Cisco 2011 Annual Report Download - page 68

including price-focused competitors from Asia, especially from China; new product introductions; sales cycles
and product implementation cycles; changes in the mix of our customers between service provider and enterprise
markets; changes in the mix of direct sales and indirect sales; variations in sales channels; and final acceptance
criteria of the product, system, or solution as specified by the customer. Sales to the service provider market have
been and may be in the future characterized by large and sporadic purchases, especially relating to our router
sales and sales of certain products within our New Products category. In addition, service provider customers
typically have longer implementation cycles; require a broader range of services, including network design
services; and often have acceptance provisions that can lead to a delay in revenue recognition. Certain of our
customers in the Emerging Markets segment also tend to make large and sporadic purchases, and the net sales
related to these transactions may similarly be affected by the timing of revenue recognition. As we focus on new
market opportunities, customers may require greater levels of financing arrangements, service, and support,
especially in the Emerging Markets segment, which in turn may result in a delay in the timing of revenue
recognition. To improve customer satisfaction, we continue to focus on managing our manufacturing lead-time
performance, which may result in corresponding reductions in order backlog. A decline in backlog levels could
result in more variability and less predictability in our quarter-to-quarter net sales and operating results.
Net product sales may also be adversely affected by fluctuations in demand for our products, especially with
respect to telecommunications service providers and Internet businesses, whether or not driven by any slowdown
in capital expenditures in the service provider market; price and product competition in the communications and
information technology industry; introduction and market acceptance of new technologies and products; adoption
of new networking standards; and financial difficulties experienced by our customers. We may, from time to
time, experience manufacturing issues that create a delay in our suppliers’ ability to provide specific components,
resulting in delayed shipments. To the extent that manufacturing issues and any related component shortages
result in delayed shipments in the future, and particularly in periods when we and our suppliers are operating at
higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters are
not remediated within the same quarter. For additional factors that may impact net product sales, see “Part I,
Item 1A. Risk Factors.”
Our distributors and retail partners participate in various cooperative marketing and other programs. Increased
sales to our distributors and retail partners generally result in greater difficulty in forecasting the mix of our
products and, to a certain degree, the timing of orders from our customers. We recognize revenue for sales to our
distributors and retail partners generally based on a sell-through method using information provided by them, and
we maintain estimated accruals and allowances for all cooperative marketing and other programs.
Product gross margin may be adversely affected in the future by changes in the mix of products sold, including
periods of increased growth of some of our lower margin products; introduction of new products, including
products with price-performance advantages; our ability to reduce production costs; entry into new markets,
including markets with different pricing structures and cost structures, as a result of internal development or
through acquisitions; changes in distribution channels; price competition, including competitors from Asia,
especially those from China; changes in geographic mix of our product sales; the timing of revenue recognition
and revenue deferrals; sales discounts; increases in material or labor costs, including share-based compensation
expense; excess inventory and obsolescence charges; warranty costs; changes in shipment volume; loss of cost
savings due to changes in component pricing; effects of value engineering; inventory holding charges; and the
extent to which we successfully execute on our strategy and operating plans. Additionally, our manufacturing-
related costs may be negatively impacted by constraints in our supply chain. Service gross margin may be
impacted by various factors such as the change in mix between technical support services and advanced services;
the timing of technical support service contract initiations and renewals; share-based compensation expense; and
the timing of our strategic investments in headcount and resources to support this business.
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