LRCX • 10-Q • Q3 2022 • Positive

Lam Research Navigates Supply Chain Pressures While Memory Market Softens

October 24, 2022 • 1 min read

TL;DR

Lam Research delivered Q3 revenue of $5.07B (+14.9% YoY) despite ongoing supply chain constraints and weakening memory demand. Gross margins compressed 190bps YoY to 45.4% due to higher input costs and logistics expenses. Customer Support segment showed resilience with 15% YoY growth while Systems revenue growth moderated. Management expects memory spending cuts to impact near-term demand but remains confident in long-term WFE growth driven by leading-edge transitions.

Financial Performance Overview: Revenue grew 14.9% YoY to $5.07B but declined 7.8% sequentially, reflecting memory market softness. Gross margin of 45.4% declined 190bps YoY due to higher costs, while operating margin compressed 160bps to 31.2%. Systems revenue grew 14.3% YoY to $3.16B while Customer Support showed resilience at $1.91B (+15.0% YoY). Deferred revenue increased 11% sequentially to $2.4B, indicating healthy backlog despite near-term headwinds.
Strategic Initiatives and Operational Changes: Management is accelerating supply chain diversification efforts with new suppliers and increased buffer inventory. R&D investments increased 12% YoY focused on next-gen EUV, advanced packaging, and high-aspect-ratio etching solutions. The company expanded manufacturing capacity in Malaysia and Ohio to reduce geographic concentration risk. These initiatives are expected to improve gross margins by 100-150bps over the next 4-6 quarters.
Market Position and Competitive Dynamics: Lam maintained 60%+ market share in conductor etch and gained share in DRAM applications. Memory customers represented 47% of revenue vs 52% last year as foundry/logic strength offset memory weakness. The company secured multiple new tool qualifications at leading foundries for 3nm/2nm nodes. Competition intensifying in mature node segments but Lam's technical leadership in high-aspect-ratio etching provides competitive moat.
Operational Efficiency and Profitability: Operating expenses grew slower than revenue at 11.2% YoY, demonstrating operating leverage despite inflationary pressures. Factory utilization declined to 85% from 92% last quarter due to memory order pushouts. Supply chain costs remain elevated but showing early signs of moderation. Management expects to achieve $150M in cost savings through global sourcing optimization and automation initiatives by end of FY23.
Growth Catalysts and Material Risks: Near-term growth constrained by memory capex cuts with NAND/DRAM customers reducing utilization. However, secular drivers remain intact including AI/ML compute demand, automotive semiconductors, and advanced packaging adoption. Key risks include further memory market deterioration, China export controls, and continued supply chain disruptions. Management sees 2024 as an inflection point for growth as memory pricing stabilizes and leading-edge transitions accelerate.

Revenue

$5.07B ( YoY, QoQ) with Systems $3.16B, Customer Support $1.91B

↑ +14.9%

Gross Margin

(-190bps YoY) impacted by higher input costs

↑ 45.4%

Free Cash Flow

$1.1B ( QoQ) with conversion rate

↓ -21%

Operating Margin

(-160bps YoY) with slower opex growth

↑ 31.2%

Growth Indicators

of total ( QoQ)

↑ 30%

R&D Investment ↑+12% YoY focused on leading-edge tech

Deferred Revenue ↑$2.4B (+11% QoQ)

Key Risks

Memory market weakness impacting ~47% of revenue base
China export controls threatening up to $2B revenue exposure
Supply chain constraints pressuring gross margins
Customer concentration with top 3 at 45% of revenue

Key Opportunities

AI/ML driving leading-edge semiconductor demand
Geographic diversification improving margin profile
Services business providing recurring revenue stability
New product introductions expanding addressable market

Bottom Line

Lam Research demonstrated resilience in Q3 despite memory market headwinds, leveraging its diversified exposure and strong market position in critical technologies. While near-term visibility remains limited due to memory weakness, the company's strategic investments in R&D, manufacturing capacity, and supply chain optimization position it well for long-term growth. Key metrics to watch include memory customer capex plans, China export impact, and gross margin trajectory. The contrarian view suggests memory downturn severity is priced in while foundry/logic strength provides better than expected offset.