Updated from 4:38 p.m. EDT

Sales and earnings fell at

Novellus Systems

(NVLS)

in the second quarter, and the company projected continued trouble ahead.

Investors sold the stock on the news, sending Novellus shares down 62 cents, or 2.3%, to $26.65 in recent after-hours trading.

The chip-equipment maker earned $33.23 million, or 24 cents a share, in the quarter ended July 2. In the year-ago quarter, the company earned $37.81 million, or 25 cents a share, on $338.22 million in sales.

Novellus' sales fell 2.6% year over year to $329.59 million.

The company's bottom line was better and its top line worse than in the first quarter of this year, when it earned $30.5 million, or 22 cents a share, on $339.7 million in sales.

Despite the declining results, the company bested Wall Street's predictions. Analysts had predicted that the company would earn 21 cents a share in the just-completed quarter on $328.86 million in sales, according to Thomson First Call. The company raised its guidance in May, forecasting earnings of 20 cents to 22 cents a share on sales ranging from $325 million to $330 million.

But as it did when it

reported first-quarter earnings, the company gave a dour outlook for its third quarter, predicting that current-quarter results would come in below the Street's expectations and far below last-year's earnings.

San Jose, Calif.-based Novellus expects to earn 20 cents to 22 cents a share in the third quarter on sales ranging from $315 million to $325 million, company CEO Rick Hill said on a conference call with analysts.

Wall Street has predicted that Novellus will earn 22 cents a share on $333.29 million in the current quarter. For the year, analysts are looking for a profit of 91 cents a share on sales of $1.35 billion.

In the third quarter last year, the company earned $64.66 million, or 45 cents a share, on $415.94 million in sales. For all of last year, Novellus earned $156.69 million, or $1.06 a share, on sales of $1.36 billion.

Novellus stock closed regular trading up 30 cents, or 1.1%, to $27.27.

The quarterly decline in revenue in the second quarter was paralleled by a similar drop in shipments. Novellus shipped $347.6 million worth of products in the quarter, down 3.6% from the amount shipped in the first quarter. Hill predicted that shipments in the third quarter could range from flat with the second quarter to down 10%.

One bright spot in the quarter, at least relative to the first quarter, was the company's gross margin performance. Its gross margin rose to 47.8% of sales in the just-completed quarter from 45.3% in the first quarter. A year earlier, though, the company's margin, which is the difference between what it charges customers for its products and its direct costs of producing those wares, stood at 50.2%.

The rise in gross margin was related to a favorable mix of products shipped and a decrease in supply costs, company CFO John Chenault said on the call.