Dell 2002 Annual Report Download - page 22

Table of Contents
weakened economies in many countries in the region. In both Japan and China, Dell is now the leading non-domestic seller of computer systems.
For additional information regarding Dell's segments, see Note 9 of Notes to Consolidated Financial Statements included in "Item 8 — Financial Statements
and Supplementary Data."
Gross Margin
Gross margin as a percentage of net revenue increased from 17.7% in fiscal 2002 to 17.9% in fiscal 2003. Gross margin increased across all geographies and
product categories primarily as a result of Dell's cost reduction initiatives and declining component costs. As part of its focus on improving margins, Dell
remains committed to reducing costs to maintain price leadership and improve profitability through four primary cost reduction initiatives: manufacturing
costs, warranty costs, structural or design costs, and overhead or operating expenses.
Based on the industry, economic and other factors discussed above, Dell currently expects that this gross margin environment will continue to be challenging,
but Dell's intent is to focus on improving gross margins and operating margins as the economy improves. Management believes that the strength of Dell's
direct-to-customer business model, as well as its strong liquidity position, makes Dell better positioned than its competitors to profitably grow market share in
any business climate.
As a percentage of consolidated net revenue, gross margin decreased from 20.2% in fiscal 2001 to 17.7% in fiscal 2002. This erosion began in the fourth
quarter of fiscal 2001, when Dell saw industry demand starting to decline and began an aggressive pricing strategy to gain market share and maximize
profitability. Throughout fiscal 2002, Dell focused on stabilizing and improving net operating margins. The year-to-year decrease occurred primarily as a
result of Dell's strategy to drive profitable market share growth.
Operating Expenses
The following table presents certain information regarding Dell's operating expenses during each of the past three fiscal years:
Fiscal Year Ended
January 31, February 1, February 2,
2003 2002(a) 2001(b)
(dollars in millions)
Operating Expenses:
Selling, general and administrative $ 3,050 $ 2,784 $ 3,193
% of net revenue 8.6% 8.9% 10.0%
Research, development and engineering $ 455 $ 452 $ 482
% of net revenue 1.3% 1.5% 1.5%
Special charges — $ 482 $ 105
% of net revenue — 1.5% 0.3%
Total operating expenses $ 3,505 $ 3,718 $ 3,780
Percentage of net revenue 9.9% 11.9% 11.8%
(a) The $482 million special charge relates to employee termination benefits, facilities closure costs, and other asset impairments and exit costs.
(b) The $105 million special charge relates to employee termination benefits and facilities closure costs.
Selling, general and administrative expenses decreased as a percentage of revenue during fiscal 2003 as compared to fiscal 2002 primarily as a result of the
previously referred to cost savings initiatives, including providing certain customer technical support and back-office functions from low-cost sites and
driving more efficient processes and tools. As a result of these initiatives and managing expenses relative to actual revenue growth rates, selling, general and
administrative
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