Updated from Oct. 16

SAN FRANCISCO -- Shares of Intel ( INTC) surged early Wednesday after the chipmaker grew its bottom line by more than 40% in the third quarter, thanks to record microprocessor shipments and cost-cutting efforts.

In the strongest demonstration in years that it has regained its stride, Intel blew away Wall Street estimates and raised its profitability outlook for the full year.

The stock climbed 5.2%, or $1.32, to $26.80 in premarket trading.

The bullish earnings report also seemed to quiet fears of an imminent inventory glut and a slowdown in PC demand that had kept Intel shares in check in recent weeks.

"I've read those reports, but we sure haven't seen it in the marketplace or in the requests from our customers," CEO Paul Otellini said in a post-earnings conference call.

The strength in the market is "pretty broad-based, with no sign of abatement," he added.

Intel said sales in the three months ended Sept. 29 increased 16% to $10.1 billion, well ahead of the $9.6 billion analyst expectations shown in a poll by Thomson Financial.

Intel posted net income of $1.86 billion, or 31 cents a share, up from $1.3 billion, or 22 cents, at this time a year ago.

Analysts expected earnings per share of 30 cents.

The company attributed the better-than-expected performance to growth in laptop PC, desktop PC and server chips, as well as to operational efficiencies from recent restructuring efforts.

Revenue in the laptop PC unit jumped 20% sequentially to $3.9 billion, as Intel benefited from its recently introduced Santa Rosa product , a group of chips designed specifically for mobile PCs.

However, average selling prices for laptop microprocessors were down sequentially due to severe competition with rival Advanced Micro Devices ( AMD) in the market for low-end notebook PCs.

While Intel had expected the company's overall ASPs to dip slightly during the quarter, the company reported that they remained flat in the third quarter, due in part to increasing prices for its desktop chips.

"We're trying to be smart and selective about the business we take," said Otellini, noting that the company "walked away" from a lot of business for low-end desktops and notebooks.

The Santa Clara, Calif., company shrunk its headcount by 2,000 workers to 88,000 in the third quarter, and projected an additional reduction of 2,000 employees in the current quarter as it moves ahead with a restructuring program.

The restructuring has already reduced total headcount by more than 12% and is expected to save Intel $2 billion in 2007 and $1 billion in 2008.

Intel began its cost-cutting program last year, at a time when AMD was making inroads into the company's market share thanks to a lineup of chips considered technologically superior to Intel's.

Since then, Intel has refreshed its product line up with a slew of new quad-core microprocessors and stepped up its pace of new product development.

AMD, which finally introduced a quad-core processor in September, is due to report third-quarter results Thursday.

Looking ahead, Intel projected revenue in the fourth quarter between $10.5 billion and $11.1 billion.

That's ahead of the average analyst expectation of $10.4 billion, although the low end of the guidance represents below-seasonal growth for the fourth-quarter, according to Intel.

Perhaps more important, Intel projected a big pickup in gross margins, with the fourth quarter expected to come in at 57% compared to 52.4% in the third quarter and a disastrous 46.9% in the second quarter. The fourth-quarter margin forecast would represent Intel's highest level of profitability since the fourth quarter of 2005.

The improving margins led Intel to raise its full-year margin target to 52%, vs. its previous expectation of 51%.