EMC 2003 Annual Report Download - page 16

Documentum products and services 26.4 – 26.4 *
LEGATO products and services 60.0 – 60.0 *
Other businesses 53.5 65.3 (11.8) 18
Total gross margin 2,842.1 2,118.8 723.3 34%
Operating expenses:
Research and development 718.5 781.5 (63.0) 8
Selling, general and administrative 1,656.2 1,680.8 (24.6) 2
Restructuring and other special charges 66.3 150.4 (84.1) 56
Total operating expenses 2,440.9 2,612.7 (171.7) 7
Operating income (loss) 401.2 (493.8) 895.0 *
Investment income, interest expense and other expenses, net 169.9 197.3 (27.4) 14
Income (loss) before income taxes 571.0 (296.5) 867.5 *
Provision for (benefit from) income taxes 74.9 (177.8) 252.7 *
Net income (loss) $ 496.1 $ (118.7) $ 614.8 *
* Not Measurable
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Gross Margins
Information storage products gross margins were 43.0% and 38.0% in 2003 and 2002, respectively. The increase in the gross margin percentage in 2003
compared to 2002 was attributable to increased sales volume and a lower fixed cost component of cost of sales due to cost reduction effects. The gross margin
percentage for 2002 was favorably impacted by $61.6, or 1.5%, resulting primarily from the sale of previously identified obsolete inventory for which a
reserve was established in 2001.
The gross margin percentage for information storage services increased to 51.1% in 2003 compared to 41.7% in 2002. The increase in the gross margin
percentage was primarily attributable to a greater proportion of revenues derived from the sale of software and hardware maintenance contracts compared to
professional services revenues. Maintenance revenues provide a higher margin than professional services revenues.
The gross margin percentage for the Documentum products and services segment was 86.1% in 2003. As a result of this acquisition closing near the end
of December 2003, the mix of products and services revenue was not representative of its revenue mix for an entire fiscal year. We expect this segment to
achieve gross margins of approximately 70.0% in 2004; however, the percentage will be impacted by the mix of software licenses versus services revenues.
The gross margin percentage for the LEGATO products and services segment was 77.7% in 2003. We expect this segment to achieve comparable
margins in 2004; however, the percentage will be impacted by the mix of software licenses versus services revenues.
The gross margin percentages for other businesses were 53.7% and 46.1% in 2003 and 2002, respectively. The increase in the gross margin percentage in
2003 compared to 2002 resulted from reducing costs in this segment as the volume of maintenance contracts diminished.
Our overall gross margin percentage was 45.6% in 2003 compared to 39.0% in 2002. We anticipate our overall gross margin percentage will improve in
2004 compared to 2003, expecting it to slightly exceed 50% at some point prior to the fourth quarter of 2004. However, if sales volumes do not increase,
software revenue as a percent of total revenue does not increase or competitive pricing pressures increase, gross margins may be negatively impacted in 2004.
Research and Development
As a percentage of revenues, research and development ("R&D") expenses were 11.5% and 14.4% in 2003 and 2002, respectively. In addition, we spent
$113.4 and $126.7 in 2003 and 2002, respectively, on software development, which costs were capitalized. The decline in R&D expenses was attributable to
our cost cutting initiatives. R&D spending includes enhancements to our software and information storage systems. We expect the amount of R&D spending
to be higher in 2004 compared to 2003, primarily due to the R&D spending of LEGATO, Documentum and VMware. For 2004, we expect R&D expenses, as
a percentage of revenues, to be approximately 12.0%. This percentage may vary, however, depending primarily on our 2004 revenues.
Selling, General and Administrative
As a percentage of revenues, selling, general and administrative ("SG&A") expenses were 26.6% and 30.9% in 2003 and 2002, respectively. The
decrease in the percentage was primarily attributable to increased revenues in 2003 compared to 2002. The decrease in SG&A expenses was primarily due to
savings associated with our cost cutting initiatives and a reduction in bad debt expense. Partially offsetting these declines were additional costs incurred from
the LEGATO and Documentum acquisitions. We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts and notes
receivable that will not be collected. The allowance is based upon the credit-worthiness of our customers, our historical experience, the age of our receivables
and current market and economic conditions. The provision for bad debts was $1.8 in 2003 and $35.2 in 2002. The decrease
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