Intel 2006 Annual Report Download - page 45

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
In 2005, the Asia-Pacific region’s revenue was approximately 50% of our total revenue, and it was our fastest growing region,
increasing 26% compared to 2004 and reflecting the movement of more of our customers’ PC supply chains to Asia. This
movement in the supply chain negatively affected our sales in the Americas region, which decreased 5% compared to 2004.
Japan revenue increased 19% and Europe revenue increased 6% during 2005 compared to 2004. We saw growth in both
mature and emerging markets in 2005 compared to 2004.
Overall gross margin dollars for 2005 were $23.0 billion, an increase of $3.3 billion, or 17%, compared to 2004. Our overall
gross margin percentage increased to 59.4% in 2005 from 57.7% in 2004. The overall gross margin percentage was positively
affected by a mix shift of our total revenue to the Mobility Group, which has a higher gross margin percentage. The gross
margin percentages for the Digital Enterprise Group and Flash Memory Group were higher and the gross margin percentage
for the Mobility Group was lower in 2005 compared to 2004. A substantial majority of our overall gross margin dollars in
2005 and 2004 was derived from the sale of microprocessors. As a result of a litigation settlement agreement with MicroUnity,
we recorded a $140 million charge to cost of sales in 2005, of which $110 million was allocated to the Digital Enterprise
Group and $30 million was allocated to the Mobility Group. The 2004 gross margin was affected by a litigation settlement
with Intergraph Corporation in which we recorded a $162 million charge to cost of sales, of which $120 million was allocated
to the Digital Enterprise Group and $42 million was allocated to the Mobility Group.
Digital Enterprise Group
The revenue and operating income for the Digital Enterprise Group (DEG) for the three years ended December 30, 2006 were
as follows:
Net revenue for the DEG operating segment decreased significantly, by $5.3 billion, or 21%, in 2006 compared to 2005. The
decline in net revenue was mostly due to a significant decline in microprocessor revenue, and to a lesser extent, a decline in
chipset, motherboard, and other revenue. The significant decline in microprocessor revenue was due to lower average selling
prices and unit sales of desktop microprocessors. Enterprise microprocessor revenue increased in 2006. The decline in chipset,
motherboard, and other revenue was due equally to lower chipset revenue and motherboard revenue. Microprocessors within
DEG include microprocessors designed for the desktop and enterprise computing market segments, previously included within
the former Intel Architecture business operating segment, as well as embedded microprocessors. Revenue from network
processors, which are based on our Intel XScale technology, is included in “chipset, motherboard, and other revenue” above.
Operating income decreased significantly by $4.8 billion, or 53%, in 2006 compared to 2005. Substantially all of the decrease
was due to the revenue decline. Higher microprocessor unit costs, along with $210 million of higher factory under-utilization
charges, were offset by approximately $540 million of lower start-up costs. Unit costs were higher in 2006 compared to 2005
due primarily to a mix shift to dual-
core microprocessors. Results for 2005 included a charge related to a settlement agreement
with MicroUnity.
For 2005, revenue for the DEG operating segment was approximately flat compared to 2004. Revenue from sales of
microprocessors was approximately flat, with slightly higher unit sales being offset by slightly lower average selling prices.
Revenue from sales of server microprocessors in 2005 was negatively affected by the highly competitive server market.
Chipset, motherboard, and other revenue was higher, primarily due to higher average selling prices of chipsets.
Operating income was also approximately flat, at $9.0 billion in 2005 compared to $8.9 billion in 2004. The operating income
for DEG was positively affected by lower microprocessor unit costs and higher chipset revenue. These improvements were
offset by approximately $380 million of higher start-up costs in 2005, primarily related to our 65-nanometer process
technology. Products based on our 65-nanometer process technology began shipping in the fourth quarter of 2005. Although
revenue was flat, operating expenses increased in 2005, which negatively affected operating income. Both periods were
negatively affected by litigation settlement agreements. Results for 2005 included a charge related to a settlement agreement
with MicroUnity, and results for 2004 included a charge related to a settlement agreement with Intergraph.
35
(In Millions)
2006 2005 2004
Microprocessor revenue
$
14,606
$
19,412
$
19,426
Chipset, motherboard, and other revenue
5,270
5,725
5,352
Net revenue
$
19,876
$
25,137
$
24,778
Operating income
$
4,267
$
9,020
$
8,856