Intel's profits up 25%

Intel, the world's largest semiconductor manufacturer, announced its second quarter earnings on Tuesday.

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NEW YORK (CNNMoney.com) -- Intel Corp., the world's largest semiconductor manufacturer, said that profits rose more than expected in the second quarter on strong international sales bolstered by a weak dollar.

The company also issued a sales forecast for the third quarter that what was better than what analysts were predicting. Intel said sales will be between $10.0 billion and $10.6 billion. Analysts' estimates were for sales of $10.07 billion.

Intel's stock was up 1.3% in after hours trading, after closing up 1.2% at $20.71 in regular trading Tuesday.

Intel's net income in the second quarter rose 25% to $1.6 billion, or 28 cents per share, from $1.3 billion in the second quarter of last year. Earnings topped consensus estimates of 25 cents per share, according to analysts polled by Thomson Reuters.

One analyst said the results are better than they first appear, however. Doug Freedman, an analyst with American Technology Research, said profits were helped by a lower tax rate and a larger than expected stock buyback in the second quarter.

Sales for the Dow component came in at $9.5 billion, up 9% from a year ago and ahead of analysts' forecasts of $9.32 billion.

Global demand. "Demand remains strong for our microprocessor and chipset products in all segments and all parts of the globe," said Paul Otellini, Intel president and CEO, in a written statement.

According to the earnings report, nearly 80% of the company's sales come from outside of the Americas.

Intel (INTC, Fortune 500) reported record first-quarter sales of $9.7 billion in April. But the stock has fallen about 20% this year on fears about how the slowing global economy may affect technology sales.

Intel makes processors used in personal computers and servers and some of its key customers are Dell (DELL, Fortune 500), Hewlett-Packard (HPQ, Fortune 500) and Apple (AAPL, Fortune 500). As such, the company is seen as a bellwether for the technology sector.

And the weak economy may have hurt one key measure for Intel. The company reported gross profit margins of 55.4% for the second quarter, a bit lower than the 56% that the company predicted when it released its first quarter earnings report in April.

Gross margins represent how much money a company makes after subtracting the cost of sales and is closely watched by semiconductor analysts as a key measure of efficiency.

Intel blamed the lower-than-expected gross margin on higher demand for cheaper notebook personal computers. The increased demand for less expensive computers "resulted in a lower than expected microprocessor average selling price" the company said.

On the conference call after the earnings release, Otellini highlighted growing demand for laptop computers. "What has happened is that the consumer market on a worldwide market is shifting to notebooks," he said.

To accomodate the growing demand for cheap notebook computers, Intel has been developing new tiny Atom processor which is going to be used in smaller, less powerful notebooks used for surfing the web, targeted primarily at emerging markets. Intel is expecting to profit from this new market going forward.

Otellini said, "We will see more Atom based notebooks in coming quarters."

In fact, demand for the new Atom chip has been so great, that there is concern whether Intel can keep up with the demand. "We have been increasing our planned production of the Atom every 40 days," said Otellini on the conference call.

Investors are also worried about how a long-running price war with rival chipmaker Advanced Micro Devices will impact profits.

But one analyst said that Intel is doing better than its rival AMD.

"On an overall basis, I am pretty sure that Intel is significantly outperforming AMD," said Brian Piccioni, analyst at BMO Capital Markets.

AMD (AMD, Fortune 500) will report its second quarter results on Thursday. Analysts expect AMD to report a 5% increase in sales to $1.45 billion but they also are predicting that the company will report a loss of 52 cents per share.