Intel defends Ultrabooks as revenue falls

Intel’s weak outlook for fourth-quarter revenue and margins dispelled lingering hopes for a revival in PC demand towards the end of the year – but it remains convinced Ultrabooks will boost sales.

Intel, along with rival AMD, had previously warned of weak demand for PCs, hit by a troubled global economy and competition from tablets such as Apple’s iPad.

In the third quarter, Intel’s revenue was $13.5 billion, compared with $14.2 billion a year earlier. Net earnings were $2.97 billion, compared with $3.47 billion in the same quarter last year.

Intel has tried to inject new life into PCs by promoting Ultrabooks, but those launched so far have been criticised 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,” chief financial officer Stacy Smith told Reuters in a telephone interview. “I’m not going to put a number out there – but I expect it to grow.”

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

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 rationalising 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% year over year in the third quarter, although it was down 5% from the prior quarter.

It foresees fourth-quarter gross margins of 57%. Analysts on average expected gross margins of about 62% percent for the current quarter.

Profitability will also take a hit, as Intel idles excess capacity at its plants in an effort to reduce inventories of its processors. Intel is also running its factories at less than 50% of their capacity, redirecting unused space and equipment to be used on more cutting-edge production lines still being built.

Smith said about two-thirds of the anticipated decline in margins will come from excess capacity charges.

Intel estimated fourth-quarter revenue of $13.6 billion, plus or minus $500 million. Analysts expected $13.74 billion for the current quarter.

Microsoft as saviour

In the fast-growing and cut-throat mobile world, Intel is struggling. 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.