LRCX • 10-Q • Q4 2022 • Positive

Lam Research Hits Record Revenue Despite Supply Chain Headwinds

February 01, 2022 • 1 min read

TL;DR

Lam Research delivered record quarterly revenue of $4.23B (+22% YoY) despite ongoing supply chain constraints. Strong demand in memory and foundry segments drove growth, with system sales up 24% YoY to $2.76B. Operating margin compressed 120bps to 31.4% due to higher input costs and logistics expenses. Management expects supply challenges to persist through 2022 but maintains positive long-term outlook given $13B+ order backlog.

Financial Performance Overview: Revenue grew 22% YoY to $4.23B, with systems revenue up 24% to $2.76B and customer support revenue up 19% to $1.47B. Gross margin declined 110bps YoY to 46.8% due to higher component and freight costs. Operating margin compressed to 31.4% (-120bps YoY) but remains industry-leading. Strong cash generation with FCF of $1.1B and 26% FCF margin. Deferred revenue grew 42% YoY indicating robust future revenue visibility.
Strategic Initiatives and Operational Changes: Management is expanding manufacturing capacity in Malaysia and Korea to diversify geographic footprint and improve supply chain resilience. R&D spend increased 19% YoY to support next-gen EUV and advanced packaging solutions. New capacity should come online by mid-2022. Strategic focus on expanding services business showing results with installed base revenue up 19% YoY.
Market Position and Competitive Dynamics: Maintained 55%+ market share in critical etch segment. Customer concentration increased with top 2 customers representing 42% of revenue vs 36% year ago. Strong competitive position in memory but facing increased competition in foundry from ASML. Services attach rate improved to 85% from 82% last year showing strong customer retention.
Operational Efficiency and Profitability: Gross margin pressure from higher input costs partially offset by pricing actions and mix shift to services. Factory utilization at 92% vs 88% last year driving fixed cost leverage. Inventory turns declined to 2.8x from 3.2x due to strategic buffer stock build. Operating expenses well controlled at 15.4% of revenue despite growth investments.
Growth Catalysts and Material Risks: Record $13B+ backlog provides strong visibility into 2022-23 demand. Memory spending expected to grow 15-20% in 2022 led by DDR5 transition. Supply chain constraints remain primary near-term risk with 12-16 week lead times. Customer concentration and foundry competition pose longer-term challenges. New product introductions in advanced packaging present growth opportunity.

Revenue

$4.23B ( YoY, QoQ) with systems $2.76B, services $1.47B

↑ +22%

Gross Margin

(-110bps YoY) impacted by component and logistics costs

↑ 46.8%

Free Cash Flow

$1.1B ( margin, YoY)

↑ 26%

Operating Margin

(-120bps YoY) with increased R&D investment

↑ 31.4%

Growth Indicators

$13B+ (record level, YoY)

↑ +45%

Deferred Revenue ↑$1.9B (+42% YoY)

Services Attach Rate ↑85% (+300bps YoY)

Key Risks

Supply chain constraints impacting lead times and costs
Customer concentration risk with top 2 at 42% of revenue
China exposure at 33% of revenue presents geopolitical risk
Margin pressure from input costs and logistics expenses

Key Opportunities

Memory spending growth 15-20% expected in 2022
Advanced packaging $3B+ TAM by 2025
Services business expansion with subscription offerings
Manufacturing capacity expansion providing 15-20% additional output

Bottom Line

Lam Research demonstrated strong execution in Q4 despite significant headwinds, with record revenue and robust backlog providing confidence in near-term trajectory. While supply chain challenges and margin pressure warrant monitoring, the company's strategic initiatives around manufacturing expansion, services growth, and R&D investments position it well for sustainable growth. Key metrics to watch include gross margin recovery, services attach rate, and China exposure levels. The contrarian view suggests margin pressure may persist longer than expected, but Lam's technology leadership and strong customer relationships provide competitive moat.