Intel last night said its margins tumbled in the latest quarter as consumers bought cheaper laptops and pandemic-stricken businesses and governments clamped down on data centre spending.
The news sent its shares down 10% on Wall Street last night.
Intel, the dominant provider of processor chips for PCs and data centers, has struggled with manufacturing delays. In July, it said its next generation of chipmaking technology was six months behind schedule.
Chip sales are booming, but customers want lower-priced chips rather than Intel's pricier high-performance offerings, dragging down overall gross margins.
The pandemic has given Intel a boost in the form or surging laptop sales as employees and students work and learn from home.
Sales in its PC group were $9.8 billion, beating analyst estimates $9.09 billion, according to FactSet.
But Intel sold a higher volume of less-profitable chips in its PC business, driving operating margins down to 36% in the third quarter from 44% a year earlier.
"You're seeing the demand shift from desktops and higher-end enterprise PCs to the entry-level consumer and education PCs," Intel's chief financial officer George Davis told Reuters in an interview.
"Even though the volume is good, your (average selling prices) are coming down, so that impacts your gross margins a little bit."
Davis said a similar dynamic hit the data centre business, where spending by government and business customers plummeted 47% after two quarters of growth and operating margins dropped from 49% to 32%.
Revenue from Intel's data-centre business fell 7% to $5.9 billion in the reported quarter versus analyst of $6.21 billion, according to FactSet.
While cloud computing customers and operators of 5G networks helped make up for some of the shortfall, those chips are lower priced, Davis said.
Intel faces a challenge from rivals such as Advanced Micro Devices and Nvidia. Those competitors use outside manufacturers and have capitalised on Intel's woes to gain market share in both data centres and PCs, with AMD in particular hitting its highest market share since 2013 earlier this year.
Intel, however, said a 10-nanometer chip factory in Arizona had reached full production capacity and that it now expects to ship 30% higher 10nm product volumes in 2020 compared to January expectations.
Excluding items, the company said it earned $1.11 per share, in line with estimates, according to IBES data from Refinitiv.
Intel said it was expecting fourth-quarter revenue of about $17.4 billion, while analysts were expecting revenue of $17.36 billion.
Earlier this week, Intel said it would sell a money-losing commodity memory chip business to Korea's SK Hynix in a $9 billion all cash deal, with Intel hanging on to a more advanced memory chip unit and using the cash to invest in other products.
The company also said it started a $10 billion share repurchase programme in August.