Cisco 2013 Annual Report Download - page 27

• Changes in distribution channels
• Increased warranty costs
• Increased amortization of purchased intangible assets, especially from acquisitions
• 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 newer product categories such as Data Center, Collaboration, and Service Provider
Video, 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. 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.
DISRUPTION OF OR CHANGES IN OUR DISTRIBUTION MODEL COULD HARM OUR SALES AND MARGINS
If we fail to manage distribution of our products and services properly, or if our distributors’ financial condition or operations
weaken, our revenue and gross margins could be adversely affected.
A substantial portion of our products and services is sold through our channel partners, and the remainder is sold through
direct sales. Our channel partners include systems integrators, service providers, other resellers, and distributors. Systems
integrators and service providers typically sell directly to end users and often provide system installation, technical support,
professional services, and other support services in addition to network equipment sales. Systems integrators also typically
integrate our products into an overall solution, and a number of service providers are also systems integrators. Distributors
stock inventory and typically sell to systems integrators, service providers, and other resellers. We refer to sales through
distributors as our two-tier system of sales to the end customer. Revenue from distributors is generally recognized based on a
sell-through method using information provided by them. These distributors are generally given business terms that allow
them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative
marketing programs. If sales through indirect channels increase, this may lead to greater difficulty in forecasting the mix of
our products and, to a degree, the timing of orders from our customers.
Historically, we have seen fluctuations in our gross margins based on changes in the balance of our distribution channels.
Although variability to date has not been significant, there can be no assurance that changes in the balance of our distribution
model in future periods would not have an adverse effect on our gross margins and profitability.
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