FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Intel Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>
2200 Mission College Boulevard
Santa Clara, CA 95052
(408) 765-8080
http://www.intel.com

UNION CITY, Ca., January 16, 1997/FOOLWIRE/ ---Intel reported their fourth quarter and fiscal 1996 results on January 14th after the market close. Revenue in the fourth quarter was $6.4 billion, up 25% from the third quarter revenues of $5.1 billion and 41% from last year's fourth quarter. Earnings were $2.13 per share.

The company characterized the quarter as "outstanding." Business was good across all geographies and all product lines and their execution in responding to increased level of business was excellent. The combination of strong demand and good execution led to records in revenues and pre-tax that were substantially above their previous records.

Unit shipments of microprocessors and chipsets set new records. Furthermore, all major products showed increases in unit shipments for Q4 over Q3.

GROSS MARGINS. Their goal remains to increase absolute dollar margins and they clearly met their goal in Q4. As was the case in the third quarter, there were no unusual royalties or write-offs that would affect gross margin in the fourth quarter. Gross margin percentage in Q4 was 63%, which was 6 points higher than Q3. The percentage in Q4 was higher for several reasons. First, they had a favorable product mix, as microprocessors accounted for most of the revenue increase over the prior quarter. Second, they shipped more units in Q4 versus Q3 and the incremental units had lower than normal costs. This is to be expected in a capital-intensive environment with incremental volume. Costs and margins will return to normal levels fairly quickly. Finally, they did not have a price reduction in the quarter on Pentium processors.

Spending grew to $1.2 billion, 22% over Q3. The growth was a bit higher than they had forecasted, primarily due to the revenue and profit-related expenses being higher than expected. Interest and other income was $133 million, above expectations because cash balances were higher than anticipated in November when they made their forecast for the quarter. The average shares outstanding were 897 million, higher than Q3 primarily due to the increased stock price in the quarter.

BALANCE SHEET ITEMS. Inventory dropped in the quarter by $77 million. This inventory level is less than they would like to have at this time and they will increase inventory when the opportunity arises. They took about $800 million out of inventory year-over-year. They indicated at the end of the third quarter conference call that inventory was pretty low and they wouldn't be uncomfortable with a little growth. Since then, they took out another $80 million. So, obviously they would like to see it grow back to at least what they had going into Q4 and even a little more than that would be fine. Channel inventory comments are based on what they can see with their OEMs, distributors, and their view into the channel on a worldwide basis. Even though the US retail sales may not have been as good as people expected them to be based on very preliminary numbers, they were certainly up from a year ago. Because of the impending launch of the MMX technology based product, Intel doesn't believe that they had a lot of non-MMX technology product left over at year end that they would have had to worry about in terms of the transition. So their view at this point currently seems pretty reasonable. Net cash grew by about $2 billion in the quarter which was driven by a combination of the increase in net income and a a reduction in working capital. Earnings per share, at $2.13, was up 44% from Q3 and up 117% from Q4 1995.

REVENUE DRIVERS. Intel's fourth quarter revenue was at an all-time high. It was driven by growth in all geographies and included normal seasonal growth in Europe. Analyzing their revenue growth trends, the US retail segment as percent of the total worldwide PC market is becoming not the driver it used to be and Intel now focuses on all markets, not just US retail. Growth through the third quarter was principally a function of significant unit growth in microprocessor shipments, which reached an all-time high. Pentium processor speed mix continued to increase over the quarter while Pentium Pro processor volumes grew significantly as that product line continues to benefit from broad acceptance, an ongoing corporate upgrade purchase cycle, and deployment of Windows NT. Intel also began volume shipments of their new Pentium processor with MMX technology in Q4 in preparation for its introduction on January 8th. They don't believe they will hit supply and demand equilibrium this quarter, it's still probably a little tight.

GEOGRAPHIC TRENDS. 1996 as a whole, was the year of Asia/Pacific for Intel revenue growth. Revenues in Asia/Pacific grew from 12% of their revenues in 1995 to 18% in 1996 and exited the year at 20% of the total. They think this growth is a function of a couple of things. The economies are booming in that part of the world, particularly in China. PCs going into large and small business are sort of requirements for doing business in the modern world. So as those businesses emerge and get going and start looking at world trade, it fires growth. The other vector is for home use, both in education where it is an important factor and the growth of the Internet, even in China. So, there is a bunch of stuff coming together in an economy that has a reasonable amount of money to spend. In 1996 the Americas' region share of Intel revenue, while growing in absolute terms, dropped 7% to 42%. The growth of non-US PC consumption continues to outpace that in the United States. As far as geographic mix, they think as PCs become more pervasive and more a requirement for both education and business, the mix will tend to disperse towards average per capita in terms of the developed parts of the world. Then you get into sequential machines and replacement rates and those kinds of things.

CHANNEL INVENTORY. Intel expects revenues in Q1 to be flattish from Q4 and their backlog for Q1 supports this. Distributor inventories grew a bit this quarter, resulting principally from shipments into the channel late in the quarter in anticipation of January sales out. Channel inventories in general seem to be in good shape worldwide and they see no signs of surplus. They had record shipments of flash memory, but saw ASP erosion offsetting the volume growth as it has in much of the general semiconductor industry.

PRODUCTION CAPACITY. Intel is continuing to add capacity. The capital forecast is $4.5 billion for next year with about one third going into manufacturing bricks and mortar, about one third going into equipment, and about one third going into engineering and administrative building. That includes finishing two fabs they have started, beginning a new fab in Ft. Worth, and starting an assembly test plant. More than that, it includes bringing the 0.25 micron process online sometime this year and adding capability inside the existing factories. It is very likely they would take both their Pentium generation and their P6 generation to that process the way they have with prior generations. So, they are continuing to expand capacity as the year continues on. As far as demand, they will be able to meet their current year's growth for customers in the near term. That includes the demand for the 200 mHz Pentium product. Their production has recovered where they would like it to be and they are now shipping both 180 mHz and 200 mHz versions in high volume.

COMPONENT/PROCESSOR MIX ON PENTIUMS. On the Pentium processor, motherboards shipped as a percent of processors shipped continues down as they expect in their technology that has been out a year or two. That contrasts with Pentium Pro, a new product in the beginning stages. As advanced technology moves into the marketplace they tend to have a pretty high percentage. They don't plan to give much specific guidance on the processor to component ratio going forward. They said that the patterns they are seeing on the Pentium Pro are similar to the patterns they saw with the Pentium. For the Pentium with MMX technology, the mix is not really a decision that Intel makes. The Pentium with MMX technology is the same socket as the Pentium without MMX technology. Their customers typically buy the motherboards without CPUs and end up putting whatever frequency or flavor of Pentium processor they choose. So it's not really predictable, nor does it matter.

PENTIUM WITH MMX LAUNCH. Intel released the Pentium processor with MMX technology last week at 166 mHz and 200 mHz, putting it pretty high in their overall Pentium processor product line. The price points are typically, from what they've seen, at $1600 and above, running up to $2200-$2500. It is rather high, but is going to come down in price over the course of the year like all of their products. The next round of price cuts is scheduled for February 1st. They have a very aggressive manufacturing ramp, but the exact mix is really a function of what their customers ask them to build in terms of the mix between the MMX technology version and the one without.

KLAMATH MODEL STRATEGY. The company was asked what advantage the Klamath module strategy gives them in erecting some sort of barrier to competitive entry. They responded that this was not the intent behind the design. They looked at the product form factor and integration level that made the most sense from the ability to scale frequency over time and to be able to handle multiple products in a common motherboard, much like they had in the old socketed days of Pentium processor or 486. They were asked if they thought there would still be some barriers building and they responded that they think there are clever engineers out there. Klamath is still on track to be introduced sometime in the first half of 1997.

AGP STRATEGY. The program is on track and chipsets that support it will be coming out in the second half. Graphics vendors with graphics chips that support it will be there in the second half too. Microsoft is in support of it and the bulk of the large graphics-intensive ISVs are also supportive of it. The program is moving along fine.

THE NOTEBOOK MARKET. This sector looks pretty good. Comparing it to a year ago, the number of OEMs shipping Pentium processor based notebooks is basically across the board from a year ago. They are shipping in rather high average frequency mix because screen costs are still rather high so they can afford a fairly rich CPU budget. As far as overall demand, the US continues to lead with Japan and Western Europe following and it isn't yet a big market in Asia/Pacific. For the past couple of years, mobile computing has grown at or slightly above the desktop market, but it's not materially different. As far as the Pentium Pro, they do not expect to ship a mobile version within the first half of the year. The problem with putting a Pentium Pro into a mobile unit is that they need to make sure it meets the thermal envelope that most of their mobile OEM manufacturers are designing to, but they are working with them pretty aggressively to make sure they are set up when the product is available. It is not an unsolvable problem -- pretty straightforward engineering.

Q1 OUTLOOK. They believe revenue in Q1 will be approximately flat to the fourth quarter level of $6.4 billion. Gross margin absolute dollars and percentage will likely be flat to down in Q1 versus Q4. This is primarily driven by increased manufacturing costs as they add capabilities to insure they can meet future demand. Increased costs and flat revenue means they will most likely not sustain the Q4 margin percentage. Their gross margin goal for the year remains the same as it has been for several years, to increase absolute dollar margins. They will continue to make their investment decisions with this guiding principle. It is extremely difficult to predict a gross margin percentage for the year. The percentage is a function of many variables. In the last couple of years, product mix has been a variable that made it difficult to predict the margin percentage. Further, now that the product mix has a substantial affect on the percentage, it can change quickly. Based on their expectations of business levels, product mix, and manufacturing investment, the gross margin percentage for the year should be about 50% plus or minus a few points. They continue to invest and expand their efforts in non-processor areas -- networking, communications, and other semiconductor products such as flash and embedded controllers. These are all products that would have lower gross margin percentages but could add substantial absolute margin dollars. In addition, they certainly will continue to deliver their new processor technologies into market at various levels of integration. This has and will likely in the future lead to purchased material components like with their motherboard tragedy to make sure they get the technology into the marketplace as quickly as possible. Spending for Q1 will also increase as they continue to invest in R&D and marketing programs consistent with the current business rate. This should lead to a quarter-to-quarter increase in total spending of 4-5%. Other income should remain at about $139 million, depending on cash balances, interest rates, or other unusual items. At an average stock price of about $147, shares outstanding would be approximately 904 million. The tax rate for 1997 is expected to be 35.5%. Intel is also pleased to report that the board has approved a 2-for-1 stock split which will be effective as a stock distribution pending stockholder approval of increasing authorized shares in May.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.