Lam beats on EPS & Revs and good Q1 (Sept) guide

Continues to Outgrow in a Flat Capex Environment. Is September the 2016 Peak with a softer December? Lam reported June, Q4 , revenues of $1.55B and EPS of $1.80, handily beating estimates and besting relatively high expectations for a positive spin and outlook for H2. Guidance was for a Sept quarter of $1.625B in revs and $1.77 in EPS which is also ahead of current estimates.

Outperformance of the Industry coupled with Leverage…
Lam continues to do a much better job of growing revenues in a flat market as compared to the overall industry. Through a combination of share growth, served market expansion and good customer and product mix, Lam is continuing to do a better job despite the fact that capex for the semiconductor industry has been stuck in neutral for the last three years at $33B overall.

3D NAND & NVM remains the driver with DRAM in doldrums…
We note the change from describing memory as NAND to NVM which is inclusive of Intel/Microns XPoint technology which NVM but not NAND. NVM grew from last quarters 43% of business to 51% percent in the reported quarter.

Logic (read that as Intel) was flat at 7%, reflecting continued slow spending and stretching out of nodes while foundry spending was up from 23% of business to 27% of business largely on increasing spend for 10NM roll out and early 7NM buys. DRAM continued to drop from 27% of business to only 15%

While Sept Q is strong , December may slow due to lumpiness?

In trying to read between the lines of guidance for the second half of the year and Q1 guide it sounds like Q1 (September) will come in like a lion while Q2 (December) may exit a bit more like a Lam. This seemed to be confirmed by Q&A comments talking about “lumpy” business.

We continue to see these yearly cycles and ups and downs that drive the stocks and the companies back and forth but Lam has done a good job of making like a rachet and moving up the bar with every yearly cycle.

Still upbeat about KLAM merger..
Management didn’t comment very much about the merger other than to continue their unwavering support of the transaction.

Management claims that the industry is in favor of the merger as compared to the Applied TEL merger and describe it as “pro competitive”. We would not agree with the “pro-competitive” description and would suggest that though this merger is not as unpopular as the Applied/TEL deal , not everybody is in love with it.

Ruminations about Remedy Ruination…
As we have previously stated in several notes, the longer this deal takes, the more time that regulators have to ask for more “pounds of flesh” to approve the deal or find more reasons not to approve the deal. Longer is certainly not better and obviously worse.

Whereas AMAT could afford to walk away from the TEL deal after finding that the remedies required made the deal unattractive, we don’t think Lam can walk away even in the face of costly remedies as the KLAM deal gets them to the same size as AMAT and without it they are half the company AMAT is.
Management is still looking at the “next few months” and the analyst meeting (although it could always be rescheduled) is set for November so it sounds a lot like an October expectation for approval if it slips again, past that timeframe, we would then reduce the odds to less than 50%.

The stock…..
Lam’s stock has had a very strong run and deservedly so. They have done a great job. However, much of the upside is priced in and not much risk is in the stock. We think that the 90’s and $100 may prove to be a barrier this year especially in light of what could be a soft ending to the year and KLAM merger uncertainty. Even if the merger goes through we may see significant remedies that may reduce the upside.

All in all what we heard was a confirmation of a story that was already reflected in most of the stocks- a better H2 and strong 3D NAND-

Given all this we would take some money off the table and lock in some of the great gains we have gotten….