Dell 2006 Annual Report Download - page 47

Table of Contents
$3.7 billion, respectively. We introduced our new Platinum Plus offering during Fiscal 2007, which contributed to an
increase in our premium service contracts.
• Storage — In Fiscal 2007, storage revenue sustained double-digit growth with a 21% year-over-year increase as compared
to a 38% year-over-year increase in Fiscal 2006. The Americas led the revenue growth in Fiscal 2007 and Fiscal 2006 with
year-over-year increases of 21% and 40%, respectively. In Fiscal 2008, we expect to continue to expand both our
PowerVault and Dell | EMC solutions that will utilize new technologies intended to drive both additional increases in
performance and customer value. In Fiscal 2007, we also announced a five-year extension to our partnership with EMC.
These portfolio enhancements continue to deliver lower cost solutions for our customers.
Gross Margin
The following table presents information regarding our gross margin during each of the past three fiscal years:
Fiscal Year Ended
February 2, 2007 February 3, 2006 January 28, 2005
% of % of % of
Dollars Revenue Dollars Revenue Dollars Revenue
As As As As
Restated Restated Restated Restated
(in millions, except percentages)
Net revenue $ 57,420 100.0% $ 55,788 100.0% $ 49,121 100.0%
Gross margin $ 9,516 16.6% $ 9,891 17.7% $ 9,018 18.4%
In Fiscal 2007, our gross margin declined as compared to Fiscal 2006, while revenue increased year-over-year. Throughout
Fiscal 2007 industry-wide competition put pressure on average selling prices while our pricing and product strategy evolved.
In Fiscal 2007, we added a second source of micro processors ("chip sets") ending a long-standing practice of sourcing from
only one manufacturer. We believe that moving to more than one supplier of chip sets is beneficial for customers long term,
as it adds choice and ensures access to the most current technologies. We now sell the chip sets from a second source
across all of our hardware product categories. During the transition from sole to dual sourcing of chip sets, gross and
operating income margins were negatively impacted as we re-balanced our product and category mix. In addition,
commodity price declines stalled during Fiscal 2007. We continuously negotiate with our suppliers in a variety of areas
including availability of supply, quality, and cost. These real-time, continuous supplier negotiations support our business
model, which is able to respond quickly to changing market conditions due to our direct customer model and real-time
manufacturing. Our component costs reflect both ongoing supplier discount arrangements as well as shorter-term
incremental discounts and rebates based on such factors as volume, product offerings and transitions, supply conditions,
and joint activities. Because of the fluid nature of these ongoing negotiations, the timing and amount of supplier discounts
and rebates vary from time to time. Gross margin as a percent of revenue improved in the second half of the year, with the
fourth quarter of Fiscal 2007 ending at 17.1%. In Fiscal 2006, our gross margin declined as a percentage of revenue while
gross margin increased in absolute dollars as compared to Fiscal 2005. Our year-over-year decline was primarily due to a
product charge of $338 million for estimated warranty costs of servicing or replacing certain OptiPlexTM systems that included
a vendor part that failed to perform to our specifications, as well as additional charges for product rationalizations and
workforce realignment recognized in the third quarter of Fiscal 2006. These charges were offset by favorable pricing on
certain commodity components, higher revenue to leverage fixed production costs, and a favorable shift in product mix as
compared to the prior year periods.
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