Intel 2005 Annual Report Download - page 40

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Flash Memory Group
The revenue and operating loss for the Flash Memory Group (FMG) for the three years ended December 31, 2005 were as follows:
Revenue for the FMG operating segment remained approximately flat in 2005 at $2.3 billion compared to 2004. Revenue was positively affected by
higher unit sales and negatively affected by lower average selling prices. Operating loss remained approximately flat in 2005 at $154 million,
compared to $149 million in 2004. The operating loss was positively affected by lower unit costs and negatively affected by higher operating expenses.
In 2006, we will continue ramping Intel StrataFlash products on 90-nanometer process technology, and plan to grow revenue within the highly
competitive NOR market segment. Additionally, in 2006, FMG will also include the results of sales of NAND flash memory products.
For 2004, revenue for the FMG operating segment increased $677 million, or 42%, compared to 2003. The increase in FMG revenue was primarily
due to higher unit sales. Operating loss remained approximately flat in 2004 at $149 million, compared to $152 million in 2003. The operating loss
was positively affected by higher revenue, as well as approximately $100 million from lower inventory write-offs for flash memory products due to
improved demand and sales of NOR flash memory inventory that had been previously written down. This positive effect was offset by higher unit
costs for flash memory products, as we sold higher density products, and by the impact of reducing the carrying value of ending inventory to lower
current replacement costs.
Operating Expenses
Operating expenses for the three years ended December 31, 2005 were as follows:
Research and development spending increased $367 million, or 8%, in 2005 compared to 2004, and increased $418 million, or 10%, in 2004 compared
to 2003. The increase in 2005 compared to 2004 was primarily due to higher headcount and profit-dependent compensation expenses, partially offset
by lower expenses related to development for our next-generation 65-nanometer manufacturing process technology. In addition, fiscal year 2005
included 53 weeks in contrast to 52 weeks in 2004. The increase in 2004 compared to 2003 was primarily due to higher expenses related to
development of manufacturing process technologies, including our 65-nanometer process on 300mm wafers, and higher expenses for product
development programs, as well as higher profit-dependent compensation expenses.
Marketing, general and administrative expenses increased $1.0 billion, or 22%, in 2005 compared to 2004, and increased $381 million, or 9%, in 2004
compared to 2003. The increase in 2005 was primarily due to higher marketing program spending, higher headcount and higher profit-dependent
compensation expenses as well as the extra work week. The increase in 2004 was primarily due to higher cooperative advertising expenses (as a result
of higher revenue from sales of microprocessors in the DEG and MG operating segments, and because our customers used a higher percentage of their
available Intel Inside program funds) and increased profit-dependent compensation expenses. In addition, the increase was due to higher marketing
expenses from additional marketing programs and increased advertising expenses.
Research and development along with marketing, general and administrative expenses were 28% of net revenue in 2005 and 2004, and 29% of net
revenue in 2003.
36
(In Millions)
2005
2004
2003
Revenue
$
2,278
$
2,285
$
1,608
Operating income (loss)
$
(154
)
$
(149
)
$
(152
)
(In Millions)
2005
2004
2003
Research and development
$
5,145
$
4,778
$
4,360
Marketing, general and administrative
$
5,688
$
4,659
$
4,278
Impairment of goodwill
$
—
$
—
$
617
Amortization and impairment of acquisition
-
related intangibles and costs
$
126
$
179
$
301
Purchased in
-
process research and development
$
—
$
—
$
5