Battered by the same forces withering most of the technology giants, Intel Corp. suffered a 25-percent drop in its Q1 profits as it attempts to adjust to the rapidly changing face of IT. By most accounts, it could have been worse.

In the midst of the worst period of PC sales ever recorded, according to IDC, Intel on Tuesday reported net income of $2.05 billion, down from $2.74 billion in the first quarter of 2012. Revenue was roughly in line with analysts’ estimates at $12.58 billion, down from $12.91 billion in the same period last year.

Hardest hit were Intel’s PC Client Group, which accounts for some 65 percent of the vendor’s revenues, and its Data Center unit. PC’s slid 6.6 percent for the quarter and 6 percent year over year, coming in at a soft $8 billion for Q1. Data Center revenues were down 7 percent from Q1 2012 to $2.6 billion.

Intel’s gross margin of 56 percent was down 2 percent sequentially and off 8 percent year-on-year.

The numbers reflect the changing nature of Intel’s business. Once the far-and-away leader in processors that powered the ubiquitous mainstays of business computing, Intel is now being forced to compete with several smaller chip-makers scrambling for market share in an increasingly mobile IT world.

In addition to the rising number of smartphones and tablets displacing traditional PCs, Intel’s challenges include next-generation business computing platforms such as Hewlett-Packard Co,’s newest application-centric Moonshot servers. With Moonshot  – and a growing number of other enterprise-grade infrastructure offerings that stress economy, low power consumption, and hyperscalability – Intel is being forced to compete for OEM attention with specialty processor makers such as AMD, AppliedMicro, Calxeda and Texas Instruments.

The company is counting on its strong relationships with partners like HP, Dell Inc. Lenovo Group, along with a handful of new chips in the pipeline such as its ultrabook and touch-screen focused Haswell processor and its tablet and smartphone-friendly Bay Trail and Clover Trail chips to get the company back on track.

“Amidst market softness, Intel performed well in the first quarter and I’m excited about what lies ahead for the company,” said Intel CEO Paul Otellini. “We shipped our next generation PC microprocessors, introduced a new family of products for micro-servers and will ship our new tablet and smartphone microprocessors this quarter.

“We are working with our customers to introduce innovative new products across multiple operating systems,” Otellini added. The transition to 14nm technology this year will significantly increase the value provided by Intel architecture and process technology for our customers and in the marketplace.”

Still, Intel is predicting only modest increases in Q2 with revenue estimated at $12.9 billion. Despite the rough patch however, Intel executives said they’re optimistic about the company’s fortunes for the remainder of the year, perhaps even recovering to double-digit growth by the end of 2013.

“We are making significant progress in tablets and phones,” said Intel CFO Stacy Smith. “First quarter tablet volume more than doubled from the fourth quarter, and we expect it to double again in the second quarter. We have shipping designs across both Windows 8 and Android operating systems.

“In the phone segment, we had a good first quarter in our baseband business. We are shipping LTE versions today, and are on track to ship multimode voice and data LTE baseband solutions by the end of this year,” Smith added. “In other important segments of our business, we saw year on year growth in both our software and services group and our NAND business.”