LRCX weak miss results and guide Supply chain worse than expected and longer to fix

-Lam missed on both top & bottom line due to supply chain
-Previous guide was “overly optimistic” about fixing issues
-Demand is great but doesn’t matter if you can’t serve it
-We remain concerned about ability to fix issues in near term.

A miss on numbers- supply issues will persist

Lam reported Revenues of $4.06B versus already reduced street expectations of $4.25B. EPS also missed coming in at $7.40 versus street of $7.51. Results would have been even worse if we back out one time gains from Lam’s venture investments which were $0.11 per share. Guidance was even weaker with June expected to be $4.2B +- $300M and EPS of $7.25+- $0.75 falling well short of street expectations of $4.46B and EPS of $8.24.

Obviously things are not getting better. We hope that Lam has taken enough of a haircut to their numbers that they don’t miss the June guidance

Management says it was “overly optimistic” about fixing supply chain

Lam management previously thought that the supply chain issues would be solved more quickly which turned out not to be the case, in fact its quite clear that issues will persist into the June quarter and likely beyond. We don’t think management will quote an expected end date to issues again after being “overly optimistic” about resolving them. It sounds like things may be getting worse/broader. Deferred revenue grew and likely grow again due to missing parts

With roughly $2B in differed revenue and the probability that June will see a further increase in differed revenue there is a lot of product that has been shipped to the field that is missing parts that may or may not get delivered.
We also wonder about the higher costs/lower gross margins implied by doing field installs of missing parts on incomplete tools.

This is obviously a messy situation, using customer premises to store unfinished tools which would otherwise clog Lam’s production facilities.
Customers are likely willing to accept this sub optimal solution likely because Lam forces it on them lest they lose their place in line but its a poor substitute.
We would hope that these unfinished tools get completed in the second half of the year and the deferred revenue can come home.

Move to Malaysia doesn’t help

Unfortunately Lam’s move of significant production was at an inopportune time. Trying to bring up new sub suppliers in Asia during stressful times in the supply chain is not very good timing. Many of those potential suppliers already have issues and Lam as a new customer will take more time and a lower priority.

This likely stretches out the time to move to Asia resulting in more costs/double costs while Malaysia coming on line takes longer.

We remain concerned about possible share loss inability to gain share

If Lams competitors can fix their supply chain issues while Lam can’t, we could see share shift as desperate customers will easily move to suppliers who can supply. Right now everyone seems in the same boat but that could change. Its also harder for Lam to gain share with new products that just may not be available to customers.

Generally in time of short supply there is likely less ability to gain share

More vertically integrated manufacturers may fare better as they have more control over their supply chain. Some competitors, in Japan, such as TEL, typically have stronger relationships with suppliers that almost look like a vertical supply chain.

Should the industry go back to being more vertical than outsourced?

We had asked the question of Lam management several years ago at an analyst meeting about moving away from from a fully outsourced model to a more vertical model as the industry has become less cyclical and thus more suited to vertical supply. The company said they were thinking of it but never did it.

We think that many in the semiconductor tool business have to take a harder look at getting more vertical such that they have better control over their parts and manufacturing. We are at a point in the industry where it is much more important to insure supply than outsource risk of cyclicality.

The stock

Obviously the results are disappointing as is the guidance. It’s also disappointing that management underestimated the length and severity of the situation.

We don’t think there has been a lot of damage but that could change. Lam should be less impacted than ASML as their components are much less complex than ASML’s systems and sub components but it appears that Lam has been even more impacted which we find strange. Given the lens issue ASML has a better excuse for supply chain issues.

Lams stock will obviously take a hit here and we think upside may be limited until Lam can factually state that the issues have been finally fixed and deferred revenues start to come home.

After missing the projected recovery we are likely in wait and see mode.
We see no reason to get in to the stock until we have better clarity and no real reason to continue to own it as we don’t see near or medium term upside.

Also read:

Chip Enabler and Bottleneck ASML

DUV, EUV now PUV Next gen Litho and Materials Shortages worsen supply chain

AMAT – Supply Constraints continue & Backlog Builds- Almost sold out for 2022

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