, Burst, and consumers in five states. In addition, pending shareholder approval, Microsoft will change stock-based compensation to prevent employees from being affected by a likely fall in the company's share price after it pays a one-time US$32 billion dividend in Dec. 2004—another nonrecurring expense. (The company is also appealing a European Union antitrust fine of about US$605 million, but already set aside money in FY'04 in case it loses this appeal. This cost was not allocated among the seven businesses, but rather appeared as a companywide cost in Microsoft's financial statements.)

All figures in millions of U.S. dollars.