Intel 1998 Annual Report Download - page 58

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of operations
Intel posted record net revenues in 1998, for the 12th consecutive year, increasing by 5% from 1997, and by 20% from 1996 to 1997. The
increases in both periods were primarily due to higher revenues from sales of micro-
processors by the Intel Architecture Business Group and to
a lesser extent due to increases in revenues of the Computing Enhancement Group.
Cost of sales increased by 22% from 1997 to 1998, primarily due to microprocessor unit volume growth and additional costs associated with
purchased components for the Single Edge Contact ("SEC") cartridge housing the Pentium-Registered Trademark-II processor. From 1996 to
1997, cost of sales increased by 8.5% primarily due to microprocessor unit volume growth, costs related to the 0.25-micron microprocessor
manufacturing process ramp and shifts in product mix, partially offset by factory efficiencies due to the increased volumes. The gross margin
percentage was 54% in 1998, compared to 60% in 1997 and 56% in 1996. See "Outlook" for a discussion of gross margin expectations.
Research and development spending grew by 14% from 1997 to 1998, primarily due to increased spending on development of microprocessor
products and the charge for in-process research and development related to the acquisition of Chips and Technologies, Inc. (See the discussion
about purchased in-process research and development under "Computing Enhancement Group segment.") Research and development spending
increased 30% from 1996 to 1997 due to substantially increased investment in both microprocessor product development and manufacturing
technology development.
Marketing, general and administrative spending grew 6% in 1998, primarily due to the Intel Inside-Registered Trademark- cooperative
advertising program and merchandising spending, partially offset by lower profit-dependent bonus expenses. From 1996 to 1997, marketing,
general and administrative spending grew 25%, primarily due to merchandising spending, the Intel Inside program and higher profit-dependent
expenses.
Interest expense increased $7 million from 1997 to 1998 due to higher average borrowing balances and lower interest capitalization. Interest
and other income was essentially unchanged for the same period, with higher gains on sales of equity securities and higher interest income
offset by lower foreign currency gains. For 1997 compared to 1996, interest expense was essentially unchanged, and interest and other income
increased by $393 million, primarily due to higher average investment balances and higher gains on sales of equity investments.
The Company's effective income tax rate decreased to 33.6% in 1998 from 34.8% in 1997 and 35.0% in 1996. Foreign income taxed at rates
different from U.S. rates contributed to the lower tax rate in 1998.
Intel Architecture Business Group segment. Revenues increased 4% from 1997 to 1998, primarily due to higher volumes of microprocessors
sold, particularly processors based on the P6 microarchitecture (including the Intel-Registered Trademark- Celeron-TM-, Pentium II, Pentium-
Registered Trademark- Pro and Pentium-Registered Trademark- II Xeon-TM- processors). The higher volumes were partially offset by lower
average selling prices. Revenues for this operating segment increased 22% from 1996 to 1997, primarily due to higher volumes of the Pentium-
Registered Trademark- microprocessor family (including processors with Intel's MMX-TM- media enhancement technology) and Pentium Pro
processor, and the introduction of the Pentium II processor, along with increased average selling prices in the first half of 1997 compared to the
first half of 1996.
During 1998, sales of microprocessors and related board-level products based on the P6 microarchitecture comprised a majority of the
Company's consolidated revenues and a substantial majority of its gross margin. Sales of these microprocessors first became a significant
portion of the Company's revenues and gross margin in 1997. Also during 1998, sales of Pentium family processors, including Pentium
processors with MMX technology, were a rapidly declining but still significant portion of the Company's revenues and gross margin. During
1997, sales of the Pentium family processors were a majority of the Company's revenues and gross margin, and in 1996 were a majority of its
revenues and a substantial majority of its gross margin.
Operating profit for the Intel Architecture Business Group operating segment decreased 15% from 1997 to 1998, primarily due to the increased
costs related to the SEC cartridge in the Pentium II processor and the lower average selling prices of processors in the first half of 1998
compared to the first half of 1997. In the second half of 1998, gross margin improved compared to the first half of the year as the transition to
the P6 microarchitecture was largely complete and the SEC cartridge had no further