Intel 1996 Annual Report Download - page 67

Management's discussion and analysis of financial condition and results of operations
Results of operations
Intel posted record net revenues in 1996, for the tenth consecutive year, rising by 29% from 1995 to 1996 and by 41% from 1994 to 1995.
Higher volumes of the rapidly ramping Pentium(R) microprocessor family, partially offset by lower processor prices and decreased revenues
from sales of related board-level products, were responsible for most of the growth in revenues from 1995 to 1996. The Pentium(R) Pro
microprocessor family, introduced in late 1995, also contributed to the growth in revenues from 1995 to 1996. The growth in revenues from
1994 to 1995 was driven primarily by higher volumes of the Pentium processor family and related board-level products, which surpassed sales
of the Intel486(TM) microprocessor family in the third quarter of 1995. Revenues from the Intel486 microprocessor family declined
substantially in 1995 and 1996, primarily due to this shift in market demand toward the Company's more advanced microprocessors.
Higher volumes of flash memory and chipset products also contributed toward the increase in revenues from 1994 to 1996 and also helped
enable the successful Pentium and Pentium Pro microprocessor ramps. Revenues from embedded control products and networking and
communications products also grew over this period.
Cost of sales increased by 17% from 1995 to 1996 and by 40% from 1994 to 1995. The overall growth in cost of sales from 1994 to 1996 was
driven by unit volume growth in Pentium microprocessor and related board-level products, new factories commencing production,
manufacturing process conversions and shifts in product mix. While revenues increased substantially from 1995 to 1996, growth in cost of
sales was significantly less. Cost of sales in the first half of 1996 and the fourth quarter of 1995 were negatively impacted by unusually high
reserves related to inventories of certain purchased components. The second half of 1996 was favorably impacted by factory efficiencies from
higher volumes, as well as relatively lower new factory startup costs. In addition, in the second half of 1996 the Company sold significantly
more processor products than in the second half of 1995.
The gross margin percentage was 56% in 1996, compared to 52% in 1995 and 1994. However, as a result of all of the revenue and cost factors
discussed above, the gross margin percentage in the second half of 1996 was 60% (63% in the fourth quarter), compared to 50% in the second
half of 1995 (48% in the fourth quarter). Gross margin for the fourth quarter of 1994 included the impact of a $475 million charge, primarily to
cost of sales, related to a divide problem in the floating point unit of the Pentium microprocessor. See "Outlook" for a discussion of gross
margin expectations.
Sales of Pentium microprocessors and related board-level products comprised a majority of the Company's revenues and a substantial majority
of its gross margin during 1995 and 1996. During 1996 Pentium Pro microprocessors and related board-level products became an increasing
portion of the Company's revenues and gross margin. The Intel486 microprocessor family contributed negligible revenues and gross margin
during 1996. During 1995, the Intel486 microprocessor family represented a significant but rapidly declining portion of the Company's
revenues and gross margin, while it comprised a majority of the Company's revenues and a substantial majority of its gross margin during
1994.
Research and development spending grew by 40% from 1995 to 1996 and 17% from 1994 to 1995, as the Company substantially increased its
investments over this time period in strategic programs, particularly for the internal development of microprocessor products and related
manufacturing technology. Increased spending for marketing programs, including media merchandising and the Company's Intel Inside(R)
cooperative advertising program, and other revenue-dependent expenses drove the 26% and 27% increases in marketing, general and
administrative expenses from 1995 to 1996 and from 1994 to 1995, respectively.
The $4 million decrease in interest expense from 1995 to 1996 was mainly due to lower average borrowing balances and interest rates in 1996,
partially offset by lower interest capitalization. The decrease in interest expense from 1994 to 1995 was primarily due to lower average
borrowing balances in 1995 in addition to higher interest capitalization resulting from increased facility construction programs.