Updated from 4:33 p.m. EDT

Chip-equipment maker

Novellus Systems

(NVLS)

exceeded analysts' first-quarter targets Monday and raised its guidance for the second quarter, saying that capital spending in the chip industry has improved.

"We're cautiously optimistic that the second quarter will show significant improvement from the first quarter," said chairman and chief executive officer Richard Hill during a conference call.

Hill said he is now looking for second-quarter profit of 6 cents a share on revenue of $220 million. Analysts had expected the firm to lose a penny a share in the quarter on sales of $172.7 million. Novellus also said it expects bookings of $250 million with shipments of $215 million in the second quarter.

The shares shot up $3.35, or 6.6%, to $53.75 in the after-hours session on Instinet.

"We have seen some rebound in the PC arena," Hill said, but he added that the more optimistic estimates stem from a rebound in DRAM pricing as well as an improvement in microprocessor sales. Hill said he is still looking for corporate confidence to pick up and IT spending to resume.

Novellus recorded a first-quarter loss of 2 cents a share, excluding a one-time net special benefit and a gain on the sale of an investment, on revenue of $169.7 million. Analysts had expected the firm to post a loss of 9 cents a share on sales of $153.77 million.

On Feb 28, the company predicted a loss of 9 cents a share on revenue of $150 million to $160 million and orders of $130 million to $150 million.

Despite topping analysts estimates, the firm's earnings and revenue fell well short of their year-ago levels. In the first quarter of 2001, Novellus counted $458 million in revenue and a profit of 62 cents a share.

Shipments during the first quarter of 2002 stood at $147.1 million, down 9.4% sequentially, but the company achieved a bookings-to-shipments ratio greater than 1 for the first time since the fourth quarter of 2000. Net bookings reached $175 million in the quarter, and all regions improved except for the U.S, according to the firm.

By the end of the first quarter, deferred revenue stood at $117.4 million.

"The first quarter results were achieved because the semiconductor industry has begun to show improvement in capital spending," said Hill in a statement. "We are pleased to see improved bookings momentum in the first quarter, as orders strengthened after declining severely in 2001."

The company recorded $87 million in expenses in the first quarter and said costs should rise next quarter, although they should not exceed $100 million. Also in the first quarter, inventories rose by $20 million sequentially, although the firm hopes to reduce inventories by $80 million over the next three quarters. Gross margins reached 42.2% in the quarter, but the firm predicted that margins would rise to 50% by the fourth quarter.

Hill refused to offer estimates for the third quarter.

Despite the good news, some analysts worry about a possible run-up in the stock price. Novellus trades at 497 times this year's earnings and 42 times 2003 estimates. Last week, UBS Warburg analyst Byron Walker said while the industry is in the early stages of a recovery, the valuations seen in the group are more appropriate for a much later stage in the upcycle.