Oct. 17 (Bloomberg) -- Intel Corp., the world's largest computer-chip maker, said third-quarter profit fell 35 percent amid price cuts and market share losses.

Net income fell to $1.3 billion, or 22 cents a share, from $2 billion, or 32 cents, a year earlier, Santa Clara, California- based Intel said today in a statement after the close of trading in New York. The shares rose more than 2 percent after the report because profit excluding a gain beat some analysts' forecasts.

Sales slumped 12 percent to $8.74 billion. Chief Executive Officer Paul Otellini offered discounts to sell off older chips and make room for newer models to win back market share from Advanced Micro Devices Inc. Prices are improving now, and demand so far this quarter is holding up, Intel said today.

``Everything looks OK across the board,'' said Pat Becker Jr., who helps manage $2.4 billion at Becker Capital Management in Portland, Oregon. His firm owns Intel shares. ``PCs have continued to show good demand.''

Profit was 21 cents a share excluding a 1.5-cent gain. That beat an estimate of 18 cents from Prudential Equity Group's Mark Lipacis, who has StarMine Inc.'s top rating for accuracy in predicting earnings. His projection matched the average in a Thomson Financial survey. Lipacis expected sales to drop 13 percent, and the average revenue forecast was $8.6 billion, according to Thomson.

Intel shares rose 23 cents to $21.13 in extended trading after the report. They have declined 16 percent this year, making the stock the worst performer in the Dow Jones Industrial Average.

Forecast

Otellini, 56, is undertaking the largest overhaul of the chipmaker's operations since the 1980s. The company will shed 10,500 jobs to help lower costs by as much as $3 billion annually starting in 2008. The company reduced its headcount by 2,600 to less than 100,000 in the third quarter, Chief Financial Officer Andy Bryant said on a conference call. That puts Intel on course to trim its workforce to 92,000 by the middle of 2007.

Sales will fall to $9.1 billion to $9.7 billion this quarter, compared with an average estimate of $9.5 billion in a Thomson Financial survey of 32 analysts. Even if Intel reaches the highest forecast, sales will fall short of its goal for the year. Revenue will fall at least 8.9 percent in 2006, compared with projections of a 3 percent drop.

``There's no question that we had a more aggressive outlook for the second half and full year,'' Bryant said in an interview.

Gross margin, or the share of sales left after manufacturing costs, will be about 50 percent this quarter. The margin was 49 percent in the third quarter, matching Intel's forecast.

There will be ``much less downward pressure'' on prices this quarter, Bryant said. Demand is in line with normal patterns for this time of year, he said.

Holiday Sales

The new Core 2 Duo models may help revive sales during the holiday shopping season, and some analysts are betting the third quarter will be the lowest point for Intel.

``They just got caught by a more nimble, maybe quicker- reacting competitor who was really customer focused,'' said John Lau, an analyst at Jefferies & Co. in New York. He rates the shares ``buy'' and said he doesn't own them. ``They've responded to that.''

Intel's market share has sunk to its lowest point in more than four years. The chipmaker had 72.9 percent of the market for personal-computer processors in the second quarter, down from 82.2 percent a year earlier, according to Cave Creek, Arizona- based Mercury Research.

Gaining Share

Otellini told analysts that his company regained market share in the third quarter from the second, particularly in server computers. He declined to give details.

Intel today lowered its 2006 budget for spending on new plants and equipment to $5.7 billion to $5.9 billion, from an earlier forecast of about $6.2 billion.

Intel's earnings are seen as an indicator of demand for computers and components. Computer maker International Business Machines Corp. today said profit jumped 47 percent, beating analysts' estimates. Sunnyvale, California-based Advanced Micro will report tomorrow.

Of analysts tracked by Bloomberg, 22 recommend buying the stock, 18 advise holding and four say sell. Goldman, Sachs & Co.'s James Covello cut his rating to ``neutral'' from ``buy'' today because the stock reached his $22 target price.

``What you're seeing is a work in process,'' said Crawford Del Prete, an analyst at Framingham, Massachusetts-based IDC. ``The trick from here is, can they stay focused?''

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net.

Last Updated: October 17, 2006 19:06 EDT