Big data, artificial intelligence, and the Internet of Things are continuing to pick up steam, which is driving the need for semiconductor devices to power them. Flash memory providers such as Samsung and Micron are responding to increasing consumer electronic demand, which is benefiting the upstream companies that supply the machinery that is used to manufacture those semiconductor and memory devices.

Lam Research (NASDAQ:LRCX) has emerged as one of the leaders in this wafer fab equipment (WFE) oligopoly, and the company has done quite well in recent quarters from an uptick in end-market demand for flash memory.

Connected drawings of items including a smartphone, a camera, and a water tap.

Image source: Getty Images.

But Lam's business took a breather in its most recent fiscal quarter, which was reported last week. Revenue and profits both fell, and investors will keep a close eye on whether this is a short-term hiccup or a developing longer-term trend.

To help find out, let's take a closer look at Lam Research's first-quarter results.

Lam Research results: The raw numbers

Metric Q1 2019 Q1 2018 Year-Over-Year Change
Revenue $2.33 billion $2.48 billion (6%)
Operating income $592 million $693 million (15%)
Earnings per share* $3.23 $3.21 1%

Data source: Lam Research. *On a fully diluted basis.

What happened with Lam Research this quarter?

Lam's management acknowledged that this wasn't a great quarter, with CFO Doug Bettinger even referring to it as "a near-term trough" for the business. The company also just adopted a new accounting standard -- ASC 606 -- which records revenue at the point of shipment rather than at customer acceptance. One of the largest impacts of this change was a drastic reduction in Lam's deferred revenue. 

  • Revenue of $2.33 billion was down 6% year over year, largely from softness in orders. Nonvolatile memory still accounts for 51% of Lam's total revenue, but the company mentioned that nearly every one of its NAND customers anticipates reduced spending this year.
  • Gross margin fell to 45.4%, from 46.4% last year.
  • Operating income fell 15% from last year and 38% sequentially. Many of Lam's costs are fixed in nature, so reductions in revenue have an even greater impact on operating profits.
  • Lam's forward guidance is for $2.5 billion of revenue, 46% gross margin, and $3.65 of earnings per share in the fiscal second quarter.

Even with the uninspiring financial results, Lam still managed to increase earnings per fully diluted share to $3.23. (Fully diluted shares take into account the company's outstanding convertible notes and warrants.)

One of the key reasons Lam was still able to grow per-share earnings was because it bought back a ton of stock. The company spent $1.7 billion this quarter on share repurchases, and this is in addition to the $1.3 billion it spent on buybacks in the previous quarter. Lam has now reduced its share count by 8% during just the past six months, which is a good indication that it believes the stock is trading at an attractive price.

What management had to say

CEO Martin Anstice noted that Lam's first-quarter results outperformed the midpoint of expectations and that management still sees strong long-term demand for the company's products.

We are pleased to report September quarter results that modestly exceed expectations and forecast a stronger December quarter sequentially. More importantly, central to the Lam outperformance aspiration is our commitment to investing in innovation and close collaboration with our customers to address the technical and economic challenges of device and systems performance scaling. We remain focused on creating and capturing value for our customers in the world of emerging data economy opportunity.

Looking forward

Even with the weak quarter, Lam seems to be in good long-term shape. The world's growing thirst for data seems indicative of a growing demand for semiconductors. Lam's installed based of etching and deposition chambers (the equipment used for semiconductor manufacturing) has increased more than 50% during the past four years, and the Internet of Things is driving further adoption. Twenty-eight million wearable devices shipped last quarter, led mostly by the watches and sports bands offered by Apple, Xiaomi, and Fitbit. Each of these small, internet-connected devices contains billions of semiconductor transistors -- which is a good sign of future business.

The company's capital return program has also been one of the most exciting developments for investors, with management promising to return "at least 50%" of its free cash flow to investors. They certainly topped that this quarter, with their $1.7 billion of buybacks and $174 million of cash dividends dwarfing the $660 million of free cash flow. Lam dipped into its existing cash balance to fund the difference.

We shouldn't expect that Lam will overspend like this in future quarters. Bettinger noted that the company accelerated its repurchase schedule a bit this quarter, which would "cover repurchases until the March quarter of 2019." That seems to suggest that management believes their current stock price is a bargain.

In addition to the buybacks, Lam is also paying a $1.10-per-share quarterly cash dividend, which is 144% greater than the $0.45 quarterly payout last year. 

Simon Erickson owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Lam Research. The Motley Fool has a disclosure policy.