Lam Research Beats on Q3 Earnings, Revs - Analyst Blog

On Apr 23, Lam Research Corporation LRCX reported third quarter fiscal 2014 non-GAAP earnings of $1.26 per share, which beat the Zacks Consensus Estimate by 10 cents. This Zacks Rank #2 (Buy) company has a very good earnings surprise history, posting an average four-quarter surprise of 10.2%.

Revenues of $1.23 billion increased 10.0% sequentially and 45.3% year over year. Revenues also beat the Zacks Consensus Estimate of $1.21 billion. The sequential improvement was primarily driven by an increase in market share in the memory space.

Revenues by Geography

Region-wise, the U.S. contributed 10% of fiscal third quarter 2014 revenues (13% in the prior quarter). Europe's share was 6% (5% in the prior quarter) while Japan brought in 11% (17% in the prior quarter). China accounted for 22% of the revenues (12% in the previous quarter), Korea added 28% (19% in last quarter) and Taiwan contributed 19% (28% in the previous quarter). Southeast Asia contributed the remaining 4% (6% in the previous quarter).
 
Shipments

Total system shipments were roughly $1.26 billion during the quarter, up 11.0% from $1.14 billion in the prior quarter. The memory segment collectively accounted for 66% of shipments, NAND shipments contributed 36.0% while DRAM added 30.0% to the same.

DRAM shipments again comprised 25 nanometer (nm) conversions as well as 20 nm pilot production. The company benefitted excessively from these shipments due to its strong position in multiple pattern applications market.

Foundries accounted for 28% of total shipments, which were flat on percentage terms with the previous quarter but up 15% on a dollar basis.

Logic and others constituted 6% of the total shipments, which declined from 8% in the last quarter.

Geographically, the U.S. accounted for 11% of fiscal third quarter 2014 shipments (9% in the first quarter of fiscal 2014). Europe generated 5% (7% in the prior quarter), while Japan brought in 11% (13% in the prior quarter). Korea contributed 28% (24% in the previous quarter) and was the largest contributor for the quarter. Taiwan accounted for 22% (in line with the prior quarter). China constituted 20% (21% in the previous quarter), while Southeast Asia contributed 3% (4% in the previous quarter) of total shipments.

Margins

Non-GAAP gross profit was $558.9 million, or 45.5% of revenues compared with non-GAAP gross profit of $510.7 million, or 45.8% of revenues in the prior quarter. Several factors such as favorable customer mix, product mix and higher business volume contributed to the improved gross margin performance.

Total operating expenses were $311.0 million, up from $302.1 million in the prior quarter. Operating margin was 20.2%, up 150 basis points (bps) from 18.7% recorded in the prior quarter.

Net Income

Non-GAAP net income was $216.4 million compared with income of $188.7 million in the prior quarter and $74.5 million in the year-ago quarter.

Balance Sheet

Exiting fiscal third quarter 2014, cash and cash equivalents, short-term investments, and restricted cash and investment balances were $2.9 billion compared with $2.7 billion in the prior quarter. This increase was mainly attributable to around $290 million in cash flow from operating activities during the reported quarter, partly offset by $52 million of stock repurchases.

Deferred revenue and deferred profit balances improved to $431.5 million and $257.3 million, respectively, compared with $405.0 million and $224.4 million in the prior quarter. Long term debt, convertible notes, and capital leases amounted to $810.7 million compared with $803.3 million in the prior quarter.

Guidance

For the fourth quarter of fiscal 2014, Lam Research provided guidance on a non-GAAP basis.

It expects revenues of approximately 1.24 billion (+/- 50 million). Shipments are expected to be roughly $1.15 billion (+/- 50 million). Gross margin is expected to be approximately 45% (+/-1%) while operating margin is expected to be around 17% (+/-1%). Earnings per share are projected to be 98 cents (+/- 7 cents) on a share count of $172.0 million.

Our Take    

Lam Research delivered encouraging fiscal third quarter 2014 results with both the top and bottom lines beating the Zacks Consensus Estimate. Foundries are not the only segment witnessing growth. Lam's memory business was also very strong in the quarter. Further, the company provided strong fourth quarter guidance, reflecting modest improvement in semiconductor spending, but management expects a slowdown in shipments by mid-2014. This might be due to current doubts over the extent and timing of investments in next generation products.

Lam Research believes that the company's product mix including multi-patterning, 3D device and advanced packaging industry transitions will boost growth and profitability going forward.

However, uncertainties in the semiconductor industry, customer electronics business and the entire economy; fierce competition and uncertainties related to the acceptance of its new technologies and products can be hindrances to the company's growth path.

Other companies in the computer and technology sector include Conversant, Inc. CNVR, Advanced Energy Industries, Inc. AEIS and E-Commerce China Dangdang Inc. DANG, all with a Zacks Rank #1 (Strong Buy). Considering the favorable Zacks Ranks, these stocks may be better selections at this time.