Cisco 2015 Annual Report Download - page 21

Research and Development
We regularly seek to introduce new products and features to address the requirements of our markets. We allocate our research
and development budget among our product categories, which consist of Switching, NGN Routing, Collaboration, Service
Provider Video, Data Center, Wireless, Security, and Other Product technologies, for this purpose. Our research and development
expenditures were $6.2 billion, $6.3 billion, and $5.9 billion in fiscal 2015, 2014, and 2013, respectively. These expenditures are
applied generally to all product areas, with specific areas of focus being identified from time to time. Recent areas of increased
focus include, but are not limited to, our core routing and switching products, collaboration, and products related to the data
center. Our expenditures for research and development costs were expensed as incurred.
The industry in which we compete is subject to rapid technological developments, evolving standards, changes in customer
requirements, and new product introductions and enhancements. As a result, our success depends in part upon our ability, on a
cost-effective and timely basis, to continue to enhance our existing products and to develop and introduce new products that
improve performance and reduce total cost of ownership. To achieve these objectives, our management and engineering
personnel work with customers to identify and respond to customer needs, as well as with other innovators of internetworking
products, including universities, laboratories, and corporations. We also expect to continue to make acquisitions and investments,
where appropriate, to provide us with access to new technologies. Nonetheless, there can be no assurance that we will be able to
successfully develop products to address new customer requirements and technological changes or that those products will
achieve market acceptance.
Manufacturing
We rely on contract manufacturers for all of our manufacturing needs. We presently use a variety of independent third-party
companies to provide services related to printed-circuit board assembly, in-circuit test, product repair, and product assembly.
Proprietary software on electronically programmable memory chips is used to configure products that meet customer
requirements and to maintain quality control and security. The manufacturing process enables us to configure the hardware and
software in unique combinations to meet a wide variety of individual customer requirements. The manufacturing process uses
automated testing equipment and burn-in procedures, as well as comprehensive inspection, testing, and statistical process
controls, which are designed to help ensure the quality and reliability of our products. The manufacturing processes and
procedures are generally certified to International Organization for Standardization (ISO) 9001 or ISO 9003 standards.
Our arrangements with contract manufacturers generally provide for quality, cost, and delivery requirements, as well as
manufacturing process terms, such as continuity of supply; inventory management; flexibility regarding capacity, quality, and
cost management; oversight of manufacturing; and conditions for use of our intellectual property. We have not entered into any
significant long-term contracts with any manufacturing service provider. We generally have the option to renew arrangements on
an as-needed basis. These arrangements generally do not commit us to purchase any particular amount or any quantities beyond
certain amounts covered by orders or forecasts that we submit covering discrete periods of time, defined as less than one year.
Patents, Intellectual Property, and Licensing
We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights,
trademarks, and trade secret laws. We have a program to file applications for and obtain patents, copyrights, and trademarks in
the United States and in selected foreign countries where we believe filing for such protection is appropriate. We also seek to
maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate
confidentiality agreements. We have obtained a substantial number of patents and trademarks in the United States and in other
countries. There can be no assurance, however, that the rights obtained can be successfully enforced against infringing products
in every jurisdiction. Although we believe the protection afforded by our patents, copyrights, trademarks, and trade secrets has
value, the rapidly changing technology in the networking industry and uncertainties in the legal process make our future success
dependent primarily on the innovative skills, technological expertise, and management abilities of our employees rather than on
the protection afforded by patent, copyright, trademark, and trade secret laws.
Many of our products are designed to include software or other intellectual property licensed from third parties. While it may be
necessary in the future to seek or renew licenses relating to various aspects of our products, we believe, based upon past
experience and standard industry practice, that such licenses generally could be obtained on commercially reasonable terms.
Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability
to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation
regarding these matters, could have a material adverse effect on our business, operating results, and financial condition.
Moreover, inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis
can limit our ability to protect our proprietary rights in our products.
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