2nd 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's warning marks a turnaround from a rosy forecast it offered a little over a month ago when it smashed estimates for its second-quarter results. At that time, the global economy seemed to be finding its legs and consumers were showing signs they would spring for new gadgets.

Since then, the economy has weakened, a trend that weighs on Intel's sales. Analysts and investors were already expecting the chip giant, which provides 80% of the world's microprocessors, would have to lower its estimates.

"This has not caught investors by surprise," said Rodman & Renshaw analyst Ashok Kumar. "There were enough data points heading in this direction."

Intel's new guidance comes as the technology sector struggles to deal with a slowing economy. Many consumers are holding off on purchases of big-ticket items like the 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 and providing 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 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 shares, which were halted in conjunction with the release, triggered a single-stock circuit breaker shortly after resuming trading but quickly turned positive as investors re-evaluated the extent of Intel's warning. In late afternoon trading, Intel was up 1.5% at $18.45.

Still, Intel is down 10% in August alone. That's far worse than the 3.6% decline in the Standard & Poor's 500 and the 5.6% slide in the information technology sector.

Needham analyst N. Quinn Bolton noted that many investors had refrained from buying Intel shares in anticipation of an estimate cut. With the new guidance out of the way, those investors feel emboldened to move into the stock, he said.

Some analysts said the relief rally could prove to be a head fake and that the slowdown Intel sees could spread to other parts of the technology economy.

"The reality is this [relief] may be very early," said Williams Financial analyst Cody Acree, who added more warnings in the sector could come soon. "I don't think that the entire market is braced for that."

Intel said 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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