LRCX • 10-Q • Q3 2023 • Positive

Lam Research Navigates Memory Slump with Strong Foundry Growth and China Resilience

October 23, 2023 • 1 min read

TL;DR

Lam Research demonstrated resilience in Q3 2023 despite ongoing memory market weakness, with revenue of $3.48B (-31.5% YoY) driven by foundry strength offsetting memory decline. China revenue surprisingly grew to 39% of total sales despite export controls, while Korea dropped to 8%. Gross margins improved 120bps YoY to 46.5% through cost optimization and pricing discipline. Management's outlook suggests memory market stabilization by mid-2024, with foundry/logic momentum continuing to provide su

Financial Performance Overview: Revenue declined 31.5% YoY to $3.48B but grew 9.2% QoQ, marking potential bottom in memory cycle. Systems revenue fell 38% YoY while Customer Support remained resilient at -13%. Gross margins expanded 120bps YoY to 46.5% through cost controls and favorable mix. Operating margin of 28.4% (-460bps YoY) reflects continued R&D investment at 14.2% of sales. Free cash flow generation remained strong at $0.9B despite top-line pressure.
Strategic Initiatives and Operational Changes: Management emphasized equipment innovation for gate-all-around and backside power delivery adoption. R&D investments increased 12% QoQ to support next-gen development. Supply chain diversification efforts progressed with alternate sourcing for key components. New Sense.ai portfolio launch strengthens competitive position in process control. Selective headcount optimization balanced cost control with innovation capabilities.
Market Position and Competitive Dynamics: Maintained 55%+ market share in etch and deposition despite memory weakness. China revenue concentration increased to 39% as domestic capacity expansion continued. Korea exposure dropped to 8% from 31% YoY reflecting memory capex cuts. New wins in advanced packaging and heterogeneous integration expand TAM. Growing competitive pressure in mature nodes but leadership position intact in leading edge.
Operational Efficiency and Profitability: Gross margin improvement to 46.5% driven by favorable product mix and pricing actions. Operating expenses well-controlled at 18.1% of revenue despite continued R&D investment. Factory utilization improved sequentially but remains below optimal levels. Services attach rate increased to 33% providing recurring revenue stability. Working capital management drove strong cash conversion despite lower volumes.
Growth Catalysts and Material Risks: Memory market stabilization expected by mid-2024 based on inventory drawdown trends. High-NA EUV and Gate-All-Around transitions driving new opportunities. China exposure presents both growth driver and regulatory risk. Supply chain constraints mostly resolved but geopolitical tensions remain. Services business provides buffer through downcycle while maintaining customer engagement.

Revenue

$3.48B ( YoY, QoQ) with systems at $2.11B and services at $1.37B

↓ -31.5%

Rd Spend

$494M ( QoQ) at of revenue

↑ +12%

Net Income

$787M ( YoY) representing net margin

↓ -45.5%

Gross Margin

(+120bps YoY) driven by mix and cost control

↑ 46.5%

Free Cash Flow

$0.9B with conversion rate

↑ 115%

Operating Margin

(-460bps YoY) reflecting continued R&D investment

↑ 28.4%

Growth Indicators

$2.1B ( QoQ)

↑ +15%

Services Attach Rate ↑33% (+200bps YoY)

Customer Concentration ↑Top 2 customers 42% of revenue

Key Risks

China exposure at 39% of revenue amid tightening export controls
Customer concentration with top 2 at 42% of revenue
Memory market recovery timing uncertainty
Rising R&D requirements with technology complexity

Key Opportunities

Memory market stabilization expected by mid-2024 ($100B+ TAM)
High-NA EUV and Gate-All-Around transitions driving new tool demand
Services business expansion with 33% attach rate
Advanced packaging adoption accelerating ($10B+ TAM)

Bottom Line

Lam Research demonstrated strong execution amid challenging industry conditions in Q3 2023. While memory weakness persists, operational discipline and strategic positioning for next-gen transitions provide resilience. The growing China exposure presents both opportunity and risk requiring careful management. Memory market stabilization signs suggest potential recovery by mid-2024, though timing remains uncertain. The company's continued R&D investments and new product introductions position it well for upcoming technology transitions. Key metrics to watch include memory customer capex plans, China exposure evolution, and services attach rates.