Intel Grapples With Inventory Balance

In a conference call Tuesday with financial analysts, Intel President Paul Otellini said the company's financial results were affected by a slower-than-expected adoption of its latest desktop chip, formerly code-named Prescott, and an abundance of wafers from its new manufacturing process.

Prescott presented issues for Intel on both ends of the process. The chip is being built under Intel's new, more efficient 300mm-based fabrication process, which executives said produced a greater-than-expected "yield" on those wafers. But at the same time, Otellini said, customer conversion to systems with the new chips "ran below our goals" in the early part of the quarter and accelerated toward the end. A better balance should be achieved in the second half, he said.

One result may be lower average selling prices on core Intel Architecture products. The company already lowered its expectations for gross profit margin for the third quarter from about 62 percent to 60 percent. Eventually, however, Intel's process for 300mm wafers and 90nm and 65nm processors are expected to be the most efficient in the industry, which would give the company an even greater economy of scale over its rivals.

Still, Intel's second-quarter results indicate some bumps in the road. Overall, the company turned in a profit of 27 cents per share on revenue of $8.05 billion. The earnings were on target with Wall Street projections, but revenue came in slightly below what analysts expected.

Looking ahead, the Santa Clara, Calif.-based chip maker said higher-than-expected sales of lower-margin products like flash memory and chipsets will mean that a lower overall gross-margin percentage could come in the second half of the year.

Besides the issues with Prescott and product mix, Otellini said Intel doesn't foresee any slowdown to the corporate refresh cycle that began last year and that seasonal patterns remain.