Big data and artificial intelligence (AI) are on everyone's minds right now. Companies want more data, so they're deploying nearly 50 billion Internet of Things (IoT) devices to capture and digitize the world's information.
This growing trend has led to a pocket of surging demand in the semiconductor industry. The companies that provide the components that make the Internet of Things possible -- such as NAND flash memory providers like Samsung and Toshiba -- are seeing a significant uptick in their consumer electronics business.
Image source: Getty Images.
Far upstream from the end products are the companies that provide the machinery used to manufacture the silicon chips themselves. At this point of the value chain, Lam Research (LRCX -0.25%) is one of the established leaders in the wafer fab equipment (WFE) oligopoly.
The strong end-user demand for flash memory has been quite beneficial to Lam. The consolidated industry growth of WFE for memory has been 10 times greater than the growth rate for foundry during the past seven years (foundries are huge manufacturing facilities that are contracted by others to produce more customized semiconductors). Memory has expanded from 58% to 67% of Lam's overall business during just the past two years.
Lam's recent wins in memory have been counteracted by weakness in other product lines. Customer demand in the logic and foundry segments is reaching multiyear lows. However, cyclicality like this is nothing new for semiconductor providers, who often invest in capacity to capitalize on the strength of products that are in vogue while others underperform.
With that background in mind, let's take a closer look at Lam's recently reported fourth quarter and full-year results.
Lam Research results: The raw numbers
| Metric | Q4 2018 | Q4 2017 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $3.126 billion | $2.345 billion | 33% |
| Operating income | $955 million | $608 million | 57% |
| Earnings per share* | $5.82 | $2.82 | 106% |
Data source: Lam Research. *On a fully diluted basis.
What happened with Lam Research this quarter?
- Lam's $3 billion of fourth-quarter revenue and nearly $1 billion of operating income were both all-time highs. Its $11 billion of annual revenue and $3.4 billion of operating income made for the strongest fiscal year in the company's history.
- Lam is recognizing new opportunities within its existing base of customers, such as multipatterning and 3D device scaling.
- Memory accounted for 80% of the company's shipments during the fourth quarter, with non-volatile (flash) memory accounting for 55% and DRAM accounting for 25%.
- Non-GAAP gross margin was 48% and non-GAAP operating margin was 31.8%. These were up from 46.8% and 30%, respectively, in the previous quarter.
- Lam issued guidance for $2.3 billion of revenue, 46% gross margin, and 26% operating margin for the upcoming quarter.
What management had to say
CEO Martin Anstice offered conservative upcoming quarterly guidance, recognizing the financial discipline of several of Lam's customers. But he also reassured investors that the company still has a very strong longer-term opportunity. He stated:
... [C]ustomer equipment investment spending has softened near term, as industry participants continue to strive for discipline and sustainability in their businesses. While it is true to say that the short-term headlines reflect themselves in lower calendar Q3 guidance than we were anticipating earlier, we consider the change a strong positive long-term influence. ... Bottom line, our customers have inspirational ambition, and we exist to support them. Arguably, there's not been a more exciting time in our industry in decades ...
Looking forward
There were a lot of moving parts in Lam's fourth quarter. The recent strength of its flash memory WFE division has manifested in excellent current profitability. But management recognizes that the tide could quickly turn in this cyclical industry. Its upcoming guidance reflects lower revenue and margins.
We could applaud it for being conservative, and its forecasts certainly align with others'. VLSI Research also expects much slower growth in the WFE industry in 2018.
But perhaps the most intriguing part for investors is Lam's commitment to shareholder-friendly moves. Management has guided to return 50% of each year's free cash flow to investors as dividends and share buybacks. Earlier this year, the company increased its quarterly dividend by an incredible 120%. Lam is now paying out $1.10 per share each quarter, which implies a 2.3% yield at today's $187 stock price.
That seems to suggest that Lam Research is comfortable with the long-term relationship it has built with its customers. And investors can now enjoy receiving a bit more money in their pockets every quarter.
