Cisco 2012 Annual Report Download - page 66

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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.
Service Gross Margin
Fiscal 2012 Compared with Fiscal 2011
Our service gross margin percentage increased by 0.5 percentage points for fiscal 2012, as compared with fiscal
2011. The increase was primarily due to higher sales volume for both technical support services and advanced
services. The benefit to gross margin of increased volume was partially offset by increased headcount-related and
partner delivery costs, and unfavorable mix. The mix impacts were due to our lower gross margin advanced
services revenue contributing a higher proportion of service revenue for fiscal 2012, as compared with the prior
year. Lower share-based compensation expense in fiscal 2012 as compared with fiscal 2011 also added to the
increase in service gross margin.
For fiscal 2012, as compared with fiscal 2011, gross margin from technical support services was flat as the
benefits from a 10% increase in revenue combined with lower supply chain costs were offset by higher
headcount-related costs. For fiscal 2012, as compared with fiscal 2011, gross margin in advanced services
increased primarily due to a 20% increase in revenue in fiscal 2012. Partially offsetting the volume benefit were
higher delivery team costs which were, in part headcount related, and higher partner delivery costs. Our revenue
from advanced services may increase to a higher proportion of total service revenue due to our continued focus
on providing comprehensive support to our customers’ networking devices, applications, and infrastructures.
Our service gross margin normally experiences some fluctuations due to various factors such as the timing of
contract initiations in our renewals, our strategic investments in headcount, and the resources we deploy to
support the overall service business. Other factors include the mix of service offerings, as the gross margin from
our advanced services is typically lower than the gross margin from technical support services.
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