EMC 2004 Annual Report Download - page 23

Download and view the complete annual report

Please find page 23 of the 2004 EMC annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

Table of Contents
The gross margin percentages for information storage and management services were 51.1%, 49.4% and 39.9% in 2004, 2003 and 2002, respectively. The
improvements in both 2004 and 2003 were driven by a shift in the mix of our services offerings with a greater proportion of revenues being derived from
software and hardware maintenance contracts compared to professional services revenues. Maintenance revenues provide a higher gross margin than
professional services revenues. Additionally, the increases in the gross margin percentages in both 2004 and 2003 were attributable to improvements in the
gross margins earned from professional services.
The gross margin percentages for the EMC Software Group products and services segment were 78.0%, 82.7% and 81.1% in 2004, 2003 and 2002,
respectively. The decrease in the gross margin percentage in 2004 compared to 2003 was primarily attributable to intangible amortization expense associated
with the acquisitions of LEGATO and Documentum. The decrease in the gross margin percentage was also attributable to a change in the revenue mix. In
2004, software maintenance and professional services accounted for a greater proportion of total revenue as compared to 2003. Software license revenues
have a higher gross margin than software maintenance and professional services revenues. The increase in the gross margin percentage in 2003 compared to
2002 was primarily attributable to the acquisitions of LEGATO and Documentum, both of which were consummated in the fourth quarter of 2003.
The gross margin percentage for the VMware products and services segment was 79.5% in 2004.
The gross margin percentages for other businesses were 53.4%, 53.7% and 46.1% in 2004, 2003 and 2002, respectively. The decrease in the gross margin
percentage in 2004 compared to 2003 resulted from declining revenues in this segment as the volume of maintenance contracts decreased. The increase in the
gross margin percentage in 2003 compared to 2002 resulted from reducing costs in this segment as we discontinued selling servers.
Research and Development
As a percentage of revenues, research and development ("R&D") expenses were 10.3%, 11.5% and 14.4% in 2004, 2003 and 2002, respectively. In
addition, we spent $166.3, $113.4 and $126.7 in 2004, 2003 and 2002, respectively, on software development, which costs were capitalized. R&D spending
includes enhancements to our software and information storage systems. The increase in R&D expenses in 2004 compared to 2003 was primarily attributable
to the increased salaries and related costs from the LEGATO, Documentum and VMware acquisitions. The decrease in R&D expenses in 2003 compared to
2002 was attributable to our cost cutting initiatives.
Selling, General and Administrative
As a percentage of revenues, selling, general and administrative ("SG&A") expenses were 27.5%, 26.6% and 30.9% in 2004, 2003 and 2002, respectively.
The increase in absolute dollars spent in 2004 compared to 2003 was primarily attributable to the increased salaries and related costs from the LEGATO,
Documentum and VMware acquisitions. The increase in SG&A expenses as a percentage of revenue in 2004 compared to 2003 was due to the acquisitions of
LEGATO, Documentum and VMware. These operations have a higher selling cost as a percentage of revenue than EMC has historically incurred. The
decrease in absolute dollars spent in 2003 compared to 2002 was primarily attributable to savings associated with our cost cutting initiatives and a reduction in
bad debt expense. The decrease in SG&A expenses as a percentage of revenue in 2003 compared to 2002 was due to an increase in revenues while decreasing
our operating costs.
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 $10.1 in 2004, $1.8 in 2003 and $35.2 in 2002. The increase in the provision in 2004 compared to 2003 was due
to our increased sales. The decrease in the provision in 2003 compared to 2002 was due to the improvement in our collection experience and expected
collection 20