Lam Research (LRCX) is trading modestly higher today after reporting 1Q18 (Sep) earnings last night. In terms of quick background, Lam Research is a supplier of equipment used by semiconductor manufacturers to make chips. Specifically, it makes wafer fabrication equipment (WFE). Its products are designed to help customers build smaller, faster, and better performing devices that are used in a variety of electronic products, including mobile phones, PCs, servers, wearables, automotive devices, storage devices, and networking equipment.
Its customer base includes semiconductor memory, foundry, and integrated device manufacturers (IDMs) that make products such as non-volatile memory (NVM), DRAM memory, and logic devices. LRCX's core technical competency is integrating hardware, process, materials, software, and process control enabling results on the wafer.
Semiconductor manufacturing, its customers' business, involves the complete fabrication of multiple dies or integrated circuits (ICs) on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale.
Demand from cloud computing, the Internet of Things (IoT), and other markets is driving the need for increasingly powerful and cost-efficient semiconductors. At the same time, there are growing technical challenges with traditional two-dimensional scaling. These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical scaling strategies like 3D architectures as well as multiple patterning to enable shrinks. These trends have significantly expanded LRCX's addressable markets from about 26% of WFE spending in calendar year 2013 to about 34% in calendar year 2016.
Turning to the SepQ results, non-GAAP EPS came in at $3.46, well ahead of prior guidance of $3.13-3.37. Revenue rose 51.8% year/year to $2.48 bln vs prior guidance of $2.35-2.55 bln. In terms of guidance for Q2 (Dec), LRCX sees non-GAAP EPS of $3.53-3.77 and revenue of $2.45-2.65 bln. The EPS guidance is a good bit better than market expectations while revenue is generally in-line.
On the earnings call last night, LRCX talked about how it continues to expect a strong industry spending environment once again in calendar 2018. The company believes there are enduring drivers behind the sustainability of industry spending levels and LRCX's outperformance. The last decade saw the transition from a PC-centric to a mobile-centric world. LRCX expects the next decade is defined by a transition to an AI-centric world. Mobile devices have enabled an incredible platform of almost 4 billion global smartphone users, which allows for the rapid delivery and scaling of new AI-enabled services on a growing array of IoT devices and systems.
Together, these trends are resulting in semiconductor industry revenue growth rates accelerating from an average of just over 2% in the last six years to over 15% in 2017. Even more important than revenue and profit growth, a dramatic diversification in end use demand bodes well for LRCX's future. The critical role of data in this market transition is particularly positive for memory and storage semiconductor demand in the cloud and also IoT.
Cloud computing is a foundation for extremely data-intensive applications, which is driving strong demand for bit growth in server DRAM and NAND of over 30% and 50% respectively. For IoT devices, LRCX believes we are in early stages of adoption of exciting new technologies like 3D cameras, AR and VR, and broad automation trends. This is driving over 40% demand bit growth in these NAND markets.
In sum, this was another solid quarter for Lam Research. The company has now beaten EPS expectations for at least nine quarters in a row. As such, the stock has been on a big run over the past year, from $94 in mid-November 2016 to near $200 currently.