Lam Research (LRCX) Q2 2026 earnings review
Record Year Capped with Accelerated Guidance, Despite China Headwind
Lam Research delivered a solid quarter where non-China growth successfully absorbed a massive drop in Chinese demand. While Q2 revenue was essentially flat sequentially at $5.34B, it represented a 22% YoY surge. The narrative shift is clear: the 'China overhang' is normalizing rapidly (from 43% to 35% of revenue in one quarter), yet the company guided for an accelerating Q3 with revenue of $5.70B (+7% QoQ). The only blemish is margin compression—Gross Margin peaked last quarter and is guiding lower (49.0%), likely due to the mix shift away from high-margin China domestic sales.
🐂 Bull Case
The most bullish signal is the revenue hold. China revenue dropped from ~43% to 35% of the mix sequentially (approx. $400M impact), yet total revenue remained flat. This implies non-China revenue grew significantly, driven by global strategic customers and AI/Advanced Packaging demand.
After three quarters of hovering near $5.2-5.3B, management guided 26Q3 revenue to $5.7B. This signals that the 'next leg' of the cycle—driven by HBM4, gate-all-around, and advanced packaging—is materializing now.
🐻 Bear Case
Gross margins have rolled over. After hitting 50.4% in Q1, they fell to 49.6% in Q2 and are guided to 49.0% in Q3. The loss of high-margin domestic China volume is creating a structural headwind that operational efficiency hasn't fully offset.
Cash and equivalents dropped by $516M to $6.2B despite strong net income. The company spent $1.46B on buybacks and $327M on dividends in a single quarter—significantly exceeding free cash flow. While shareholder-friendly, this burn rate reduces balance sheet flexibility.
⚖️ Verdict: 🟢
Bullish. The market feared the 'China cliff,' and Lam just proved it can grow through it. The Q3 revenue breakout guidance ($5.7B) outweighs the slight margin compression. The story has successfully transitioned from 'China reliance' to 'AI/Packaging execution.'
Key Themes
The Great Rotation: China Down, World Up
A massive geographical rotation is underway. China revenue plummeted from 43% in Q1 ($2.29B implied) to 35% in Q2 ($1.87B implied)—a ~$420M sequential air pocket. Despite this, total revenue held flat. This confirms strong acceleration in Taiwan (flat at 19-20%), Korea (up to 20%), and US/Europe, validating the 'global multinationals will offset China' thesis from the previous quarter.
Margin Compression Cycle
Decelerating. Gross Margin (GAAP) contracted 80 bps QoQ to 49.6% and is guided down another 60 bps to 49.0%. While still healthy by historical standards, the trend is negative. This is the direct cost of the geographic rotation: losing efficiency/pricing power from the China market. Operating margin also compressed 50 bps sequentially.
Customer Support (CSBG) Powerhouse
Accelerating. The Customer Support-related revenue (CSBG) surged 12% QoQ to $1.99B (up from $1.78B). This high-quality recurring revenue stream now accounts for 37% of total revenue. As the installed base grows and complexity increases (AI tools require more service), this segment provides a crucial floor for earnings.
Deferred Revenue Drain
Reversing. Deferred revenue fell significantly from $2.77B in Q1 to $2.25B in Q2. While part of this is revenue recognition, a $520M drop suggests cash collections from prepayments are slowing down or the backlog is being burned faster than replenished in certain segments (likely China).
AI Infrastructure Buildup
Stable/Positive. CEO Tim Archer explicitly linked the Q3 guidance strength to 'AI accelerating.' The portfolio transition to 'smaller, more complex 3D devices' (HBM, Advanced Packaging) is the primary engine filling the gap left by China. This confirms the thesis that WFE (Wafer Fab Equipment) intensity is increasing for AI-specific workloads.
Other KPIs
Stable sequentially ($5.32B in Q1) but up 22% YoY ($4.38B in 25Q2). Beat the midpoint of prior guidance. The flat sequential performance masks the massive internal rotation out of China and into ROW markets.
Accelerating. Up 2% QoQ ($1.24) and up 37% YoY ($0.92). Profitability growth is outpacing revenue growth significantly on a year-over-year basis, demonstrating strong operating leverage gained over the last 12 months.
Accelerating. The company deployed $1.46B in share buybacks and $327M in dividends. This is aggressive capital return, representing >110% of Net Income and significantly exceeding Free Cash Flow, resulting in a $516M draw on cash balance.
Guidance
Accelerating. Implies +6.7% sequential growth and +20.7% YoY growth. This is a breakout number after three quarters of relative stability around the $5.2-5.3B mark. It signals confidence in the H1 2026 demand environment.
Decelerating. Down from 49.6% in Q2 and 50.4% in Q1. The trend is clearly lower, reverting to the mean after a record run. This reflects the continued normalization of the geographic mix.
Accelerating. Implies +7% sequential growth and +31% YoY growth vs 25Q3 ($1.03). Despite margin compression, volume growth and share buybacks are driving EPS higher.
Key Questions
Gross Margin Floor
Gross margins have compressed for two consecutive quarters (50.4% -> 49.6% -> 49.0% guide). Is 49% the normalized floor given the new geographic mix, or should we model further compression if China revenue share drops below 30%?
Deferred Revenue Drop
Deferred revenue dropped over $500M sequentially to $2.25B. Was this primarily due to revenue recognition on previously restricted China systems, or does it signal a slowdown in new bookings/prepayments from global customers?
China Revenue Normalization
China revenue fell from 43% to 35% this quarter. Do you view this 35% level as sustainable for the remainder of CY2026, or do you expect further declines toward the historical <30% range?
Support Revenue Surge
CSBG revenue jumped 12% QoQ to nearly $2B. Was this driven by specific upgrades (e.g., NAND) or seasonal spares buying? Is this $2B/quarter run-rate sustainable?
Japan Inventory Build
Future revenue from Japan shipments (inventory at cost) rose to $226M from $131M. What is the expected timing for acceptance and revenue recognition of these systems?