Cisco 2011 Annual Report Download - page 65

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Gross Margin
The following table presents the gross margin for products and services (in millions, except percentages):
AMOUNT PERCENTAGE
Years Ended July 30, 2011 July 31, 2010 July 25, 2009 July 30, 2011 July 31, 2010 July 25, 2009
Gross margin:
Product ................ $20,879 $20,800 $18,650 60.5% 64.2% 64.0%
Service ................ 5,657 4,843 4,444 65.1% 63.6% 63.6%
Total .............. $26,536 $25,643 $23,094 61.4% 64.0% 63.9%
Product Gross Margin
Fiscal 2011 Compared with Fiscal 2010
The following table summarizes the key factors that contributed to the change in product gross margin
percentage from fiscal 2010 to fiscal 2011:
Product
Gross Margin
Percentage
Fiscal 2010 ..................................... 64.2%
Sales discounts, rebates, and product pricing ........ (2.9)%
Mix of products sold ............................. (1.6)%
Amortization of purchased intangible assets ......... (0.6)%
Restructuring and other charges .................. (0.4)%
Overall manufacturing costs ...................... 1.4%
Shipment volume, net of certain variable costs ....... 0.4%
Fiscal 2011 ..................................... 60.5%
In fiscal 2011, product gross margin decreased by 3.7 percentage points. The decrease was primarily due to the
impact of higher sales discounts, rebates, and unfavorable product pricing which were driven by normal market
factors and by the geographic mix of product revenue. These factors impacted most of our customer markets and
all of our geographic segments. Additionally, our product gross margin was negatively impacted by the shift in
the mix of products sold as a result of revenue declines in our higher margin switching products coupled with
revenue increases from our lower margin Cisco Unified Computing System products. Higher year-over-year
impairment charges related to acquisition-related intangible assets and higher restructuring and other charges,
both primarily in the consumer business, also contributed to the decline in our product gross margin percentage.
These negative factors were partially offset by lower overall manufacturing costs and by slightly higher shipment
volume. The lower overall manufacturing costs were in part due to favorable component pricing, continued
operational efficiency in manufacturing operations, and value engineering. Value engineering is the process by
which production costs are reduced through component redesign, board configuration, test processes, and
transformation processes.
Our future gross margins could be impacted by our product mix and by further growth in sales of products that
have lower gross margins, such as Cisco Unified Computing System products. Our gross margins may also be
impacted by the geographic mix of our revenue or, as was the case in fiscal 2011 and 2010, by increased sales
discounts, rebates, and product pricing, which may be attributable to competitive factors. Additionally, our
manufacturing-related costs may be negatively impacted by constraints in our supply chain. If any of the
preceding factors that impact our gross margins are adversely affected in future periods, our product and service
gross margins could continue to decline.
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