Intel shares rallied 3 percent Tuesday as the company reported third quarter earnings that beat analyst expectations by $0.04 a share, despite sharply lower profits compared to a year ago.

The chip giant generated net income of $1.3 billion, or $0.22 per share, on $8.7 billion in sales for the quarter. Analysts polled by Thomson Financial had expected an average net income of $1.01 billion, or $0.18 per share, on $7.62 billion in sales.

Excluding a special charge of $232 million, or $0.05 per share, from share-based compensation, Intel generated $1.5 billion in net income, or $0.27 per share. Excluding a 1.5-cent gain from selling assets worth $230 million and a restructuring charge of $98 million, the profit was $0.21 per share.

Intel has been plagued by market share losses to Advanced Micro Devices, based in Sunnyvale, California. Intel brought out new dual-core processors and began shipping quad-core chips during the third quarter, hoping to catch up to its rival. Mr. Otellini also announced a sweeping restructuring plan to sharpen the company’s competitive edge (see Intel to Cut 10% of Workforce).

The company, which announced the financial results after the stock market closed, saw its shares rise more than 3 percent, or $0.64, to $21.54 per share in after-hour trading.

In a statement, Intel CEO Paul Otellini touted increased chip shipments and the introduction of new dual- and quad-core chips.

The company, based in Santa Clara, California, shipped more microprocessors, chipsets, and motherboards during the quarter, although the microprocessors’ average selling price was lower. Although Intel began selling new chips able to command a premium price during the quarter, it also had to take a $100 million write-off for its inventory of older chips.

While Intel’s year-over-year results were weak, the company showed improvement over the second quarter by improving third-quarter revenue by 9 percent and net income by 47 percent. Nevertheless, the performance fell far from what it achieved a year ago, when it recorded revenue of $5.9 billion and a net income of nearly $2 billion, or $0.32 per share.

Intel expects to generate between $9.1 billion and $9.7 billion in sales for the fourth quarter and a gross margin of 50 percent, plus or minus a couple of points.

Contact the writer:UWang@RedHerring.com