Cisco 2013 Annual Report Download - page 91

Many of the Company’s products have both software and nonsoftware components that function together to deliver the
products’ essential functionality. The Company’s product offerings fall into the following categories: Switching, Next-
Generation Network (NGN) Routing, Service Provider Video, Collaboration, Wireless, Data Center, Security, and Other
Products. The Company also provides technical support and advanced services. The Company has a broad customer base that
encompasses virtually all types of public and private entities, including enterprise businesses, service providers, and
commercial customers. The Company and its salesforce are not organized by product divisions, and the Company’s products
and services can be sold standalone or together in various combinations across the Company’s geographic segments or
customer markets. For example, service provider arrangements are typically larger in scale with longer deployment schedules
and involve the delivery of a variety of product technologies, including high-end routing, video and network management
software, and other product technologies along with technical support and advanced services. The Company’s enterprise and
commercial arrangements are unique for each customer and smaller in scale and may include network infrastructure products
such as routers and switches or collaboration technologies such as Unified Communications and Cisco TelePresence systems
products along with technical support services.
The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings
due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical
support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and
the technical support services delivered across multiple reporting periods. Another customer may purchase networking
products along with advanced service offerings, in which all the elements are delivered within the same reporting period. In
addition, distributors purchase products or technical support services on a standalone basis for resale to an end user or for
purposes of stocking certain products, and these transactions would not result in a multiple-element arrangement.
In many instances, products are sold separately in standalone arrangements as customers may support the products themselves
or purchase support on a time-and-materials basis. Advanced services are sometimes sold in standalone engagements such as
general consulting, network management, or security advisory projects, and technical support services are sold separately
through renewals of annual contracts. The Company determines its vendor-specific objective evidence (VSOE) based on its
normal pricing and discounting practices for the specific product or service when sold separately. VSOE determination
requires that a substantial majority of the historical standalone transactions have the selling prices for a product or service that
fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone
transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in
which the products or services are sold, major product and service groups and customer classifications, and other
environmental or marketing variables in determining VSOE.
When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be
due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a
limited sales history, such as in the case of certain newly introduced product categories, the Company attempts to determine
the selling price of each element based on third-party evidence of selling price (TPE). TPE is determined based on competitor
prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its
peers, and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar
functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’
selling prices are on a standalone basis. Therefore, the Company is typically not able to determine TPE.
When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling prices (ESP) in its
allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a
sale if the product or service were regularly sold on a standalone basis. ESP is generally used for new or highly proprietary
offerings and solutions or for offerings not priced within a reasonably narrow range. The Company determines ESP for a product
or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape,
internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and
formal approval by the Company’s management, taking into consideration the go-to-market strategy.
The Company regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of
these estimates. There were no material impacts during the fiscal year, nor does the Company currently expect a material
impact in the near term from changes in VSOE, TPE, or ESP.
The Company’s arrangements with multiple deliverables may have a standalone software deliverable that is subject to the
software revenue recognition guidance. In these cases, revenue for the software is generally recognized upon shipment or
electronic delivery and granting of the license. The revenue for these multiple-element arrangements is allocated to the
software deliverable and the nonsoftware deliverables based on the relative selling prices of all of the deliverables in the
arrangement using the hierarchy in the applicable accounting guidance. In the circumstances where the Company cannot
determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable,
ESP is used for the purposes of performing this allocation.
(p) Advertising Costs The Company expenses all advertising costs as incurred. Advertising costs included within sales and
marketing expenses were approximately $218 million, $218 million, and $325 million for fiscal 2013, 2012, and 2011,
respectively.
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