Cisco 2013 Annual Report Download - page 26

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capacity, it is possible that revenue for a quarter could be adversely affected if such matters occur and are not remediated
within the same quarter.
The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter,
primarily in the United States and in emerging countries. From time to time, we receive large orders that have a significant
effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult
to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue. As a result,
our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate
recognition as revenue.
Inventory management remains an area of focus. We have experienced longer than normal manufacturing lead times in the
past which have caused some customers to place the same order multiple times within our various sales channels and to cancel
the duplicative orders upon receipt of the product, or to place orders with other vendors with shorter manufacturing lead times.
Such multiple ordering (along with other factors) or risk of order cancellation may cause difficulty in predicting our revenue
and, as a result, could impair our ability to manage parts inventory effectively. In addition, our efforts to improve
manufacturing lead-time performance 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 revenue and operating results. In addition,
when facing component supply-related challenges, we have increased our efforts in procuring components in order to meet
customer expectations which in turn contribute to an increase in purchase commitments. Increases in our purchase
commitments to shorten lead times could also lead to excess and obsolete inventory charges if the demand for our products is
less than our expectations.
We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-
term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below
expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
Any of the above factors could have a material adverse impact on our operations and financial results.
WE EXPECT GROSS MARGIN TO VARY OVER TIME, AND OUR LEVEL OF PRODUCT GROSS MARGIN
MAY NOT BE SUSTAINABLE
Our level of product gross margins declined in fiscal 2011 and to a lesser extent in fiscal 2012 and fiscal 2013 and may
continue to decline and be adversely affected by numerous factors, including:
• Changes in customer, geographic, or product mix, including mix of configurations within each product group
• Introduction of new products, including products with price-performance advantages, and new business models for
our offerings such as XaaS
• Our ability to reduce production costs
• Entry into new markets or growth in lower margin markets, including markets with different pricing and cost
structures, through acquisitions or internal development
• Sales discounts
• 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
18