FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (TMF Ralegh)

Intel Corp.
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2200 Mission College Blvd.
Santa Clara, CA 95052-8119
(408) 765-8080
http://www.intel.com

ALEXANDRIA, VA., (April 27, 1997) /FOOLWIRE/ -- Intel Corporation reported on April 14, 1997 its first quarter fiscal 1997 results. First quarter revenue was $6.4 billion, up 39% from last year, and earnings per share were $2.20 per share, new records for both revenues and earnings. In January, the company indicated that it expected revenues in the first quarter to be flat with fourth quarter levels. EPS increased 3% sequentially and 116% from $1.02 one year ago.

"Business was strong in the quarter, and out execution in responding to this high level of business was outstanding. Revenue by geography reflected strong demand within normal seasonal patterns. Shipments of microprocessors continued at high levels, with significant increases in shipments of Pentium Pro processors, Pentium processors with MMX technology, and initial shipments of Pentium II processors. The highlight of the first quarter was the excellent acceptance of the Pentium processor with MMX technology following its introduction in January. Revenue from embedded controllers continued at roughly the same level as the fourth quarter. Revenue from chipsets and flash memory declined in the quarter."

OTHER FINANCIAL ITEMS. "First quarter spending grew to $1.3 billion, up just under 3% from the fourth quarter. Higher R&D was offset by seasonally lower spending and Intel Inside. Interest and other income was $2008 million, higher than our expectation of $130 million, due to higher cash balances and a gain on the sale of securities. Average shares outstanding were 900 million, up from 897 million in Q4. During the quarter, we repurchased 7.7 million shares." Inventory increased by $80 million during the quarter, consistent with the company's plan to increase inventories from the "unusually low level at the end of the fourth quarter." Cash flow from operations was over $2.2 billion. Capital expenditures totaled $789 million and the company used $1.2 billion in share repurchases during the quarter. Net cash increased by $548 million.

GROSS MARGIN AND SECOND QUARTER OUTLOOK. "As always, our goal remains to increase absolute dollar margins, which grew to $4.1 billion in the first quarter. Gross margin percentage in the quarter was 64.2%. The principle variance from the prior quarter was a more favorable product mix, which produced an increase in gross margin percentage. Gross margin was not influenced materially by royalties or write-offs in the first quarter... We expect revenue to be flat to slightly up from first quarter levels... Based upon our product mix expectations, we expect gross margin percentage to be flat to slightly down from the first quarter level of 64.2%. As for the full year 1997, our gross margin goal remains the same as it has always been -- to increase absolute dollar margins. We will continue to make investment decisions consistent 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 and the variable with the greatest impact in the last few years has been product mix, which can change quickly. In January, we gave gross margin guidance for 1997 of about 60 percent, plus or minus a few points. Our current expectation is for gross margin percentage for the full year to be at the mid to higher part of that range. As we ramp new processor technologies into the marketplace, our motherboard revenue may increase. In addition, our newest product, the Pentium II processor, will be packaged with purchased components, primarily SRAMs and a single-edged contact cartridge. Both of these factors tend to increase absolute dollar margins but lower gross margin percentage. Spending (operating expenses) is also expected to increase, as we will continue to invest in R&D and marketing programs to support business growth. The increase in the second quarter will be greater due to increased merchandising, Intel Inside spending, and annual salary increases, which are effective on April 1. This should lead to a quarter-to-quarter expense increase of 7-9% in the second quarter."

"Interest and other income should be about $170 million, depending on cash balances, interest rates, and assuming no unanticipated items. We expect a tax rate of 35.5% to continue for the year."

SHARE BUYBACK AUTHORIZATION. The board of directors has increased its stock buyback authorization by 30 million shares, bringing the total authorization to 140 million shares.

PRODUCT DISCUSSION. Historically, Q1 has been a slow quarter as U.S. and European retail sales are slower after the Christmas season. This quarter, the company benefited from a boost in worldwide retail sales driven by the introduction of the Pentium processor with MMX technology in January. The company has been quite pleased with the introduction and the reception of MMX. This quarter, Intel also began volume revenue shipments to OEMs of the next-generation Pentium II microprocessor, which will be introduced in May. Pentium Pro shipments also grew significantly in Q1, benefiting from strong worldwide business demand for the product, especially for enterprises moving to Windows NT. All in all, new product machinery is working very well and the company has solid demand for all these products.

Shipments of Pentium processors without MMX technology declined from Q4 levels as the company began its transition to new products. In other product area, Intel's chipset business remains strong but declined from its seasonal Q4 high. Flash unit shipments increased, but continued pricing pressures drove flash revenues down from Q4 levels. Growth in Asia/Pacific outpaced the rest of the world. Revenues in that regional almost doubled year-over-year and Intel is selling as robust a mix of products in that region as in more mature markets. Brand preference in this geographic segment is as strong or stronger than in other markets, positioning the company well for growth going forward.

PRICING AND REVENUE GUIDANCE. There has been much speculation in the press about the company's upcoming pricing moves. The next regularly-scheduled pricing move will take effect at the end of April and it is not unlike the February move in overall impact. It is focused, as usual, on moving higher-performance parts into the mainstream. The company believes that its current backlog for the second quarter should yield revenues that will be flat to up slightly from Q1 levels.

QUESTION AND ANSWER SESSION. The company believes that there is very good demand for high-level products that pricing reductions will 'drive in new products from the top and drive out old products from the bottom.'

Processor margins are the highest of the company's product lines.

Excluding depreciation, cost of sales was lower in the first quarter because of product mix.

Unit growth flatness from Q4 to Q1 was not surprising, as that's the norm for this time of year. If anything, the company was surprised by the retail boost from the MMX launch. Going into the second quarter, the company believes flattish unit growth expectations is reasonable.

Broader pricing moves come at the high-end of the range of products. The goal in the price cuts is to sell out the factories.

Intel has 0.25 micron capacity plans for the second half of the year. The company is currently targetting capital expenditures of $4.5 billion, up from $3 billion in 1996. Most of that spending is related to 0.25 micron capacity slated for the second half of the year. 0.35 micron capacity will also be targeted for a move to smaller feature sizes.

Volume on the Pentium Pro was up significantly in the quarter. The company is still somewhat constrained on the Pentium Pro in the high end as demand outstripped capacity. The company tries to support the server configurations first as those customers depend most heavily on the processor's availability. Once again, the company has planned for more unit growth hoping to catch up with demand growth, but that has been an elusive target.

Worldwide sell-through indications on the MMX are very positive, and U.S. retail indications are excellent. The business marketplace seems to be pretty consistent in growth across geographies, especially as NT grows and businesses are buying PCs for the first time to run their businesses on that operating system.

As higher performance notebook products come off the 0.25 micron line, notebook products expend. At the same time, Intel is driving the MMX processor farther down into the notebook product line pricing, the net impact of which will be newer products with lower consumer price points in the notebook space.

Lead-times in the microprocessor arena generally don't change -- customers tend to book a quarter ahead of time. Turns business has come down and is expected to come down again in the second quarter.

"When we launched the Pentium processor into the mainstream marketplace, our motherboard as a percentage of our Pentium processor output went up dramatically. A lot of that had to do with the readiness of the infrastructure of the industry, both from a chipset standpoint and a third-party motherboard design standpoint to support the Pentium process ramp. In general, you're going to see our motherboard output as a percentage of our new processor always be higher at the leading edge microprocessor ramp. I think it's not going to be as acute as it was on Pentium II as it was back on Pentium because the industry seems to have learned to follow our pattern a bit more in terms of third-party motherboard designs. As we get ready to launch the Pentium II, the industry's much more ready to ramp the product on its own versus Intel's factories."

The company's strategy is to get technology to customers while increasing absolute gross profits. There are many reasons why gross margin percentage may drop in the future, but the margin percentage is not the focus of their overall corporate strategy. The company will continue to expand its efforts in the networking, communications, and other semiconductor areas such as flash and embedded controllers, all of which have lower gross margins. Intel will continue to deliver into the marketplace new processor technology at various levels of integration involving the use of purchased components and motherboards. While all the above increase gross profits, they decrease gross margin percentages.

Depreciation is expected to total $2.5 billion for the year and $580 million for Q2.

Flash demand, from a unit perspective, is very good. Worldwide demand, particularly in communications, is strong but pricing is still very aggressive with a number of competitors in the marketplace. Intel believes that it is number one in flash. AMD is one of three other competitors that the company watches very closely.

In terms of SRAMs and chipset limitations, the company feels that it is in better position on the Pentium II launch than with the Pentium launch. The first Pentium II will use the same chipset that the Pentium Pro has been using. The SRAMs embedded in the single-edge cartridge are industry-standard SRAMs. Intel will be positioning the product initially in the business desktop and workstation market and it believes that it will move very rapidly into the high-end consumer market in late 1997.

The company expects to ship Pentiums without MMX through the end of the year. By the end of the year, though, Intel believes that the majority of processors shipped will be equipped with MMX technology.

The bottleneck in consumer PC space has to do with the multimedia aspects of software, but that's the company believes that MMX will help that along. In enterprise computing, NT is bringing along demand, but speeds on the LAN and the WAN have been bottlenecks. In the aggregate, Intel doesn't see any fundamental limits to company's ability to sell its product.

The Pentium Pro has become the processor of choice in the server market. "I would expect that the Pentium II will quickly displace the Pentium Pro sales into the high-end of the consumer market segments. In servers, Pentium Pro will have a long life and because its architecture is particularly well-suited for multi-processing. The only real question is how fast Pentium Pro desktop machines in corporate get displaced by Pentium II. That tends to be a function of price. When the price of the Pentium II systems gets down to where they're attractive versus the Pentium Pro, it's over."

On sharecount, every five dollars in the share price translates into about a million shares on a diluted basis.

The company is bringing on capacity as fast as it can. In general, though, the company feels comfortable with its ability to meet demand. With Pentium II, however, naturally output will be dictated by the company's ramp and ability to get the yields it is looking for.

* 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.