Novellus Systems (NASDAQ:NVLS) reported results for its fiscal second quarter after market-close yesterday. As expected, the chip equipment maker reported strong increases in sales, earnings, and bookings, and expressed a remarkably bright outlook for NAND flash memory -- the stuff used to store songs in Apple's (NASDAQ:AAPL) iPod nano and other MP3 players.

Revenues for the quarter reached $410 million, which was up 12% sequentially and 24% year over year. Net income totaled $52.7 million (or $0.42 per share), more than twice the previous quarter's $25 million, and a 59% gain over the year-ago level. Meanwhile, bookings were $458 million, a 10% increase sequentially.

Just like revenue, other financial metrics showed improvement as well. The gross profit margin reached 49.9% compared to last year's 47.8%, and the operating margin reached 18.3% compared to 13.3% last year.

Judging from the conference call, it seems Novellus' real strength came from the memory segment. By my count, the word "NAND" was used 25 times during the call -- all the NAND cheerleading made me a little uncomfortable, actually. Novellus is very bullish on the future of NAND flash memory; in fact, CEO Rick Hill expects that NAND flash solid-state drives will replace hard drives in all notebook computers within three years.

Color me skeptical. While solid-state drives may make their way into lots of notebooks in three years, hard drives will still likely offer the lowest cost per gigabyte for storage. I'll bet that plenty of notebooks will still ship with hard drives -- although they may combine a spinning platter with flash memory.

I do believe that NAND flash memory has some amazing growth ahead -- although it remains to be seen whether SanDisk (NASDAQ:SNDK), Samsung, and their ilk will benefit from it. The real beneficiaries may be chip equipment firms like Novellus, Applied Materials (NASDAQ:AMAT), and Lam Research (NASDAQ:LRCX), although one has to wonder whether NAND flash capacity expansions have gone too far, too fast this year. This year's NAND production, as measured by the number of bits, should increase by around 175% compared to 2005.

Nevertheless, I don't think it will take too long to absorb the excess, which will trigger another round of expansions. While these shares may be worth a look, be aware that chip equipment firms have very volatile businesses. With Novellus, you're making an indirect bet on the NAND flash market.

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Fool contributor Dan Bloom has no financial interest in any company mentioned in this column. He welcomes your comments.