Cisco 2009 Annual Report Download - page 25

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Factors That May Impact Net Sales and Gross Margin
Net product sales may continue to be affected by factors including the global economic downturn and related market uncertainty, which so
far have resulted in reduced or cautious spending in our global enterprise, service provider, and commercial markets; changes in the
geopolitical environment and global economic conditions; competition, including price-focused competitors from Asia, especially from
China; new product introductions; sales cycles and product implementation cycles; changes in the mix of our customers between service
provider and enterprise markets; changes in the mix of direct sales and indirect sales; variations in sales channels; and final acceptance
criteria of the product, system, or solution as specified by the customer. Sales to the service provider market have been and may be in the
future characterized by large and sporadic purchases, especially relating to our router sales and sales of certain advanced technologies. In
addition, service provider customers typically have longer implementation cycles; require a broader range of services, including network
design services; and often have acceptance provisions that can lead to a delay in revenue recognition. Certain of our customers in the
Emerging Markets theater also tend to make large and sporadic purchases, and the net sales related to these transactions may similarly be
affected by the timing of revenue recognition. As we focus on new market opportunities, customers may require greater levels of financing
arrangements, service, and support, especially in the Emerging Markets theater, which may result in a delay in the timing of revenue
recognition. To improve customer satisfaction, we continue to focus on managing our manufacturing lead-time performance, which may
result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our
quarter-to-quarter net sales and operating results.
Net product sales may also be adversely affected by fluctuations in demand for our products, especially with respect to
telecommunications service providers and Internet businesses, whether or not driven by any slowdown in capital expenditures in the
service provider market; price and product competition in the communications and information technology industry; introduction and
market acceptance of new technologies and products; adoption of new networking standards; and financial difficulties experienced by our
customers. We may, from time to time, experience manufacturing issues that create a delay in our suppliers’ ability to provide specific
components, resulting in delayed shipments. To the extent that manufacturing issues and any related component shortages result in
delayed shipments in the future, and particularly in periods when we and our suppliers are operating at higher levels of capacity, it is
possible that revenue for a quarter could be adversely affected if such matters are not remediated within the same quarter. For additional
factors that may impact net product sales, see “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K. Our distributors and retail
partners participate in various cooperative marketing and other programs. In addition, increasing sales to our distributors and retail partners
generally results in greater difficulty in forecasting the mix of our products and, to a certain degree, the timing of orders from our customers.
We recognize revenue for sales to our distributors and retail partners based on a sell-through method using information provided by them,
and we maintain estimated accruals and allowances for all cooperative marketing and other programs.
Product gross margin may be adversely affected in the future by changes in the mix of products sold, including further periods of
increased growth of some of our lower-margin products; introduction of new products, including products with price-performance
advantages; our ability to reduce production costs; entry into new markets, including markets with different pricing structures and cost
structures, as a result of internal development or through acquisitions; changes in distribution channels; price competition, including
competitors from Asia, especially from China; changes in geographic mix of our product sales; the timing of revenue recognition and
revenue deferrals; sales discounts; increases in material or labor costs; excess inventory and obsolescence charges; warranty costs;
changes in shipment volume; loss of cost savings due to changes in component pricing; effects of value engineering; inventory holding
charges; and the extent to which we successfully execute on our strategy and operating plans. Service gross margin may be impacted by
various factors such as the change in mix between technical support services and advanced services, the timing of technical support
service contract initiations and renewals, and the timing of our strategic investments in headcount and resources to support this business.
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