EMC 2010 Annual Report Download - page 28

Table of Contents
gross margin percentage was the decrease of corporate reconciling items, consisting of stock-based compensation, acquisition-related intangible asset
amortization, restructuring charges and transition costs, which increased the consolidated gross margin percentage by 3 basis points. The decline in the gross
margin percentage in 2009 compared to 2008 was primarily attributable to the Information Storage segment, which decreased overall gross margins by 17
basis points and the RSA Information Security segment, which decreased overall gross margins by 5 basis points. These declines were partially offset by the
VMware Virtual Infrastructure segment which improved overall gross margins by 11 basis points, and the Information Intelligence Group segment which
improved overall gross margins by 7 basis points. The increase in corporate reconciling items, consisting of stock-based compensation, acquisition-related
intangible asset amortization, restructuring charges and transition costs, decreased the consolidated gross margin percentage by 6 basis points. The transition
costs represent the incremental costs incurred to transform our current cost structure to a more streamlined cost structure.
For segment reporting purposes, stock-based compensation, restructuring and acquisition-related charges, acquisition-related intangible asset
amortization and transition costs are recognized as corporate expenses and are not allocated among our various operating segments. The decrease of $4.1 in
the corporate reconciling items in 2010 was attributable to a $12.5 decrease in restructuring charges and a $0.9 decrease in transition costs, partially offset by
a $9.3 increase in stock-based compensation expense. Acquisition-related intangible asset amortization expense remained flat. The $9.3 increase in stock-
based compensation expense was primarily attributable to the incremental expense associated with VMware's equity grants and the full-year impact of options
exchanged in the acquisition of Data Domain, which was acquired in the third quarter of 2009. The increase of $8.1 in the corporate reconciling items in 2009
was attributable to a $12.5 increase in restructuring charges, a $19.3 increase in stock-based compensation expense and a $3.1 increase in transition costs,
partially offset by a $26.8 decrease in acquisition-related intangible asset amortization expense. The $19.3 increase in stock-based compensation expense was
primarily attributable to incremental expense associated with options exchanged in the acquisition of Data Domain and expense associated with VMware's
equity grants. The decrease in intangible asset amortization expense in 2009 was attributable to acquisition-related intangible assets acquired in acquisitions
becoming fully amortized.
The gross margin percentages for the Information Storage segment were 54.0%, 50.7% and 51.3% in 2010, 2009 and 2008, respectively. The increase
in gross margin percentage in 2010 compared to 2009 was primarily attributable to improved product gross margins, driven by an improved product mix
attributable to higher margin product offerings, higher sales volume and an improved cost structure. The decrease in the gross margin percentage in 2009
compared to 2008 was primarily attributable to lower sales volume and a greater mix of lower margin Iomega revenue. Iomega, acquired in June 2008,
operates within the consumer and small business marketplace which historically has had lower gross margins than marketplaces typically served by our
Information Storage segment. Partially offsetting these declines was an improvement in the gross margin attributable to a greater mix of higher margin
services revenues as a percentage of total segment revenues. Services revenues as a percentage of total Information Storage segment revenues increased to
32.5% in 2009 from 29.0% in 2008.
The gross margin percentages for Information Intelligence Group segment were 64.9%, 62.8% and 61.1% in 2010, 2009 and 2008, respectively. The
increase in gross margin percentage in 2010 compared to 2009 related to an increase in the product margins due to a decrease in the royalties paid for third
party software embedded into the products in 2010 compared to 2009. The increase in the gross margin percentage in 2009 compared to 2008 was primarily
attributable to a change in the mix of services revenues with a higher proportion of maintenance revenues and a lower proportion of professional services
revenues to total services revenues. Maintenance revenues generally provide a higher margin percentage than professional services revenues.
The gross margin percentages for the RSA Information Security segment were 69.6%, 69.2% and 70.6% in 2010, 2009 and 2008, respectively. The
slight increase in the gross margin percentage in 2010 compared to 2009 was due to an increase in product margins partially offset by a decrease in services
margins. The decrease in the gross margin percentage in 2009 compared to 2008 was primarily due to a decrease in product revenues as a percentage of total
segment revenues. Product revenues as a percentage of total revenues decreased to 61.1% in 2008 and to 56.2% in 2009.
The gross margin percentages for the VMware Virtual Infrastructure segment were 85.1% in 2010, 84.4% in 2009 and 85.7% in 2008. The increase in
gross margin percentage in 2010 compared to 2009 was primarily attributable to improved services margins. The decrease in the gross margin percentage in
2009 compared to 2008 was primarily attributable to an increase in the amortization of software development costs as a percentage of total segment revenues.
The amortization of software development costs as a percentage of total segment revenues increased to 3.3% in 2009, compared to 2.3% in 2008.
Research and Development
As a percentage of revenues, R&D expenses were 11.1%, 11.6% and 11.6% in 2010, 2009 and 2008, respectively. R&D expenses increased $260.5 in
2010 primarily due to an increase in personnel-related costs, including stock-based compensation, depreciation expense, cost of facilities and travel costs,
partially offset by greater levels of software capitalization. Personnel-related costs increased by $250.6, depreciation expense increased by $23.4, cost of
facilities increased by $19.4 and travel costs
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