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Intel Trims Guidance

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The world’s largest manufacturer of semiconductor products, Intel Corp. (INTC - Free Report) lowered its sales guidance for the third quarter of 2012. Following the news, the shares fell 3.61% to $24.19 after the markets closed on Friday.

The chip maker expects third quarter net sales to be $13.2 billion (plus or minus $300 million), below the previously announced range of $13.8–$14.8 billion. This also represents a decline of 7% from the year-ago quarter. The company also lowered its gross margin guidance to 62% (plus or minus one percentage point), lower than the previous expectation of 63% (plus or minus a couple of percentage points).

Additionally, management now expects full-year capital spending to be at the lower end of its previous outlook of $12.1 billion to 12.9 billion, as the company accelerates the re-use of existing equipment to the 14nm node.

Management said that the guidance cut was on account of lower-than-expected demand and a challenging global economy.It stated that customers are reducing their orders due to lower demand for PCs or servers. Intel also stated that it is experiencing weak demand in the enterprise PC segment, which has generally been strong for some time now.

The weakening PC sales in the corporate market are a sign of a technological shift, driven by the growing popularity of smartphones and tablet computers. We believe that Apple’s (AAPL - Free Report) iPad and other tablets will continue to eat into notebook sales.

The popularity of tablets is definitely one of the chief factors resulting in a weak PC market. Also, a few customers are holding back their purchases owing to the forthcoming release of Windows 8. However, we believe that the release of Windows 8 will not be a major help to the ailing PC market in the near term as businesses tend to be conservative when it comes to upgrading Windows. There are still a lot of companies which haven’t upgraded from Windows XP.

Market research firms, Gartner and IDF estimate that shipments of traditional computers were down 0.1% from the prior-year quarter to 87.5 million units in the second quarter, when Intel's IvyBridgeprocessors and Ultrabooks were supposed to revive the PC market, indicating a weak PC market ahead.

Intel remains the leading producer of microprocessors for the PC market and there do not appear to be any near-term challenges to this position. In the second quarter, Intel posted decent numbers, with both revenue and earnings surpassing our expectations.

Currently, Intel has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).

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