Letter to our stockholders

2001 was a tough year for the technology industry. Most companies took a beating, and many investors wondered if technology was dead. Our answer is a resounding no. The history of technology revolutions is told in cycles of boom, bust, and build-out. Despite the recent downturn, we are confident that we will see decades of future growth in Internet-related technologies. Here at Intel, we are staying the course. Guided by our vision of the ongoing digital revolution, we continue to introduce new products and invest for the future so we are ready to ride the recovery.



As 2001 progressed, it became increasingly clear that the economy had drifted into a recession with worldwide impact. Just as the high-tech sector had fueled the previously buoyant worldwide economy, it also led the way into the slow business climate.

In 2001, the high-tech industry was characterized by high inventories and over-capacity of component and system products. Parts of the high-tech infrastructure had been built ahead of anticipated demand, leading many companies to cut back on their computing and communications technology expenditures in 2001. In addition, the dot-com collapse triggered market declines that affected all areas of the high-tech industry.

All this made for a pretty bleak year for Intel financially. Revenue for 2001 was $26.5 billion, down 21% from 2000. Including acquisition-related costs of nearly $2.5 billion, net income for 2001 was $1.3 billion, down 88% from $10.5 billion in 2000. Excluding these costs, net income was $3.6 billion, down 70% from 2000.

Our sales came from an increasingly international market. We ended 2001 with nearly two-thirds of our sales generated outside the Americas. For the first time in our history, sales were strongest in the Asia-Pacific region. A growing distributor channel and strong processor and chipset sales helped drive growth in Asia-Pacific, as it is increasingly becoming the manufacturing center for the world-wide PC industry. Sales were lower in the Americas and Japan than they were in 2000, reflecting the worldwide reach of the recession.

In response to the global slowdown, we focused our efforts around three key principles. First, we believe that, as in previous economic cycles, great new products will lead the recovery. In 2001, we accelerated our efforts to develop and introduce the prod-ucts that we expect will help bring the industry out of the downturn. In August, we introduced the Intel® Pentium® 4 processor running at 2.0 gigahertz, or 2.0 billion cycles per second. With its unique Intel ® NetBurst ™ microarchitecture, the Pentium 4 processor is optimized for a richer multimedia online experience. By year’s end, we were building this chip on our new 0.13-micron technology increasing on-chip memory while reducing processor size by nearly 30%.

We also continued to advance our 64-bit processor for high-end servers and workstations—the Intel ® Itanium ™ processor. This processor enables most data-intensive applications, such as enter-prise resource planning and intensive graphics modeling, to run much faster than they would on a 32-bit processor. In December 2001, our OEM customers began shipping to end users their initial pilot systems based on our next-generation Itanium processor, codenamed McKinley. We anticipate that the McKinley processor will be generally available in mid-2002.

Our product roadmap acceleration efforts were by no means confined to microprocessors. Our Ethernet products translate and transmit data across networks. In 2001, we introduced and shipped in volume the world’s first single-chip, 1-Gigabit Ethernet controller, which operates 10 times faster than the previous industry-standard product. Our Gigabit Ethernet solutions have been widely adopted. As of the end of 2001, Intel products accounted for more than half of the Gigabit Ethernet connections worldwide.

In flash memory, a critical ingredient of today’s smart cell phones and other handheld computing devices, we extended our leadership by introducing the first flash memory built on the 0.13-micron process technology. The new flash chip is nearly half the size of its predecessor and also consumes less power.

Our second key principle: we know that a downturn is no time to shy away from strategic spending. Though the high-tech industry was mired in overcapacity in 2001, we know from experi-ence that capacity wilts like lettuce. There’s always too much of yesterday’s technology and never enough of tomorrow’s. For Intel, tomorrow’s manufacturing capacity is necessary to build the advanced products we expect to help contribute to the recovery. Consequently, during this downturn, we did what may seem counter-intuitive: we accelerated our capital investments, spending $7.3 billion in 2001, compared with approximately $10 billion in capital spending over the previous two years combined. We also invested $3.8 billion in research and development in 2001, mostly focused on silicon products and processes.

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