PhonlamaiPhoto/iStock via Getty Images
In TSMC’s (TSM) Q1 2022 earnings call, CEO C. C. Wei remarked:
“we see this kind of tool delivery problem unexpectedly from beginning of this year. And we are working very hard with our tool suppliers to resolve all the issues. And so as for which technology node or which technology or what are being impacted, all the leading-edge technology and mature node technologies capacity expansion are being impacted. And certainly, in order to support our customers’ strong demand, we’re working very hard for the tool suppliers to resolve all the issues.
By taking such actions, we do not expect any impact to our 2022 capacity plan, and we continue to work closely with our suppliers on 2023 and beyond so that we can ramp-up our capacity to meet customers’ demand.”
Lam Research (NASDAQ:LRCX) announces F3Q22 earnings after the market closes on April 20, 2022. Since LRCX is a supplier to TSMC, and TSMC is experiencing supply chain problems, this article attempts to analyze some of these issues that may impact Lam’s earnings.
In the previous two quarters, the company missed on revenues but beat on EPS. The most recent quarter was significantly worse than the prior one, as LRCX reported revenue of $4.23B that missed by $188.09M on January 26, 2022.
Lam CEO Tim Archer blamed the shortfall on several items in the most recent earnings call:
“Lam’s operations and results were impacted by the effects of COVID-19, labor shortages, freight and logistics cost escalation and supply chain constraints.
Looking into the first weeks of 2022, we see that supply challenges have broadened with the COVID Omicron surge adding further disruption to freight and logistics operations as well as exacerbating skilled labor shortages. We also continued to encounter significant scarcity of certain components and parts, including semiconductors. As a result, our March quarter revenue levels will be limited by the output constraints of our global supply chain. And this is reflected in our guidance.”
Lam Research’s Supply Chain Problems Persist
UCITT
One of the major suppliers of components for equipment for Lam Research and for Applied Materials (AMAT), which announces a month later, is Ultra Clean Holdings (UCTT). The company provides turnkey systems that permit the precise delivery, management and control of specialty gasses and chemicals in semiconductor and flat panel applications, according to The Information Network’s report entitled “Applied Materials: Competing Analysis of Served Markets.“
In its Q4, 2021 earnings call on February 23, 2022, UCITT was vague on its supply chain issues, as CEO Jim Scholhamer noted:
“UCT’s global footprint enables us to leverage economies of scale and our procurement teams have found innovative ways to limit risk by increasing resiliency and efficiency in our supply chain. To a large extent UCT has not been the limiting factor in the supply chain for on time delivery.”
UCITT beat on earnings and revenues, but the stock dropped 10% over the next few days before recovering completely within a week of trading. LRCX and AMAT shares rose 6% in the next few days before dropping to pre-announcement share price.
However, the supply problems not only persisted but got worse for UCITT. On April 11, 2022, UCITT issued a press release stating it was significantly revising guidance. The company noted:
“first quarter 2022 outlook and expected revenue in the range of $580.0 to $630.0 million. UCT now expects first quarter 2022 revenue to be between $560.0 and $570.0 million.
The recent China government mandated COVID lockdown policy affected UCT’s production schedule at its Shanghai facility. Additionally, the grounding of all Boeing 737-800 aircraft, due to the recent China Eastern Airlines accident, impacted UCT’s ability to receive and send materials from China. The Company is actively engaged with its customers and suppliers to mitigate disruption.”
MKS Instruments
MKS Instruments (MKSI) supplies a multitude of different semiconductor components and is a large supplier of RF power supplies. I discussed MKSI in my January 31, 2022 Seeking Alpha article entitled “Lam Research Stock: Not All Its Problems Are Supply Chain Related.“
Like UCITT, MKSI is a supplier to both LRCX and AMAT, so any supply chain disruptions impacting LRCX could do the same with AMAT a month later.
According to Seth Bagshaw – Senior Vice President and Chief Financial Officer:
“We estimate first quarter revenue of $750 million plus a minus $30 million. This estimate includes headwinds of industry-wide supply chain constraints, which we expect to persist through the first quarter.”
So far, I have not seen any updates to MKSI’s guidance announced in January. MKSI announces its quarterly earnings on April 26, and guidance could affect AMAT earnings release a few weeks later.
Investor Takeaway
Potential Impact on Lam Research’s Q3 Earnings
UCITT dropped its revenue guidance 6.6% (midpoint). Of the two excuses for the lower guidance:
UCITT has a plant in Shanghai, China, which houses its precision machined parts and subsystem assembly operations. The Shanghai decided in late March, more than a month after the initial outbreak, to implement a two-stage lockdown that eventually applied to all districts, generally forcing people not to leave their apartments. At least 373 million people-in cities that represent roughly 40% of China’s gross domestic product-have been affected by the most recent wave of lockdowns across China, Reuters reported.
The China Eastern Airlines Boeing 737-800 aircraft crashed on March 22, 222. The 223 plans in the fleet are still grounded although there are 4,502 of the 737-800s now in service worldwide. There are a total of 1,177 in service in China with other airlines, so the impact may be a temporary glitch.
Shanghai is home to the world’s largest port, and although it has largely remained open, trucks are struggling to unload cargo due to strict permit regulations, causing shipping containers to stack up. The shutdowns went into effect April 1, 2022, which is after the close of the previous quarter so there is no impact on UCITT or LRCX this coming earnings call.
Since the grounding started on March 23, that gives just one week of freight disruptions in the quarter so the impact on UCITT and LRCX should be minimal. One week out of 12 weeks in a quarter represents 8% of period, so UCITT’s 6.6% drop in guidance is exclusively attributed to the airline issue.
Potential Impact on Lam’s Q4 Earnings
The Covid shutdown continues nearly one month in the quarter, which will have a major impact on LRCX (and UCITT and AMAT) in next quarterly earnings. The depth of the impact will depend on whether UCITT is able to produce and ship comparable Chemical & Gas Delivery System products from other facilities to customers serviced by the Shanghai plant. The company has comparable facilities in Czech Republic and Austin TX.
Indeed, UCITT claims in its 10K that “our manufacturing facilities are all using the same processes and procedures, enabling us to respond to rapid demand changes by employing as much or as little manufacturing capabilities as required.”
Be the first to comment