MKS Inc. (MKSI) Earnings

Management highlights

### Overall Business Momentum & Strategic Positioning - MKS delivered Q2 revenue and profitability metrics at the high end or above prior guidance ranges, with accelerating year-over-year growth through the first half of 2026, supported by broad-based intensifying AI-driven investment across semiconductor and advanced electronics applications. - MKS holds a foundational enabling position across the advanced electronics ecosystem, with product offerings spanning vacuum/plasma/power for etch/deposition, optical/photonic solutions for lithography/metrology/inspection, and laser systems/proprietary chemistries/equipment for advanced PCBs, positioning the company to capitalize on long-term growth from new design wins. ### Capacity Expansion & Scaling - The new Malaysia Supercenter facility opened in Q2 2026, with first revenue shipments completed; it is configured to support up to $200-$250 billion of worldwide wafer fabrication equipment (WFE) demand, primarily to meet 2027 and future demand, rather than 2026 requirements. - MKS is doubling capacity at its Guangzhou chemistry equipment factory to meet record high demand, with the expanded facility expected to come online in Q3 2027; the existing Germany facility has been reactivated to meet near-term demand gaps before the Guangzhou expansion is completed. - MKS is increasing near-term working capital investments and making long-term capacity plans to meet rapidly accelerating customer demand, with the goal of not being a supply constraint for customers. ### Profitability & Balance Sheet - Q2 non-GAAP gross margin was 47.6%, including 100 basis points of discrete benefits primarily from tariff and duty refunds; excluding these discrete items, gross margin remained healthy despite unfavorable product mix from high growth of lower-margin chemistry equipment and upfront ramp investments for new capacity. - Q2 operating income was $320 million (25.6% operating margin), up 480 basis points year-over-year; adjusted EBITDA was $358 million (28.6% margin), both above the high end of prior guidance. - MKS continues to prioritize organic growth investment first, followed by balance sheet deleveraging; it made a $100 million term loan prepayment in Q2, reducing leverage to 3x (trailing 12-month adjusted EBITDA), down 1 full turn from Q2 2025, and remains on track to reach its target leverage ratio.

Guidance

- **Total Q3 2026 revenue guidance**: $1.35 billion, plus or minus $40 million, representing continued sequential growth and further acceleration of year-over-year growth. - **Segment Q3 2026 revenue guidance**: Semiconductor revenue expected to be $630 million plus or minus $15 million (representing over 50% year-over-year growth); Electronics and packaging revenue expected to be $385 million plus or minus $15 million (over 30% year-over-year growth, with AI-related investment partially offset by normal sequential seasonality in the flex PCB market); Specialty industrial revenue expected to be $335 million plus or minus $10 million, with continued strength led by data comm and defense. - **Profitability guidance**: Q3 gross margin expected to be 47% plus or minus 100 basis points; operating expenses expected to be $280 million plus or minus $5 million, growing at a much slower rate than revenue; Q3 operating income expected to be $355 million (26.3% operating margin); adjusted EBITDA expected to be $395 million plus or minus $28 million; diluted net earnings per share expected to be $3.58 plus or minus 31 cents. - **Full year 2026 guidance updates**: Full-year capital expenditure is expected to remain in the range of 4% to 5% of total annual revenue; the full-year effective tax rate is expected to come in at the lower end of the prior 18% to 20% range. - **Long-term growth positioning**: MKS expects continued outperformance of overall WFE growth through at least the first half of the current industry investment ramp, with visibility into demand extending through 2027 for electronics and packaging, driven by long lead-time chemistry equipment orders.

Segment performance

Total company Q2 2026 revenue was $1.25 billion, up 16% sequentially and 28% year-over-year. - **Semiconductor segment**: Q2 revenue was $554 million, representing 44.3% of total company revenue. It grew 19% sequentially and 28% year-over-year, with broad strength across plasma, reactive gases, vacuum products, power solutions, optics, and photonics, driven by demand for DRAM, logic, and increased NAND upgrade activity. - **Electronics and packaging segment**: Q2 revenue was $381 million, representing 30.5% of total company revenue. It grew 19% sequentially and 44% year-over-year, with elevated demand across chemistry solutions, chemistry equipment, and flexible PCB drilling, and particularly strong inflection in chemistry equipment demand driven by AI-related applications. Excluding FX and palladium pass-through impacts, chemistry sales grew 21% year-over-year. - **Specialty industrial segment**: Q2 revenue was $313 million, representing 25.0% of total company revenue. It grew 8% sequentially and 14% year-over-year, with growth led by strong demand from data comm and defense end markets, while automotive and other industrial segments remained steady.

Risks & headwinds

- Upfront investments in capacity ramp and expansion create near-term headwinds for gross margin, with startup costs for new facilities currently reducing gross margin by 50 to 80 basis points per quarter, an impact that will persist for at least the next couple of quarters before abating as facilities reach full production. - Current product mix is unfavorable for gross margin, as fast-growing lower-margin chemistry equipment sales currently weigh on overall company margins, even though these sales position MKS for higher-margin chemistry attach sales in future years. - While MKS has secured extended demand visibility from customers, customer investment plans could change, creating uncertainty around longer-term growth outlooks beyond the next quarter.

Analyst Q&A

• Q: What is the current timeline for NAND upgrade activity versus upcoming greenfield NAND projects, and what is MKS' opportunity in each? /

  A: MKS is seeing ongoing NAND upgrade activity in 2026, which will continue through the end of the decade before new greenfield NAND fabs come online. Greenfield projects are currently scheduled to start production in late 2027 or early 2028, and will be more beneficial for MKS because the company can supply its full semiconductor portfolio beyond just the large RF power content that is the primary MKS contribution in upgrades.

• Q: What is the updated capacity outlook from the new Malaysia facility, and what end markets are driving strength in the specialty industrial segment? /

  A: The Malaysia facility began ramping in Q2, and after reconfiguration, it will support up to $200-$250 billion of global WFE, up from the prior $180-$200 billion target, primarily to meet 2027+ demand. Strength in specialty industrial is driven by AI-related demand for data communications testing equipment for AI data centers, and sustained growth in the defense segment; automotive and general industrial are steady but not growing at the same pace as these two end markets.

• Q: What is the current AI contribution to chemistry revenue, how will chemistry growth evolve as new equipment ramps, and what is MKS' deleveraging prioritization? /

  A: AI now represents 15-20% of total chemistry revenue, up from 10% last year and 5% in 2024. Chemistry will grow steadily over the next 2-3 years as new equipment ships and ramps to volume production; the 20-40% chemistry attach rate per dollar of equipment sales still holds, but higher ASPs for new AI-focused equipment shift the range to the lower end of this band. Organic growth investment is MKS' first priority, followed by deleveraging; $100 million in quarterly prepayments will continue, with additional prepayments expected in the second half of 2026.

• Q: What explains the Q3 semiconductor revenue acceleration to over 50% year-over-year, and how will MKS' growth compare to overall WFE growth in 2027? /

  A: Acceleration is broad-based across both deep etch and lithography/metrology/inspection, though deep etch is growing much faster than the latter segment, pulling the overall average above 50% year-over-year. MKS is planning for continued accelerating demand and outperformance of overall WFE growth in 2027, which is typical during the first half of an industry investment ramp.

• Q: How is MKS managing near-term chemistry equipment capacity before the Guangzhou expansion is complete, and what drove strong services revenue growth this quarter? /

  A: MKS is not capacity constrained, because it reactivated its underutilized Germany facility to meet near-term demand, and has squeezed incremental capacity out of the existing Guangzhou factory, allowing it to fulfill all current customer orders. Strong services growth is driven by 100% utilization rates at customer semiconductor fabs, which increases the need for service and replacement parts, and this elevated demand is expected to continue.