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 per cent 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 per cent 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 per cent, or 58 per cent on a non-GAAP basis, both plus or minus a couple of percentage points. Analysts on average expected gross margins of about 62 per cent for the current quarter.
Chief Financial Officer Stacy Smith said about two-third of the anticipated decline in margins will come from excess capacity charges.
Intel is also running its factories at less than 50 per cent 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