Updated from 4:41 PM ESTSAN FRANCISCO Novellus Systems ( NVLS) delivered a financial outlook Wednesday that was significantly below Wall Street expectations. The semiconductor capital equipment maker projected that sales in the current quarter will range between $315 million and $325 million, compared with the average analyst forecast of $356 million. In a post-earnings conference call, Novellus CEO Richard Hill said that revenue in the first-quarter would fall short of the company's actual shipments, as "a large number of new products that will be shipped to customers for the first time require us to defer any revenue recognition until accepted." Hill said the deferred revenue will also adversely affect the bottom line, and projected EPS of 21 cents to 24 cents, vs. the average analyst expectation of 34 cents. Shares of Novellus were down 3.6%, or 85 cents, at $22.56 in extended trading Wednesday. Chip equipment makers like Novellus have been under pressure in recent months, as fears of an economic downturn as well as the prospects of a slowdown in spending on chip manufacturing have weighed on stocks. Novellus' stock is down more than 30% from its 52-week high of $34. Applied Materials ( AMAT), the world's No.1 semiconductor equipment maker, was trading 22% off its 52-week high at Wednesday's close. Hill echoed the broader market's macroeconomic fears Wednesday, characterizing current business conditions as "challenging." "The bad news is it appears we are slipping into a recession," he said. But he pointed to positive trends in the chip equipment business, such as his belief that corporations will increasingly adopt Microsoft's Vista operating system in 2008, keeping PC demand strong and stabilizing prices for DRAM memory chips. Novellus sells tools used by chipmakers to manufacture semiconductors, such as DRAM and flash memory. A glut of DRAM and flash chips on the market has caused prices for the chips to plummet in recent months. The oversupply also means that chipmakers have less reason to increase manufacturing capacity and to buy gear from companies like Novellus. While some chip firms have "completely shut off capital expenditures," Hill said that some of the biggest players, like Intel ( INTC) and Samsung, are continuing to spend money on manufacturing equipment. The current supply imbalance will be solved as demand catches-up thanks to new products like flash-based PC hard drives, Hill said. In the meantime, Novellus plans to keep a lid on costs. Novellus executives said the company is aiming to reduce operating expenses to $110 million a quarter in 2008. The company's operating expense, excluding one-time items, was $115 million in the fourth quarter, and $128 million in the third quarter. In the three months ended December 31, Novellus' sales totaled $363.5 million, down 17% year over year, and roughly in line with the Street's $361.4 million expectation. The company earned $52.9 million in net income, or 47 cents a share, vs. $42.6 million, or 34 cents a share at this time last year. The profit included an $8 million gain from the sale of property and buildings in San Jose. And Novellus said it reversed $8.4 million of previously recognized share-based compensation expenses, after concluding that certain performance targets impacting employee stock option vesting would not likely be met. Excluding the items, Novellus said it earned $41.2 million, or 37 cents a share. The average analyst expectation, which generally excludes one-time items, called for EPS of 36 cents according to Thomson Financial.