Dell 2009 Annual Report Download - page 29

Download and view the complete annual report

Please find page 29 of the 2009 Dell annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

Table of Contents
Gross Margin
The following table presents information regarding our gross margin during each of the past three fiscal years:
Fiscal Year Ended
January 29, 2010 January 30, 2009 February 1, 2008
% of % % of % % of
Dollars Revenue Change Dollars Revenue Change Dollars Revenue
(in millions, except percentages)
Gross margin:
Product $ 6,163 14.1% (20%) $ 7,667 14.6% (11%) $ 8,579 16.0%
Services, including software related 3,098 33.7% (6%) 3,290 37.5% 6% 3,092 41.8%
Total gross margin $ 9,261 17.5% (15%) $ 10,957 17.9% (6%) $ 11,671 19.1%
Fiscal 2010 compared to Fiscal 2009
• Products — Product gross margin decreased in absolute dollars and in gross margin percentage during Fiscal 2010. The decline in
gross margin dollars was attributable to softer demand, change in sales mix, and lower average selling prices. Additionally, during
Fiscal 2010, gross margins were negatively impacted by component cost pressures. We expect these component cost pressures to
continue into Fiscal 2011 for selected key components. In an effort to improve costs and gross margin, we launched a number of new
cost-optimized products and will continue cost optimization efforts in Fiscal 2011. We continue to make progress in our other
ongoing cost improvement initiatives, and approximately 53% of our production volume is now manufactured by contract
manufacturers.
• Services, including software related — Our services (including software related) gross margin rate is driven by our extended
warranty sales, partially offset by lower margin categories such as software, consulting, and managed services. Our extended
warranty services are more profitable because we sell our extended warranty offerings directly to customers instead of selling through
a distribution channel. We also have a services support structure that allows us to favorably manage our fixed costs.
During Fiscal 2010, our services gross margin decreased in absolute dollars compared to the prior year with a corresponding decrease
in gross margin percentage. Our solution services offerings faced competitive pricing pressures in the current economic environment,
resulting in lower gross margin percentages.
We continue to actively review all aspects of our facilities, logistics, supply chain, and manufacturing footprints. This review is focused
on identifying efficiencies and cost reduction opportunities while maintaining a strong customer experience. As a result of this review to
date, we have begun using contract manufacturers in an effort to migrate towards a more variable cost manufacturing model. This shift
has resulted in the announced closures of our North Carolina manufacturing plant, as well as the pending sale of our Poland facility and
the closure of the Limerick, Ireland, facility. During Fiscal 2010 and 2009, the cost of these individual severance and facility actions was
$481 million and $282 million, respectively, of which approximately $237 million and $146 million, respectively, affected gross margin.
We continue to actively evaluate our overall cost structure, including product design and manufacturing costs. We expect that we will
continue our overall cost reduction activities, which may include selected headcount reductions, as well as other cost reduction programs.
While we believe that we will have completed a significant portion of our manufacturing transformation once we finalize the closures of
our North Carolina and Poland facilities, we expect to implement additional cost reduction measures depending on a number of factors,
including end-user demand, capabilities, and our continued simplification of our supply and logistics chain. See Note 8 of the Notes to
Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements and Supplementary Data" for additional
information on severance and facility action costs.
As we continue to evolve our inventory and manufacturing business model to drive cost efficiencies, 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 structure, which is able to respond quickly to changing market conditions due to our customer-facing model. Such
negotiations are focused on achieving the lowest net cost of our various components, independent of the pricing strategies used by our
supplier base. Because of the fluid nature of these ongoing negotiations, the timing and amount of supplier discounts and rebates vary
from
25