MKS INC Q3 FY2024 earnings call

John Lee introduced the new CFO, Ram Mayampurath, who joined in October and is contributing to strategic initiatives. MKS delivered a strong third quarter with key financial metrics at or above guidance ranges. Gross margin strength came from the broad and differentiated product portfolio, including chemistry revenues supporting profitability during muted semiconductor demand. Operating margin profile showed cost discipline and strong cash flows. They made progress in managing leverage, repriced debt, and had over $140 million in free cash flow in Q3. John Lee discussed performance in end markets: semiconductor revenue up 3% sequentially driven by DRAM and logic foundry, electronics and packaging revenue grew 1% driven by chemistry sales with encouraging order activity, specialty industrial market revenue down 1% sequentially. Ram Mayampurath shared initial observations on MKS as a technology-driven secular growth company, focusing on attractive growth areas and maintaining cost discipline. Michelle McCarthy reviewed financial results: revenue $896 million, up 1% sequentially; gross margin 48.2% above guidance high; operating income $195 million with 21.8% operating margin; adjusted EBITDA $232 million; net earnings $116 million; free cash flow $141 million.

In the semiconductor market, third quarter revenue was $378 million, up 3% sequentially and above the high end of the guidance range. In the electronics and packaging market, third quarter revenue was $231 million, an increase of 1% quarter-over-quarter and also above the high end of the expectations. In the specialty industrial market, third quarter revenue was $287 million, a decline of 1% sequentially and just below the guidance midpoint.

Fourth quarter revenue expected to be $910 million plus or minus $40 million. Semiconductor market revenue expected to be $380 million plus or minus $15 million; electronics and packaging market revenue expected to be $240 million plus or minus $10 million; specialty industrial market revenue expected to be $290 million plus or minus $15 million. Fourth quarter gross margin estimated at 47% plus or minus 100 basis points. Operating expenses expected to be $240 million plus or minus $5 million. Adjusted EBITDA estimated at $226 million plus or minus $23 million. Fourth quarter net earnings per diluted share expected to be $1.95 plus or minus $0.32.

No detailed specific risks discussed in depth, but mentioned that actual results may differ materially from forward-looking statements due to various factors including those in the press release and annual report on Form 10-K, and geopolitical and market fluctuations could impact business.

Q: Hi, guys. Thanks for taking the questions. I guess maybe to start on your semiconductors business. Can you maybe add some more color on what you're seeing in terms of customer utilization rates, spare business ordering patterns, or anything else that may help inform an early view into 2025 dynamics?

A: Yes, hi Matt. It's John. Thanks for the question. I think we've continued to see utilization rates pick up. Certainly HBM DRAM utilizations have been great. So we're seeing the same things that many people have talked about. Logic and Foundry at certain customers remains very strong. And then NAND remains muted. So I think, when you think about 2025, I think the views have come down over the year, but it's still generally an up year. And that's not necessarily our opinion. That's what we're seeing from many of our customers and what they're telling us. So I think NAND still remains muted and depends on when that turns. But Foundry logic drams seem to be holding up well and the expectation is that it will hold up well in 2025 as well.

Q: Great. That's helpful. And then would love to hear a little bit more color on your progress in the photonics initiatives. And then also given the given the pushouts experienced by the largest litho player, how does this change your ramp expectations around your new Photonics win and subsequent duration of that margin headwind? Thanks.

A: Right. So, we talked about last quarter a Photonics win. This quarter we talked about another Photonics win with a different customer. So this is in the lithography metrology inspection space as you know. Certainly the lead times for those kinds of subsystems as well as of course the systems are much longer than in the vacuum area for WFE. And so short term I don't think there's really any effect, because the lead times are quite long for our stuff as well as their stuff. So longer term, of course market demands will determine what the long-term needs are for critical lithography tools, metrology tools and inspection tools. So I think our point is there's lots of opportunity there to gain share with the technology we provide. We think we're unique, because we can bring more tools to the toolbox. Integrating different kinds of technologies together that makes us unique. So longer term, we're still very excited about our growth in the world-class optics initiative as well as the market share gain opportunities in this segment of WFE.

Q: Hi, good morning everyone. Looking at the guidance at the midpoint gross margin steps down about 120 basis points sequentially. Is that mix or can you talk through what the swing factors are around that range?

A: Yes, Steve, thanks for the question. You know it is mix. We expect electronics and packaging revenue to be a little higher next quarter, as we just said, and that a lot of that is driven by equipment. So we did see some, you know, some promising orders in Q3, for equipment related to AI. And this is equipment that's servicing all segments of the PCB industry. The HDI, the MLB and then the packaged substrate. And as we've talked about in the past, to make an AI board you need the package substrate. Of course that's the highest density type of most advanced part of the PCB industry. But then you've got to put it on HDI and MOP boards. And so it was quite interesting for us, to see some of our customers start ordering for those applications. And so that equipment revenue will flow through into Q4. And as you know, our equipment gross margin is slightly lower than the chemistry. So that's really part of it. That's really that mix.

Q: Hi, good morning. This is Chris Grenga on for Jim. Thank you for taking the questions. Could you elaborate on what you're seeing from a demand standpoint in some of the primary industrial end markets, in particular automotive. And could you remind us what share of revenue, is exclusively for enabling EV type applications?

A: Thank you. Thanks for the question, Chris. So what we've seen in automotive is certainly more muted and that's not a surprise. It's well documented. Our automotive revenue has been pretty stable though, even in this muted environment. And this is really the GMF business. The kind of brake calipers and decorative type of things that go into cars, both ICE and EV. We haven't broken out EV versus ICE. I think there's a lot of opportunities that arise with EV, such as all the components that go into the battery that require metal coating. So those are opportunities, tailwinds. And then some things go away, such as perhaps as much chrome on the front of the grill. So there's puts and takes. But right now we think that EVs offer, a slightly better opportunity for our GMF business. And that's not even adding to the electronics part. So the electronics part for automotive, it's really still not categorized in the automotive part of our business. It's really part of our electronics business. So automotive units are down worldwide, but our business there seems to be holding up pretty steadily.

Q: Yes, thanks for taking the questions. I know you guys announced kind of a new semiconductor factory you're building in Malaysia. I'm wondering if you could talk about one, maybe the CapEx kind of requirements there over the next two quarters as we think about excess free cash flow for debt pay down. And then also how do we think about the mix of production? I think a lot of your semi related production capacities located in China.

A: Yes, Joe. That's a great question. So we announced the groundbreaking in Malaysia for another factory target towards our semiconductor and maybe even photonics types of products. And that's expansion for capacity that we think we will need. It's certainly putting less risk in our footprint, our manufacturing footprint and that's certainly something our customers want to see. So those are the two reasons why we're doing that. In terms of CapEx, I think the way to think about it, Joe, is we've always been in that 3% to 5% level in terms of CapEx spend. So very, very low. Maybe the next year or two it might edge up towards the five because we've got a couple of factories being built for good reasons. But this past year I think we'll be in that 3% range and then it could oscillate between 3 to 5. But still quite a low CapEx intensity model that we have.

Q: Hi there. Thank you for letting me ask a question and look forward to working with you, Ram. I think I heard in your preamble that you talked about a back end win for HBM. Can you give us any more color on what that is? How big it can be? And if you expect any other similar wins?

A: Yes, thanks, Melissa. The HBM win we talked about was lasers. And so lasers can be used, are used to do cutting of chips. That's not news. But HBM type of die, you're putting dyes on top of each other. And so precision and the fineness of the edges, and all that are giving laser makers us opportunities, because the more precise you can make those cuts, the better yield you're going to have on those kinds of chips. So. And we called out one particular customer and it's pretty significant, but MKS is pretty big, so. But for the laser group, it's significant and it's not just one customer, so it's multiple customers doing this.