Cisco 2015 Annual Report Download - page 90

Many of the Company’s products have both software and non-software 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, Collaboration, Service Provider Video, Data Center, Wireless, 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. The Company considers several factors when
reviewing multiple purchases made by the same customer within a short time frame in order to identify multiple-element
arrangements, including whether the deliverables are closely interrelated, whether the deliverables are essential to each other’s
functionality, whether payment terms are linked, whether the customer is entitled to a refund or concession if another purchase is not
completed satisfactorily, and/or whether the purchases were negotiated together as one overall 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 products or services when sold separately. VSOE determination requires that a substantial majority of the
historical standalone transactions has 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 include one or more software deliverables that are 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
deliverables and the non-software 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
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