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Thursday, January 29, 2009

Lam Research 2Q:2009 results

Business has been falling off a cliff for the last couple of quarters due to the contraction in memory spending from unprecedented record levels.  Memory, which had been over 80% of Lam’s orders at the peak of the cycle, is under severe pressure due to oversupply in the marketplace and insolvency risk amongst manufacturers.

Lam guided significantly below street estimates.  Orders are expected to be ~160-190 mil for next quarter.  In a stark admission of the challenges facing the industry, Lam said they do not believe orders will pick up for the next 6-8 quarters.  They believe wafer equipment orders will fall by 50% for 2009 – this is the lower end of expectations.  In addition to customer weakness, used fab equipment is beginning to become more prevalent in the market.  As semiconductor equipment investors are conditioned to buy the stocks 2-3 quarters before an anticipated upturn, 6-8 quarters of projected slow (or no) growth will make it very difficult to make the case to buy the stock.

They’re burning through cash now and will lose in excess of $1.50 this year.  Deferred revenue dropped q/q, leaving them with not much in the way of cushion there.  Days sales outstanding rose to ~93 days as the company extended terms to struggling customers – that’s a polite way of saying they’re not getting paid for stuff they’ve already sold.  As the DRAM industry’s capital structure is in utter disarray and the likelihood of eventual insolvencies in Taiwan increases with time, some of these receivables probably will be uncollectable.

The rise in memory spending was unprecedented, so too shall be the decline.  While it’s tempting to call the bottom like Citi is, I think it’s imprudent to do so.  Management is very bearish and generally it’s good to gun against that.   However, the stock trades at twice book value and it would not surprise me to see the stocks trough at the lower end of their historic price to book range – somewhere between 1 and 1.5* book.  That’s another 25% downside in the stock minimum – and book is likely to decrease over the next couple of quarters so the bottom is still a moving target.

Obviously, this doesn’t bode well for the rest of the semiconductor capital equipment industry.

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