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Cisco Systems Inc. (CSCO)

Analysis of Revenues

Difficulty: Advanced

Revenue Recognition Accounting Policy

Cisco recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. For hosting arrangements, Cisco recognizes revenue ratably over the hosting period, while usage revenue is recognized based on utilization. Software subscription revenue is deferred and recognized ratably over the subscription term upon delivery of the first product and commencement of the term. Technical support and consulting services revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years. Transactional advanced services revenue is recognized upon delivery or completion of performance milestones.

Cisco uses distributors that typically stock inventory and sell to systems integrators, service providers, and other resellers. Cisco refers to this as the two-tier sales to the end customer. Revenue from distributors is recognized based on a sell-through method using point-of-sale information provided by the distributors. Distributors and other partners participate in various rebate, cooperative marketing, and other incentive programs, and Cisco maintains estimated accruals and allowances for these programs. The ending liability for these programs was included in other current liabilities, and the balance was $1.0 billion as of each of July 28, 2018 and July 29, 2017. Cisco accrues for warranty costs, sales returns, and other allowances based on the historical experience. Shipping and handling fees billed to customers are included in revenue, with the associated costs included in cost of sales.

Many of Cisco’s products have both software and non-software components that function together to deliver the products’ essential functionality. Cisco also provides technical support and advanced services. Cisco has a broad customer base that encompasses virtually all types of public and private entities, including enterprise businesses, service providers, and commercial customers. Cisco and the salesforce are not organized by product divisions, and the products and services can be sold standalone or together in various combinations across the 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. Cisco’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.

Cisco enters into revenue arrangements that may consist of multiple deliverables of the product and service offerings due to the needs of the 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. Cisco 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. Cisco determines the vendor-specific objective evidence (VSOE) based on the 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, Cisco 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 Cisco is not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to Cisco 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, Cisco 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, Cisco’s go-to-market strategy differs from that of the peers, and the offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, Cisco is unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, Cisco is typically not able to determine TPE.

When Cisco is unable to establish fair value using VSOE or TPE, Cisco uses estimated selling prices (ESP) in the allocation of arrangement consideration. The objective of ESP is to determine the price at which Cisco 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. Cisco 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 Cisco’s management, taking into consideration the go-to-market strategy.

Cisco regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material impacts during fiscal 2018 from changes in VSOE, TPE, or ESP.

Cisco’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 Cisco cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverables, ESP is used for the purposes of performing this allocation. VSOE is required to allocate the revenue between multiple software deliverables. If VSOE is available for the undelivered software elements, Cisco applies the residual method; where VSOE is not available, software revenue is either recognized when all software elements have been delivered or recognized ratably when post-contract support is the only undelivered software element remaining.

Source: 10-K (filing date: 2018-09-06).

Revenues as Reported

Cisco Systems Inc., Income Statement, Revenues

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Jul 28, 2018 Jul 29, 2017 Jul 30, 2016 Jul 25, 2015 Jul 26, 2014 Jul 27, 2013
Infrastructure Platforms hidden hidden hidden hidden hidden hidden
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Security hidden hidden hidden hidden hidden hidden
Other Products hidden hidden hidden hidden hidden hidden
Product hidden hidden hidden hidden hidden hidden
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Revenue hidden hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09), 10-K (filing date: 2013-09-10).

Item Description The company
Revenue Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss). Cisco Systems Inc.’s revenue declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.