Advanced Micro Devices’ shares fell more than 13 percent even as the company posted a 77 percent rise in net income for the third quarter, beating analyst expectations.

AMD’s third-quarter net income rose to $134.46 million, or $0.27 per share, from $76 million, or $0.18 per share, a year ago. The computer chip maker, based in Sunnyvale, California, reported $1.33 billion in sales—excluding sales from the memory business AMD spun out—up 32 percent from a year ago. Analysts polled by Thomson Financial had expected an average of $117.2 million for net income, or $0.24 per share, on $1.31 billion in sales.

Although notebook and server chip businesses were strong, AMD’s desktop processor sales were flat quarter-over-quarter, thanks to a lower average selling price. An intense price war between AMD and Intel also caused the overall average selling price to drop for AMD, leading to gross margin of 51.4 percent. AMD’s gross margin was 56.8 percent for the second quarter this year and 55.4 percent for the third quarter in 2005.

AMD said it shipped a record number of notebook and server processors, both of which also had higher average selling prices. The strong financial performance reflected pain AMD has inflicted on its larger rival, Intel.

AMD’s processor shipments rose 18 percent quarter-over-quarter “due to strong demand for all AMD processor brands,” said Robert J. Rivet, AMD’s chief financial officer, in a statement. The company won over Dell, which for years only bought chips from Intel.

With Intel also posting better-than-expected results for the third quarter, however, investors are questioning whether AMD can continue its strong growth.

AMD, which announced its earnings after the stock market closed, saw shares drop more than 13 percent, or $3.18, to $21.05 per share in after-hours trading.

The desktop chip market hasn’t been good to Intel either. Intel, which reported its earnings yesterday, also reported a lower average selling price in the third quarter for its processors (see Under Pressure, Intel Beats Street).

Like AMD, however, Intel also reported a strong demand for its notebook and server processors. Intel CEO Paul Otellini told analysts yesterday that he believes the company had gained market share in the overall computer processor market. The chip giant historically has around 80 percent of that market.

With the new line of chips Intel introduced over the summer, the Santa Clara, California-based company expects to improve its financial performance gradually. Its third-quarter earnings, while poor compared with the same period in 2005, were better than what investors had expected. That has prompted analysts to predict an Intel rebound.

Contact the writer:UWang@RedHerring.com

del.icio.us

Digg this

Slash it