Updated from 4:30 p.m. EDT

Chip-equipment manufacturer

Novellus Systems

(NVLS)

reported improving sales and earnings for its first quarter, but warned that the positive results may be a short-term blip.

The San Jose, Calif.-based company earned $11.8 million, or 8 cents a share, on $238.41 million in sales in the quarter ended March 29. In the same period a year ago, Novellus earned $3.8 million, or 3 cents a share, on $169.68 million in revenue.

The results topped Wall Street expectations. Analysts had projected that the company would earn 7 cents a share on $234.18 million in revenue.

But the company warned that its second-quarter earnings would fall shy of projections. The company said it expects to earn 5 cents a share on flat revenue in the current quarter. Analysts were expecting the company to earn 9 cents a share in the June quarter.

"The tentative behavior of customers, because of the war and SARS

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severe acute respiratory syndrome, is having an adverse effect" on business, said Rick Hill, Novellus' chief executive officer, during a conference call with investors and analysts. "As a result, in the last two weeks, we've seen a significant decrease in forecasted bookings."

Novellus expects its bookings to fall to $188 million in the second quarter from $243.7 million in the first quarter, Hill said. Meanwhile, the company expects its shipments to fall to $215 million in the current quarter from $235.2 million in the just-completed quarter.

The company saw improvement in its cost structure in the quarter, compared with the same period last year. Its gross profit margin, which represents the difference between what it charges customers for its products and what it pays its suppliers for raw materials, jumped 3.9% points over the year ago quarter to 46.1% of sales.

The improved gross margin came as a result of lower personnel costs and a better mix of higher margin products, Hill said.

Meanwhile, Novellus' sales, general and administrative expenses declined by 2.6% points to 17.9% of sales, compared with the same quarter a year ago. After seeing its revenue plummet along with the technology slump, Novellus restructured and cut staff.

But the company's sales and administrative expenses increased compared with the fourth quarter, when they were just 16.94% of sales. An increased headcount, higher salaries and fewer vacation days compared with the fourth quarter helped bump up sales and administrative costs, company officials said.

Even with the uptick in revenue and earnings, the company's results are a far cry from just two years ago. In the first quarter of 2001, Novellus earned $82.1 million, or 55 cents a share, on $458.71 million in sales.

The war in Iraq and concern over SARS have further dampened demand by making customers even more tentative, especially in Asia, Hill said. Meanwhile, a changing mix of products in the second quarter to lower-margin items will depress Novellus' earnings in the quarter, he said.

The company's future earnings may be further reduced if it has to change its accounting for its synthetic leases. Such leases, which affect most of the company's properties, are not currently included on Novellus' balance sheet.

The company is considering including them as soon as the third quarter, said Kevin Royal, the company's chief financial officer. If it does, Novellus' earnings will be depressed by about 4 to 6 cents per quarter on an ongoing basis due to depreciation related to those leases, Royal said.