Cisco 2011 Annual Report Download - page 26

• Increases in material, labor or other manufacturing-related costs, which could be significant especially
during periods of supply constraints
• Excess inventory and inventory holding charges
• Obsolescence charges
• Changes in shipment volume
• The timing of revenue recognition and revenue deferrals
• Increased cost, loss of cost savings or dilution of savings due to changes in component pricing or
charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product
demand or if the financial health of either contract manufacturers or suppliers deteriorates
• Lower than expected benefits from value engineering
• Increased price competition, including competitors from Asia, especially from China
• Changes in distribution channels
• Increased warranty costs
• How well we execute on our strategy and operating plans
Changes in service gross margin may result from various factors such as changes in the mix between technical
support services and advanced services, as well as the timing of technical support service contract initiations and
renewals and the addition of personnel and other resources to support higher levels of service business in future
periods.
SALES TO THE SERVICE PROVIDER MARKET ARE ESPECIALLY VOLATILE, AND WEAKNESS
IN SALES ORDERS FROM THIS INDUSTRY MAY HARM OUR OPERATING RESULTS AND
FINANCIAL CONDITION
Sales to the service provider market have been characterized by large and sporadic purchases, especially relating
to our router sales and sales of certain products in our New Products category, in addition to longer sales cycles.
In the past, we have experienced significant weakness in sales to service providers over certain extended periods
of time as market conditions have fluctuated. Sales activity in this industry depends upon the stage of completion
of expanding network infrastructures; the availability of funding; and the extent to which service providers are
affected by regulatory, economic, and business conditions in the country of operations. Weakness in orders from
this industry, including as a result of any slowdown in capital expenditures by service providers (which may be
more prevalent during a global economic downturn or periods of economic uncertainty), could have a material
adverse effect on our business, operating results, and financial condition. For example, during fiscal 2009, we
experienced a slowdown in service provider capital expenditures globally, and in fiscal 2011 we experienced a
slowdown in certain segments of this market, including in capital expenditures by some service provider
customers and in sales of our traditional cable set-top boxes in our United States and Canada segment. Such
slowdowns may continue or recur in future periods. Orders from this industry could decline for many reasons
other than the competitiveness of our products and services within their respective markets. For example, in the
past, many of our service provider customers have been materially and adversely affected by slowdowns in the
general economy, by overcapacity, by changes in the service provider market, by regulatory developments, and
by constraints on capital availability, resulting in business failures and substantial reductions in spending and
expansion plans. These conditions have materially harmed our business and operating results in the past, and
some of these or other conditions in the service provider market could affect our business and operating results in
any future period. Finally, service provider customers typically have longer implementation cycles; require a
broader range of services, including design services; demand that vendors take on a larger share of risks; often
require acceptance provisions, which can lead to a delay in revenue recognition; and expect financing from
vendors. All these factors can add further risk to business conducted with service providers.
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