During TSMC’s (TSM) Q1 2022 earnings call, CEO CC Wei remarked:
“We have been seeing this kind of tool delivery problem unexpectedly since the beginning of this year. And we are working very hard with our tool suppliers to solve all problems. And so, for which technology node or which technology or what is affected, all advanced technologies and capacity expansion of mature node technologies are affected. And of course, to keep up with the high demand from our customers, we are working hard to get tool suppliers to resolve any issues.
By taking such measures, we do not foresee any impact on our 2022 capacity plan, and we continue to work closely with our suppliers on 2023 and beyond so that we can increase our capacity to meet customer demand. »
Lam Search (NASDAQ: LRCX) announces Q3Q22 results after market close on April 20, 2022. Since LRCX is a supplier to TSMC and TSMC has supply chain issues, this article attempts to analyze some of these issues that may impact Lam’s earnings.
In the previous two quarters, the company lacked revenue but beat EPS. The most recent quarter was significantly worse than the previous one as LRCX reported revenue of $4.23 billion which fell by $188.09 million on January 26, 2022.
Lam CEO Tim Archer blamed the shortfall on several things during the latest earnings call:
“Lam’s operations and results have been impacted by the effects of COVID-19, labor shortages, escalating freight and logistics costs, and supply chain constraints.
Looking back to the first weeks of 2022, we find that supply issues have widened with the COVID Omicron surge, adding further disruptions to freight and logistics operations and exacerbating skilled labor shortages. We also continued to experience significant shortages of certain components and parts, including semiconductors. As a result, revenue levels in our March quarter will be limited by production constraints in our global supply chain. And that is reflected in our advice.”
Lam Research supply chain issues persist
One of the major suppliers of equipment components for Lam Research and for Applied Materials (AMAT), which announces a month later, is Ultra Clean Holdings (UCTT). The company provides turnkey systems that enable the precise delivery, management and control of specialty gases and chemicals in semiconductor and flat panel display applications, according to The Information Network report titled “Applied materials: Competitive analysis of the markets served.“
In its fourth quarter 2021 earnings call on February 23, 2022, UCITT was vague about its supply chain issues, as CEO Jim Scholhamer noted:
“UCT’s global footprint allows us to take advantage of economies of scale and our procurement teams have found innovative ways to mitigate risk by increasing the resilience and efficiency of our supply chain. To a large extent, UCT has not been the limiting factor in supply chain on-time delivery.”
UCITT beat earnings and earnings, but the stock fell 10% over the next few days before fully recovering within a week of trading. LRCX and AMAT shares rose 6% over the next few days before falling back to the pre-announcement share price.
However, supply issues not only persisted but worsened for UCITT. On April 11, 2022, the UCITT issued a press release indicating that it was significantly revising its guidelines. The company noted:
“Outlook for the first quarter of 2022 and expected revenue between $580.0 and $630.0 million. UCT now expects first quarter 2022 revenue to be between $560.0 and $570.0 million .
The recent COVID lockdown policy imposed by the Chinese government has affected UCT’s production schedule at its Shanghai factory. Additionally, the grounding of all Boeing 737-800s, due to the recent China Eastern Airlines accident, has impacted UCT’s ability to receive and send materials from China. The company is actively engaging with its customers and suppliers to mitigate disruption.”
MKS Instruments (MKSI) supplies a multitude of different semiconductor components and is a leading supplier of RF power supplies. I discussed MKSI in my January 31, 2022 Seeking Alpha article titled “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 disruption affecting LRCX could do the same to AMAT a month later.
According to Seth Bagshaw – Senior Vice President and Chief Financial Officer:
“We estimate first-quarter revenue of $750 million plus minus $30 million. This estimate includes headwinds from industry-wide supply chain constraints, which are expected to persist. throughout the first trimester.
So far, I haven’t seen any updates to the MKSI guidelines announced in January. MKSI announces its quarterly results on April 26 and forecasts could affect AMAT’s earnings release a few weeks later.
Key takeaway for investors
Potential Impact on Lam Research’s Third Quarter Earnings
The UCITT lowered its revenue forecast by 6.6% (midpoint). Of the two excuses for inferior advice:
UCITT has a factory 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 neighborhoods, generally forcing people not to leave their apartments. At least 373 million people – in cities that account for around 40% of China’s gross domestic product – have been affected by the latest wave of lockdowns across China, Reuters reported.
China Eastern Airlines Boeing 737-800 plane crashed March 22, 222. All 223 planes in the fleet are still on the ground although there are 4,502 of the 737-800s currently in service worldwide. There are a total of 1,177 in service in China with other airlines, so the impact may be a temporary issue.
Shanghai is home to the world’s largest port, and although it has remained wide open, trucks are struggling to unload goods due to strict permit regulations, resulting in shipping containers stacking up. The closures took effect on April 1, 2022, i.e. after the close of the previous quarter, so there is no impact on the UCITT or LRCX in this upcoming earnings call.
Since the grounding began on March 23, this only gives 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 the period, so the 6.6% drop in the UCITT forecast is exclusively attributed to the airline problem.
Potential impact on Lam’s earnings in the fourth quarter
The Covid shutdown continues for nearly a month into the quarter, which will have a major impact on LRCX (and UCITT and AMAT) in the upcoming quarterly results. The extent of the impact will depend on UCITT’s ability to produce and ship comparable chemical and gas distribution system products from other facilities to customers served by the Shanghai plant. The company has comparable facilities in the Czech Republic and Austin TX.
Indeed, the UCITT claims in its 10K that “our manufacturing facilities all use the same processes and procedures, allowing us to respond to rapid changes in demand by employing as much or as little manufacturing capacity as required.”