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What Lam Research’s Fiscal 3Q18 Earnings Say about Memory Market

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Lam Research

Lam Research (LRCX) was among the first semiconductor companies to release its fiscal 3Q18 earnings for the quarter that ended on March 25. The company manufactures wafer fabrication equipment used primarily to produce memory chips. The company earned 84% of its revenue from memory, 10% from the foundry, and 6% from logic and other markets.

Since Lam Research largely caters to memory chipmakers, its key market is South Korea (EWY), home to the top two memory chipmakers, Samsung (SSNLF) and SK Hynix. Lam earned 36% of its revenue from South Korea.

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Fiscal 3Q18 earnings

In fiscal 3Q18, Lam’s revenue rose 34.4% YoY (year-over-year) and 12% sequentially to $2.89 billion, beating analysts’ estimate of $2.85 billion. Revenue growth came as memory makers transitioned to advanced nodes, which are material-intensive.

Lam’s shipments rose 19% sequentially, or $500 million, to a record $3.1 billion in fiscal 3Q18, driven by a 30% sequential growth in shipments to memory customers that invest in 3D (three-dimensional) NAND (negative AND) and DRAM (dynamic random access memory) capacity and upgrades.

Lam’s non-GAAP (generally accepted accounting principle) EPS (earnings per share) rose 71% YoY to $4.79. It beat analysts’ estimate of $4.36 and its own higher-end guidance of $4.50.

Cash flows

Higher revenue and profits boosted Lam’s operating cash flow to $1.1 billion in fiscal 3Q18. It spent $80 million of that on dividend payments, $49 million on capital expenditures, and $29 million on debt repayments.

It’s the first time in more than two years that the company’s quarterly cash flow hit the $1 billion mark. It increased Lam’s cash reserves by $785 million to $6.5 billion against a long-term debt of $1.9 billion.

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Fiscal 4Q18 guidance

Lam expects this strong growth momentum to continue in fiscal 4Q18, resulting in revenue of $3.1 billion, up 7.3% sequentially and higher than analysts’ estimate of $2.9 billion. The company’s 4Q18 non-GAAP EPS guidance of $5 is higher than analysts’ EPS estimate of $4.60.

Even though Lam’s earnings and guidance beat analysts’ estimates by a good margin, the stock fell 4% on April 18. The company’s 4Q18 shipments guidance of $3 billion represented a sequential decline of 4.2%, or $100 million.

Lam’s shipment guidance pulled down the stocks of memory chipmakers Micron Technology (MU) and Western Digital (WDC) by 4.8% and 2.4%, respectively, on April 19, and they’ve been declining ever since. The stocks reacted negatively since investors and analysts were afraid that the slight decline in Lam’s shipments indicates that the memory cycle has reached its peak and that growth is set to slow down or stall in the second half of 2018.

Next, we’ll look at analysts’ views on Lam Research and the overall outlook for the fab equipment market.

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