EMC 2011 Annual Report Download - page 30

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Table of Contents
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 increase of $39.7 in
the corporate reconciling items in 2011 was attributable to a $25.4 increase in intangible asset amortization expense and a $15.0 increase in stock-based
compensation expense, partially offset by a $0.7 decrease in transition costs. The $15.0 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 Isilon,
which was acquired in the fourth quarter of 2010. 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 was 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 gross margin percentages for the Information Storage segment were 56.4%, 54.0% and 50.7% in 2011, 2010 and 2009, respectively. The increase
in gross margin percentage in 2011 compared to 2010 and in 2010 compared to 2009 was primarily attributable to improved product gross margins, driven by
a shift in product mix towards higher margin products, higher sales volume and an improved cost structure.
The gross margin percentages for the RSA Information Security segment were 56.8%, 69.6% and 69.2% in 2011, 2010 and 2009, respectively. The
decrease in the gross margin percentage in 2011 compared to 2010 was due to a decrease in product margins. The decrease in product margins was caused by
costs accrued associated with working with our customers to implement remediation programs in the first quarter of 2011 and to the $66.3 charge related to
the expansion of the customer remediation programs that we recorded in the second quarter of 2011. We expanded our customer remediation programs in the
second quarter of 2011 as a result of the heightened customer concerns resulting from press coverage related to an unsuccessful cyber attack on one of our
defense sector customers, as well as broad media coverage of cyber attacks on other high profile organizations. 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 gross margin percentages for the Information Intelligence Group segment were 64.3%, 64.9% and 62.8% in 2011, 2010 and 2009, respectively. The
slight decrease in gross margin percentage in 2011 compared to 2010 was attributable to an increase in the mix of service revenue as a percentage of total
revenue, slightly offset by an increase in service gross margins. 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 gross margin percentages for the VMware Virtual Infrastructure segment were 85.8% in 2011, 85.1% in 2010 and 84.4% in 2009. The increase in
gross margin percentage in 2011 compared to 2010 was primarily attributable to improvements in license gross margins resulting from decreased software
capitalization amortization expense. The increase in gross margin percentage in 2010 compared to 2009 was primarily attributable to improved services
margins.
Research and Development
As a percentage of revenues, R&D expenses were 10.7%, 11.1% and 11.6% in 2011, 2010 and 2009, respectively. R&D expenses increased $261.8 in
2011 primarily due to an increase in personnel-related costs, including stock-based compensation, cost of facilities, depreciation expense and travel costs,
partially offset by greater levels of software capitalization. Personnel-related costs increased by $274.0, cost of facilities increased by $20.5, depreciation
expense increased by $13.0 and travel costs increased by $10.0. Capitalized software development costs, which reduce R&D expense, increased by $73.6.
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 increased by $9.4. Capitalized software development costs, which reduce R&D
expense, increased by $62.2.
Corporate reconciling items within R&D, which consist of stock-based compensation, acquisition-related intangible asset amortization and transition
costs increased $35.2 and $51.6 to $322.6 and $287.4 in 2011 and 2010, respectively. Stock-based compensation expense increased $40.5 and $44.2 in 2011
and 2010, respectively. Acquisition-related intangible asset amortization decreased $7.1 in 2011 and increased $10.7 in 2010 and transition costs increased
$1.8 and decreased $3.3 in 2011 and 2010, respectively. Intangible asset amortization increased in 2011 primarily due to the Isilon acquisition, which was
consummated in the fourth quarter of 2010. Intangible asset amortization increased in 2010 primarily due to VMware acquisitions and to the Data Domain
acquisition, which was consummated in the third quarter of 2009. The increase in stock-based compensation expense in 2011 was primarily due to options
exchanged in the Isilon acquisition, which was consummated in the fourth quarter of 2010. The increase in stock-based compensation expense in 2010 was
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.
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