Letter #67: Gordon Moore and Bob Noyce (1975)
Intel Cofounders | 1975 Shareholder Letter
Yesterday, Gordon Moore passed away. Today, I’d like to share with you the first shareholder letter he wrote as President of Intel.
Gordon had a very prolific career, with highlights including being part of the “Traitorous Eight” who left Shockley Semiconductor to start Fairchild Semiconductor, leaving Fairchild to start Intel with Bob Noyce (and bringing along Andy Grove), observing Moore’s Law (the observation that the number of transistors in an integrated circuit doubles about every two years), and establishing the Gordon and Betty Moore Foundation.
While perhaps today better known for Moore’s Law and founding Intel, Gordon first started Fairchild Semiconductor, which is known for being a key catalyst of the formation of Silicon Valley. They’re known as “The First Trillion Dollar Startup” — despite never having a market cap above $2.5bn. That’s because it spawned a spin-offs now known as “Fairchildren” that seeded the Silicon Valley ecosystem and led to the creation of companies like Apple, Google, Oracle, Facebook, Intel, and much more. In fact, a 2014 study found that “70% of the [130+ Bay Area tech companies trading on the NASDAQ or NYSE] can be traced directly back to the founders and employees of Fairchild. The 92 public companies that can be traced to Fairchild are now worth about $2.1tn, which is more than the annual GDP of Canada, India, or Spain.”
Gordon himself was at Fairchild until 1968, when he left alongside Bob Noyce to start Intel. He served as Executive Vice President from the company’s founding until 1975, when he took over as President. This is the letter he wrote that year.
I hope you enjoy this letter as much as I did!
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Letter
Intel was organized in 1968 to develop the burgeoning technology of integrated electronics, from which the corporation derives its name. During its brief history it has become the world’s largest producer of MOS circuits, and is in the top ten producers of all semiconductor devices.
The company has concentrated on large integrated circuits (LSI) rather than competing broadly in the semiconductor device market. Intel recognized the potential of LSI for memory applications and spearheaded the development of semiconductor memories, becoming the largest supplier of semiconductor memory components.
With the semiconductor memory components as a large volume production base, Intel was able to develop a position in the logic market which was and still is the largest market for integrated circuits. LSI had previously been used in this market mainly in the form of custom circuits designed for a particular application. A new concept was necessary to develop a large market for general applications of LSI circuits since only the largest applications could justify the initial development cost of custom circuits.
Intel introduced the microprocessor in 1971, allowing most logic to be performed by a microcomputer. The company continues to lead the development of the vast market opened by this new approach. Viewed as revolutionary by many, the microcomputer is finding markets in applications totally new to electronics, as well replacing existing semiconductor logic circuits.
The Memory Systems Division (MSD) was started in 1971 to offer to our customers complete memory systems as well as components. Here our knowledge of the critical design parameters of the components has given us a significant advantage in establishing ourselves in the systems business. MSD provides a significant outlet for our components, as well as design feedback for our components group.
In 1972, Intel entered the digital watch market through the acquisition of fledgling Microma, Inc. Digital watches are expected to displace a large fraction of the mechanical watches produced today. Microma's watches are dependent upon our LSI circuits and liquid crystal displays (LCD's) produced by Microma.
The semiconductor industry has been and will continue to be intensely competitive. Technological change has occurred rapidly, presenting us with new challenges and opportunities for profit. We expect to continue to take advantage of these new opportunities through our growing engineering, production and marketing capabilities.
Although 1975 revenues of $136.8 million were a new high, up 1.7% from 1974, earnings of $16.3 million, or $2.35 per share, were down by 17.7% from the record levels of 1974. The last two quarters do, however, compare favorably with the corresponding quarters in 1974 both in revenues and earnings.
The recession, which hit most of the semiconductor industry about mid-1974, has proven to be deeper and more persistent than previous dips, such as the one in 1970-71. As yet, we see no clear signs of any renewed strength in the electronic components portions of business. While the suddenness and depth of the decline were certainly exaggerated by a recognition on the part of the users that they had excess inventory for their projected business levels, this excess has, for the most part, been worked off. We feel that there is now relatively little inventory of Intel's products in our customers' hands and that our shipments approximate quite closely their usage. Any increase in usage levels which would also require increased inventory should cause rapid acceleration of orders. This has not yet occurred.
The relative softness in the components business was compensated somewhat by growth in the Memory Systems Division and in Microma, our electronic watch subsidiary. In particular, the market for add-on memory systems for IBM computers has been strong, and we expect it to continue strong into 1976. This is, in part, the result of new products added to our line and, in part, a result of a sales force added to serve this market directly as well as through third-party leasing companies.
Microma has placed its major emphasis during the year on building up volume production of its own brand of electronic watches and marketing them through quality department stores and similar retail outlets. The de-emphasis of modules sales reflected our view that, in order to participate in this large new market for electronics, it is necessary to make the complete watch. Progress has been gratifying. Microma has established itself as one of the leading producers of electronic watches.
Intel shipped over 50% more memory "bits" in 1975 than in 1974, showing that even in this period of economic recession the demand for memory has continued to expand rapidly even though it is not obvious from the revenue figures. A combination of unusually severe price drops in certain products and a trend toward increased complexity with correspondingly lower costs per function were responsible for the large decrease in average revenue per bit. Particularly important is the acceptance of 4096 bit random access memories (4K RAMs) to replace both cores and less complex semiconductor chips. These new devices offer large cost advantages to the user and are rapidly expanding the number of memory bits used. Intel has a strong position in this product area. We are expending considerable effort to enhance this position by offering a variety of 4K RAMs and by continuing to improve our ability to manufacture and test them efficiently so that we can supply a major fraction of the large projected requirements in 1976 and beyond.
The microcomputer is probably the most discussed new product in electronics. Intel pioneered these exciting devices and has a major market position. We offer the most complete line of microcomputer products including components, design aids and software. We have been investing heavily to retain this position. The worldwide economic situation has also slowed development of the microcomputer market in 1975. Production of many new systems which would have used our microcomputer components has been delayed. Production should proceed as conditions improve. However, we were successful in winning a large fraction of new design commitments to our products. The Intel products, particularly the 8080 family, have become industry standards. Some of our competitors have decided to become alternative sources to our products rather than to develop and support a microcomputer family of their own. This action strengthens the position of the Intel designs as standards and makes them acceptable to some large potential users who require multiple independent sources before making major product commitments. While alternative sources increase the pressure on prices, particularly in times of excess production capacity, we feel that over a period of time their existence is more of a positive than a negative for Intel.
Even though revenues were flat and conditions relatively uncertain in 1975, Intel expanded its R&D investment by 39% from 1974. This reflects our desire to maintain our position of technological leadership.
In many respects periods of soft economic conditions offer exceptional opportunities for well-financed companies to improve their relative technical positions. We feel our recruitment efforts have been quite successful and that our staff has been greatly strengthened. During 1975, we introduced 55 new products which accounted for 15% of our total revenue. These products will contribute a much greater percentage in 1976. Only through such continued investment in new products and technology can Intel hope to maintain its rate of progress within the industry.
As pre-announced in last year's annual report, there were several management changes this year. In addition to the moves whereby Bob Noyce, Gordon Moore and Andy Grove became Chairman, President, and Executive Vice President respectively, Ed Gelbach was made Sr. Vice President and General Manager of a newly created Components Division. Jack Carsten, Gene Flath and Les Vadasz were elected Vice Presidents for Marketing, Manufacturing, and Engineering respectively, in the new Components Division. Dick Egan joined our Memory Systems Division as Assistant General Manager and has managed our direct entry into add-on memory sales and leasing. Irv Cooper, Des Fitzgerald and Keith Thomson were elected Vice Presidents of Microma for Marketing, Engineering, and Manufacturing respectively.
A discussion of the year would not be complete without mention of the fire that destroyed the majority of our component assembly capacity last May 1. Our Penang, Malaysia, plant burned to the ground destroying the equipment and much of the inventory. It required a massive effort on the part of many people for us to recover with minimal problems for our customers. We have submitted insurance claims for the property and business interruption losses.
Our strong cash position and absence of debt will allow us to grow rapidly again as the world economy recovers. Inventories are at levels consistent with the present slowly growing levels of business. In anticipation of a return to a more vigorous economy, we have expanded our staff over the last six months. Employment is now 4600 compared to 3150 at the end of 1974 and 3350 in mid-1975.
Gordon E. Moore, President
Robert N. Noyce, Chairman of the Board
Wrap-up
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