Margins Mar AMD

Updated from 5:30 p.m. EDT

Advanced Micro Devices(AMD Quote) grew its sales sequentially 9% in the third quarter, beating Wall Street estimates and matching rival Intel's(INTC Quote) pace of growth during the same period.

But the ongoing price war between AMD and Intel took a toll on profit margins, sending the company's shares down as much as 12% in extended trading Wednesday.

AMD said it generated $1.33 billion in sales for the three months ended Oct. 1, with a net income of $134.4 million, or 27 cents a share. Those results included $16.5 million of stock option compensation expenses.

The average analyst expectation called for AMD to earn 23 cents a share on sales of $1.3 billion.

AMD said its operating income was down 8% year over year, adjusting its 2005 third-quarter results to exclude the contribution of its memory business, which it has since spun off. Gross profit margin fell to 51.4% compared with 55.4% at this time last year.

AMD blamed the eroding margins on lower desktop processor prices, which dragged down the company's overall average selling prices.

While AMD had previously indicated that it would sooner walk away form certain business than get caught up in a price war, executives acknowledged that the chipmaker had opted to make its prices a little more competitive in the third quarter.