EMC 2006 Annual Report Download - page 28

Table of Contents
Gross margin percentages for the Information storage segment were 51.0%, 52.2% and 50.0% in 2006, 2005 and 2004, respectively. The decrease in the
gross margin percentage in 2006 was attributable to a reduction in the mix of software license revenues as a percentage of total segment revenues, to 21.0% in
2006 from 22.8% in 2005. Software license revenues generally provide a higher gross margin percentage than systems revenues and services revenues.
Additionally, margins generated on both our maintenance and professional services businesses decreased due to increased labor and third party maintenance
costs. The increase in the gross margin percentage in 2005 was attributable to achieving higher sales volumes while at the same time improving our
manufacturing cost structure. Provisions for product warranties, which reduce storage gross margins, were $127.4 in 2005 and $146.5 in 2004. In 2005, as a
result of cost control efforts, we were able to reduce the cost of fulfilling our service obligations. These efforts reduced the provision as a percentage of
systems revenues to 2.8% in 2005 compared to 3.8% in 2004. The gross margin percentage in 2005 was also favorably impacted by improvements in the
gross margin percentages earned from professional services which resulted primarily from reducing our services cost structure and an increase in the mix of
software maintenance revenues as a percentage of total services revenue. Software maintenance revenues generally provide a higher gross margin percentage
than other services revenues.
The gross margin percentages for the Content management and archiving segment were 67.1%, 69.1% and 72.5% in 2006, 2005 and 2004, respectively.
The decrease in gross margin percentage in 2006 was primarily attributable to lower margins generated on our professional services businesses due to
increased labor costs as well as higher amortization expense from increased capitalized software development costs. Partially offsetting the decrease in gross
margin percentage was a 1.7% favorable impact due to the Captiva acquisition which was completed in December 2005. The decrease in gross margin
percentage in 2005 was primarily due to a reduction in the mix of software license revenues as a percentage of total segment revenues. Software license
revenues as a percentage of total segment revenues declined to 47.2% in 2005 from 48.6% in 2004. Software license revenues generally provide a higher
gross margin percentage than services revenues. Additionally, higher amortization expense associated with increased capitalized software development costs
contributed to the decrease in gross margin percentage.
The gross margin percentage for the VMware virtual infrastructure segment was 84.9% in 2006, 88.3% in 2005 and 91.7% for 2004. The decrease in
the gross margin percentages in both 2006 and 2005 was attributable to a reduction in the mix of software license revenues as a percentage of total segment
revenues. Software license revenues as a percentage of total segment revenues declined to 69.8% in 2006 from 74.2% in 2005 and 81.7% in 2004. Software
license revenues generally provide a higher gross margin percentage than services revenues.
The gross margin percentage for the RSA information security segment was 75.2% in 2006. The RSA information security segment was created during
the third quarter of 2006 as a result of our acquisitions of RSA and Network Intelligence.
Research and Development
As a percentage of revenues, R&D expenses were 11.2%, 10.4% and 10.3% in 2006, 2005 and 2004, respectively. In addition, we incurred $215.6,
$167.1 and $166.3 in 2006, 2005 and 2004, respectively, on software development costs which were capitalized. Software development costs increased from
2005 to 2006 due to increased development efforts across all of our segments. Incremental stock-based compensation expense recognized as a result of
adopting FAS No. 123R was $52.5 in 2006, increasing R&D as a percentage of revenue by 0.5% compared to 2005. R&D spending includes research and
development on new product offerings and enhancements to our software and information storage systems. In addition to incremental stock-based
compensation expense, R&D expenses increased in 2006 compared to 2005 and 2005 compared to 2004 due to increased investments to support new product
development and incremental R&D efforts resulting from the acquisitions of RSA in 2006 and Smarts and Captiva in 2005.
Selling, General and Administrative
As a percentage of revenues, selling, general and administrative ("SG&A") expenses were 29.2%, 27.0% and 27.5% in 2006, 2005 and 2004,
respectively. Incremental stock-based compensation expense recognized as a result of adopting FAS No. 123R was $131.9 in 2006, negatively impacting
SG&A as a percentage of revenues by 1.2% compared to 2005. In addition to incremental stock-based compensation expense, the majority of the increase in
SG&A expenses in 2006 compared to 2005 consisted of increases to support our newly acquired higher growth businesses. The expense increases were
primarily incremental selling costs and salaries and benefits associated with personnel for these businesses. SG&A expenses increased in absolute dollars in
2005 compared to 2004 but decreased as a percentage of revenue as we achieved higher sales volumes while controlling our cost structure.
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