Intel, which warned of declining sales last month, didn’t do quite as badly in Q3 as expected given its guidance, which was below Wall Street estimates, despite the popularity of iPads and smartphones, which IDC and Gartner say have created an 8%-9% contraction in the PC market.

But because of the continuing lousy economic environment Intel only made $2.97 billion, down a nasty 14.3% from $3.47 billion year-over-year or 58 cents versus 65 cents last year and up from the 50 cents a negative Wall Street expected.

Sales were $13.457 billion, down 5.45% from $14.23 billion last year, but above the $13.2 billion it guided to last month.

Optimist analysts were expecting revenue of $13.56 billion.

Got all that?

Okay, so Intel’s PC sales amounted to a sequentially flat $8.6 billion, down 8% year-over-year. China slowed – Intel thinks it’s because the government’s changing – Europe struggled, the US wasn’t that great, and Intel had higher expenses.

PC ASPs were down 4% year-over-year.

That’s bad enough, but – and you knew there was gonna be a but – right? – Intel’s Q4 guidance was worse and as a result, it’s gonna cut output, leading to $500 million in underutilization charges this quarter because it can’t keep the factories running at this rate.

It’ll give 14nm chips priority over 22nm to get a jump on the future presuming there is one. It’s also going to push Atom “as hard as possible” against ARM.

CEO Paul Otellini said PC sales this quarter, like last quarter, will only “grow at about half of what we would expect from normal seasonality.”

That means Intel is projecting only $13.6 billion in Q4 revenue, give or take $500 million, because customers – out of caution – aren’t building as much inventory as usual. Analysts were expecting sales of $13.7 billion.

Intel now also expects a gross margin of only 57%-58%, down sequentially from 63%. Expectations were for 62%.

Part of that consumer caution is due to the arrival next week of Windows 8 although Intel’s got design-wins for 140 Ultrabooks – which so far aren’t selling well – 40 of them with touch including convertibles that combine the productivity of the laptop with the convenience of a tablet not to mention 20 Atom-based tablets coming from six or so OEMs using the Clover Trail SoC.

Intel said it isn’t sure customers will buy into Windows 8.

And then there’s the little matter of server chips softening – even for the cloud – and server chips are more profitable than PC chips. They were up 6% year-over-year but down 5% sequentially to $2.7 billion while server ASPs were down 7%.

Intel’s net income has fallen for three quarters in a row and it said it won’t be sure what the fates have in store for it for another 12 months.