UPDATE: Intel Lowers 3Q Sales, Margin Targets On Weaker PC Demand

Intel Corp. (INTC) cut its third-quarter revenue and gross-margin target on Friday as weaker-than-expected consumer demand for personal computers takes its toll on the chip giant.

Intel warned it expects revenue of $10.8 billion to $11.2 billion and a gross margin of 66%, plus or minus one percentage point. Both of the estimates fall well short of the rosy expectations it announced in July, when it surprised investors and analysts by forecasting revenue of $11.2 billion to $12 billion and a gross margin of 67%, plus or minus a couple of percentage points.

Intel's new revenue guidance comes amid growing concerns the global economy is slowing again, a development that has prompted many consumers to hold off on purchases of computers that use Intel's chips to power them. Difficulties in Europe, which has had trouble shaking off the effects of the financial crisis, are also seen weighing on computer sales, another drag on Intel.

Industry research group Gartner Inc. (IT) recently slashed its forecast for worldwide business technology spending, while Cisco Systems Inc. (CSCO) sounded a cautious tone two weeks ago when it said it was seeing "mixed signals" and an "unusual uncertainty" during a forecast for the rest of its fiscal year that disappointed investors.

Intel shares, which were halted in conjunction with the release, hit a low of $17.81 soon after resuming trading and triggered a single-stock circuit breaker. But they quickly turned positive, edging up 1.6% to $18.47 in recent trading.

Still, shares of Intel, which makes the chips that run 80% of the world's computers, are down 11% in August, far worse than the 3.8% decline in the Standard & Poor's 500 and the 6% slide in the information technology sector.

The reaction to Intel's cut among chip stocks was muted. Advanced Micro Devices Inc. (AMD) was up 1 cent at $5.88, while Texas Instruments Inc. (TXN) edged up 13 cents to $23.96 and Nvidia Corp. (NVDA) climbed 3.8% to $10.18.

Intel's warning comes amid a growing shift in the way computing is conducted. More and more computing is being done at huge data centers and accessed via the Internet. This paradigm, known as "cloud computing," doesn't require desktop and laptop PCs to be powerful, a development that has the potential to cut into Intel's sales.

It also comes as consumers and businesses increasingly choose smartphones for many of their computing tasks. A new breed of tablet computers, which have generated great excitement since the launch of Apple Inc.'s (AAPL) iPad, are also expected to weigh on traditional PC sales. Intel doesn't have a strong presence in this field.

Friday's warning marks a turnaround from Intel's expectations a little over a month ago. In mid-July, the company smashed estimates for its second-quarter results, with the semiconductor industry experiencing a surge in demand after a sharp drop during the recession.

Rodman & Renshaw analyst Ashok Kumar said the market was "extremely skeptical" of Intel's previously rosy view given macroeconomic headwinds.

"This has not caught investors by surprise," Kumar added. "There were enough data points heading in this direction that demand trends were going below seasonality."

Intel said Friday the impact of lower volume is being "partially offset" by higher average selling prices because of "solid" enterprise demand.

The company added that the outlook doesn't include the effect of any acquisitions or divestitures that might be completed from here out. The company last week agreed to buy computer-security software firm McAfee Inc. (MFE) for $7.68 billion.

Third-quarter results are due Oct. 12.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

(Nathan Becker contributed to this report.)

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