LRCX • 10-Q • Q3 2021 • Positive

Lam Research Surges on Memory Demand While Supply Chain Constraints Intensify

October 26, 2021 • 1 min read

TL;DR

Lam Research delivered exceptional Q3 performance with revenue up 35% YoY to $4.3B, driven by robust memory demand and foundry expansion. Gross margins compressed 110bps to 45.9% due to supply chain constraints and higher input costs. Customer support revenue hit record levels, now representing 34% of total revenue. The company faces increasing challenges from component shortages while demand continues to outpace supply capacity. Management expects supply chain headwinds to persist through 2022

Financial Performance Overview: Revenue grew 35% YoY to $4.3B with systems revenue up 39% and customer support up 28%. Gross margin declined 110bps to 45.9% due to higher logistics and component costs. Operating margin held steady at 31.9% through cost controls and operating leverage. Memory segment represented 58% of systems revenue, followed by foundry at 32%. Deferred revenue grew 46% YoY indicating strong forward demand despite supply constraints.
Strategic Initiatives and Operational Changes: Management is expanding manufacturing capacity in Malaysia and Oregon to diversify supply chain risks. R&D investment increased 22% YoY to $390M focused on next-gen EUV integration and advanced packaging solutions. The company is vertically integrating key component manufacturing to reduce reliance on suppliers. New customer support initiatives driving higher contract values with 95%+ retention rates. Supply chain investments expected to improve margins by 100bps in FY22.
Market Position and Competitive Dynamics: Maintained 55% market share in critical etch solutions while expanding into new adjacent markets. Top 3 customers represented 45% of revenue, down from 51% last year showing improved diversification. Gained 2 points of share in foundry/logic segment through new product wins. China revenue grew 65% YoY now representing 35% of systems sales. Competitive position strengthening in high-aspect-ratio etching and atomic layer deposition.
Operational Efficiency and Profitability: Factory utilization reached 95% despite component shortages through improved planning systems. Inventory turns declined to 2.8x from 3.2x due to strategic buffer stock build. Operating expenses as percent of revenue improved 180bps through automation and productivity initiatives. Service gross margins expanded 220bps to 48.5% from new value-added offerings. Working capital efficiency declined with DSO increasing 5 days to 65 days.
Growth Catalysts and Material Risks: Memory spending expected to grow 30%+ in 2022 driven by DDR5 transition and data center expansion. New EUV integration opportunities could add $2B to serviceable market by 2023. Supply chain constraints remain primary near-term risk with 12+ week lead times. China exposure creates regulatory uncertainty but diversification efforts underway. R&D execution critical for maintaining technology leadership in 3nm and beyond nodes.

Revenue

$4.3B ( YoY, QoQ) with systems at $2.8B and customer support at $1.5B

↑ +35%

Rd Spend

$390M ( YoY) representing of revenue

↑ +22%

Net Income

$1.17B ( YoY) with net margin

↑ +43%

Gross Margin

(-110bps YoY) impacted by supply chain costs

↑ 45.9%

Free Cash Flow

$902M ( YoY) with conversion rate

↑ +38%

Operating Margin

(flat YoY) maintained through cost controls

↑ 31.9%

Growth Indicators

Top 3 customers of revenue, improved from

↑ 45%

Deferred Revenue ↑$1.4B (+46% YoY) indicating strong demand

Service Penetration ↑95% of installed base with 98% retention

Key Risks

Supply chain constraints extending lead times beyond 12 weeks
China exposure (35% of systems revenue) creates regulatory uncertainty
Gross margin pressure from logistics and component costs
Customer concentration in memory segment

Key Opportunities

Memory spending growth 30%+ in 2022 on DDR5 and data center expansion
EUV integration adding $2B to serviceable market by 2023
Advanced packaging adoption accelerating market expansion
Geographic diversification reducing risks while accessing growth markets

Bottom Line

Lam Research delivered strong Q3 results that demonstrate both the robust semiconductor demand environment and increasing operational challenges from supply constraints. While near-term margins face pressure, strategic investments in supply chain resilience and R&D should strengthen competitive positioning. The growing importance of the customer support business provides stability and recurring revenue visibility. Execution on supply chain initiatives and continued innovation in leading-edge solutions will be critical for maintaining technology leadership and market share gains. Watch for gross margin trajectory and deferred revenue as key indicators of operational improvement and demand sustainability.