Dell 2008 Annual Report Download - page 34

Table of Contents
In general, gross margin and margins on individual products will remain under downward pressure due to a variety of factors, including continued
industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw
materials, and outside manufacturing services. We will continue to adjust our pricing strategy with the goals of remaining in competitive price
position while maximizing margin expansion through new higher margin products and lower cost optimized design and services where appropriate.
Fiscal 2008 compared to Fiscal 2007
During Fiscal 2008, our gross margin increased in absolute dollars and as a percentage of revenue from Fiscal 2007, driven by greater cost declines.
The cost environment was more favorable in the first half of Fiscal 2008 than the second half, which resulted in a decline in our gross margin
percentage from 19.6% in the first half to 18.6% in the second half of the year. The fourth quarter of Fiscal 2008 was positively impacted by a
$58 million reduction in accrued liabilities for a one-time adjustment related to a favorable ruling by the German Federal Supreme Court on a
copyright levy case.
Operating Expenses
The following table presents information regarding our operating expenses during each of the past three fiscal years:
Fiscal Year Ended
January 30, 2009 February 1, 2008 February 2, 2007
% of % % of % % of
Dollars Revenue Change Dollars Revenue Change Dollars Revenue
(in millions, except percentages)
Operating expenses:
Selling, general, and administrative $ 7,102 11.6% (6% ) $ 7,538 12.4% 27% $ 5,948 10.3%
Research, development, and engineering 663 1.1% 9% 610 1.0% 22% 498 0.9%
In-process research and development 2 0.0% (98% ) 83 0.1% N/A - -
Operating expenses $ 7,767 12.7% (6% ) $ 8,231 13.5% 28% $ 6,446 11.2%
Fiscal 2009 compared to Fiscal 2008
Selling, General, and Administrative — During Fiscal 2009, selling, general, and administrative ("SG&A") expenses decreased 6% to $7.1 billion
from $7.5 billion in Fiscal 2008. Compensation and benefits expense, excluding expenses related to headcount and infrastructure reductions,
decreased approximately $250 million in Fiscal 2009 compared to Fiscal 2008, driven primarily by decreases in bonus-related expenses due to
weaker company performance versus bonus plan targets and lower sales commission expenses. Compensation-related expenses also included
$73 million of stock option acceleration in Fiscal 2009, while Fiscal 2008 included $76 million for the cash payments made for expiring stock
options. Additionally, with the increase in retail volumes and the associated cooperative advertising programs, as well as other factors, advertising
expenses decreased approximately $130 million from Fiscal 2008. Furthermore, costs associated with the ongoing U.S. Securities and Exchange
Commission ("SEC") investigation and the Audit Committee's now completed independent investigation decreased by $117 million from
$160 million for Fiscal 2008 to $43 million for Fiscal 2009. These decreases were partially offset by an increase in SG&A expenses related to
headcount and infrastructure reductions through our on-going cost optimization efforts, which were $136 million for Fiscal 2009 compared to
$92 million for Fiscal 2008.
Research, Development, and Engineering — Research, development, and engineering ("RD&E") expenses increased 9% to $663 million for Fiscal
2009 compared to $610 million for Fiscal 2008, remaining at approximately 1% of revenue for both fiscal years. The increase in RD&E expense is
primarily due to approximately $45 million increase in compensation and benefits expenses as we continue to expand our research and development
activities in our EqualLogic and Data Center Solutions offerings. We manage our research, development, and engineering spending by targeting
those innovations and products that are most valuable to our customers and by relying upon the capabilities of our strategic partners. We will
continue to invest in research, development, and engineering activities to support our growth and to provide for new, competitive products. We have
obtained 2,253 worldwide patents and have applied for 2,514 additional worldwide patents as of January 30, 2009.
In-Process Research and Development — We recognized in-process research and development ("IPR&D") charges in connection with acquisitions
accounted for as business combinations, as more fully described in Note 7 of Notes to Consolidated Financial Statements included in "Part II —
Item 8 — Financial Statements and Supplementary Data." We recorded IPR&D charges of $2 million during Fiscal 2009 and $83 million during
Fiscal 2008. Prior to Fiscal 2008, there were no IPR&D charges related to acquisitions.
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