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Table of Contents
Cost of Revenue
The increase in cost of revenue for fiscal year 2007 was principally as a result of the acquisition of Maxtor. The gross margin percentage
decrease from fiscal year 2006 was due to the sale of lower margin Maxtor designed products during the first six months of fiscal year 2007;
costs and charges related to our acquisition of Maxtor during fiscal year 2007 (including integration and retention costs of $54 million, stock-
based compensation of $27 million, amortization of existing technology of $150 million, and an $18 million accrual for the settlement of
customer compensatory claims associated with quality issues related to legacy Maxtor products shipped prior to the closing of the Maxtor
acquisition); and an aggressive pricing environment in fiscal year 2007, particularly in the high capacity 3.5-inch and mobile markets in the first
half of the year, and the low end OEM desktop and mobile markets in the second half. These effects were partially offset by the elimination of
variable performance-based compensation for fiscal year 2007, compared to an expense of $76 million recorded in Cost of revenue in fiscal year
2006.
Product Development Expense
The increase in product development expense from fiscal year 2006 was primarily due to increases of $115 million in salaries and benefits
resulting from increased staffing levels due in part to the retention of certain Maxtor employees, and $10 million in stock-based compensation
related to the Maxtor acquisition, $7 million in non-Maxtor stock-based compensation and $4 million in the write-off of in-process research and
development related to our acquisition of EVault, partially offset by the elimination of variable performance-based compensation for fiscal year
2007, compared to an expense of $46 million in fiscal year 2006.
Marketing and Administrative Expense
The increase in marketing and administrative expense from fiscal year 2006 was primarily due to the recording in our first quarter of a
$40 million increase in the provision for doubtful accounts receivable related to eSys, previously a distributor of Seagate products, an increase of
$86 million in salaries and benefits resulting from increased staffing levels due in part to the retention of certain Maxtor employees, an increase
of $5 million in integration and retention costs related to the Maxtor acquisition, an increase of $11 million in advertising expense and an
increase of $11 million in non-Maxtor stock-based compensation. These increases were partially offset by the elimination of variable
performance-based compensation for fiscal year 2007, compared to an expense of $41 million in fiscal year 2006.
55
Fiscal Years Ended
(Dollars in millions)
June 29,
2007
June 30,
2006
Change
%
Change
Cost of revenue
$
9,175
$
7,069
$
2,106
30
%
Gross margin
$
2,185
$
2,137
$
48
2
%
Gross margin percentage
19%
23%
Fiscal Years Ended
(Dollars in millions)
June 29,
2007
June 30,
2006
Change
%
Change
Product development
$
904
$
805
$
99
12
%
Fiscal Years Ended
(Dollars in millions)
June 29,
2007
June 30,
2006
Change
%
Change
Marketing and administrative
$
589
$
447
$
142
32
%