After the close last night, semiconductor equipment manufacturer Lam Research (LRCX) issued strong upside 3Q17 results, coupled with Q4 guidance that was also comfortably ahead of expectations. This comes on the heels of an impressive beat-and-raise 2Q17 report, illustrating the considerable momentum behind its business.
Not surprisingly, given its quarterly results, the stock has been on a tear, surging by about 65% since this time last year. We'll discuss the catalysts in more detail below, but, what mainly has been driving this burst of growth has been new innovation in NAND chips and a sharp recovery in DRAM production.
Taking a closer look at its 3Q17 report, EPS came in at $2.80, crushing the $2.55 estimate by $0.25, with revenue surging by 64% year/year to $2.15 billion, edging the $2.13 billion consensus. The 64% topline growth clearly stands out as that was its highest growth rate in at least five years. In fact, LRCX achieved record quarterly levels of shipments ($2.4 bln), revenue, gross margin dollars ($971 mln), operating income dollars ($538.4 mln), and EPS.
If there was a blemish on this report, it would be that Non-GAAP gross margin declined modestly to 46.1% from 46.4% in the year ago quarter, but that is really nit-picking. Operating margin was up 90 basis points to 26.9%, helping to drive a 25% increase in diluted EPS. Furthermore, cash flow from operations increased to $423 million from $404 million in the December quarter.
There are a number of catalysts that are driving LRCX's exceptional growth and performance. First, demand for NAND in the solid state drive (SSD) and embedded markets continues to be robust. LRCX commented during its conference call last night that its customers are investing in new 3D wafers and are entering new 3D technology conversions. This, in turn, is driving increased demand for its highly-specialized semiconductor processing equipment. Additionally, management noted that it is seeing an uptick in DRAM spending with improved demand coming from areas such as smartphones and servers. Its customers are increasing investments at the 10-nanometer node. Consequently, LRCX is modeling double-digit growth in equipment spending for DRAM this calendar year.
LRCX also provided Q4 guidance that was well ahead of consensus estimates. Specifically, it sees EPS of $2.88-$3.12 vs. the $2.65 estimate, on revenue of $2.2-$2.4 billion vs. the $2.19 billion estimate. The company stated that its business has never been stronger financially, believing that it is "in the right place, at the right time." In order to capitalize on this momentum, it plans on making investments -- particularly in R&D -- to sustain longer-term growth.
To quickly wrap up, LRCX delivered a very impressive report, further driving home the point that the semicap industry is red-hot right now. Its results should also have a positive impact on other names in the field, like Applied Materials (AMAT), Ichor (ICHR), and KLA Tencor (KLAC).