NEW YORK (CNNMoney.com) -- Intel's profit sank in the third quarter as it fought off fierce competition from rival Advanced Micro Devices, but the chipmaker beat Wall Street's earnings estimates and said it's winning back lost market share.

Shares rose about 1.5 percent in extended trading Tuesday on the results, which were released after the market close.

Intel shares (blue) have struggled this year, underperforming the tech-fueled Nasdaq Composite (yellow).

The world's largest maker of chips for PCs reported that third-quarter net income tumbled 35 percent from the same period a year earlier to $1.3 billion.

Excluding stock-option-related expenses, earnings per share fell to 27 cents. Analysts had been forecasting earnings of 18 cents a share on that basis.

Santa Clara, Calif.-based Intel (Charts) said revenue fell to $8.7 billion, a 12 percent decline from the year-earlier quarter and a shade above the $8.6 billion analysts had expected.

Intel has been locked in a dogfight with smaller rival AMD (Charts), which has been chipping away at the chip leader's market share.

But Intel chief executive Paul Otellini said during a conference call with analysts that Intel gained market share during the third quarter.

Shipments of server microprocessors helped the company gain overall market share, and Intel aims to keep gaining share throughout the year, Otellini said.

He also said the company is on track with its previously announced restructuring plan.

In September Intel said it would cut 10,500 jobs by the middle of 2007 and aim to save $5 billion over two years as part of a broad restructuring plan.

"Revenue isn't at its best levels, but the results would indicate the restructuring process is really starting to pay off," said Martin Kariithi, an analyst with research firm Technology Business Research.

Looking ahead, the No. 1 chipmaker forecast revenue of between $9.1 billion and $9.7 billion for the current quarter. The midpoint of that range, $9.4 billion, is roughly in line with Wall Street's estimates.

The company, which rolled out a line of new "dual core" processors for desktops, notebooks and servers this summer, said it expects strong shipments of those new products.

"Outstanding new products, leadership in manufacturing technology and disciplined execution point to a stronger second half with stronger seasonal growth," CFO Andy Bryant told analysts.

Gross margin, a key measure of profitability, continued to slide at Intel. The company reported gross margin of 49.1 percent for the third quarter, down from 52.1 percent in the previous quarter.

Kariithi said gross margin was a concern, but he expects that measure to improve as Intel works through the inventory problems that have plagued it for the last year. "This might be the last quarter we see inventory problems now that they're getting rid of their old chips," Kariithi said.

Intel has cut the prices on some of its chips in an attempt to regain market share and said it wrote off about $100 million in excess chip inventory during the quarter.

Intense competition with AMD has pressured Intel's stock and its support on Wall Street. Shares have tumbled about 18 percent so far this year and earlier on Tuesday, Goldman Sachs (Charts) cut its rating on the chipmaker to "neutral" from "buy."

Intel, considered a bellwether for the tech industry, kicks off earnings for the semiconductor industry. AMD reports Wednesday and Texas Instruments (Charts) is due to announce quarterly results next week.

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