Foundry CAPEX Jumped from 17% to 37% of LAM Business

Lam- in line qtr but guides above street over near term. As with ASML, foundry is driver with subdued memory, The Math implies biz peaking-Looking for DRAM in 2017.

Lam reported another great, record quarter, more or less in line with expectations with revenues coming in at $1.632B and shipments of $1.708B, generating EPS of $1.81. As we had previously predicted, forward guidance was off the charts with the December quarter revenues expected to be $1.84B +- $75M and shipments to be $1.85B +- $75M, generating $2.18 in EPS.

The company paid back some debt that was earmarked for the KLAM deal and will likely restart and potentially increase buybacks and/or increase dividends with some leftover cash. Foundry jumped from 17% to 37% of business, with memory down and logic flattish. The subdued memory likely limited upside in the just reported quarter and Samsung was likely slower than previous memory spend.

TSMC terrific….
Foundry spending was the big driver with 10NM/7NM being at the core and we are sure TSMC, the biggest foundry, is prepping to produce parts for Apple’s next Iphone next year. While foundry spending was up 25%, Lam said its foundry business was up 40% suggesting significant share gains and SAM expansion.

2017 will depend a lot on DRAM….
With 3D NAND and foundry continuing their strong pace the missing link is DRAM which saw a drop of 40% in spending this year. The most significant variable in spending outlook in 2017 is wether or not DRAM comes back. So far the signs look promising as pricing is good but we still wouldn’t count our chickens before they are hatched.

A new beginning (in New York)
Lam pushed back its analyst meeting , which was originally intended to be a KLAM celebration, back by two days and East by 2500 miles to New York. Much as Applied did after the failed TEL merger, we heard the new business model and targets set forth. We expect both a reset on the Lam business model as well as renewed returns to shareholders either through buy backs or dividends.

One issue we have is that its a bit of short time period to come up with a new plan and business model in 5 or 6 short short weeks after the end of the KLAM deal when planning for the KLAM deal went on for almost a year. We expect the real recovery to be more like 6 months or more to get fully back on track, much as we saw at Applied. But at least we will get an idea of the new strategic direction.

Running the numbers…
When we do the math on the guidance for the December quarter versus Lam’s expectations for the overall capex market next year it seems clear that the rate of growth will either slow or reverse. Much of the math is dependent on the state of DRAM and its recovery. Lam’s SAM has expanded greatly but we would likely to hear where the new SAM is coming from now without KLA, ….hopefully at the analyst meeting.

As we had previously predicted the next few quarters will be strong but investors will want to understand the longer term as fear increases that we are nearing a top because in previous cycles we saw a similar spurt of growth before a downturn started.

Predicting KLAC ….
If foundries were good for Lam, they will be fantastic for KLAC as they get a much bigger benefit from foundry/logic spending trends we are currently seeing. The reports out of both ASML and Lam confirm the current foundry ramp.

The stock…
Given the December guidance of $2.18 EPS, we are looking at a potential of a $9+ in EPS in 2017 , even if we flat line earnings. $9 in earnings is likely worth $110 a share or better but investors need to be comfortable that growth will continue and not top out or fall off in 2017 after several strong quarters. We are sure management will make the case at the analyst meeting….so far the track record has been good…

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