Dell 1998 Annual Report Download - page 18

additional production capacity during fiscal year 1999. To accommodate this
growth, the Company added a state-of-the-art manufacturing facility to its
operations in Austin, Texas. The Company also added to its regional
manufacturing operations in Limerick, Ireland and Xiamen, China.
Gross Margin
The increase in gross margin as a percentage of consolidated net revenue in
fiscal year 1999 over fiscal year 1998 was primarily attributable to component
cost declines. These component cost declines were generally passed through to
customers, resulting in the aforementioned declines in average revenue per unit
sold for fiscal year 1999. Also contributing to the increase in gross margin in
fiscal year 1999 were overall efficiencies experienced in the Company's
manufacturing operations and a continued shift in product mix to the higher-end
enterprise systems and notebook computers. The mix of enterprise systems and
notebook computers increased to 13% and 23% of system revenue, respectively,
compared with 9% and 20%, respectively, during the prior fiscal year.
The gross margin increase as a percentage of consolidated net revenue in fiscal
year 1998 from fiscal year 1997 resulted primarily from component cost declines,
manufacturing efficiencies and an overall shift in mix to higher-end enterprise
systems and notebook computers.
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Operating Expenses
The following table presents certain information regarding the Company's
operating expenses during each of the last three fiscal years:
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, FEBRUARY 1, FEBRUARY 2,
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN MILLIONS)
Operating expenses:
Selling, general and administrative................... $1,788 $1,202 $826
Percentage of net revenue.......................... 9.8% 9.8% 10.7%
Research, development and engineering................. $ 272 $ 204 $126
Percentage of net revenue.......................... 1.5% 1.6% 1.6%
Total operating expenses................................ $2,060 $1,406 $952
Percentage of net revenue.......................... 11.3% 11.4% 12.3%
Selling, general and administrative expenses increased in absolute dollar
amounts but remained flat as a percentage of consolidated net revenue for fiscal
year 1999, and declined for fiscal year 1998. The increase in absolute dollars
was due primarily to the Company's increase in staffing and increased
infrastructure expenses, including information systems, to support the Company's
continued growth. The decline in selling, general and administrative expenses as
a percentage of net revenue for fiscal year 1998 resulted from significant net
revenue growth.
The Company continues to invest in research, development and engineering
activities to support its continued goal of improving and developing efficient
procurement, manufacturing and distribution processes, and to develop and
introduce new products. As a result, research, development and engineering
expenses have increased each year in absolute dollars due to increased staffing
levels and product development costs. The Company expects to continue to
increase its research, development and engineering spending in absolute dollar
amounts.
The Company believes that its ability to manage operating expenses is an
important factor in its ability to remain competitive and successful. The
Company will continue to invest in personnel, information systems and other
infrastructure, and in research, development and engineering activities, to
support its continued growth and to continue to develop new, competitive
products and more efficient methods of delivery. It is the Company's goal to
manage operating expenses, over time, relative to its net revenue and gross
margin.
While delivering annual revenue growth of 48% and 59% in fiscal year 1999 and
1998, respectively, the Company has grown operating income by 56% in fiscal year
1999 and 84% in fiscal year 1998. This reflects the Company's ability to manage
operating expenses relative to gross margin resulting in increased operating
profitability.
Income Taxes
The Company's effective tax rate was 30% for fiscal year 1999 compared to 31%
for fiscal year 1998 and 29% for fiscal year 1997. The differences in the
effective tax rates among fiscal years result from changes in the geographical
distribution of income and losses. The Company's effective tax rate is lower
than the U.S. federal statutory rate of 35%, principally resulting from the