Lam Research Corporation (LRCX) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary indicates strong financial performance with a projected increase in WFE spending and SAM expansion. Product development and market strategy are robust, with significant advancements in NAND and AI infrastructure, suggesting future growth. The Q&A section highlights strong market demand and strategic positioning, though some uncertainties remain about China WFE and infrastructure limitations. Overall, the positive outlook on financial metrics, product development, and market strategy outweighs the uncertainties, leading to a positive sentiment rating.

Key Financial Performance

Revenue Record revenue of $5.3 billion for the September quarter, up 3% from the June quarter. This growth was driven by strong company-wide execution and the critical role of Lam's products and services in the semiconductor industry.

Gross Margin Achieved a record gross margin of 50.6% in the September quarter, up from 50.3% in the June quarter. The increase was primarily driven by favorable customer mix, partially offset by the impact of tariffs.

Operating Margin Record operating margin of 35% in the September quarter, driven by strong profitability and operational efficiency.

Deferred Revenue Deferred revenue balance at the end of the September quarter was $2.77 billion, slightly up from the June quarter due to increases in services and system-related transactions where revenue recognition was not yet complete.

Customer Support Business Group (CSBG) Revenue Generated approximately $1.8 billion in revenue for the September quarter, slightly higher sequentially and year-over-year, driven by continued strength in spares and upgrades.

China Revenue China accounted for 43% of total revenue in the September quarter, up from 35% in the June quarter. Growth was driven by domestic Chinese customers.

R&D Expenses R&D accounted for 68% of total operating expenses in the September quarter, with investments in innovations like Vantex, Akara, Halo, and Dextro to maintain product leadership.

Capital Return Allocated approximately $990 million to share buybacks in the September quarter, with an average buyback price of $106 per share. Paid $292 million in dividends during the quarter.

Cash and Cash Equivalents Cash and cash equivalents totaled $6.7 billion at the end of the September quarter, up from $6.4 billion at the end of the June quarter, primarily due to cash generated from operating activities.

Inventory Turns Improved inventory turns to 2.6x in the September quarter, up from 2.4x in the June quarter, reflecting better asset utilization.

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Operating Highlights

Record revenues: Achieved record revenues of $5.3 billion in the September quarter, with gross margin of 50.6% and operating margin of 35%.

AI-related demand: AI-related demand is driving significant expansion in manufacturing capacity, with Lam's deposition and etch products playing a critical role.

NAND upgrades: Customers are upgrading existing fabs for higher layer count and performance, requiring $40 billion in WFE spending over the next several years.

Advanced packaging: Investing in panel-level packaging to improve manufacturing efficiency for larger semiconductor devices.

China market impact: New 50% affiliate rule restricting shipments to certain domestic China customers is expected to reduce 2026 revenues by $600 million, with China representing less than 30% of overall revenues.

WFE spending growth: Worldwide fabrication equipment spending in 2025 is expected to exceed $105 billion, with robust growth anticipated in 2026 driven by AI-related demand.

Customer Support Business Group (CSBG): Generated $1.8 billion in revenue in the September quarter, driven by spares and upgrades, and is expected to grow year-over-year in 2025.

Gross margin improvement: Achieved a gross margin of 50.6%, driven by favorable customer mix.

AI and advanced technologies: Lam is focusing on AI-related opportunities, including advanced packaging and High-NA EUV technologies, to address future semiconductor complexity.

Partnership with JSR Corporation: Collaborating on EUV patterning materials and advanced ALD applications to enhance capabilities for future technology inflections.

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Risk or Challenges

China Revenue Impact: The recently announced 50% affiliate rule restricting shipments to certain domestic China customers is expected to impact revenues by $200 million in the December quarter and approximately $600 million in calendar year 2026. This will reduce the China region's contribution to less than 30% of overall revenues in 2026.

Tariffs: Tariffs are contributing to a sequential decline in gross margin and are expected to continue increasing in the December quarter, impacting profitability.

Customer Mix: A shift in customer mix, particularly the normalization of China mix, is expected to act as a headwind to gross margins in 2026.

Supply Chain Constraints: Availability of clean room space is likely to limit the pace of NAND supply growth, potentially delaying capacity additions needed to meet rising demand.

Economic and Regulatory Uncertainty: The global minimum tax regime and increased GILTI rate in the United States are expected to slightly increase the effective tax rate in 2026, impacting net profitability.

Geopolitical Risks: The decline in domestic China-related investments due to regulatory restrictions and geopolitical tensions could offset growth in other regions.

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Guidance & Outlook

Revenue Guidance for December 2025 Quarter: Revenue is expected to be $5.2 billion, plus or minus $300 million.

China Revenue Impact: December quarter guidance includes a $200 million revenue impact from the 50% affiliate rule restricting shipments to certain domestic China customers. This rule is expected to impact calendar year 2026 revenues by approximately $600 million.

China Revenue Proportion: China region is expected to represent less than 30% of overall revenues in calendar year 2026.

Worldwide Fabrication Equipment (WFE) Spending: WFE spending in calendar year 2025 is expected to be slightly better than the prior view of $105 billion, driven by high-bandwidth memory (HBM) investments. Robust equipment spending is anticipated in calendar year 2026, supported by AI-related demand and leading-edge growth in foundry logic, DRAM, and NAND.

AI-Driven Market Expansion: AI-related demand is expected to drive significant expansion in manufacturing capacity over a multiyear period, creating billions of dollars of served available market expansion and share gain opportunities for Lam.

NAND Market Outlook: NAND upgrades are projected to require $40 billion of WFE spending over the next several years. Lam expects to capture a high percentage of this conversion spend due to its large installed base position. Upgrades business is projected to remain strong into 2026.

Advanced Packaging Growth: Advanced packaging demand is expected to grow in 2026, driven by AI-related spending. Lam is investing in panel-level packaging as a scalable solution for larger semiconductor devices.

Tax Rate Outlook for 2026: The effective tax rate is expected to increase slightly in calendar year 2026 due to the increase in the GILTI rate in the United States and the global minimum tax regime outside the United States.

Customer Support Business Group (CSBG) Growth: CSBG is expected to deliver year-over-year growth in 2025, driven by strength in spares and upgrades.

Capital Expenditures: Capital expenditures in the September quarter were $185 million, focused on lab investments in the United States and manufacturing site expansions in Asia, consistent with the global strategy to be close to customer locations.

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Shareholder Return Plan

Dividend Increase: The company increased its dividend from $0.23 to $0.26 per share earlier this month.

Dividend Payment: Paid $292 million in dividends in the September quarter.

Share Buyback: Allocated approximately $990 million to share buybacks through open market share repurchases in the September quarter.

Average Buyback Price: The average buyback price in the quarter was approximately $106 per share.

Year-to-Date Buybacks: Repurchased nearly 30 million shares at an average price of a little more than $88 per share.

Remaining Authorization: $6.5 billion remains on the Board-authorized share repurchase plan.

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Key Q&A

Q:How have customer conversations progressed regarding AI infrastructure spending over the last 6-8 weeks?

A:Timothy Archer explained that recent announcements about AI infrastructure spending provide guideposts for future demand rather than immediate needs. Current equipment demand is driven by enterprise SSDs and NAND upgrades, with robust demand expected into 2026.

Q:What is driving Lam Research's relative outperformance to WFE, and what are the critical drivers for 2026?

A:Timothy Archer stated that Lam's markets, such as etch and deposition, will outgrow WFE due to trends in semiconductor manufacturing, including 3D devices, advanced packaging, and higher aspect ratio devices. This confidence is based on long-term technology trends.

Q:What caused the incremental $400-$500 million increase in December revenue guidance?

A:Douglas Bettinger attributed the increase to stronger WFE, high-bandwidth memory DRAM, and overall market strength. He noted that restricted entities in China limited further growth and stated that the first half of next year is expected to be flat to slightly up from the second half of this year.

Q:Why does Lam Research believe China WFE will be down in 2026?

A:Douglas Bettinger explained that global multinationals outside of China are expected to be strong in 2026, while plans in China indicate a decrease. He acknowledged that similar predictions were made last year but emphasized that current data supports this outlook.

Q:What is the WFE intensity in an AI data center, and what is Lam's opportunity in this space?

A:Timothy Archer clarified that $8 billion of WFE corresponds to $100 billion in data center investment. Lam's opportunity grows with leading-edge nodes, with its SAM as a percentage of WFE increasing from the low 30s to high 30s.

Q:How much of the $40 billion TAM for NAND upgrades will be completed by the end of the year?

A:Timothy Archer stated that the $40 billion for NAND upgrades is being accelerated due to higher-than-expected bit demand. He did not specify how much will be completed but noted that upgrades will remain strong through 2026.

Q:Will clean room space limit WFE growth in 2026?

A:Timothy Archer suggested that physical infrastructure, such as clean room space, could limit growth. However, he emphasized that Lam's equipment supply chain is not expected to be a bottleneck.

Q:What is the growth trajectory for CSBG, and how does it compare to corporate margins?

A:Douglas Bettinger noted that CSBG is growing, driven by spares, services, and upgrades, while Reliant is not. CSBG remains accretive to operating margins, although specific figures were not disclosed.

Q:What is Lam's outlook for NAND market growth in 2026?

A:Timothy Archer indicated that NAND growth in 2026 will be driven by upgrades to the installed base, with some potential for capacity additions if demand remains high. He emphasized that upgrades are the fastest and most cost-effective way to meet demand.

Q:What is driving the second-half weighted growth in 2026?

A:Douglas Bettinger stated that growth will be driven by end demand across WFE, with contributions from both memory and foundry/logic segments.

Q:What is the status of new products like Acara and ALTUS HALO?

A:Timothy Archer reported progress with these products, which are focused on inflections in foundry logic, DRAM, and NAND. Acara has seen wins in DRAM conductor etch applications, while HALO is making progress in 3D NAND wordline applications.

Q:What is the outlook for backside power nodes?

A:Timothy Archer stated that backside power nodes are expected to ramp in volume in the next few years, driven by the need for solutions addressing power challenges in high-compute devices.

Q:What drove the recent strength in China revenue?

A:Douglas Bettinger clarified that the growth in China revenue was driven by domestic Chinese customers, not multinationals.

Q:What is the impact of U.S. investment tax credits on WFE in 2026?

A:Douglas Bettinger suggested that investment tax credits may influence the geographic distribution of WFE but emphasized that end demand is the primary driver.

Q:What is the partition of the $8 billion WFE spending across advanced logic, DRAM, and NAND?

A:Douglas Bettinger stated that more than half of the $8 billion is attributed to memory, including enterprise SSDs and high-bandwidth memory.

Q:Will the $40 billion in NAND upgrades need to be exhausted before capacity spending begins?

A:Timothy Archer explained that upgrades and capacity additions can occur concurrently, depending on customer needs. Upgrades are prioritized as the fastest and most cost-effective option.

Q:Review of Unclear Management Responses

A:Management avoided directly answering questions about the precise semiconductor content in AI data center spending and the exact growth rate of CSBG components. Additionally, they did not provide specific figures for the completion of NAND upgrades or the partitioning of WFE spending across advanced logic, DRAM, and NAND.

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Earnings Word Cloud

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