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Georgia Zhang

LRCX AT A GLANCE

P/E ► -15.4   EV/EBITDA ► -24.1   ROA ► -12.5% AVG ROE ► -18% AVG Debt to Equity ► 0.327 AVG Current Ratio ► 3.68 AVG Interest Coverage Ratio ► -91.8 LOW

 

 

 

 

 

 

Lam Research Corporation (NASDAQ: LRCX) is a company that uses innovative etch technologies to create integrated circuits used in semiconductor processing equipment. Etch, an important step in semiconductor creation, is a process where circuits are formed by the selective removal of material. As the semiconductor industry continuously transitions towards smaller and smaller transistors, the need for etch technology persists. Through continuous research and development of innovative technology, Lam Research has been gaining market share in the etch technology segment. The Exelan and Versys brands are two of Lam Research's major products sold internationally. Lam Research is a leader in the etch market, capturing about 48% of the market in Q2 2008. ^[1]

Company Overview

Lam Research Corporation was founded by Dr. David K. Lam in 1980 and is headquartered in Fremont, California. The company has consistently provided innovative technologies in the semiconductor manufacturing industry. In 1995, Lam introduced the Dual Frequency Confined technology for dielectric etching, which was the the first technology that proved flexible enough to etch all of the structures being proposed at the time for new dual schemes for integrating copper interconnect. This technology lowered capital costs for chip manufactures and improved productivity and performance. ^[2]

Business and Financial Metrics

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At the end of fiscal 2008, Lam Research had $1.2 billion in cash and investments, compared to debt of $306 million on its balance sheet. Also in the 2008 fiscal year, revenue declined 22% quarter over quarter to $440 million, due to the recent downturn in the semiconductor industry, and operating income was $17 million. ^[4] While the semiconductor industry as a whole declined 16.67, Lam Research declined 96.4. ^[5] This contrast is due to Lam Research's specialization in the etch market, which renders the company more sensitive to specific demand changes in the etch industry.

In the economic slowdown of this year, many semiconductor businesses are implementing spending cuts. The lower demand of semiconductor products adversely affects Lam Research's earnings. In addition, Lam's share price is significantly affected by memory stock prices, especially SNDK and MU. According to Needham, the correlation coefficient between stock prices of Lam and SNDK is 0.78, which shows a significant positive correlation between Lam and one of the largest memory stocks. ^[6] The memory technology market is also in a decline, which is another explanation of Lam Research's falling revenue. Lam's revenue declined from September 2007 ($ 684.6 million) to the September quarter ($440 million) this year. ^[7] Furthermore, Lam Research's gross margin declined from $343.9 million in September 2007 to $183.1 million in the September 2008.^[8]

Over the past decade, Lam Research has been acquiring suitable technologies from other companies to further enhance its own design and production of semiconductor technologies. In 2008, Lam has acquired The SEZ Group (the Switzerland-based wafer cleaning technology supplier) for about $568 million in cash. With the acquisition Lam gained the SEZ Group's spin clean tools, which lead to the formation of Lam's new Spin Clean Division. ^[9] In 2004, Lam acquired the silicon growing and fabrication assets of Bullen Ultrasonics. The acquisition of these companies expands Lam's resources and equipment, letting it to further develop its own semiconductor technologies. Furthermore, the etch technology currently captures only 12% of the overall wafer fabrication market, and Lam expects etch to gain a larger percentage this market.

Business Segments

Geographic Breakdown

Lam's customers are mostly from the United States, Europe, and the Asia Pacific region and include large chip makers such as Samsung Electronics (19% of sales) and Toshiba (13% of sales).^[10]

Lam Research has a strong customer base including leading memory chipmakers such as Samsung and Toshiba. Lam Research also supplies equipment to smaller companies such as Elphia, Hynix, Micron and the Taiwanese DRAM. However, due to lower NAND prices and losses in DRAM space, many of these smaller customers have cut back their orders or cancelled projects completely.

Products and Services

Dielectric Etch: Lam Research has patented the Dual Frequency Confined technology, which integrates multi-frequency power with a physically confined plasma. The the ability to apply power at different frequencies increases flexibility and allows different materials to be etched in the same chamber. Lam Research has a lower market share in dielectric etch than silicon and metal etch methods and has room to grow in the dielectric etch market. Products: 2300 Exelan Flex, 2300 Exelan Flex45 Dielectric Etch Systems

Conductor Etch: Lam Research patented the Transformer Coupled Plasma (TCP) technology, which makes possible advanced conductor etch applications at the 45 nm node and beyond. This technology provides a uniform and high-density plasma across the wafer and removes the need of magnetic enhancements that could damage the device. Products: 2300 Versys Kiyo, 2300 Versys Kiyo45, 2300 Versys Kiyo3x, 2300 Versys Metal45 Etch System Conductor Etch Systems

Mems and Deep Silicon Etch: This is one of Lam's major etch methods. Micro-electromechanical systems (MEMS) devices are used in consumer devices such as ink jet printer heads. Increase demand is causing MEMS applications to transition into higher volume manufacturing. Products: TCP 9400DSiE Deep Silicon Etch System

Three-Dimensional Integrated Circuits (3-D IC) Etch: Lam uses 3-D IC to develop interconnect capabilities for die-to-die and wafer-to-wafer stacking. The 2300 Syndion Through-Silicon Via Etch System is based on the company’s patented TCP technology and the production-proven 2300 Versys Kiyo conductor etch system. Products: 2300 Syndion Through-Silicon Via Etch System

Clean Process: Single-Wafer Spin Clean and Plasma-Based Bevel Clean--- Lam produces single-wafer Spin-Processor technology for cleaning and removing films and has helped the industry move from batch to single-wafer wet processing. The plasma-based bevel clean system uses plasma technology to selectively remove materials while preventing defects. Products: SP Series, Da Vinci, DV-Prime, Esanti, 2300 Coronus Plasma-Based Bevel Clean System

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Trends and Forces

The Cyclical Semiconductor Industry

The semiconductor industry is known to be very cyclical as a whole. The etch market is no different, and Lam Research is particularly sensitive to the changes in demand for etch technology. The semiconductor market ultimately depends on consumer demand for electronics such as PC's, cell phones and video games. Consumer demand fluctuates in cycles, and the various sectors of the semiconductor industry fluctuates as a result. However, overall demand has been strong for semiconductor materials. The industry has been rising steadily at an 13% annual growth rate for the past 20 years. ^[12] New technologies and materials such as 300-millimeter wafers, copper, and low-k dielectrics are continuously needed because they help chipmakers produce cheaper, faster, smaller chips.

Economic Downturns and Decreased Consumer Spending

Consumer spending has been declining for the past few quarters in fiscal 2008 and has hurt not only Lam Research but most other semiconductor companies as well. In response to the recent credit crisis and global financial meltdown, Lam Research has instigated corporate structuring which led to the lay off of 600 employees. In other financial downturns such as the 2001-2003 decline of the chip industry, Lam also implemented cost-cutting measures and layed off 20% of its employees. Lam's operating model implements outsourcing that has improved profitability and offers a variable-cost structure to adjust to industry fluctuations. Lam fought through the slump of the chip industry in the 1990's by targeting niche markets in the semiconductor industry and introduced new technology such as a new generation of 300mm wafers. When the industry bounced back in 1999, Lam's profits rebounded with orders from major chip makers such as AMD.^[13]

Asia's Influence: Customers, Competition, and Outsourcing

Many of Lam Research's customers are located in Asia. Samsung and Toshiba, Lam Research's two largest customers, are based in Asia and have significant influence on Lam Research's revenue. Together they account for 32% of Lam Research's sales. ^[14] Lam also supplies smaller companies from Taiwan, Korea, Japan, and Asia-Pacific, and these smaller companies have increasingly been cancelling their projects or reducing the size of their orders with the worldwide economic downturn. This has been contributing to Lam's falling stock price and falling revenue. In addition, Lam Research's competitors such as Applied Materials is proactively increasing their presence in Asia. Asia is still a developing market and Lam and many other semiconductor companies view Asia as an important area of expansion. Asia is also a potential for outsourcing some of Lam's non-core operations to reduce costs. In 2004, Lam started a global product training center in Hsinchu, Taiwan to educate customers about the etching process. ^[15]

Competition

Lam Research's two main competitors in the etch industry are Applied Materials and Tokyo Electron, the two largest semiconductor equipment companies in the world. These two companies have vastly more resources and operate on a larger scale. These companies have very diversified products and are involved in many areas such as Deposition, Etch, Process Control, Rapid Thermal Processing, and Chemical Mechanical Planarization. In the single-wafer cleaning industry, Lam Research's main competitor is Dainippon Screen Manufacturing Co. Ltd.

Applied Materials holds 20.6% of the etch market share while Lam Research currently hold about 48% of the market. Lam Research has the advantage of being specialized in etch technology. Lam is able to focus its resources on this field and has an edge in this field over its competitors. However, a downside to being specialized is that Lam is more vulnerable to market fluctuations in regards to etch technology. A more diversified product line would let a company to better take on volatility in the various sectors of the semiconductor industry.

References

1. ↑ [Needham April 15, 2008, page 8]
2. ↑ [Lam Research| Technology Leadership| http://www.lamresearch.com/company_1_1.cfm]
3. ↑ http://finance.yahoo.com/q/ks?s=LRCX
4. ↑ [Morningstar LRCX Nov. 28, 2008]
5. ↑ [Thomson One| LCRX}
6. ↑ [Needham April 15, 2008]
7. ↑ [LCRX 2008 10-Q, page 4]
8. ↑ [LCRX 2008 10-Q, page 4]
9. ↑ ["SEZ Group Now Lam's Spin Clean Division"| http://www.semiconductor.net/article/CA6554643.html| Lammers]
10. ↑ [Hoovers| LRCX]
11. ↑ [ValueEngine LRCX Report]
12. ↑ http://www.wikinvest.com/stock/Applied_Materials_(AMAT)
13. ↑ [Hoovers| LCRX]
14. ↑ [Hoovers| LRCX]
15. ↑ [1]