LRCX • 10-Q • Q1 2022 • Positive

Lam Research Navigates Supply Chain Headwinds While Maintaining Record Demand Backlog

April 26, 2022 • 1 min read

TL;DR

Lam Research delivered Q1 revenue of $4.06B (+22% YoY) despite persistent supply chain constraints limiting output. System revenue grew 21.5% YoY driven by memory and foundry demand, while Customer Support revenue increased 23.5%. Gross margins compressed 110bps to 44.7% due to higher logistics and component costs. The company maintains a record backlog exceeding $15B as semiconductor manufacturers continue aggressive capacity expansion plans, though near-term execution remains challenged by par

Financial Performance Overview: Revenue grew 22% YoY to $4.06B but declined 5.5% QoQ as supply constraints limited shipments. Gross margin of 44.7% declined 110bps YoY and 70bps QoQ due to higher input costs and expedited freight charges. Operating margin contracted 180bps YoY to 29.4% despite operating leverage on higher volumes. Customer Support business showed resilience with 23.5% YoY growth to $1.41B, now representing 35% of total revenue. Deferred revenue increased 54% YoY to $2.07B, indicating strong future revenue visibility despite near-term challenges.
Strategic Initiatives and Operational Changes: Management is executing a multi-pronged strategy to address supply chain constraints, including qualifying additional suppliers, redesigning products for component flexibility, and increasing inventory buffers of critical parts. The company expanded manufacturing capacity in Malaysia and Korea while accelerating localization efforts in key markets. R&D investments increased 19% YoY focused on next-generation EUV, advanced packaging, and heterogeneous integration solutions. These initiatives position Lam to capture growing demand for leading-edge semiconductor manufacturing equipment.
Market Position and Competitive Dynamics: Lam maintained its dominant position in etch and deposition with 55%+ market share in critical applications. Customer concentration remains high with top 3 customers representing 45% of revenue. The company is gaining share in foundry/logic segments while defending its strong memory position. Competition is intensifying from AMAT and TEL in advanced packaging and atomic layer deposition, though Lam's process control innovations provide competitive moats. The expanding semiconductor equipment TAM ($100B+ by 2025) provides substantial growth runway.
Operational Efficiency and Profitability: Despite volume growth, profitability metrics declined due to supply chain inefficiencies and inflationary pressures. Gross margin compression of 110bps stemmed from higher logistics costs (+85bps impact) and increased component prices (+65bps impact), partially offset by favorable mix (+40bps). Operating expenses grew slower than revenue at 15% YoY, demonstrating good cost control. Working capital efficiency deteriorated with inventory turns declining to 2.8x from 3.2x as the company builds buffer stock.
Growth Catalysts and Material Risks: Near-term growth remains constrained by parts availability, though underlying demand drivers remain robust including datacenter expansion, 5G rollout, and automotive semiconductor content growth. Key risks include potential memory spending cuts if macro conditions worsen, geopolitical tensions affecting China sales (24% of revenue), and increased competition in emerging technology nodes. Management expects supply challenges to persist through 2022 while maintaining confidence in multi-year growth trajectory driven by semiconductor industry capacity expansion.

Revenue

$4.06B ( YoY, QoQ) with Systems $2.65B, Customer Support $1.41B

↑ +22%

Gross Margin

(-110bps YoY, -70bps QoQ) due to higher input costs

↑ 44.7%

Free Cash Flow

$994M ( YoY) with conversion rate

↓ -12%

Operating Margin

(-180bps YoY) despite good opex control

↑ 29.4%

Growth Indicators

>$15B (record levels)

Inventory Turns ↓2.8x (down from 3.2x)

Deferred Revenue ↑$2.07B (+54% YoY)

Key Risks

Supply chain constraints limiting output through 2022
Gross margin pressure from logistics and component costs
China exposure (24% of revenue) amid geopolitical tensions
Memory spending cuts if macro conditions worsen

Key Opportunities

Expanding semiconductor equipment TAM ($100B+ by 2025)
Customer Support growth from larger installed base
Advanced packaging and heterogeneous integration adoption
Geographic diversification reducing China concentration

Bottom Line

Lam Research's Q1 results demonstrate both the company's strong competitive position and near-term operational challenges facing the semiconductor equipment industry. While supply constraints may persist through 2022, underlying demand drivers remain robust with record backlog providing strong visibility. Management's operational initiatives show early progress though margin pressure likely continues near-term. The expanding semiconductor equipment TAM provides substantial growth runway, with Lam well-positioned in critical applications. Key metrics to watch include gross margin trajectory, deferred revenue conversion, and China exposure evolution. The contrarian take is that current supply challenges may ultimately strengthen Lam's competitive position by accelerating product redesigns and supplier diversification ahead of the next industry upturn.