Lam Research (LRCX) Q1 2026 earnings review
Record Quarter Shadowed by Margin Contraction and New China Restrictions
Lam Research reported a stellar quarter with record revenue of $5.3 billion and a record non-GAAP operating margin of 35.0%, driven by a surge in China sales which accounted for 43% of the total. However, the forward-looking picture is significantly more cautious. Guidance for the December quarter points to a sharp contraction in profitability, with gross margin expected to fall over 200 basis points to 48.5% due to a less favorable customer mix and tariffs. Furthermore, the company quantified the impact of new US export controls, projecting a ~$200 million revenue hit in the December quarter and a substantial ~$600 million headwind for calendar year 2026, signaling that the current peak in performance is unlikely to be sustained.
🐂 Bull Case
The long-term thesis remains intact, with AI data center investment creating robust demand. Management estimates every $100B in data center investment translates to ~$8B in WFE. The calendar 2025 WFE outlook is trending slightly above the prior $105B view, supported by HBM-related investments.
Lam continues to secure design wins in next-generation technologies like Gate-All-Around, advanced packaging, and 3D NAND upgrades. The Ether Dry Resist solution for EUV is now ramping in HBM production, showcasing the company's ability to capitalize on key semiconductor transitions.
🐻 Bear Case
New restrictions on shipments to certain Chinese customers are expected to reduce revenue by ~$200M in the December quarter and ~$600M in calendar 2026. This is a significant, quantified negative impact on future growth.
Guidance for the December quarter implies a significant reversal in profitability. Non-GAAP gross margin is expected to fall from a record 50.6% to 48.5%, attributed to a less favorable customer mix (less China) and higher tariffs, indicating the peak has passed.
⚖️ Verdict: 🔴
Bearish. While the September quarter results were exceptional, they are backward-looking and heavily inflated by a surge in China revenue that is now subject to new restrictions. The forward-looking guidance, with its sharp margin contraction and a quantified multi-hundred-million-dollar revenue headwind from export controls, is far more telling. The underlying AI story is strong, but near-term financial performance is set to deteriorate.
Key Themes
New US Export Controls to Impact CY26 by ~$600M
Management provided a specific financial impact from new US export restrictions targeting certain domestic Chinese customers. The headwind is estimated at ~$200 million for the December 2025 quarter and a total of ~$600 million for calendar year 2026. This has prompted the company to forecast that China's share of revenue will decline from the current 43% to less than 30% in CY26, representing a significant challenge to topline growth.
Profitability Set for Sharp Contraction
The record 50.6% non-GAAP gross margin and 35.0% operating margin in the September quarter appear to be a cyclical peak. Guidance for the December quarter indicates a reversal, with gross margin guided down to 48.5% and operating margin to 33.0%. Management explicitly attributes this decline to a less favorable customer mix as high-margin China sales are restricted, and the increasing impact of tariffs.
AI Investment Fuels Foundry and WFE Strength
The Foundry segment was the standout performer, growing to a record 60% of systems revenue from 52% last quarter, driven by leading-edge and mature node spending. Management underscored the tailwind from AI, noting CY25 WFE is trending better than the prior $105B forecast due to HBM demand. They see a robust setup for WFE growth in CY26, driven by sustained AI-related demand across foundry, logic, and memory.
Late-model Used Equipment Inventory Weighing on Trade Cycle
While used inventory-to-sales ratios have stabilized just above the long-term average, the mix remains problematic. Late-model (1-2 year old) used equipment population is approximately 2x normal levels, slowing the trade-in cycle and pressuring new equipment demand. Management is deploying 'pool funds' to support dealers in clearing used inventory, which contributed to negative price realization in prior quarters. The high-horsepower tractor situation remains the primary focus, with combine inventory already normalized.
Late-model Used Equipment Inventory Weighing on Trade Cycle
While used inventory-to-sales ratios have stabilized just above the long-term average, the mix remains problematic. Late-model (1-2 year old) used equipment population is approximately 2x normal levels, slowing the trade-in cycle and pressuring new equipment demand. Management is deploying 'pool funds' to support dealers in clearing used inventory, which contributed to negative price realization in prior quarters. The high-horsepower tractor situation remains the primary focus, with combine inventory already normalized.
WFE Outlook Positive for 2026 but Second-Half Weighted
Management sees a robust setup for WFE spending growth in calendar 2026, fueled by AI. However, they noted the year looks to be second-half weighted. This is partly because the newly restricted China entities would have represented business weighted to the first half of the year, creating a softer start to CY26 before spending from global multinationals accelerates.
Other KPIs
Stable. Revenue from spares, services, and upgrades remained strong and consistent, slightly higher sequentially and year-over-year. This segment provides a durable, high-margin revenue stream that helps offset the volatility of the systems business. Management noted that CSBG has grown every year except for one since the Novellus merger.
In the September quarter, Lam returned ~$1.28 billion to shareholders, consisting of $990 million in share buybacks and $292 million in dividends. The company also recently increased its quarterly dividend from $0.23 to $0.26 per share, signaling continued commitment to returning cash to shareholders.
The deferred revenue balance increased slightly from $2.68 billion in the prior quarter. However, management noted that customer advanced down payments, a component of this balance, were reduced by ~$100 million and are expected to continue declining in the December quarter.
Guidance
Decelerating. The midpoint of $5.20B implies a -2.3% sequential decline and a +18.8% YoY growth. This represents a significant deceleration from the current quarter's +27.7% YoY growth rate, reflecting the initial impact of new China restrictions.
Reversing. This guidance marks a sharp reversal from four consecutive quarters of gross margin expansion. The ~210 basis point sequential drop from 50.6% is attributed to a less favorable customer mix (less China) and increasing tariffs.
Decelerating. The midpoint of $1.15 implies an 8.7% sequential decline. While still up 26.4% YoY, it's a marked slowdown from the current quarter's 46.5% YoY growth, reflecting the flow-through of lower revenue and margins.