Intel 2002 Annual Report Download - page 34

Revenue growth for WCCG is largely dependent on the trend toward higher density flash memory products and continued end user adoption of
new leading-edge cellular handsets. The outlook for the telecommunications industry continues to be weak. Service providers continue to reduce
capital equipment purchases, and land-line, or "wired," telecommunications OEMs continue to reduce headcount and report lower revenue. In
this environment, revenue growth for ICG is largely dependent on securing design wins for new products and OEMs taking these product
designs to production.
Our financial results are substantially dependent on sales of microprocessors and related components by the Intel Architecture operating
segment. Revenue is partly a function of the mix of microprocessor types and speeds sold, as well as the mix of related chipsets and
motherboards, all of which are difficult to forecast. Because of the wide price differences among performance desktop, value desktop, mobile
and server microprocessors, the mix of types of microprocessors sold affects the average price that we will realize and has a large impact on our
revenue and gross margin. Microprocessor revenue is also dependent on the availability of other parts of the system platform, including chipsets,
motherboards, operating system software and application software. Revenue is also affected by our sales of other semiconductor and non-
semiconductor products, and is subject to the impact of economic conditions in various geographic regions.
Our gross margin expectation for 2003 is 51% plus or minus a few points, which is a slight increase from the 2002 gross margin of 50%.
Our gross margin varies depending on unit volumes and the mix of types and speeds of processors sold, as well as the mix of microprocessors,
related chipsets and motherboards, and other semiconductor and non-semiconductor products. Variability of other factors will also continue to
affect cost of sales and the gross margin percentage, including unit costs and yield issues associated with production at factories, timing and
execution of the manufacturing ramp, including the ramp of manufacturing on 300-millimeter wafers and the 90-nanometer process technology
on 300mm wafers, excess of manufacturing capacity, the reusability of factory equipment, insufficient or excess inventory, inventory
obsolescence and variations in inventory valuation.
We have significantly expanded our semiconductor manufacturing and assembly and test capacity over the last few years, and we continue
to plan capacity based on the assumed continued success of our strategy and the acceptance of our products in specific market segments.
However, we expect that capital spending will decrease to a range of $3.5 billion to $3.9 billion in 2003 from $4.7 billion in 2002. The reduction
is primarily the result of expected improvements in capital efficiency, with an increase in effective manufacturing capacity as we transition to the
larger, 300mm wafer manufacturing process, and the timing of manufacturing process technology cycles. This capital spending plan is dependent
on expectations regarding production efficiencies and delivery times of various machinery and equipment, and construction schedules for new
facilities. If the demand for our products does not grow and continue to move toward higher performance products in the various market
segments, revenue and gross margin would be adversely affected, manufacturing capacity would be under-utilized, and the rate of capital
spending could be further reduced. However, in the long-term, revenue and gross margin may also be adversely affected if we do not add
capacity fast enough to meet market demand when economic conditions improve.
Depreciation for 2003 is expected to be approximately $4.9 billion, compared to $4.7 billion in 2002. Most of this increase would be
included in cost of sales and research and development spending.
Our industry is characterized by very short product life cycles, and our continued success is dependent on technological advances, including
the development and implementation of new processes and new strategic products for specific market segments. Because we consider it
imperative to maintain a strong research and
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development program, spending for research and development in 2003, excluding purchased IPR&D, is expected to remain at approximately
$4.0 billion. We also intend to continue spending to promote our products and to increase the value of our product brands.
Based on acquisitions completed through March 5, 2003, we expect amortization of acquisition-related intangibles and costs to be
approximately $300 million in 2003.
In conjunction with the implementation of the new accounting rules for goodwill, we completed the initial goodwill impairment review as
of the beginning of 2002 and the required annual review during the fourth quarter for ICG and WCCG, which are the reporting units with
substantially all of our recorded goodwill. We found no impairment. Our impairment review process is based on a discounted cash flow
approach that uses our estimates of revenue for the reporting units and appropriate discount rates. The estimates we have used are consistent with
the plans and estimates that we are using to manage the underlying businesses. If we fail to deliver new products for these groups, if the products
fail to gain expected market acceptance, or if market conditions in the communications businesses fail to improve, our revenue and cost forecasts
may not be achieved and we may incur charges for impairment of goodwill.
At the end of 2002, we held non-marketable equity securities with a carrying value of $730 million. Our ability to recover our investments
in non-marketable equity securities and to earn a return on these investments is primarily dependent on how successfully these companies are
able to execute to their business plans and how their products are accepted, as well as their ability to obtain venture capital funding to continue
operations and to grow. In the current equity market environment, their ability to obtain additional funding as well as to take advantage of
liquidity events, such as initial public offerings, mergers and private sales, is significantly constrained. As the equity markets have declined
significantly over the past two years, we have experienced substantial impairments in our portfolio of non-marketable equity securities. If equity
market conditions do not improve, as companies within our portfolio attempt to raise additional funds, the funds may not be available to them, or