Cisco 2008 Annual Report Download - page 29

34 Cisco Systems, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Product Sales by Groups of Similar Products
Routers The increase in net product sales related to routers in fiscal 2007 compared with fiscal 2006 was primarily due to higher sales of
our high-end routers, with strength in our Cisco CRS-1 Carrier Routing System, Cisco 7600 Series, and Cisco 12000 Series products. Sales
of our high-end routers increased by approximately $855 million in fiscal 2007 compared with fiscal 2006. During fiscal 2007, our sales of
our integrated services routers also increased and contributed to growth in sales of our advanced technologies products, such as security,
unified communications, and wireless.
Switches The increase in net product sales related to switches in fiscal 2007 was primarily due to higher sales of LAN fixed-configuration
switches, which increased during fiscal 2007 by approximately $1.1 billion compared with fiscal 2006. Sales of LAN modular switches also
increased during fiscal 2007 compared with fiscal 2006. The increase in sales of LAN switches was a result of the continued adoption by
our customers of new technologies, including Gigabit Ethernet, 10 Gigabit Ethernet, and Power over Ethernet. This has resulted in higher
sales of fixed-configuration switches, including the Cisco Catalyst 3750, 2960, and 3560 Series, and our high-end modular switches, the
Cisco Catalyst 6500 Series.
Advanced Technologies The increase in net product sales related to advanced technologies in fiscal 2007 compared with fiscal 2006 was
primarily due to the following:
• Video systems sales increased by approximately $1.2 billion during fiscal 2007. The increases were attributable to several factors,
including Scientific-Atlanta product sales being included in fiscal 2006 only subsequent to its acquisition in February 2006 compared
with a full year in fiscal 2007; an increase in the demand for HD set-top boxes; network upgrades; international expansion; and the FCC
requirements effective July 1, 2007, which required separable security for set-top boxes sold in the United States.
• Unified communications sales increased by approximately $390 million during fiscal 2007, primarily due to sales of IP phones and
associated software as our customers continued to transition from an analog-based to an IP-based infrastructure, and also the addition
of sales from the acquisition of WebEx.
• Home networking product sales increased by approximately $240 million during fiscal 2007. Scientific-Atlanta products composed the
majority of the increase in home networking product sales during fiscal 2007.
• Sales of security products increased by approximately $240 million during fiscal 2007, primarily due to module and line card sales
related to our routers and LAN modular switches as customers continued to emphasize network security, and also due to sales of our
next-generation adaptive security appliance product, which integrates multiple technologies including VPN, firewall, and intrusion
prevention services on one platform.
• Sales of wireless LAN products increased by approximately $190 million during fiscal 2007 primarily due to new customers, continued
deployments with existing customers, and their adoption of our unified architecture platform.
• Other sales of advanced technologies relating to sales of storage area networking products increased by approximately $110 million
during fiscal 2007 and application networking services increased by approximately $85 million during fiscal 2007.
Other Product Revenue The increase in other product revenue during fiscal 2007 compared with fiscal 2006 was primarily due to an
increase in sales of optical networking products, sales of IP-based communications solutions to service providers, and the additional
contribution from Scientific-Atlanta. Other product revenue also includes sales of emerging technology products.
Net Service Revenue
The increase in net service revenue during fiscal 2007 compared with fiscal 2006 was primarily due to increased technical support service
contract initiations and renewals associated with higher product sales, which have resulted in a larger installed base of equipment being
serviced, and increased revenue from advanced services. The increase in advanced services revenue during fiscal 2007 compared with
fiscal 2006 was attributable primarily to our revenue growth in the service provider market, the Emerging Markets theater, and advanced
technologies products.
Gross Margin
Gross margin increased in absolute dollars but gross margin percentage decreased during fiscal 2007 compared with fiscal 2006 primarily
due to higher net product sales from Scientific-Atlanta and also due to the factors described under “Product Gross Margin” below. The
decrease in service gross margin also contributed to the lower gross margin percentage.