Lam Research Is Up On Weak Outlook - What's A Trough?

Summary

• In its recent earnings call, Lam Research's CFO stated that "the September quarter marks a near-term trough for our business."
• My calculations estimate that the "trough" will last at least two quarters.
• Investors have chosen to accept management's explanation that the weakness is temporary, as shares have risen 7.5% since the earnings call.
• Investors have also disregarded uncertainty in memory equipment spend, memory pricing volatility, and lackluster logic chip sales.

Lam Research (NASDAQ:LRCX) reported quarterly earnings of $5.31 per share, beating the consensus estimate of $4.94 per share. Downside Q1 guidance has revenue of $2.15 billion to $2.45 billion (consensus: $2.77 billion) with an EPS of $3 to $3.40 (consensus: $3.89).

The company reported revenues of $3.13 billion, beating by $70 million. For the September 2018 quarter, Lam Research expects revenue to be $2.3 billion, plus or minus $150 million. Adjusted earnings are expected to be $3.20 per share, plus or minus $0.20.

Douglas R. Bettinger - Lam Research Corp.’s CFO stated in the company's FY Q4 earnings call:

"As we sit here today, we believe the September quarter marks a near-term trough for our business."

Table 2 presents an analysis of the semiconductor equipment market according to The Information Network’s report “The Global Semiconductor Equipment Market: Markets, Market Shares, Market Forecast.”

Table 2 shows that total semiconductor equipment for CY 2017 was $56.6 billion and segmented by region. 1H 2018 revenues are also detailed by region and the share by region is presented.

Martin Brian Anstice, Lam Research Corp commented in the earnings call:

“We noted last quarter that we expected low double-digit WFE growth in 2018… We now plan overall 2018 WFE up year-over-year in the single-digit range.”

Using 2018 growth of 10%, equipment revenues are forecast to be $62.3 billion. Based on the percentage share for 1H 2018, revenues are calculated for 2H 2018 and for the entire 2018. U.S. revenues for CY 2018 are forecast to be $26.7 billion.

I’ve calculated and estimated Lam’s “Trough” in Table 3. Lam’s revenues for CY 1H 2018 were $6.0 billion. The company’s outlook for the September quarter is $2.3 billion. Note that these reported revenues are for equipment, service, and spare parts, whereas revenue in Table 2 is “equipment only.” Based on previous years, Lam’s equipment comprised 82% of total revenues. Thus, the company had equipment revenues of $4.9 billion in 1H 2018. This $4.9 billion represented 33% of the U.S. revenues of $15.1 billion in Table 1.

Based on the 33% ratio, Lam’s estimated equipment revenues for CY 2018 is $8.7 billion, and based on 82% ratio, Lam’s total revenues (equipment, service, and spare parts) is estimated at $10.6 billion.

If we combine actual 1H revenues of $6.0 billion and CY Q3 outlook of $2.3 billion reported during the earnings call, then CY Q4 revenues are estimated at $2.3 billion.

Investor Takeaway

Lam’s CFO stated that the “September quarter marks a near-term trough for our business.” Based on calculations in Tables 2 and 3, the trough will last at least two quarters, not just the September quarter.

Clearly, the market appears to have accepted management's explanation that the weakness is temporary, as shares have risen from a low of $177.26 just before the earnings call to $190.64 at the market close on July 31, 2018.

There is a tremendous amount of uncertainty in the semiconductor equipment market, which grew 31.1% YoY in 2017. Lam now foresees calendar 2018 equipment spending to be up in the mid-single digits as opposed to the low-double digits previously. There is not only uncertainty around the timing of a recovery in equipment, but also memory price volatility.

Lam’s weak outlook for the September quarter is largely attributed to push outs in the memory market and a lackluster logic outlook from TSMC (TSM).

Chart 1 shows equipment billings for the past 4½ years by month for North American equipment manufacturers. The falloff for June 2018 is unprecedented, supporting my contention that the uncertainty in the equipment market will not only impact LRCX, but other North American equipment suppliers as well.

KLA-Tencor (KLAC) recently reported lackluster FY 4Q revenue growth of 4.8% compared to 4.6% in FY 3Q. KLAC reported better than expected FY Q4 results and provided upbeat guidance, but KLAC doesn’t have the exposure to memory companies as does LRCX.

Applied Materials’ (AMAT) next quarter ends July 31, 2018. The company has a large exposure to the memory market and revenue will be impacted by pushouts by Samsung Electronics (OTCPK:SSNLF), as well as lackluster logic from TSM, which has reduced its estimate for sales revenue growth in 2018 and its capital expenditure budget. Samsung Electronics’ memory equipment investments are set to drop to 11 trillion won ($9.9 billion) in 2018, which comprises DRAM investments of 9 trillion ($8.1 billion) and NAND investments of 2 trillion won ($1.8 billion).

Chart 1

Chart 2 shows billings for Japanese equipment companies for the past 4½ years. The 20% drop in June revenues is dramatic, but this trend appears seasonal based the May-June changes for the previous four years.

Semiconductor’s CY Q2 revenues dropped 43.9% QoQ while Tokyo Electron’s QoQ revenues dropped 16.1%.

Chart 2

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.