Why Is Lam Research (LRCX) Down 3% Since Last Earnings Report?

It has been about a month since the last earnings report for Lam Research (LRCX). Shares have lost about 3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lam Research due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Lam Research's Earnings & Revenues Beat Q1 Estimates

Lam Research Corporation (NASDAQ:LRCX) reported first-quarter fiscal 2019 non-GAAP earnings of $3.36 per share, which beat the Zacks Consensus Estimate by 15 cents. However, the figure decreased 36.7% sequentially.

Adjusted revenues of $2.33 billion comfortably surpassed the Zacks Consensus Estimate of $2.30 billion and were slightly above the mid-point of the company’s guidance. However, the figure decreased 25.4% sequentially and 5.9% year over year.

Quarter Details

In the quarter, Japan, China, Korea and Taiwan accounted for 29%, 25%, 16% and 12% of total revenues, respectively. Southeast Asia, United States and Europe contributed 9%, 5% and 4% of total revenues, respectively.

Memory accounted for 77% of total system revenues. Non-volatile memory revenues represented approximately 51% of system revenues, while DRAM represented 26%. DRAM spending remained focused on conversions to both the 1x and 1y nanometer (nm) node.

Foundry segment was stronger in the quarter, accounting for 17% of system revenues. Logic and other segment contributed 6% of system revenues.

Non-GAAP gross margin contracted 170 basis points (bps) on a sequential basis to 46.4%.

Non-GAAP operating expenses were $450.5 million, down 11.2% sequentially. As percentage of total revenues, operating expenses increased 310 basis points (bps) sequentially to 19.3%.

Research & development (R&D) related spending accounted for almost two-third of operating expenses.

Adjusted operating margin contracted 480 bps sequentially to 27% but was better than management’s guidance, primarily due to stronger gross margin and lower spending.

Balance Sheet & Cash Flow

As of Sep 23, 2018, cash and cash equivalents, short-term investments, and restricted cash and investments balances decreased to $3.9 billion compared with $5.2 billion as of Jun 24, 2018.

Cash flow from operating activities was $720.3 million, up from $718.4 billion in the last reported quarter. Capital expenditures were $56 million, down from $80 million in the previous quarter.

During the quarter, Lam Research bought back shares worth $1.7 billion and paid dividends of $174 million.

Guidance

For second-quarter fiscal 2019, Lam Research projects revenues of $2.5 billion (+/- $150 million). The Zacks Consensus Estimate is pegged at $2.53 billion. Management expected modest increase in customer spending across multiple segments.

Gross margin is predicted at around 46% (+/-1%), while operating margin is expected to come in at 27.5% (+/-1%).

Non-GAAP earnings are projected at $3.65 (+/- 20 cents) per share on a share count of nearly 163 million. The Zacks Consensus Estimate is pegged at $3.77.

Management stated that Wafer Fab Equipment (WFE) expectations continue to grow slightly on a year-over-year basis in 2018. WFE is stronger in logic but slightly weaker in NAND and foundry.

Lam Research stated that it is looking into 14 new fab projects in calendar 2019. Management expects first half of 2019 to be strong than the second half of 2018.

Lam Research provided an optimistic long-term outlook. The rapid proliferation of next generation device and systems architectures, and the expansion of the materials in chip design and manufacturing creates compelling opportunities for the company’s etch and deposition expertise.

Moreover, the company expects to eventually hit long-term operating margin target of 32-33%, with increase in DRAM, logic and foundry revenues.

Lam Research expects about 1 million wafer starts per month of incremental capacity in the system related to non-volatile memory, over the long term.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, Lam Research has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Lam Research has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.