Intel 2004 Annual Report Download - page 44

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Business Outlook
In 2005, we are planning for continued growth in annual revenue and increasing gross margin dollars. We also expect to see continued
growth in the total number of computers using our microprocessors. Further, we expect continued benefit from the productive use of our 90-
nanometer process technology on 300mm wafers. At the same time, we will continue to invest in our next generation 65-nanometer process
technology. Revenue for ICG is largely dependent on our continuing to secure design wins for our customers’ new and existing products, on
supplying the products for these design wins and on OEMs taking the product designs to production. Demand for our flash memory products is
uncertain in the highly competitive cellular handset market segment. Revenue growth for our flash memory products is largely dependent on
customer demand for higher density flash memory and continued user adoption of new leading-edge cellular handsets. The statements below
do not include any impact related to the expensing of stock options according to Statement of Financial Accounting Standards (SFAS) No.
123R, “Share-Based Payment.” If we had applied SFAS No. 123R to our results for the year ended December 25, 2004, our gross margin
percentage would have been lower by approximately one percentage point. In addition, the expensing of stock options would increase operating
expenses, which include both R&D expenses and marketing, general and administrative expenses, and would affect the tax rate. See “Note 2:
Accounting Policies” in Part II, Item 8 of this Form 10-K.
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 types and performance capabilities of microprocessors 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 desktop, mobile and server
microprocessors, the mix of types and performance levels of microprocessors sold affects the average selling 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 2005 is 58% plus or minus a few points. The 58% midpoint is approximately flat compared to our 2004
gross margin of 57.7%. In the first half of 2005, higher unit volumes for microprocessors and higher factory utilization are expected to be offset
by higher start-up costs related to the ramp of our 65-nanometer process technology. In the second half of 2005, these start-up costs should
decline, and if our business progresses according to typical seasonal patterns, we expect our gross margin percentage to be higher than in the
first half of 2005.
Our gross margin varies primarily with revenue levels, which are dependent on unit volumes and prices, as well as the mix of types and
performance levels of processors sold, and 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 our factories, timing and execution of the production ramp, excess of manufacturing or
assembly and test capacity, the reusability of factory equipment, impairment of manufacturing or assembly and test assets, 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 overall strategy and the acceptance of our products in specific market
segments. We currently expect that capital spending will be between $4.9 billion and $5.3 billion in 2005, compared to $3.8 billion in 2004.
The midpoint of this range, $5.1 billion, is significantly higher than in 2004. Most of the projected increase will be spent to ramp capacity on
our 65-nanometer process technology in 300mm factories. In fact, 90% of our fab equipment spending is anticipated to be on 65-nanometer
process technology. This capital-spending plan is dependent on expectations regarding production efficiencies and delivery times of various
machinery and equipment, and construction schedules. 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, and manufacturing and/or
assembly and test capacity would be under-utilized, and the rate of capital spending could be reduced. We could be required to record an
impairment of our manufacturing or assembly and test equipment and/or facilities, or factory planning decisions may cause us to record
accelerated depreciation. However, in the long term, revenue and gross margin may also be affected if we do not add capacity fast enough to
meet market demand.
Depreciation for 2005 is expected to be approximately $4.4 billion, plus or minus $100 million, compared to $4.6 billion in 2004.
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