Cisco 2011 Annual Report Download - page 66

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Fiscal 2010 Compared with Fiscal 2009
The following table summarizes the key factors that contributed to the change in product gross margin
percentage from fiscal 2009 to fiscal 2010:
Product
Gross Margin
Percentage
Fiscal 2009 ..................................... 64.0%
Overall manufacturing costs ....................... 1.7%
Shipment volume, net of certain variable costs ......... 0.6%
Mix of products sold ............................. 0.1%
Sales discounts, rebates, and product pricing .......... (2.2)%
Fiscal 2010 ..................................... 64.2%
Product gross margin for fiscal 2010 increased by 0.2 percentage points compared with fiscal 2009, due primarily
to lower overall manufacturing costs driven by strong operational efficiency in manufacturing operations, value
engineering, and a reduction in other manufacturing-related costs. The product gross margin for fiscal 2010 also
benefited from the increase in shipment volume. A favorable product mix contributed slightly to the increase in
product gross margin percentage. Fiscal 2010 product gross margin was negatively impacted by sales discounts,
rebates, and product pricing, which were driven by normal market factors, as well as the geographic mix of
product revenue. The impact from sales discounts, rebates and product pricing was within our expected range.
Service Gross Margin
Fiscal 2011 Compared with Fiscal 2010
Our service gross margin percentage increased by 1.5 percentage points for fiscal 2011, as compared with fiscal
2010, with both technical support services and advanced services experiencing higher gross margins. The
increase was primarily due to higher sales volume. Partially offsetting the volume increases were unfavorable
mix impacts, primarily due to advanced services representing a higher proportion of service revenue in fiscal
2011 and due to increased service delivery costs. Gross margin in technical support services increased primarily
as a result of increased sales volume and lower headcount-related cost impacts. These benefits were partially
offset by increased support service delivery costs, particularly from outside services. Advanced services gross
margin increased primarily due to strong volume growth partially offset by higher delivery team costs, which
were partially headcount related. Our revenue from advanced services may increase to a higher proportion of
total service revenue due to our continued focus on providing comprehensive support to our customers’
networking devices, applications, and infrastructures.
Our service gross margin normally experiences some fluctuations due to various factors such as the timing of
contract initiations in our renewals, our strategic investments in headcount, and resources to support the overall
service business. Other factors include the mix of service offerings, as the gross margin from our advanced
services is typically lower than the gross margin from technical support services.
Fiscal 2010 Compared with Fiscal 2009
Our service gross margin percentage was unchanged from fiscal 2009 due to higher margins for technical support
services offset by a decline in the gross margin for advanced services. The increase in technical support service
gross margin in fiscal 2010 from fiscal 2009 was primarily a result of increased volume. Technical support
margins will experience some variability due to various factors such as the timing of technical support service
contract initiations and renewals as well as the timing of our strategic investments in headcount and resources to
support this business. The decrease in advanced services gross margin in fiscal 2010 from fiscal 2009 was
primarily due to increased headcount costs, partially offset by higher volume.
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