Cisco 2009 Annual Report Download - page 34

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financing Receivables and Guarantees The following table summarizes our financing receivables, financing guarantees, and the related
deferred revenue (in millions):
July 25, 2009 July 26, 2008
Increase
(Decrease)
Lease receivables $ 1,805 $ 1,552 $ 253
Financed service contracts 1,642 1,328 314
Loan receivables 861 607 254
Gross financing receivables 4,308 3,487 821
Financing guarantees — channel partner 334 450 (116)
Financing guarantees — end-user 405 380 25
Gross financing receivables and guarantees 5,047 4,317 730
Allowances for financing receivables (327) (274) (53)
Deferred revenue related to financing receivables and guarantees (2,639) (2,091) (548)
Financing receivables and guarantees, net $ 2,081 $ 1,952 $ 129
Financing Receivables We provide financing to certain end-user customers and channel partners to enable sales of our products,
services, and networking solutions. These financing arrangements include leases, financed service contracts, and loans. These
arrangements are generally collateralized by a security interest in the underlying assets. Lease receivables include sales-type and direct-
financing leases. We also provide certain qualified customers financing for long-term service contracts, which primarily relate to technical
support services. Our loan financing arrangements may include not only financing the acquisition of our products and services but also
providing additional funds for other costs associated with network installation and integration of our products and services. We expect to
continue to expand the use of our financing programs in the near term.
Financing Guarantees In the normal course of business, third parties may provide financing arrangements to our customers and channel
partners under financing programs. The financing arrangements to customers provided by third parties are related to leases and loans and
typically have terms of up to three years. In some cases, we provide guarantees to third parties for these lease and loan arrangements. The
financing arrangements to channel partners consist of revolving short-term financing provided by third parties, generally with payment
terms ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of our receivables to the third party.
The receivables are derecognized upon transfer, as these transfers qualify as true sales, and we receive a payment for the receivables
from the third party based on our standard payment terms. These financing arrangements facilitate the working capital requirements of the
channel partners and, in some cases, we guarantee a portion of these arrangements. We could be called upon to make payments under
these guarantees in the event of nonpayment by the channel partners or end-user customers. Where we provide a guarantee, we defer the
revenue associated with the channel partner and end-user financing arrangement in accordance with revenue recognition policies, or we
record a liability for the fair value of the guarantees. In either case, the deferred revenue is recognized as revenue when the guarantee is
removed.
Deferred Revenue Related to Financing Receivables and Guarantees The majority of the deferred revenue in the table above is related
to financed service contracts. The revenue related to financed service contracts, which primarily relates to technical support services, is
deferred and included in deferred service revenue. The revenue related to financed service contracts is recognized ratably over the period
during which the related services are to be performed. A portion of the revenue related to lease and loan receivables is also deferred and
included in deferred product revenue based on revenue recognition criteria.
32 Cisco Systems, Inc.