Lam chops guidance, outlook, headcount- an ugly, long downturn- memory plunges

-Lam Research chops guidance, outlook & headcount sharply
-Further declines as 2023 will be H1 weighted- No end in sight
-System sales cut by more than half as even service is cut
-Memory is the culprit as expected-Forcing business “reset”

A sad sounding conference call….

While Lam reported a good December, as expected by us and others, coming in at $5.28B in revenues and non GAAP EPS of $10.71 versus expectations of $5.08B and EPS of $9.96.

The real problem is guidance going into 2023. Guidance is for $3.8B+-$300M and EPS of $6.50+-$0.75 versus street expectations, which were already sharply lowered of $4.38B and $7.88 EPS.

The real problem is that “real” results are much, much worse after you back out deferred revenue from incomplete units in the field waiting on parts.
In the December quarter Lam benefited to the tune of $700M so the “real” revenue would have been $4.58B. Worse yet with expectations of $3.8B in March, if you back out deferred revenue it looks to drop below $3B. Deferred revenue was down from September’s $2.75B to $2B.

Also remember that deferred comes in at higher margins. So its way worse than it looks at first blush. The call had a very downbeat tone overall with management using words like “reset”, “decline meaningfully”, “well below”, “Unprecedented” .

Perhaps most telling was CEO Tim Archer saying on Q&A that there was “no timeframe on recovery”. So it sounds like no end in sight, no hope of a second half recovery.

The company also said that revenue would be first half weighted which suggests a weaker, not better second half due largely to taking down the deferred revenue

The company will be taking about $250M in charges

Headcount cuts signal bad/long downturn

We haven’t seen layoffs in the semiconductor equipment business for quite some time. Lam announced headcount cuts of 1300 full time employees plus 700 part time/contract on top of earlier cuts, so well over 2000 cuts or a bit over 10%

Even service/support dropped- previously sacrosanct

Lam had previously spoke about service/support revenue as being bulletproof and not vulnerable to variations. Turns out to be not true as service/support was down from September’s $1.9 to December’s $1.7B as tools were idled and did not need service.

Even worse still, if we back out the declining service revenue could “system” sales fall below $2B and approach a low of $1B in Q1????This is really off a cliff and explains the actions taken.

Memory, especially NAND, is hardest hit

Its no surprise that memory is hardest hit as we have heard for months that the memory industry was in sharp decline. Utilization is way down, tools are idled and new projects are being pushed way out. It sure sounds like we are not going to see a memory recovery any time soon and not this year.

Tim Archer said that “memory is at levels we haven’t seen in 25 years”. If we turn the clock back 25 years, memory spending was a very small fraction of where it has been over the last year- probably single digit percentages
Memory is obviously off the proverbial cliff without skid marks……

March quarter not likely the bottom- Bottom may be H2

It sounds as if we are in a situation where Lam will see declines over the course of the year especially if their view that 2023 is “first half weighted” is accurate. This suggests a bottom in H2 (or beyond?) Certainly not the H2 recovery that bullish people are expecting.

Welcome to reality

We have been clear in our view of the negative impact we expected from Lam and we now have the proof in black and white. We suggested that Lam was a short while every other analyst on the street had at least a neutral and most with buys despite the very clear signals.
In our most recent note;

Where there’s smoke there’s fire

We pointed out that pre-announcements from both UCTT & ICHR clearly telegraphed a horrible outlook from Lam. How could everyone miss this?

The stocks

Lam was down sharply, 4% in the after market as the call went on. As all those bullish analyst cut their numbers and do a “reset” we would also assume a few ratings changes after the cows have left the barn.

There is obviously no reason to own the stock if we haven’t yet hit bottom nor have any idea where the bottom is. We can just wait on the side line and watch it get cheaper.

There may be some temptation to buy on a relief rally, that it could have been even worse but obviously thats not a very good reason to own a stock.
Things are clearly much worse than most (not all) expected.

There is likely some collateral damage as sub suppliers to Lam will see the effects of Lams inventory reductions talked about on the call., as Lam appropriately cuts back on parts. Obviously supply chain constraints are less of an issue in a sharp downturn.

We would expect AMAT to sing a similar tune but with slightly less impact as Lam remains the memory poster child. KLAC is obviously negatively impacted in China but historically been the foundry/logic poster child and less impacted by memory.

As we stated in our note on ASML this morning, ASML is almost completely unaffected and almost invulnerable as they remain head and shoulders above the dep and etch business which is reverting back into a very competitive “turns” business.

This reminds me of an old book….. A tale of two cities “it was the best of times (for ASML) it was the worst of times (for LRCX)”

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

Also Read:

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