If you invest in semiconductor companies, you're probably well aware of the volatility of their businesses. Business conditions can change quickly, resulting in wild swings in revenue and stock prices. So even though Applied Materials (NASDAQ:AMAT) reported solid results for its first fiscal quarter in 2007 on Tuesday, not to mention a favorable outlook, I have to wonder when the pendulum will swing in the other direction. But before worrying about the future, let's look at the recent past.

There was a wide divergence of results from Applied's individual business segments. The silicon segment, which is Applied's largest by far, delivered $1.49 billion in revenues for a 22% year-over-year increase. Sales to memory customers were very strong, while those to logic and foundry customers were somewhat weak. The outlook is also bright, depending on your view of the memory situation (more on that later), with new orders totaling $1.76 billion.

Applied's second-largest segment, fab solutions, which aims to help increase the productivity of its customers' fabs, delivered good growth with $525 million in revenue and orders totaling $686 million. This performance represented a 13% increase in revenue over the previous year and a 12% increase in orders.

The display segment, which sells manufacturing equipment to flat-panel manufacturers, also delivered decent results (at least compared to a year ago), but it looks poised to do a belly flop next quarter. Display segment revenues grew 39% over last year, to $230 million, but new orders were down a jarring 81% from the previous quarter. If you paid attention to the overcapacity issues that arose at flat-panel display makers during 2006, you probably aren't too surprised by the crummy outlook.

The big question mark for the rest of this year, in my mind, has to do with the memory customers, since they account for roughly 50% of new orders. The primary memory customers are those that manufacture DRAM (used as main system memory in computers) and NAND flash (used to store songs in some Apple (NASDAQ:AAPL) iPods and pictures in digital cameras).

While chip equipment companies are fond of saying that capacity additions are much more rational now than they have been in the past, some poor decisions are still made. For example, when NAND flash began to get hot a couple of years ago, some DRAM fabs were converted to NAND flash production. At the same time, NAND flash manufacturers erected new facilities, resulting in significant price drops for NAND flash last year while DRAM prices strengthened.

In response, some companies decided to increase their DRAM manufacturing by converting NAND flash capacity back to DRAM. This action, combined with the new DRAM fabs that were built in anticipation of the release of Microsoft's (NASDAQ:MSFT) Windows Vista, had the predicted effect. Memory manufacturers effectively erected a dam in the river of cash that was flowing to them. DRAM pricing so far in 2007 has been very weak, as has that of NAND flash. The hope now is that strong demand later in the year can soak up the extra capacity.

It is worth noting that Applied is not the only chip equipment firm tied to memory spending. Other chip equipment manufacturers, like Novellus (NASDAQ:NVLS), KLA-Tencor (NASDAQ:KLAC), and Lam Research (NASDAQ:LRCX), have somewhere around 50% or more of their business tied to the memory companies as well. While I do like Applied Materials' position in the industry, my concern about overcapacity in memory will continue to keep me on the sidelines.

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Fool contributor Dan Bloom and his wife own shares of KLA-Tencor. He'd like to own shares in some of the other companies that were mentioned, but he's too much of a cheapskate to pay the current price. The Fool's disclosure policy always applies itself.