Lam Research misses estimates, cuts staff

3 min read

Tagged by what company executives called an "unprecedented contraction" in new orders, Lam Research fell short of its own reduced estimates in the third quarter Wednesday and announced it would cut 15 percent of its work force in a cost-cutting move.

Chief Executive Officer Jim Bagley told analysts during a conference call that the cancellation of previous orders and the abrupt halt in new orders this quarter "was beyond anything I've ever seen in my career."

"When your orders drop from a peak level to a trough level in 90 days, it does shake your confidence," he said. "Literally, every week the orders dropped."

In the quarter, the chip-equipment maker posted a profit of $44.4 million, or 33 cents a share, on sales of $421.5 million.

First Call consensus pegged Lam Research for a profit of 36 cents a share on sales of $420.4 million.

Lam Research (Nasdaq: LRCX) shares rose $1.57 to $24.57 ahead of the earnings report before falling to $24.16 in after-hours trading.

Company executives warned on February 28 that cancelled orders and the deteriorating economy would result in a shortfall this quarter.

Analysts originally expected the company to earn 49 cents a share on sales of between $480 million and $490 million.

At the time, Lam executives said the company would take five mandatory shut-down days each quarter and that executives would take a 10 percent pay cut.

Apparently, that's not going to be enough to get Lam through this severe economic slowdown.

Bagley said the company will cut 15 percent of its employees by month's end, roughly 550 people.

Company executives said a dearth of new orders was especially pronounced in the Asia-Pacific region this quarter.

The $421.5 million in sales represents a 29 percent improvement from the year-ago quarter when it earned $67 million, or 48 cents a share, on sales of $326.3 million.

But sales and new orders fell 15 percent and 60 percent, respectively, from the second quarter.

By region, North America accounted for 35 percent of new orders while Asia-Pacific and Europe chipped in 33 percent and 24 percent, respectively. Japan checked in with 8 percent of new orders in the quarter.

Gross profit margins in the quarter slumped to 41 percent in the quarter, down from 46.7 percent in the second quarter.

The company ended the quarter with more than $505 million in cash and short-term investments, but inventories shot up $33 million due to cancelled and delayed orders.

Bagley told investors to expect a fourth-quarter profit of 15 cents a share on sales of $340 million, below the current First Call estimate calling for sales of $350.2 million and a profit of 20 cents a share.

He added that orders for the fourth quarter appear to be improving from the dramatic decline this quarter, saying "we may have reached the trough."

"Saying that, our confidence level for the (fourth) quarter has to be somewhat shaky considering our abysmal ability to forecast the (third) quarter," he said.

Not a complete surprise
This unprecedented collapse in new orders didn't catch analysts off-guard, as most were predicting sales closer to $400 million this quarter.

Timothy Arcuri, an analyst at Deutsche Banc Alex Brown, predicted Lam would earn 34 cents a share on sales of $400 million.

"I think there's a risk for the (profit) number to come in maybe 3 or 4 cents below my estimate," he said ahead of the earnings report. "The key thing really is the guidance. I wouldn't be surprised to hear them start talking about break-even in the fourth quarter."

While Bagley admits that he isn't completely confident in the company's revised profit estimate of 15 cents a share, he said the layoffs and other cost-cutting moves ensure the company will at least break even at a quarterly sales rate of $250 million.

"The company, from a product and operational perspective, is stronger than it's ever been," he said.

Last quarter, Lam Research topped analysts' estimates when it posted a profit of $79.1 million, or 58 cents a share, on sales of $494.3 million.

The stock moved as high as $56.81 last April before bottoming out at $13 in December.

Fifteen of the 20 analysts tracking the stock maintain either a "buy" or "strong buy" recommendation.