Cisco 2015 Annual Report Download - page 26

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quarters recurs in future periods. We have experienced periods of time during which shipments have exceeded net bookings or
manufacturing issues have delayed shipments, leading to nonlinearity in shipping patterns. In addition to making it difficult to
predict revenue for a particular period, nonlinearity in shipping can increase costs, because irregular shipment patterns result in
periods of underutilized capacity and periods in which overtime expenses may be incurred, as well as in potential additional
inventory management-related costs. In addition, to the extent that manufacturing issues and any related component shortages
result in delayed shipments in the future, and particularly in periods in which our contract manufacturers are operating at higher
levels of 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
Although our product gross margin increased in the second half of fiscal 2015, our level of product gross margins have declined
in recent periods and could decline in future quarters due to adverse impacts from various 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
18