MKS INC Q1 FY2025 earnings call

• MKS delivered excellent Q1 results with revenue of $936 million and gross margins of 47.4% at the high end of guidance. - Semiconductor market saw revenue at high end of guidance, driven by NAND demand and RF power solutions. Electronics and Packaging revenue was at high end of guidance with growth in flexible PCB drilling and chemistry equipment. Specialty Industrial revenue was above midpoint but impacted by soft industrial and automotive markets. - Strong gross margin of 47.4% despite higher equipment mix, operating expenses near midpoint, operating income $189 million with margin 20.2%, adjusted EBITDA $236 million at high end.

Semiconductor: Q1 revenue was $413 million, up 3% sequentially and 18% year-over-year, at the high end of guidance. Electronics and Packaging: Revenue was $253 million, at the high end of guidance, up 22% year-over-year. Specialty Industrial: Revenue was $270 million, a decline of 4% sequentially, down 13% year-over-year but above guidance midpoint.

• Q2 revenue expected to be $925 million plus or minus $40 million. - Semiconductor revenue expected $415 million plus or minus $15 million, Electronics and Packaging $240 million plus or minus $10 million, Specialty Industrial $270 million plus or minus $15 million. - Gross margin guided at 46.5% plus or minus 100 basis points. - Operating expenses expected $252 million plus or minus $5 million, adjusted EBITDA $216 million plus or minus $23 million. - Full year tax rate expected 18% to 20%, Q2 net earnings per diluted share $1.56 plus or minus $0.28.

• Uncertainty from new and changing trade policies injecting uncertainty into the industry. - Near-term impact on margins as optimizing supply chain and manufacturing activities in response to geopolitical environment. - Softness in general industrial and automotive markets impacting Specialty Industrial segment.

Q: John, you said system upgrades for memory tools have increased. Does it feel like that trend has some momentum and can you talk about size and timing?

A: John Lee said inventory burn in NAND market has normalized, upgrades for NAND are continuing but can vary depending on customer plans. Upgrades relate to install base and RF power, hard to gauge exact size.

Q: For chemistry equipment solutions, can you frame up two-half visibility or second-half visibility?

A: John Lee said chemistry equipment bookings and revenue have increased for three quarters, tied to HDI and MLB for AI, bookings from three quarters ago are now going in, with high attach rate to chemistry.

Q: On tariffs, how are you mitigating impact and any change to customer order patterns?

A: Ram Mayampurath said closely engaged with customers and suppliers, using global manufacturing and multi-site capabilities. So far no impact on top line from tariffs. John Lee clarified they incorporated effect of tariffs on gross margin up to 100 basis points but didn't say whole amount.

Q: What drove pull forward on flex drilling side? Any anticipation of tariffs?

A: John Lee said it was just real underlying demand, customers needed it earlier than typical cycle, not tariff-related.

Q: Specific pain points with tariffs, which product areas impacted?

A: John Lee said chemistry business has minimal impact due to localization, vacuum side has some factories shipping worldwide causing impact, working on mitigation.

Q: Thoughts on semi-market recovery to peak?

A: John Lee said MKS addresses 85% of WFE, other sub-segments like logic, DRAM, packaging contribute to growth, natural growth of WFE market helps, NAND won't return to peak but other areas can grow.

Q: Traction on photonic side of business?

A: John Lee said design wins in semi photonic side remain engaged, working on new things, lead times longer, some complex subsystems going into production on advanced tools.

Q: Ability to continue paying down debt?

A: Ram Mayampurath said similar pattern as last year, will do prepayment in Q2, capital allocation strategy remains repayment of debt, liquidity strong, evaluation of stock buyback accretive.

Q: Specialty industrial business, automotive trend?

A: John Lee said automotive production forecast down, very muted, tariff environment adds uncertainty, market driven macro effect, uncertain if will get worse.

Q: Chemistries side growth rate beyond seasonality?

A: John Lee said PCB industry chemistry growth long-term model is GDP plus 300 basis points, broken into segments, AI adding incremental growth.

Q: Second half customers' four-year outlook and MKSI benefit?

A: John Lee said semi customers relatively positive for second half, def-etch customers more positive, packaging equipment orders tied to AI, customers bullish as they invest for AI.

Q: Free cash flow and working capital in Q1?

A: Ram Mayampurath said improvements in working capital from last year helped, CapEx timing, cash flow strong, normal year considering top line, tax rate improvement helpful.

Q: Opportunistic stock buyback given stock volatility?

A: Ram Mayampurath said evaluated, when accretive take into consideration, still have authorization left, debt repayment primary focus but internal evaluation done.