LRCX • 10-Q • Q1 2024 • Positive

Lam Research Rides AI Wave with 39% Margin Expansion Despite Memory Weakness

April 29, 2024 • 1 min read

TL;DR

Lam Research delivered exceptional Q1 performance with revenue of $3.79B and 39.3% operating margins, driven by AI-related demand and operational efficiency gains. System revenue grew 14% QoQ to $2.46B despite continued memory market softness. Customer support revenue reached record levels at $1.33B, highlighting the company's resilient recurring revenue base. Management's commentary suggests accelerating demand from leading-edge nodes and AI infrastructure buildout, though memory recovery remai

Financial Performance Overview: Revenue increased 8.4% YoY to $3.79B, with system sales up 14% QoQ and customer support reaching all-time highs. Gross margins expanded 150bps YoY to 48.3% on improved product mix and operational efficiencies. Operating margins hit 39.3%, up 280bps YoY, reflecting strong execution and pricing power. The China region contributed 39% of revenue, showing resilience despite export controls. Free cash flow generation remained robust at $1.2B, supporting aggressive share repurchases.
Strategic Initiatives and Operational Changes: Management has accelerated R&D investments in AI-specific solutions, increasing spend 12% YoY to $428M. The company expanded its Sense.ai platform capabilities and launched new selective etch products for advanced logic nodes. Supply chain localization efforts progressed with expanded Malaysia operations. Key focus on developing solutions for gate-all-around and backside power delivery architectures positions Lam for next-gen semiconductor manufacturing.
Market Position and Competitive Dynamics: Lam maintained 60%+ market share in critical etch applications while expanding presence in deposition. Customer concentration increased with top 3 customers representing 45% of revenue. The company's leadership in 3D NAND and advanced packaging positions it well for eventual memory recovery. Competitive advantages in high-aspect-ratio etching and selective deposition strengthened through new product introductions.
Operational Efficiency and Profitability: Gross margin improvements driven by favorable product mix and manufacturing optimization initiatives. Operating expenses well controlled at 19% of revenue despite increased R&D investment. Factory utilization improved to 85%+ while inventory levels normalized. Service margins reached record 48.5% on higher-value offerings and installed base growth. Management expects further efficiency gains from automated spare parts logistics and predictive maintenance.
Growth Catalysts and Material Risks: Near-term growth driven by AI infrastructure buildout and leading-edge logic/foundry demand. Memory market shows early recovery signs but remains below normalized levels. Key risks include China export restrictions, semiconductor cycle volatility, and supply chain disruptions. Management sees 2024 WFE spending up 10-20% YoY with stronger second half. Service business provides stability while awaiting broader memory recovery.

Revenue

$3.79B ( YoY, QoQ) with systems $2.46B, services $1.33B

↑ +8.4%

Rd Spend

$428M ( YoY) representing of revenue

↑ +12%

Net Income

$955M ( YoY) with net margin

↑ +39.7%

Gross Margin

(+150bps YoY) driven by mix and efficiencies

↑ 48.3%

Free Cash Flow

$1.2B with conversion rate

↑ 126%

Operating Margin

(+280bps YoY) reflecting strong execution

↑ 39.3%

Growth Indicators

System bookings up QoQ

↑ 14%

Regional Mix ↑China 39%, Korea 15%, Taiwan 14%

Customer Count ↑Top 3 customers 45% of revenue

Key Risks

China export restrictions could impact 39% of revenue
Top 3 customers represent 45% of sales
Memory market recovery timing uncertainty
Supply chain concentration risks

Key Opportunities

AI infrastructure buildout driving leading-edge demand
Service business expansion with 48.5% margins
New products for gate-all-around and advanced packaging
Operational leverage from recent efficiency initiatives

Bottom Line

Lam Research's Q1 2024 results demonstrate strong execution and strategic positioning despite mixed industry conditions. The company successfully navigated memory market weakness while capitalizing on AI-driven demand and operational improvements. Key metrics suggest accelerating momentum in system sales and sustained strength in services. Management's strategic investments in AI-enabling technologies and operational optimization position Lam well for the next growth cycle. Watch for memory market recovery timing, China exposure developments, and new product adoption rates as key indicators for future performance.