I am long equity in both my long-term portfolio and trading account, I also have exposure through call options. At first glance, the quarter seemed OK. Then, after further review and listening to the call, as well as reading the call a few times, things seem perfectly fine to me under the hood. Especially financially.
Let us start with estimates vs actuals... below you have the Revenue, EBITDA, EBIT, and EPS (non-GAAP) est vs actuals.
Given the current supply chain issues globally, Lam Research was experiencing higher freight and logistics costs that put pressure on margins. We already knew this heading into the report, and current margin guidance for the next quarter includes those costs as well. This leaves room for surprise to the upside in my opinion. I continue to remain extremely bullish on semi equipment, notably LRCX and AMAT (AMAT has more Foundry & Logic exposure).
Lam Research continued to impress, with record revenue, record operating income dollars, and record EPS. The company continued to buyback shares, a total of $1.2b worth in the quarter, as well as paying dividends of $185m in the Q. The company is on track to return 100% of their free cash flow to shareholders. How can you not like a nice capital allocation program? Especially when it all comes back to you!
Customer Support Business Group, or the CSBG, has still posted record revenue coming in at $1.38b up 34% YoY and flat from prior Q. As the installed base of chambers grow for Lam, their CSBG group will continue to grow especially with fabs running as high utilization levels. Spare parts and service are a necessity. The CSBG is representing roughly 32% of total quarterly revenue, as of recent.
Gross margins had come in around the midpoint of last Qs guidance, at 46%. This includes the higher freight and logistics costs that most businesses seem to be dealing with. Which is an external factor that will work itself out over time, so short-term compression is alright. Lam is also realizing some margin dilution due to the new Malaysia factory, but down the road the Malaysia factory will pay its dividends to us.
The company reported all this, during some of the toughest supply chain issues and coming out of COVID. I am impressed, and will continue to load up shares and trade options even though I had a very large loss (timing issue) recently on them.
Sure, investors and short term pajama traders can focus on the supply chain issues, but as a LT GARP investor, I think this presents a very nice opportunity for a business that is in a secular uptrend, and returning 100% of FCF to shareholders through buybacks and dividends. I do not know what else people want from a great company.
Guidance was pretty much in-line. That was the most disappointing part for me at first, but then I stepped back and realized the tough environment they are in, well, a lot of businesses are in.
Fiducia Thoughts and Extended Commentary
Overall, I thought the report was fine. I think this was the final wash out, per the intra day price movement on Lam on October 21st. Margins should improve over the next year as Malaysia ramps up, and supply chain issues get worked out. I think their capital allocation program will continue to attract investors especially during "inflationary" times. China always remains a risk, as does the China / Taiwan geopolitical risk. Seems like Lam is finding in uptick in Foundry & Logic, which is Applied Materials core competency. Lam is memory, and Lam abated memory fears of a downturn in this latest report by saying CAPEX is strong there. So that was against the narrative of a multi-quarter downturn in memory (like 2018, 2019). Except 2019 Lam research shares ripped, much higher....
I dont know what more the market wanted from this report but its a buy the negative news type of deal in my opinion. Certainly have hit a rough patch in the trading account, for now, but will bounce back stronger. Long-term account is steady, and compounding.
Doug mentioned some of these headwinds are going to be around for a while, so it should be fully baked into the share price now.
Think of the installed base at Lam like the installed base at Apple, not the exact same, but there is a base of chambers that need serviced and spare parts, so they upgrade and get worked on through services.
Stacy Ragson pointed out the foundry and logic business at Lam was down 25% sequentially, and down YoY even though it is a strong foundry spend environment. Dougs response was "nothing goes up every single quarter...ebbs and flows... its a 2H weighted foundry/logic spend profile...december will be a good Q....concentrated set of big customers...lumpy atr times....", decent answer I guess.
Lam's next quarter guidance was relatively in-line, this would be their December quarter. Guidance of $4.4b at midpoint was in-line with the street, but below some analyst notes (I read a few today that I was sent to by someone, you know who you are, thank you!). The fact the company gave in-line guidance was pretty solid, given the backdrop of the supply chain environment. Guidance implies a 27% YoY growth on top-line and 2% QoQ.
The rest of the guide was 46% gross margins, +/- 1%, 32% non-GAAP operating margin +/- 1%, and non-GAAP EPS of $8.45 +/- $0.50.
Analyst Harlan Sur brought up the "market is concerned we are headed into a multi-quarter downturn in memory" (which is majority of LRCX revenue), and Tim Archer said that the simple answer is "no". So this is really interesting, and against consensus on the market. I view it as a net positive that spend with memory sees no turning down, like a 2018 downturn.
Lead times are stretched out to where Lam has visibility into demand to 2022, better than usual. Management feels much more constrained by the supply chain issues at hand, and meeting shipments.
Management expects DRAM and foundry/logic to be higher in 2H, and NAND to be more balanced.
I remain long, and will accumulate shares over time while the company retires shares and gives me a nice dividend.
I try to make these as short and to the point as possible, and no beating around the bush.
Have a great weekend everyone. Relax. Something I need to do more.