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Lam Research Corporation (LRCX - Snapshot Report) reported fourth quarter fiscal 2013 non-GAAP earnings of 80 cents per share, beating the Zacks Consensus Estimate by 8 cents or 11.1%.

Revenues of $986.2 million increased 16.7% sequentially and 32.9% year over year. The year-over-year improvement was driven by continued strength in the foundry segment at the 28-nanometer node.

Revenues by Geography

Revenue contribution from North America in the fourth quarter was 15%, down 32.7% from the prior quarter. Europe’s contribution was 8%, down 6.6% sequentially. Taiwan saw the strongest growth among Asian countries, increasing 48.1%, followed by Asia-Pacific, which was up 43.7%, Korea, up 41.7% and Japan 16.7%. Japan, Korea, Taiwan and Asia-Pacific generated 11%, 17%, 33% and 16% of fourth quarter revenues, respectively.

Shipments

Shipments were roughly $1.08 billion during the quarter, increasing 20.5% from $896.0 million in the prior quarter. Foundries accounted for 43% of total shipments, NAND 18%, DRAM 28.0%, with Logic and Others bringing in the balance.

From a geographical perspective, North America contributed 13% of fourth quarter 2013 shipments (21% in the third quarter of 2013). Europe generated 7% (9% in the prior quarter), Japan brought in 13% (11% in the prior quarter), Korea contributed 20% (12% in the previous quarter), the Asia Pacific contributed 15% (14% in the previous quarter) and Taiwan accounted for 32% (33% in the March quarter).

Margins

GAAP gross margin increased 177 basis points (bps) year over year to 42.0%. Higher revenues coupled with favorable customer mix were the main reasons for the margin expansion.

Total operating expenses of $327.4 million were up 23.3% from $265.5 million in the year-ago quarter. Operating margin was 8.8%, up 437 bps from 4.4% recorded in the previous-year quarter. Both research and development and selling, general and administrative expenses decreased as a percentage of sales.

Net Income

GAAP net income was $85.7 million or 8.7% of sales compared with income of $18.1 million or 2.4% of sales in the year-ago quarter. Reported earnings per share were 50 cents, up from 13 cents in the prior-year quarter. After adjusting for restructuring charges and impairment of long-lived assets on a tax-adjusted basis, non-GAAP earnings were 80 cents in the quarter compared with 44 cents in the prior quarter.

Balance Sheet

Inventories rose 2.6% sequentially to $559.3 million in the fourth quarter. The company ended the quarter with cash, cash equivalents and short-term investments of $2.50 billion, up from $2.36 billion in the previous quarter. Lam Research’s long-term debt and capital lease balance was $789.3 million in the fourth quarter. Day sales outstanding (DSO) were 56 days and inventory turns were 4.1X. Cash from operations was $175.0 million in the fourth quarter, up from $102.5 million in the previous quarter. Capital expenditure in the quarter was $43.1 million, up from third quarter capex of $34.8 million.

Guidance

For the first quarter of 2014, Lam Research expects revenues in the range of $970.0 million–$1.30 billion. Shipments are expected to be roughly in the range of $970 million–$1.30 billion. Gross margin is expected to be in the range of 43%–45% and operating profit within a range of 12.5%–15.5%. Earnings are projected in the range of 61 cents to 75 cents on a share count of 170.0 million.

Our Take

Lam Research delivered decent fourth quarter 2013 results with the bottom line beating the Zacks Consensus Estimate. Strengthening demand at Taiwan Semiconductor was encouraging. But foundries is not the only segment seeing growth. Lam’s memory business was also very strong in the quarter, with shipments at both NAND and DRAM customers increasing in strong double-digits. Further, the company provided strong first quarter guidance, reflecting modest improvement in semiconductor spending.

Lam Research is well-positioned in the semiconductor equipment segment and its closest peers are Applied Materials (AMAT - Analyst Report), Tokyo Electron and ASML Holding NV (ASML - Snapshot Report). It has further solidified its position with the addition of Novellus Systems’ thin-film deposition and surface preparation product lines. We are positive about Lam Research’s strategic collaboration with Axcelis Technologies, Inc. (ACLS - Snapshot Report) as it promises multiyear growth in etch, deposition, clean and installed base businesses. We are also optimistic about its prospects in non-oxidizing strip applications for advanced memory and logic applications.

Further, Lam Research is witnessing strength in the advanced packaging segment on the back of several design wins in advanced wafer-level packaging applications.

Lam Research has a Zacks Rank #3 (Hold).

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