Lam Research (LRCX) Q3 Earnings & Revenues Beat Estimates

Lam Research Corporation (NASDAQ:LRCX) reported third-quarter fiscal 2018 non-GAAP earnings of $4.79 per share, which came ahead of the Zacks Consensus Estimate of $4.36. The figure increased 10.4% sequentially and 71.1% on a year-over-year basis.

Adjusted revenues increased 12% sequentially and 34.4% year over year to $2.89 billion beating the Zacks Consensus Estimate of $2.85 billion.

The year-over-year growth was attributed to robust performance of both etch and deposition technologies which resulted in expansion of serviceable addressable market of the company.

Total system shipments were $3.13 billion during the third quarter, which was up 19% sequentially and 29.9% on a year-over-year basis. However, shipments were below management’s guidance of $3.17 billion.

We note that in spite of strong quarter results, share price of Lam Research dropped 6.4% in after-hours trading, primarily due to lower-than-expected shipment.

Moreover, the stock has returned 46.9% over a year, underperforming the industry’s rally of 53%.

Top Line in Detail

In the quarter, Korea, China, Japan and Taiwan accounted for 36%, 17%, 14% and 12% of the company’s total revenues. Both the United States and Southeast Asia contributed 8%, while Europe contributed 5%.

The company experienced rising demand for DRAM application and NAND Flash that led to the increasing adoption of dielectric etch technology. Moreover, Lam Research benefited from its transition to new data enabled economy in which DRAM and NAND continues to gain from density growth.

Also, the company’s deposition portfolio continued to perform well and witnessed increased volume of shipments in the quarter.

Growing Shipments

Lam Research witnessed a record level of shipments since it crossed over $3 billion mark for the first time.

Shipment increase was driven mostly by improved memory shipments which accounted for 84% of the total shipments. Non-volatile memory shipments contributed to 57% and DRAM shipments contributed 27%.

The Foundry segment of the company contributed to 10%, Logic and other segment contributed 6% to the total shipments.

Operating Details

Non-GAAP gross profit came in $1.35 billion or 46.8% of revenues, which expanded 70 basis points (bps) on a year-over-year basis but contracted 80 bps sequentially.

Non-GAAP operating expenses were $486 million, reflecting an increase of 17.4% year over year and 8.2% from the previous quarter. This was due to increased research and development and selling, general and administrative expenditure.

Adjusted operating margin was 30%, expanded 310 bps but contracted 20 bps sequentially.

Balance Sheet & Cash Flow

As of Mar 25, 2018, cash and cash equivalents, short-term investments and restricted cash and investment balances came in $6.7 billion compared with $6 billion as of Dec 24, 2017. This increase was attributed to cash flow from operating activities was $1.05 billion, up from $28.7 million in the prior quarter.

Also, capital expenditures amounted to $49 million which were down from $84.7 million in the last quarter. The company also repaid debt of $29 million.

Lam Research paid $80 million in cash dividends to stock holders and covered 25% of the current $4 billion share repurchase authorization by spending $1 billion to buy back shares.

Guidance

For fourth-quarter fiscal 2018, Lam Research’s revenues are projected at $3.1 billion (+/- $150 million) and the Zacks Consensus Estimate is pegged at $2.91 billion. Management believes that memory segment will continue to perform well and expects consumer spending for its NAND products to increase further. Foundry and Logic segments are also expected to improve.

Shipments are projected to be around $3 billion (+/- $150 million). Gross margin is predicted at around 47.5% (+/-1%), while operating margin is likely to be about 31% (+/-1%).

Earnings per share are projected at $5 (+/- 15 cents) on a share count of nearly 181 million. The Zacks Consensus Estimate is pegged at $3.81 per share, which makes guidance better than expected. GAAP earnings per share are projected at $4.10 (+/- 15 cents).

Based on a share count of 178 million, management expects non-GAAP earnings of $5 (+/- 20 cents) per share. The Zacks Consensus Estimate is pegged at $4.59 for the upcoming quarter.

Conclusion

We believe Lam Research’s strong focus toward innovation will continue to aid the robust performance of its products in the end-markets.

Moreover, the company’s increasing investments in research and development bodes well for the idea of product innovation and expansion.

Additionally, deployment of 5G networks will require DRAM content especially in the smartphones and this is likely to drive the demand for the company’s DRAM memories.

Further, the company’s popular etch and deposition technologies are suitable for the ongoing vertical scaling, multi-patterning, advanced packaging and advanced transistor architectures. This will help the company to gain momentum in the market.

Zacks Rank & Other Stocks to Consider

Lam Research carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the broader technology sector are Micron Technology (NASDAQ:MU) , AMETEK (NYSE:AME) and Analog Devices (NASDAQ:ADI) . While Micron Technology sports a Zacks Rank #1 (Strong Buy), AMETEK and Analog Devices carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Micron Technology, AMETEK and Analog Devices is pegged at 10%, 10% and 12%, respectively.

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