Intel 2006 Annual Report Download - page 54

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Our financial results are substantially dependent on sales of microprocessors. Revenue is partly a function of the mix of types
and performance capabilities of microprocessors sold, as well as the mix of chipsets, flash memory, and other semiconductor
products sold, all of which are difficult to forecast. Because of the wide price differences among mobile, desktop, 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. Revenue is affected by the timing of new Intel product
introductions and the demand for and market acceptance of our products, as well as actions taken by our competitors,
including new product offerings, marketing programs, and pricing pressures, and our reaction to such actions. Microprocessor
revenue is also dependent on the availability of other parts of the platform, including chipsets, motherboards, operating system
software, and application software. Revenue is also subject to demand fluctuations and the impact of economic conditions in
various geographic regions.
Our gross margin expectation for 2007 is 50% plus or minus a few points. The 50% midpoint is slightly lower compared to our
2006 gross margin of 51.5%, primarily due to expected higher start-up costs for microprocessors and chipsets, partially offset
by lower unit costs on microprocessors. The gross margin percentage could vary significantly from expectations based on
changes in revenue levels; product mix and pricing; capacity utilization; changes in unit costs; excess or obsolete inventory;
manufacturing yields; the timing and execution of the manufacturing ramp and associated costs, including start-up costs; and
impairments of long-lived assets, including manufacturing, assembly and test, and intangible assets.
We have continued to expand our semiconductor manufacturing and assembly and test capacity over the last few years, and
we continue to plan capacity based on our overall strategy and the acceptance of our products in specific market segments. We
currently expect that capital spending in 2007 will be approximately $5.5 billion, plus or minus $200 million, compared to
$5.8 billion in 2006. Capital spending is expected to be lower in 2007 compared to 2006, primarily due to continued efficiency
efforts, partially offset by higher spending on capital equipment, related to our next-generation, 45-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, 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. In addition, if demand for our products is
reduced or we fail to accurately forecast demand, we could be required to write down inventory, which would have a negative
impact on our gross margin. 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 2007 is expected to be approximately $4.8 billion, plus or minus $100 million, compared to $4.7 billion in
2006.
Spending on research and development, plus marketing, general and administrative expenses (total spending) in 2007 is
expected to be approximately $10.7 billion. The expectation for total spending in 2007 is significantly lower than our 2006
spending of $12.0 billion. We continue to focus on controlling our total spending through cost-saving actions. Expenses,
particularly certain marketing and compensation expenses, vary depending on the level of demand for our products, the level
of revenue and profits, and impairments of long-lived assets. Research and development spending in 2007 is expected to be
approximately $5.4 billion.
The tax rate for 2007 is expected to be approximately 30%. The estimated effective tax rate is based on tax law in effect at
December 30, 2006 and current expected income. The tax rate may also be affected by the closing of acquisitions or
divestitures; the jurisdiction in which profits are determined to be earned and taxed; changes in estimates of credits, benefits,
and deductions; the resolution of issues arising from tax audits with various tax authorities; and the ability to realize deferred
tax assets.
We believe that we have the product offerings, facilities, personnel, and competitive and financial resources for continued
business success, but future revenue, costs, gross margin, and profits are all influenced by a number of factors, including those
discussed above, all of which are inherently difficult to forecast.
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