LRCX - Lam Research: A Preview Of Upcoming Earnings In Light Of Severe Headwinds

2023-04-17 18:19:04 ET

Summary

• Lam Research’s market share of the WFE equipment market decreased 9.9% in 2022, underperforming the global 8.9% increase.
• Lam Research underperformed all peers of the WFE top five companies in 2022.
• Lam Research had high exposure to memory companies, representing 55% of total revenues in 2022, at a time when DRAM and NAND capex is plummeting.

Lam Research ( LRCX ) is expected to report fiscal Q3 2022 earnings on Wednesday, April 19, after market close. According to Zacks Investment Research, based on 10 analysts' forecasts, the consensus EPS forecast for the quarter is $6.53. The reported EPS for the same quarter last year was $7.4.

Table 1 shows historic and quarterly earnings forecast, showing that QoQ, EPS is forecast to drop to $6.68 in the quarter ended March 31 from $10.71 the previous quarter. This represents a YoY drop of 9.7% and a QoQ drop of 37.6%.

Table 2 shows quarterly earnings forecast for the next three quarters following the March 2023 quarter, consensus EPS will continue to drop, recovering only to nearly par in the quarter ending a year from now on March 2024.

Table 3 shows the significant drop in Consensus Revenue forecast, according to MarketBeat .

Importantly, earnings have been rising over the last four quarters, but with uncertainty on the macro and geopolitical level, and a significant downturn in memory equipment, which LRCX has a large footprint, I expect weak results to be announced in the upcoming call. These will be analyzed in detail in this article.

Multiple Headwinds

Weak Forecast

CEO Tim Archer reported in the previous fiscal Q2 2023 earnings call:

"In 2022, WFE spending ended the year in the mid-$90 billion range, slightly higher than our prior view due to easing supply chain constraints. As we indicated in our last earnings call, we expect calendar year 2023 WFE to be in the mid-$70 billion range.

Given the decreased business levels expected this year, we have made the difficult decision to reduce our overall workforce by approximately 1,300 employees by the end of the March quarter, about 7% of our global employee base."

What Archer is saying is that WFE will be down 21% in CY2023. Actually, in my Feb. 9, 2023, Seeking Alpha article entitled " Applied Materials: Important Questions Are Still Unresolved Leading Up To Its Next Earnings Call ," I noted

"I presented my thesis in mid 2021 that the extraordinary amount of capex spend for equipment will lead to a severe downturn in 2023 for equipment companies because of an oversupply of capacity and chips. That market will be down 20%-plus, and all analysts are now projecting this decrease in 2023. I reconfirmed my 2021 analysis in mid 2022, and investors can better understand my thesis in a July 11, 2022, Seeking Alpha article entitled " Assessing My 2021 Call For A Likely Semiconductor Equipment Meltdown In 2023 Impacting Applied Materials ."

So, I alerted readers of my article that the equipment market would be down 20%-plus, which Archer concurs. But more importantly, I alerted readers back on July 11, 2022, that I was confirming my 2021 analysis for an "equipment meltdown" in 2023.

On June 24, 2021, I published on Seeking Alpha an article entitled " Applied Materials: Tracking A Likely Semiconductor Equipment Meltdown In 2023 ."

Readers can access both my original 2021 thesis and my 2022 affirmation with the links provided in this article.

Restructuring

In the recent earnings call, LRCX CFO Doug Bettinger not only commented on the headcount reduction of 7% of global employees, but he also noted a restructuring of the company. I still haven't seen any reports of management salary reductions as a result of poor management decisions that are impacting the company.

"We will be taking a charge of approximately $80 million in the March quarter from headcount reduction…we are anticipating a total of $150 million to $250 million in charges to be incurred over the next 12 months.

In addition to headcount, we anticipate potential charges from facilities restructuring, business realignment and transformation and product rationalization."

Underperformance Against Peers

Chart 1 shows YoY wafer front end (WFE) semiconductor equipment revenue growth for 2022 based on a bottom-up analysis of all companies. This revenue growth is for semiconductor equipment only and does not include service, spare parts, or non-semiconductor business segments.

LRCX revenue decreased 9.9%, underperforming the overall WFE semiconductor equipment market, which grew 8.9% to $95.0 billion in 2022 from $87.2 billion in 2021, according to our report entitled " Global Semiconductor Equipment: Market Share, Market Analysis, Market Forecast. "

LRCX lost market share to each of the Top 5 equipment companies in Chart 5.

Chart 1

Impacted by China Sanctions on Semiconductor Equipment

Chart 2 shows Lam's performance compared to Chinese and non-Chinese equipment companies, showing YoY growth for 2022 versus 2021. There are two takeaways from the Chart:

• The mean growth for the top five non-Chinese companies was 8.2%, and Lam's performance of -9.9% indicates a significant underperformance against other top WFE competitors.
• The mean growth for Chinese companies was 62.6%, indicating that Chinese equipment companies are gaining in the market, although their revenues are significantly lower than non-Chinese counterparts, according to The Information Network's report entitled " Mainland China's Semiconductor and Equipment Markets: Analysis and Manufacturing Trends ."

Chart 2

High Exposure to Memory

In 2022, both LRCX and Applied Materials ( AMAT ) generated the largest revenues from memory, as shown in Table 4. Lam's revenues from memory companies reached $6.8 billion, representing 55% of total revenues for CY 2022.

This is significant, as revenues from memory companies plummeted in 2022 and are projected to decrease more in 2023. I presented the metrics for DRAM and NAND in my March 7, 2023, Seeking Alpha article entitled " Micron: A Bad 2022, A Dire 2023, A Positive 2024 ."

Investor Takeaway

On Feb. 3, 2023, MKS Instruments, Inc. ( MKSI ) became aware of a ransomware attack and reported it on Feb. 6. Now, it plans to announce its fourth quarter earnings on Feb. 28 instead of Feb. 13, as originally scheduled. According to MKSI, the incident has affected specific business systems, including production-related systems.

The company said in a filing with the U.S. Securities and Exchange Commission.

"The Company's investigation and assessment of the impact of this incident is ongoing and appropriate incident response professionals have been engaged."

It's important to understand the significance of this "event" because MKSI's two largest customers are the two largest U.S. semiconductor equipment companies - Lam Research and Applied Materials. Together they accounted for approximately 27%, 24%, and 18% of net revenues for the years 2021, 2020, and 2019, respectively.

Lam's previous quarter ended on Dec. 31, 2022, and the company reported fiscal Q2 2023 revenues on Jan. 25, 2023. That was before the MKSI ransomware shutdown. The impact of a ransomware attack on MKS Instruments could invalidate CY 2Q23 revenue guidance of -26.9% QoQ previously given by Lam Research.

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