Cisco 2006 Annual Report Download - page 26

2006 Annual Report 29
Research and Development, Sales and Marketing, and General and Administrative Expenses
R&D expenses increased for scal 2006 compared to scal 2005 primarily due to higher headcount-related expenses reecting our
continued investment in R&D efforts in routers, switches, advanced technologies, and other product technologies; the effect of stock-based
compensation expense related to employee stock options and employee stock purchases under SFAS 123(R); and the acquisition of
Scientic-Atlanta. R&D expenses include $346 million of stock-based compensation expense related to employee stock options and
employee stock purchases under SFAS 123(R), and Scientic-Atlanta contributed $90 million of additional R&D expenses. We have also
continued to purchase or license technology in order to bring a broad range of products to market in a timely fashion. If we believe that we are
unable to enter a particular market in a timely manner with internally developed products, we may license technology from other businesses
or acquire businesses as an alternative to internal R&D. All of our R&D costs have been expensed as incurred.
Sales and marketing expenses for scal 2006 increased compared to scal 2005 primarily due to an increase in sales expenses of
approximately $1.1 billion. Sales expenses increased primarily due to an increase in headcount-related expenses, an increase in sales
program expenses, and the acquisition of Scientic-Atlanta, which added approximately $30 million of sales expenses. Sales expenses
also include stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) of
$337 million during scal 2006. Marketing expenses include $90 million of stock-based compensation expense related to employee stock
options and employee stock purchases under SFAS 123(R) during scal 2006. Scientic-Atlanta added approximately $20 million of
marketing expenses.
G&A expenses for scal 2006 increased compared to scal 2005 primarily because of stock-based compensation expense related to
employee stock options and employee stock purchases under SFAS 123(R), and the acquisition of Scientic-Atlanta. G&A expenses include
$115 million of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R)
and Scientic-Atlanta contributed approximately $40 million of G&A expenses.
Our headcount increased by approximately 11,500 employees in scal 2006. Approximately 8,000 of the new employees were attributable
to acquisitions we completed in scal 2006. Our headcount is expected to increase, as we continue to focus on the commercial market
segment; additional sales coverage; growing and expanding our advanced technologies; our evolving support model; expanding our
presence in the Emerging Markets theater; the next-generation service provider network build-outs; strengthening our product offerings in
the consumer market; and providing more comprehensive solutions to our customers as they employ Internet solutions. As a result, if we do
not achieve the benets anticipated from these investments, our operating results may be adversely affected.
Stock-Based Compensation Expense
On July 31, 2005, we adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors including employee stock options and employee stock purchases based on estimated
fair values. Stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) for
scal 2006 was allocated as follows (in millions):
Amount
Cost of sales—product $ 50
Cost of sales—service 112
Stock-based compensation expense included in cost of sales 162
Research and development 346
Sales and marketing 427
General and administrative 115
Stock-based compensation expense included in operating expenses 888
Total stock-based compensation expense related to employee stock options and employee stock purchases 1,050
Tax benefit (294)
Stock-based compensation expense related to employee stock options and employee stock purchases, net of tax $ 756
Stock-based compensation expense related to acquisitions and investments of $87 million for scal 2006 is disclosed in Note 3 and is
not included in the above table. There was no stock-based compensation expense recognized for scal 2005 other than as related to
acquisitions and investments.
Management’s Discussion and Analysis of Financial Condition and Results of Operations