Intel's weak forth quarter outlook for revenue and margins has dispelled lingering hopes for a revival in PC demand towards the end of the year.
The chip making giant, along with rival AMD, had previously warned of weak demand for PCs, hit by a troubled global economy and the growing popularity of tablets like Apple's iPad.
Intel's corporate-focused server and datacentre business has helped offset weak PC sales in recent quarters, but in Q3, revenue from that division also disappointed as enterprises bought fewer servers.
The level of innovation we're seeing in Ultrabooks is going to drive PC market growth.
"You have to remember, datacentre 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 datacentre business, which sells server chips and other equipment to companies and governments, grew 6 per cent 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-thirds 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 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," 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.
The world's leading chipmaker is used to being king of the personal computer market, particularly through its historic "Wintel" alliance with Microsoft, which led to high profit margins and an 80 per cent market share.
But in the fast-growing and cutthroat mobile world, Intel is struggling - its market share is less than 1 per cent of smartphones, trailing Qualcomm, Samsung, ARM and others.
That leaves some investors, already concerned about a lackluster global economy, asking if Intel's invincibility has come to an end.
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.
