LRCX — Q1 FY2027 Financial Report Analysis

Record quarter: revenue up 54% as chipmakers' factory spending accelerates

Lam Research makes the machines chipmakers use to build chips layer by layer: tools that deposit ultra-thin films onto a silicon wafer, etch away material to form circuit patterns, and clean the wafer between steps. Its customers are a small number of very large chipmakers, so Lam's results follow those customers' factory-building budgets, an industry total known as wafer fabrication equipment (WFE) spending.

For the first quarter of fiscal 2027 (the three months ended September 27, 2026; Lam's fiscal year ends in late June), revenue rose 54.4% from a year earlier to $8.22 billion, and 22.3% from the June quarter. Net income rose 75.5% to $2.75 billion and diluted earnings per share (EPS) rose 76.6% to $2.19. CEO Tim Archer called it record revenue, profit and EPS, crediting "AI driving higher semiconductor demand and greater device complexity." Results came in above the midpoint of what Lam had guided in July ($8.10 billion revenue, $2.15 EPS).

This analysis is based on Lam's earnings release (Exhibit 99.1 to its October 21, 2026 Form 8-K). The full 10-Q has not been filed yet, so the breakdown by customer type (memory vs foundry vs logic) and management's line-by-line explanation of the changes are not available yet. Some of the "why" below is limited to what the release states.

All figures are U.S. GAAP unless labelled non-GAAP. Basis points ("bps") are hundredths of a percentage point: 190 bps = 1.9 percentage points.

Where the growth came from

Lam splits revenue into two parts. Systems is new leading-edge equipment for deposition, etch and clean. Customer support-related revenue is service, spare parts, upgrades and older-generation tools from its Reliant line. Systems revenue rose to $5.73 billion and made up 69.7% of revenue, up from 66.6% a year earlier. Against the June quarter the difference is starker: systems revenue jumped $1.48 billion (+34.9%), while customer support was almost unchanged ($2.49 billion vs $2.47 billion). Practically all of the quarter-on-quarter increase was new tools shipping, which is what you would expect if customers are adding factory capacity.

Geography moved sharply. Lam reports revenue by where the customer's factory sits:

Shares are from the Sept 2026, June 2026 and Sept 2025 earnings releases (Europe for the two earlier quarters is the remainder after the listed regions).

Applying those rounded shares to revenue gives approximate dollar figures. China went from about $1.75 billion in the June quarter to about $2.88 billion, roughly 65% more in one quarter, and supplied most of the $1.50 billion sequential increase. Taiwan, the home of the large contract chipmakers ("foundries") that drove fiscal 2026, fell from about $1.82 billion to about $1.48 billion. Korea, where the big memory makers are concentrated, held a 20% share, which on a larger total is roughly $1.64 billion, about double the year-ago quarter's roughly $0.80 billion.

The release does not say why China rebounded or why Taiwan dipped, and it doesn't break revenue down by customer type, so this is as far as the filing goes. The 10-Q should show whether the shift is memory or foundry spending.

Takeaway: This was a better-quality quarter than the fiscal 2026 annual numbers: margins widened again and the cash came in, so the profit is not just on paper. The catch is where the extra revenue came from. China's share jumped from 26% to 35% in one quarter and accounts for most of the sequential growth. China is the market most exposed to U.S. export controls, which Lam itself lists as a risk to its revenue.

Why margins widened

Gross margin, the share of revenue left after the cost of building and installing the tools, rose to 52.3% from 50.4% a year earlier and 51.7% in the June quarter. The release doesn't explain the change, so the driver (customer mix, pricing, factory utilisation) will have to wait for the 10-Q.

Most of the operating margin gain is operating leverage. Operating expenses rose 18.6% to $1.02 billion (R&D +15.6% to $666.4 million, selling, general and administrative +24.8% to $348.7 million), against revenue growth of 54.4%. Operating expenses fell from 16.1% of revenue to 12.4%. Of the 560 bps gain in operating margin, about 190 bps came from gross margin and about 370 bps from costs growing more slowly than sales. That is normal for an equipment maker in an up-cycle, but it also works in reverse: if revenue stalls, R&D spending won't shrink with it.

What the headline numbers hide

• Cash conversion is strong this quarter. Operating cash flow was $3.50 billion against $2.75 billion of net income. Working capital (receivables, inventory, payables, deferred revenue and similar items) released $535.4 million of cash, after absorbing $859.9 million in the June quarter. After $257.7 million of capital spending, free cash flow was about $3.24 billion.
• Receivables are being collected faster. Accounts receivable (money billed but not yet collected) rose 6.0% from June to $5.66 billion, while revenue rose 22.3%. On a quarterly basis that is roughly 63 days of sales outstanding, down from about 72 in the June quarter and about level with a year ago (about 62).
• Inventory did not build. It rose 6.4% from June and 11.1% from a year ago, both well below revenue growth. Note that tools shipped to customers in Japan sit in inventory until the customer accepts them; Lam estimates $468.3 million of future revenue from those shipments, down from $490.2 million in June.
• The GAAP vs adjusted gap is negligible. Non-GAAP net income was $2.77 billion vs GAAP $2.75 billion, a $15.3 million difference (one cent of EPS). The exclusions are acquired-intangible amortization, a deferred-compensation plan whose asset gains and liability increases roughly cancel out, note-discount amortization, and $11.5 million of income tax expense from a change in tax law, which the release does not describe further.
• Taxes were a headwind, not a tailwind. The effective tax rate was 16.9%, up from 15.6% a year earlier and 10.9% in the June quarter. EPS grew in spite of the tax line.
• Buybacks added only about one point of EPS growth. Diluted shares fell 1.1% from a year ago to 1,255.8 million. EPS grew 76.6% and net income 75.5%, so nearly all of the EPS gain came from the business itself. Lam bought back $1.02 billion of stock and paid $325.4 million of dividends, both covered by free cash flow, and raised the declared quarterly dividend to $0.33 from $0.26.
• Results beat Lam's own guidance, but not by much. Revenue was $8.22 billion vs the $8.10 billion ± $400 million guided in July, GAAP operating margin was 40.0% vs 39.5% ± 1%, and EPS was $2.19 vs $2.15 ± $0.15. Every figure landed inside the range, slightly above the midpoint.

Did last time's read hold up?

Our fiscal 2026 annual analysis called the cash gap the one thing to watch: operating cash flow had fallen 5.1% while net income rose 35.6%, because receivables had grown 58%. It also named deferred revenue, which fell 9.3% on lower customer down payments, as the cheapest early sign of whether revenue would hold. Both have turned. Cash flow was 127% of net income this quarter, receivables grew far more slowly than sales, and deferred revenue rose 9.5% to $2.66 billion.

The annual report also expected "continued revenue growth with flatter margins." The revenue half was right. The margin half was wrong so far: gross margin was 52.3% against 50.5% for fiscal 2026, and operating margin was 40.0% against 35.3%. Its point that memory spending was the swing factor can't be checked until the 10-Q's customer-type breakdown, though Korea holding 20% of a larger total suggests memory customers did not pull back.

Outlook

Lam guided the December 2026 quarter to:

At the midpoint that is about 4.6% more revenue than the September quarter and about 6.4% more EPS, with slightly wider margins. Lam is guiding for growth again, but much slower than this quarter's 22.3% sequential jump. Management's statement is that its investments in technology changes and manufacturing capacity position it to "outgrow the wafer fabrication equipment market as the industry expands"; it gave no WFE forecast in the release.

Our read: the September quarter is cleaner than fiscal 2026 overall. The cash and deferred-revenue concerns from the annual report eased, and margin expansion continued without help from buybacks or taxes. Two things to watch in the 10-Q and the December quarter:

1. China. Whether China's jump to 35% of revenue is a one-quarter catch-up or a lasting level. A high China share leaves more revenue exposed to any tightening of U.S. export rules.
2. Customer mix. The 10-Q's memory/foundry/logic split will show whether foundry demand cooled as Taiwan's share fell and memory took its place. Fiscal 2026's annual report credited part of its margin gain to "favorable customer mix," so a shift in mix could move gross margin either way.