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CPU Surplus Swells On Intel Inventory Glut

By now, most system builders selling desktop systems have realized there's an oversupply of some Intel processors. But the size of the swell may come as a surprise.

Research firm iSuppli reported July 31 that worldwide surplus semiconductor inventory--driven primarily by processors and chipsets from Intel--ballooned to $2 billion in the second quarter. That's up 77.6 percent from the first quarter and marks the highest level since excess inventory bulged to $1.6 billion during a troublesome glut in the third quarter of 2004.

The numbers illuminate what many in the U.S. channel have seen for at least the past quarter: drastic price cuts, more gray market activity and cautious buying. Yet they also indicate a complex product transition period for Intel.

The Santa Clara, Calif., chip maker moved up several product launches this year to stave off market share increases from rival Advanced Micro Devices. The most recent launch was Intel's Core 2 Duo desktop processors. Since that product shipped earlier than expected, Intel had to clear out excess supply of older chips, many in the system builder industry have said. Recent deep discounts knocked some Pentium 4 processors to as low as $74--a more than 50 percent reduction, in some cases--and Celerons to as low as $39. Sunnyvale, Calif.-based AMD countered with its own price cuts.

During Intel's second-quarter earnings call last month, company executives acknowledged the high inventory levels and addressed concerns raised by financial analysts. Intel's inventory position in the second quarter increased to $4.33 billion, up 21 percent from $3.57 billion in the first quarter. But executives said the company believes the inventory levels are adequate and will dissipate as demand rises in the second half.

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