SAN FRANCISCO -- Advanced Micro Devices ( AMD) reported a narrower-than-expected loss in the third quarter, as the company's computer chip shipments jumped.

The surprising strength in AMD's business cheered investors, even as the company added its voice to the growing chorus of tech firms warning that demand is lagging in the final quarter of the year.

Shares of AMD were up about 10% at $4.53 in extended trading Thursday.

AMD said revenue in its graphics processor and microprocessor businesses both increased during the third quarter, contributing to $1.78 billion in sales for the three months ended Sept. 27, compared to $1.63 billion at this time last year.

While the results included of $191 million from a licensing deal, AMD managed to beat the $1.48 billion in sales expected by Wall Street analysts even excluding the licensing benefit.

For AMD, which has stumbled through one problem after another during the past year, the third-quarter results represented some much-needed good news.

CEO Dirk Meyer -- who replaced Hector Ruiz at the top post in July -- characterized the third quarter as "directionally correct."

"We're on the path to becoming the company we aspire to be, and we will be," Meyer said, while noting that he was still not satisfied with the company's performance.

AMD chalked up its eighth consecutive quarter of red ink in the third quarter.

But the loss of $67 million, or 11 cents a share, was significantly lower than the $396 million, or 71 cents a share, loss that the company reported at this time last year. Analysts polled by Thomson Reuters were expecting a loss of 40 cents.

AMD said it achieved an important milestone by returning to profitability on an operating basis, with $131 million in operating income, or 21 cents a share.

Of course, that feat was only possible thanks to the licensing deal, which added 31 cents to the company's operating income.

AMD executives said the licensing revenue was related to its previous sale of older-generation manufacturing equipment, and was not expected to recur in future quarters.

The earnings report come a week after AMD announced the first details of its much-anticipated "asset smart" plan, which calls for spinning off its chip fabrication facilities into a separate company.

The plan, which involves financing from a pair of Middle Eastern government investment funds and is slated to close in the first quarter of 2009, is designed to shore up AMD's balance sheet and free it from the burden of supporting expensive chip factories.

By focusing exclusively on designing chips, rather than manufacturing them, AMD hopes to improve its effectiveness in competing against chip goliath Intel ( INTC), which controls about 80% of the market for PC microprocessors.

Both companies are poised to release new server processors in the coming months, though it's not yet clear that AMD's new processor will be able to reshuffle a competitive landscape that currently favors Intel.

Moreover, each company's new products will come to market as the global economy appears in danger of slipping into a recession amid a widespread credit crisis and weak consumer demand.

Earlier this week, Intel offered a lackluster forecast for the fourth quarter, citing soft corporate spending on technology. AMD confirmed the gloomy business outlook.

The chipmaker said sales in the current quarter would be flat sequentially at $1.58 billion (excluding the third-quarter's licensing deal). Typically, AMD's computing business increases 8% to 10% sequentially, executives noted.

Meyer said the consumer demand was softer than normal in September, and that corporate demand continued to be weak.

"I would just say the quarter doesn't have its usual strength," he added later, though he stressed that he did not expect a disaster in the fourth quarter.

The star of AMD's third quarter was the ATI graphics division, which AMD acquired in 2006. Revenue from the graphics business totaled $385 million, up 40% sequentially.

AMD executives said they believe the graphics business gained market share in the quarter, even as the average selling price for its graphics processors increased.

AMD is benefitting from a newly-released lineup of graphics chips that offer a better balance of price and performance than those of rival Nvidia ( NVDA).

And AMD said that unit shipments of its quad-core processors increased 46% sequentially, as server vendors Dell ( DELL) and Hewlett-Packard ( HPQ)introduced new models featuring the chip.

AMD said it was currently shipping its new version of the processor, dubbed Shanghai, to customers, and that it expects Shanghai-based servers to be available this quarter. Shanghai features transistors that measure 45 nanometers, instead of the 65 nanometer-circuit size of its current product.

The smaller circuit size will reduce AMD's manufacturing cost per chip, which AMD said should benefit its gross profit margin.

AMD's gross margin in the third quarter -- excluding the licensing deal benefit -- was 45%, compared to 37% in the second quarter.

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