Intel Corp's weak outlook for fourth-quarter revenue and margins dispelled lingering hopes for a revival in PC demand towards the end of the year, pushing its shares 2 percent lower.
Intel, along with rival Advanced Micro Devices, had previously warned of weak demand for PCs, hit by a troubled global economy and the growing popularity of tablets like Apple Inc's iPad, once dismissed as a niche device but now leading a fundamental shift in consumer computing.
Intel's corporate-focused server and data center business has helped offset weak PC sales in recent quarters, but in the third quarter, revenue from that division also disappointed as enterprises bought fewer servers.
"You have to remember, data center has been the rock we've all leaned on," said Patrick Wang, an analyst at Evercore Partners. "It's a reflection of enterprises and companies rationalizing their year-end spend."
With economic growth slowing in China and struggling in Europe and the United States, global PC shipments are expected by analysts to decline slightly this year, the first annual drop since 2001.
Intel said the data center business, which sells server chips and other equipment to companies and governments, grew 6 percent year over year in the third quarter, although it was down 5 percent from the prior quarter.
Profitability will also take a hit, as Intel idles excess capacity at its plants in an effort to reduce inventories of its processors.
It foresees fourth-quarter gross margins of 57 percent, or 58 percent on a non-GAAP basis, both plus or minus a couple of percentage points. Analysts on average expected gross margins of about 62 percent for the current quarter.
Chief Financial Officer Stacy Smith said about two-thirds of the anticipated decline in margins will come from excess capacity charges.
Intel is also running its factories at less than 50 percent of their capacity, redirecting unused space and equipment to be used on more cutting-edge production lines still being built.
To inject new life into PCs, Intel has been promoting a new category of thin, "Ultrabook" laptops with touch screens enabled by Microsoft's upcoming Windows 8. But the Ultrabooks launched so far have been criticized as too expensive, and manufacturers have shipped fewer than expected.
"I absolutely expect growth in the PC segment, and I firmly believe that the level of innovation we're seeing in Ultrabooks is going to be one of the catalysts," Smith told Reuters in a telephone interview. "I'm not going to put a number out there -but I expect it to grow."
Shares of Intel fell to $22.35 in after hours trade, after closing up 2.85 percent at $22.35.
Microsoft as savior?
The world's leading chipmaker is used to being king of the personal computer market, particularly through its historic "Wintel" alliance with Microsoft Corp, which led to breathtakingly high profit margins and an 80 percent market share.
But in the fast-growing and cut-throat mobile world, Intel is struggling - its market share is less than 1 percent of smartphones, trailing Qualcomm Inc, Samsung Electronics Co Ltd, ARM Holdings Plc and others.
That leaves some investors, already concerned about a lackluster global economy, asking if Intel's invincibility has come to an end, and whether its profit and revenue growth potential may come back down to earth.
The PC industry has been banking on Microsoft's launch of Windows 8 later in October to breathe new life into laptops and slow the trend of consumers buying smartphones and tablets instead of PCs. But there has been little sign of a significant bump in PC manufacturing or shipments ahead of the launch, at least in the short-term, analysts say.
Intel estimated fourth-quarter revenue of $13.6 billion, plus or minus $500 million. Analysts expected $13.74 billion for the current quarter.
In the third quarter, Intel's revenue was $13.5 billion, compared with $14.2 billion a year earlier. Analysts had expected $13.23 billion in revenue for the third quarter, according to Thomson Reuters I/B/E/S.
Net earnings were $2.97 billion, or 58 cents a share, compared with $3.47 billion, or 65 cents a share in the same quarter last year.