EMC 2006 Annual Report Download - page 27

Table of Contents
The following table presents our costs and expenses, other income and net income.
Percentage Change
2006
2005 2004 2006 vs 2005 2005 vs 2004
Cost of revenue:
Information storage $ 4,710.8 $ 4,198.6 $ 3,807.1 12.2% 10.3%
Content management and archiving 225.8 149.5 109.0 51.0 37.2
VMware virtual infrastructure 107.0 45.3 18.1 136.2 150.3
RSA information security 37.7 — — NM NM
Corporate reconciling items 160.6 77.7 80.6 106.7 (3.6)
Total cost of revenue 5,241.9 4,471.1 4,014.9 17.2 11.4
Gross margins:
Information storage 4,897.8 4,593.6 3,807.9 6.6 20.6
Content management and archiving 460.0 334.8 287.3 37.4 16.5
VMware virtual infrastructure 602.0 342.2 200.0 75.9 71.1
RSA information security 114.0 — — NM NM
Corporate reconciling items (160.6) (77.7) (80.6) (106.7) 3.6
Total gross margin 5,913.2 5,192.8 4,214.6 13.9 23.2
Operating expenses:
Research and development 1,254.2 1,004.8 847.9 24.8 18.5
Selling, general and administrative 3,253.3 2,606.0 2,266.7 24.8 15.0
In-process research and development 35.4 17.4 17.4 103.4 —
Restructuring charges 162.6 84.2 38.6 93.1 118.1
Total operating expenses 4,705.4 3,712.4 3,170.6 26.7 17.1
Operating income 1,207.8 1,480.4 1,044.0 (18.4) 41.8
Investment income, interest expense and other expenses 182.3 171.8 141.0 6.1 21.8
Income before taxes and cumulative effect of a change in accounting principle 1,390.0 1,652.2 1,185.0 (15.9) 39.4
Provision for income taxes 162.7 519.1 313.8 (68.7) 65.4
Income before cumulative effect of a change in accounting principle 1,227.4 1,133.2 871.2 8.3 30.1
Cumulative effect of a change in accounting principle (3.4) — — NM NM
Net income $ 1,224.0 $ 1,133.2 $ 871.2 8.0% 30.1%
NM – not measurable
Gross Margins
Our overall gross margin percentages were 53.0% in 2006, 53.7% in 2005 and 51.2% in 2004. Incremental stock-based compensation expense
recognized within cost of product sales and cost of services as a result of adopting FAS No. 123R was $53.9 in 2006, negatively impacting our overall gross
margin by 0.5%. Additionally, our overall gross margin in 2006 was negatively impacted 1.3% by the Information storage segment and 0.2% by increases in
intangible amortization expense associated with acquisitions. Our overall gross margin in 2006 was favorably impacted 0.8% by the VMware virtual
infrastructure segment, 0.2% by the Content management and archiving segment and 0.3% by the incremental margin generated from the RSA information
security segment as a result of the acquisitions of RSA and Network Intelligence during the third quarter of 2006. Our overall gross margin in 2005 was
favorably impacted 1.9% by the Information storage segment and 0.6% by the VMware virtual infrastructure segment. The Content management and
archiving segment had a neutral impact on our overall gross margin in 2005 compared to 2004.
For segment reporting purposes, stock-based compensation and acquisition-related intangible asset amortization are recognized as corporate expenses
and are not allocated among our various operating segments. Stock-based compensation expense and acquisition-related intangible asset amortization expense
was $160.6, $77.7 and $80.6 in 2006, 2005 and 2004, respectively. Acquisition-related intangible asset amortization expense was $94.3, $72.5 and $75.7 in
2006, 2005 and 2004, respectively. The increase in 2006 compared to 2005 was primarily due to the impact of the acquisitions of Captiva in December 2005
and RSA in September 2006. Stock-based compensation expense was $66.3, $5.2 and $4.9 in 2006, 2005 and 2004, respectively. The stock-based
compensation expense increase in 2006 was primarily due to the adoption of FAS No. 123R.
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