EMC 2007 Annual Report Download - page 31

Gross Margins
Our overall gross margin percentages were 54.5% in 2007, 53.0% in 2006 and 53.7% in 2005. The improvement in the gross margin percentage in 2007
from 2006 was attributable to the VMware Virtual Infrastructure segment which contributed 173 basis points, the RSA Information Security segment which
contributed 56 basis points and the Content Management and Archiving segment which contributed 5 basis points. These improvements were partially offset
by reductions in the Information Storage segment gross margin which decreased by 48 basis points. Corporate reconciling items, consisting of stock-based
compensation, acquisition-related intangible asset amortization and amortization of capitalized software development costs also decreased the consolidated
gross margin by 36 basis points. The improvement in the gross margin percentage in 2006 from 2005 was attributable to the VMware Virtual Infrastructure
segment which contributed 102 basis points, the RSA Information Security segment which contributed 32 basis points and the Content Management and
Archiving segment which contributed 22 basis points. The Information Storage segment negatively impacted gross margins by 119 basis points and corporate
reconciling items decreased the gross margin by 109 basis points.
For segment reporting purposes, stock-based compensation, acquisition-related intangible asset amortization and amortization of capitalized software
development costs are recognized as corporate expenses and are not allocated among our various operating segments. The increase of $42.9 in corporate
reconciling items in 2007 as compared to 2006 was primarily attributable to a $25.6 increase in intangible asset amortization expense associated with
acquisitions and a $26.4 increase in amortization of software development costs, offset by a $9.1 decrease in stock-based compensation expense. The decrease
in stock-based compensation expense was due to higher valued options becoming fully vested in 2006. The increase in intangible asset amortization was
driven by a $41.6 increase in amortization of intangible assets associated with the RSA acquisition offset primarily by a $14.5 decrease in intangible asset
amortization associated with the VMware, LEGATO and Documentum acquisitions. The increase in amortization of software development costs was due to
an increase in the amount of unamortized software development costs which increased by $45.4 in 2007 and $48.7 in 2006 due to an increase in R&D activity
which qualified for capitalization. The increase in corporate reconciling items of $114.2 in 2006 compared to 2005 is attributable to a $61.2 increase in stock-
based compensation, including $66.3 associated with the adoption of FAS No. 123R, greater amortization expenses associated with capitalized software
development costs which increased by $31.3 and a $21.8 increase in intangible asset amortization associated with acquisitions.
The gross margin percentages for the Information Storage segment were 51.8%, 52.2% and 53.5% in 2007, 2006 and 2005, respectively. The decrease in
the gross margin percentage in 2007 was primarily attributable to the reduction in the mix of software license revenues as a percentage of total segment
revenues to 19.6% in 2007 from 21.0% in 2006. Software license revenues provide a higher margin percentage than systems and services revenues. The
decrease in the gross margin percentage in 2006 was primarily 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.
The gross margin percentages in the Content Management and Archiving segment were 67.6%, 68.6% and 70.1% in 2007, 2006 and 2005, respectively.
The decrease in the gross margin percentage in 2007 was primarily attributable to a reduction in the mix of software license revenues as a percentage of total
segment revenues. Software license revenues provide a higher gross margin percentage than services revenue. Software license revenues as a percentage of
total segment revenues declined to 42.9% in 2007 from 47.2% in 2006. The decrease in the gross margin percentage in 2006 was primarily attributable to
lower margins generated on our professional services business. Partially offsetting the decrease in the gross margin percentage was a 1.7% favorable impact
from the Captiva acquisition which was completed in December 2005.
The gross margin percentages for the RSA Information Security segment were 72.9% and 75.2% in 2007 and 2006, respectively. Because the segment
was formed in the last month of the third quarter of 2006, the change in the gross margin percentages is not meaningful.
The VMware gross margin percentages were 88.3%, 88.6% and 90.4% in 2007, 2006 and 2005, respectively. The decrease in the gross margin
percentages in all years was attributable to a reduction in the mix of software license revenues as a percentage of total segment revenues. Software license
revenues provide a higher gross margin percentage than services revenues. Software license revenues were 68.4%, 69.8% and 74.2% of total segment
revenues in 2007, 2006 and 2005, respectively.
Research and Development
As a percentage of revenues, R&D expenses were 11.5%, 11.2% and 10.4% in 2007, 2006 and 2005, respectively. R&D expense increased $272.7 in
2007 and $249.4 in 2006 primarily due to higher personnel-related costs, including salaries, benefits, recruiting, contract labor and consulting costs to support
new product development and increased facility costs. Personnel-related costs increased by $246.6 and $229.1 in 2007 and 2006, respectively. Facility costs
increased by $21.9 and $26.6 in 2007 and 2006, respectively.
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