Cisco 2013 Annual Report Download - page 61

Gross Margin
The following table presents the gross margin for products and services (in millions, except percentages):
AMOUNT PERCENTAGE
Years Ended July 27, 2013 July 28, 2012 July 30, 2011 July 27, 2013 July 28, 2012 July 30, 2011
Gross margin:
Product ........................... $22,488 $21,821 $20,879 59.1% 60.1% 60.5%
Service ........................... 6,952 6,388 5,657 65.7% 65.6% 65.1%
Total ......................... $29,440 $28,209 $26,536 60.6% 61.2% 61.4%
Product Gross Margin
Fiscal 2013 Compared with Fiscal 2012
The following table summarizes the key factors that contributed to the change in product gross margin percentage from fiscal
2012 to fiscal 2013:
Product
Gross Margin
Percentage
Fiscal 2012 ............................................... 60.1%
Sales discounts, rebates, and product pricing ................... (2.9)%
Mix of products sold ....................................... (0.7)%
Productivity (1) ............................................ 3.7%
TiVo patent litigation settlement ............................. (0.5)%
Amortization of purchased intangible assets ................... (0.5)%
Acquisition fair value adjustment to inventory and other ......... (0.1)%
Fiscal 2013 ............................................... 59.1%
(1) Productivity includes overall manufacturing-related costs, shipment volume, and other items not
categorized elsewhere.
Product gross margin decreased by 1.0 percentage points compared with fiscal 2012.
Higher sales discounts, rebates, and unfavorable product pricing contributed to our decreased product gross margin percentage
in fiscal 2013. These factors impacted most of our customer markets and all of our geographic segments. Additionally, our
product gross margin for fiscal 2013 was negatively impacted by the shift in the mix of products sold, primarily as a result of
revenue increases for our relatively lower margin Cisco Unified Computing System products. These impacts were offset by
continued productivity improvements. The productivity improvements were in large part due to increased benefits from cost
savings, particularly in certain of our Switching and NGN Routing categories in which product transitions have been taking
place, and were driven by value engineering efforts, favorable component pricing, and continued operational efficiency in
manufacturing operations. Value engineering is the process by which production costs are reduced through component
redesign, board configuration, test processes, and transformation processes.
Because the preceding factors largely offset each other, the decline in our product gross margin percentage was largely driven
by our acquisition of NDS, which resulted in higher amortization expense from purchased intangible assets along with costs
resulting from a fair value adjustment to inventory acquired as part of that acquisition. In addition, during fiscal 2013 we
incurred charges related to the TiVo patent litigation settlement in the fourth quarter that were included as part of cost of sales.
The combined effect of these items was a negative impact to our product gross margin of 1.1 percentage points for fiscal 2013.
Our future gross margins could be impacted by our product mix and could be adversely affected 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 and, as was the case in fiscal 2013 and 2012, may be adversely affected by
increased sales discounts, rebates, and product pricing attributable to competitive factors. Additionally, our manufacturing-
related costs may be negatively impacted by constraints in our supply chain, which in turn could negatively affect gross
margin. If any of the preceding factors that in the past have negatively impacted our gross margins arise in future periods, our
gross margins could continue to decline.
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