LRCX • 10-Q • Q1 2023 • Positive

Lam Research Navigates Memory Downturn with Strong Services Growth and Market Share Gains

April 24, 2023 • 1 min read

TL;DR

Despite semiconductor industry headwinds, Lam Research delivered Q1 2023 revenue of $3.87B (-4.7% YoY) driven by robust customer support revenue growth of 14% YoY. System sales declined 11% YoY reflecting memory market weakness, but the company maintained 45.6% gross margins through operational efficiency and pricing discipline. Services now represent 37% of revenue, providing stability amid cyclical downturns. Management expects memory market recovery in late 2023 with China demand remaining re

Financial Performance Overview: Q1 revenue declined 4.7% YoY to $3.87B but exceeded guidance, with systems revenue down 11% to $2.44B while customer support grew 14% to $1.43B. Gross margin of 45.6% improved 20bps QoQ despite volume headwinds, benefiting from pricing actions and cost controls. Operating margin contracted 180bps YoY to 27.3% on lower volumes, though remained above pre-pandemic levels. Services growth and operational efficiency helped maintain profitability despite cyclical pressures.
Strategic Initiatives and Operational Changes: Management accelerated investment in next-gen etch and deposition technologies, increasing R&D 12% YoY to $447M (11.6% of revenue). The company expanded its installed base services offering with new analytics capabilities and preventive maintenance solutions. Supply chain diversification efforts progressed with qualification of new suppliers, while factory automation initiatives drove productivity gains of 8% YoY. These investments position Lam for market share gains as industry growth resumes.
Market Position and Competitive Dynamics: Lam maintained leading >50% share in critical etch applications while expanding deposition share by 200bps to ~35%. Customer concentration increased with top 3 customers representing 46% of revenue vs 42% year ago. China revenue grew to 41% of total as domestic customers accelerated capacity expansion. The company's technology leadership in high-aspect-ratio etching provides competitive moat as device architectures become more complex.
Operational Efficiency and Profitability: Gross margin resilience reflects successful cost reduction initiatives and value-based pricing strategy. Factory utilization declined to 75% from 85% year ago but remained above trough levels. Inventory turns improved to 2.8x from 2.5x last quarter through supply chain optimization. Operating expenses were well-controlled at 18.3% of revenue despite growth investments. Free cash flow conversion remained strong at 25% of revenue.
Growth Catalysts and Material Risks: Near-term growth constrained by memory spending cuts, though leading indicators suggest stabilization by Q4 2023. China exposure presents both opportunity and risk given geopolitical tensions. New product introductions in atomic layer deposition and selective etch target high-growth segments. Key risks include customer concentration, supply chain disruptions, and trade restrictions. Management expects 15-20% growth in services business regardless of cycle.

Revenue

$3.87B (-4.7% YoY, -5.6% QoQ) with systems down 11% but services up 14%

Rd Spend

$447M ( YoY) at of revenue

↑ +12%

Net Income

$949M ( YoY) reflecting volume deleverage

↓ -28.8%

Gross Margin

(+20bps QoQ, -60bps YoY) showing resilience

↑ 45.6%

Free Cash Flow

$965M ( of revenue) supporting capital return

↑ 25%

Operating Margin

(-180bps YoY) but above pre-pandemic levels

↑ 27.3%

Growth Indicators

Top 3 customers of revenue, up from YoY

↑ 46%

Services Revenue ↑$1.43B (+14% YoY) now 37% of total revenue

Systems Bookings ↓$2.44B (-11% YoY) reflecting memory weakness

Key Risks

Customer concentration at 46% for top 3 customers poses revenue risk
China exposure at 41% of revenue vulnerable to trade restrictions
Memory market weakness with uncertain recovery timeline
Supply chain constraints could impact production capacity

Key Opportunities

Services business targeting 15-20% growth through expanded offerings
China domestic capacity expansion driving near-term growth
New product introductions in atomic layer deposition and selective etch
Margin expansion potential through automation and supply chain optimization

Bottom Line

Lam Research demonstrated resilient performance in Q1 2023 despite significant memory market headwinds, highlighting the success of its diversification strategy toward recurring services revenue. While systems sales declined 11% YoY, 14% growth in customer support revenue provided stability. Operational execution remained strong with gross margins holding at 45.6% despite volume pressures. The company's technology leadership in critical processes and ongoing R&D investments position it well for eventual market recovery. Key metrics to watch include memory spending patterns, China exposure risks, and services growth trajectory. The contrarian insight is that current memory weakness may accelerate industry consolidation, potentially benefiting Lam through increased customer concentration and pricing power.