Last week, Intel (Nasdaq: INTC) released its fourth-quarter and full-year results for 2000. For Intel, the year was one of ups and downs. During the first half of the year, the company produced results that exceeded expectations, while it struggled to meet the market's demand for its products. Back in July when I listened to the second-quarter conference call, I made note of the fact that I had never recalled hearing Intel's management express such an optimistic view about its future.

It didn't even take a quarter for that attitude to change. As the economy started to sour, Intel issued an earnings warning for the third quarter. That was followed by another negative earnings pre-announcement for the fourth quarter, which is historically Intel's strongest. On the fourth-quarter conference call, Intel's management's sounded as downcast as I've ever heard them. But I was encouraged by their resolve and their focus on not repeating past mistakes.

Based on the Rule Maker numbers, Intel's results for both the year and the quarter were acceptable. Intel exceeded every one of our Rule Maker targets for the year, and generally showed improvement on a year-over-year basis. However, that doesn't mean that all was rosy. Intel lost market share this year to Advanced Micro Devices (NYSE: AMD), its most meaningful competitor. In addition, Intel also had a number of other disappointments:

  • Insufficient production capacity during the first half of 2000
  • The recall of its 1.13 GHz Pentium III chip in August
  • The recall of motherboards in May, resulting in a $253 million charge to earnings
  • Delays in chipsets designed to work with Rambus (Nasdaq: RMBS) memory dating back to 1999
  • Delay in the release of its Itanium chip, which was pushed back to 2001
  • Cancellation of Timna, an inexpensive processor designed to replace Celeron

Intel's success has historically been based on its efficient manufacturing processes. Historically, AMD has had quite a bit of difficulty delivering reliable chips on a timely basis. To a certain extent, those roles were reversed this year. As a result, at the end of the year, AMD's position was much stronger.

It's important for us to understand what we see for Intel in the year ahead. First off, Intel admits that its near-term outlook includes a high degree of uncertainty. Its comfort level with forecasting results for the year ahead is as low as it's been in years. Typically, Intel expects its first-quarter sales and earnings to be a few percentage points lower than its results for the fourth quarter; however, this year, it estimates that this decline will be 15% plus or minus several percentage points.

Fortunately, Intel's focus is on the long term. Despite its uncertainty about the year ahead, Intel has stated that it will not make any cuts compromising its future or the long-term value of its shareholders' investments. Since I'm a shareholder, this is certainly the kind of talk I want to hear.

Intel has never had a year in which its year-over-year investment in research and development (R&D) decreased. It stated on its conference call that 2001 would not see that trend change, as it expects to see its investment in R&D increase by about 10% over the amount spent in 2000. In addition, it expects that its capital spending will increase from $6.7 billion to $7.5 billion this year.

This additional capital investment is necessary to enable Intel to further its movement to 0.13-micron manufacturing technology, which will result in more profit for Intel, as well as the production of chips with higher levels of performance and lower production costs. In addition, converting its production process to 300-millimeter wafers should result in a 30% cost reduction in 2002.

As part of this effort, Intel will also be doubling the production ramping of its Pentium 4 (P4) chips. Intel is on track to produce well above 1 million P4 chips this quarter. It also expects that, during 2001, the P4 will overtake the Pentium III as the microprocessor Intel manufactures in the greatest quantity.

Intel has been moving away from its earlier decision to rely on Rambus memory chips, and now plans to deliver Pentium 4 chipsets supporting other types of memory by next summer.

In past economic downturns, Intel has ensured its success by continuing to invest in technology, focusing on reducing non-essential spending and preparing to meet its customer requirements when the economy strengthens. It sees no reason that its response to the latest downturn should be any different.

According to Intel's CFO Andy Bryant, the bottom line is that "Intel has the financial strength and the management conviction to invest in key products and processes through these difficult times, to emerge a better, more-competitive company."

In adopting this strategy, Intel is also acting to correct some of its past mistakes. While the economy was strong in 1998, it was a difficult year for Intel. It reacted by halting construction of a plant in Fort Worth, Texas. That decision ended up being one of the causes of its production shortfall earlier this year.

Intel has decided to hold off on nearly all of its office-building projects, but it is moving ahead with efforts to build, expand, and upgrade manufacturing facilities. This is part of the company's aggressive cost-reduction program targeting hiring, discretionary, and capital spending. Hiring has been curtailed, and nearly all office-building projects have been stopped or postponed.

Most importantly, Intel is once again focusing on manufacturing execution. It has reassigned several executives, including its head of processor design. In addition, executive bonuses have now been aligned with operational goals.

While we cannot be certain that Intel's efforts will be successful, it is encouraging to hear that the company is moving ahead with plans to fix what's ailed it this past year. It also is positioning itself to take advantage of the opportunities that it believes will arise as a result of economic conditions. This should be music to the ears of long-term shareholders.

Have a great day.

Phil Weiss, TMF Grape on the Discussion Boards, currently reporting to you from Tokyo.