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Lam Research Corporation (LRCX - Snapshot Report) reported second quarter fiscal 2013 non-GAAP earnings of 45 cents per share, meeting the Zacks Consensus Estimate.

Revenues of $860.9 million dropped 5.1% sequentially but grew 47.4% year over year. The year-over-year improvement was aided by higher shipments, which indicated escalating demand for LRCX product suites.

Revenues by Geography

Revenue contribution from North America in the second quarter was 24.0%, up from 18.0% in the prior quarter. Europe’s contribution was 8.0%, up 1% sequentially, while contribution from Japan edged up from 7.0% in the prior quarter to 10.0%.

Contribution from Korea was 12.0% of the total revenue, down from 24.0% in prior quarter; Asia Pacific was 20.0%, up from 15.0% in the first quarter of 2013 and Taiwan was 26.0%, down from 28.0% in the September quarter of 2013.

Shipments

Shipments were roughly $803.0 million during the quarter, decreasing 14.1% from $935.0 million in the prior quarter. Foundries accounted for 51% of total shipments, NAND 11%, DRAM 9.0%, with Logic and Others bringing in the balance.

From a geographical perspective, North America contributed 29.0% of second quarter fiscal 2013 shipments (18.0% in the first quarter of 2013).  Europe generated 9.0% (7.0% in the prior quarter), Japan brought in 14.0% (8.0% in the prior quarter), Korea contributed 12.0% (16.0% in the previous quarter), the Asia Pacific contributed 14.0% (22.0% in the prior quarter) and Taiwan accounted for 22.0% (29.0% in the September quarter).

Margins

The GAAP gross margin decreased 357 basis points (bps) year over year to 36.6%. Lower volumes coupled with unfavorable product and customer mix were the main reasons for the gross margin contraction.

Total operating expenses of $311.4 million were up 66.3% from $187.3 million in the year-ago quarter. The operating margin was 0.47%, down 767 bps from 8.14% recorded in the previous-year quarter. Both research and development and selling, general and administrative expenses increased as a percentage of sales, and the lower gross margin made matters worse.

Net Income

The GAAP net income was $6.4 million or 0.7% of sales, compared with income of $33.2 million or 5.7% of sales in the year-ago quarter. Reported earnings per share were 4 cents, down from 27 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 45 cents in the quarter compared with 34 cents in the year-ago quarter.

Balance Sheet

Inventories declined 6.5% sequentially to $530.3 million in the second quarter. The company ended the quarter with cash, cash equivalents and short-term investments of $2.5 billion, down from $2.7 billion in the previous quarter.

Lam Research’s long-term debt and capital lease balance was $1.29 billion in the second quarter. Day sales outstanding (DSO) were 62 days and inventory turns were 4.1X. Cash from operations was $193.2 million in the second quarter, down from $249.3 million in the previous quarter. Capital expenditure in the quarter was $38.9 million, down from the first quarter capex of $44.0 million.

Guidance

For the third quarter of 2013, Lam Research expects revenues in the range of $800.0–$860.0 million. Shipments are expected to be roughly in the range of $850.0–$910.0 million. Gross margin is expected to be in the range of 42.5%–44.5% and operating profit within a range of 6.5%–9.5%. Earnings are forecasted to be in the range of 28 cents to 42 cents on a share count of 170.0 million. The Zacks Consensus Estimate for the third quarter is pegged at 53 cents.

Our Take

Lam Research delivered decent second quarter 2013 results with the bottom line meeting the Zacks Consensus Estimate. Year-over-year revenue growth on the back of strong product demand was encouraging. However, the company’s third quarter guidance was weak, reflecting continued uncertainty in semiconductor spending.

Lam Research is well-positioned in the semiconductor equipment segment and its closest peers in the segment 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.

Lam Research has also entered into a strategic collaboration with Axcelis Technologies, Inc. (ACLS - Snapshot Report). We are optimistic about its prospects in non-oxidizing strip applications for advanced memory and logic applications.

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

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