Cisco 2006 Annual Report Download - page 23

26 Cisco Systems, Inc.
Research and Development, Sales and Marketing, and General and Administrative Expenses
Research and development (R&D), sales and marketing, and general and administrative (G&A) expenses are summarized in the following
table (in millions, except percentages):
Years Ended July 30,2005
Variance
in Dollars
Variance
in Percent July 30,2005 July 31, 2004
Variance
in Dollars
Variance
in PercentJuly 29,2006
Research and development $ 4,067 $ 3,322 $ 745 22.4% $ 3,322 $ 3,192 $ 130 4.1%
Percentage of net sales  14.3% 13.4% 13.4% 14.5%
Sales and marketing 6,031 4,721 1,310 27.7% 4,721 4,530 191 4.2%
Percentage of net sales  21.2% 19.0% 19.0% 20.6%
General and administrative 1,169 959 210 21.9% 959 867 92 10.6%
Percentage of net sales  4.1% 3.9% 3.9% 3.9%
Total $ 11,267 $ 9,002 $ 2,265 25.2% $ 9,002 $ 8,589 $ 413 4.8%
Percentage of net sales  39.6% 36.3% 36.3% 39.0%
Interest and Other Income, Net
The following table presents the breakdown of interest and other income, net (in millions):
Years Ended July 30, 2005
Variance
in Dollars July 30, 2005 July 31, 2004
Variance
in DollarsJuly 29, 2006
Interest income, net $ 607 $ 552 $ 55 $ 552 $ 512 $ 40
Other income, net 30 68 (38) 68 188 (120)
Total $ 637 $ 620 $ 17 $ 620 $ 700 $ (80)
Discussion of Fiscal 2006 and 2005
The following discussion of scal 2006 compared with scal 2005 should be read in conjunction with the section of this report entitled
“Financial Data for Fiscal 2006, 2005, and 2004.”
Net Sales
The increase in net product sales can be attributed to the continued gradual recovery in the global economic environment coupled with
increased information technology-related capital spending in our enterprise, service provider, commercial, and consumer markets, and the
acquisition of Scientic-Atlanta. Net sales for scal 2006 include Scientic-Atlanta’s contribution for the ve-month period subsequent to the
acquisition date of $989 million, which consisted of $939 million in net product sales and $50 million in net service revenue. The increase in
net product sales occurred across our four largest geographic theaters, with the United States and Canada and Emerging Markets theaters
contributing 88.8% of the total increase. The majority of the increase in net product sales was related to higher sales of advanced technologies,
which contributed 52.0% of the total increase, and higher sales of switches, which contributed 28.8% of the total increase. The increase in
service revenue was primarily due to increased technical support service contract initiations and renewals associated with higher product
sales that have resulted in a larger installed base of equipment being serviced.
Net Product Sales by Theater
The increase in net product sales in the United States and Canada theater was due to an increase in net product sales in all of our customer
markets, led by strength in the enterprise, service provider and commercial markets, and the acquisition of Scientic-Atlanta, which contributed
approximately $755 million of net product sales in this theater during scal 2006. However, sales to the U.S. federal government grew at a
slower rate as compared to scal 2005. We believe our sales to the U.S. federal government remain subject to a possible realignment of
government spending priorities and timing of budget rollouts, which could adversely affect these sales in future periods. The increase in
net product sales in the European Markets theater was due to improvement in net product sales in Germany and France and the addition of
the net product revenue from Scientic-Atlanta of approximately $90 million during scal 2006. Net product sales in the Emerging Markets
theater increased primarily as a result of continued product deployment by service providers and growth in the enterprise and commercial
markets. Net product sales relating to Scientic-Atlanta included in the Emerging Markets theater were approximately $65 million during
scal 2006. The increase in net product sales in Asia Pacic occurred primarily as a result of continued infrastructure builds, broadband
acceleration, investments by telecommunications carriers in our Asia Pacic theater, especially in China and India, and growth in the
enterprise and commercial markets. Net product sales relating to Scientic-Atlanta included in the Asia Pacic theater were approximately
$25 million during scal 2006. Net product sales in the Japan theater declined during scal 2006, as we faced economic and other
challenges, as well as cautious spending from service providers.
Management’s Discussion and Analysis of Financial Condition and Results of Operations