All right. Good morning, and welcome to JP Morgan's 54th Annual Technology and Media and Communications Conference. My name is Harlan Sur. I'm the Semiconductor and Semiconductor Capital Equipment Analyst for the firm. Also with me today is our Mid-Cap Semiconductor analyst, Mayur Ramdhani. We're very pleased to have the team from MKS here with us today. John Lee, President and Chief Executive Officer, Ram Mayampurath, Chief Financial Officer. John's going to kick us off with a brief overview of MKS. It's been a very busy earnings season, so I've also asked the team to provide us with a summary of the March quarter, June quarter outlook, and then we'll go ahead and kick off the Q&A. Gentlemen, thank you for joining us this morning. John, let me go ahead and turn it over to you.
Okay. Thanks, Harlan. Pleasure to be here. You know, when you think about MKS, we are really focused on advanced electronics, enabling the building of advanced electronics, so providing the foundational technologies to do that. There's two parts to that. One is the semiconductor chip making, and the other is the packaging of those chips together. In semiconductor equipment, we address over 85% of every piece of equipment in every fab in the world, so no one else can actually have that scope. Then in packaging, you know, the PCB, advanced PCB manufacturing to put these chips together, we address over 70% of the steps, the chemistry, the chemistry equipment, the laser drilling equipment, and no one else has that kind of scope.
This is how we have transformed over the last 10 years. We were only originally a surround the chamber, meaning the vacuum chamber kind of company. This is only Semi and only part of Semi, the semiconductor equipment part of it that was vacuum chambers. The customers there would be Applied Materials and Lam Research and Tokyo Electron. With the acquisition of Newport Corporation in 2016, that brought in optics and photonics and lasers and motion. That allowed us to address the lithography, metrology, and inspection part of the market, and those customers, for instance, are ASML and KLA. Those five customers are the big five equipment OEMs for Semi, and they comprise over 85% of the market share, so that's how we get that number.
We bought a laser company, ESI, that introduced us into the packaging business, the PCB manufacturing business, which got a lot more interesting over time. One of the things we saw that was happening in PCB packaging was it was going through that same kind of history that semi did, meaning more complexity, more layers, smaller features. We've seen that movie before. We thought that this was going to be a very interesting market.
That MKS has the right, you know, capabilities to take advantage and grow. That's why we did the Atotech acquisition in 2022. That was the biggest acquisition in our history. I think we were early. A lot of people didn't see that packaging was going to be that important. We did see that, and then we went into kind of a two-year downturn for both Semi and packaging, so it was hard to see the numbers there. Obviously in the last year and a half, with the advent of AI, you can now see the growth in packaging as well as the growth in Semi.
That is how we've changed from a 2,000 person company, $700 million a year kind of before 2016 to now a $4 billion company pushing $5 billion this year, if you read all the analysts' expectations, and 10,000 people. That's the transformation of MKS over the last 10 years.
Perfect. Why don't we start off with your semiconductor franchise? It's about 45% of your total revenues. Your largest customers have pointed to roughly $140 billion in wafer equipment spending this year. That's up 25%-30%, with strength broadly across all segments, as well as in some of your key areas like NAND. There's a big upgrade cycle happening in NAND as well. Historically, in prior cycles, 2016, 2020, your semiconductor business outperformed WFE by 2.5x, 3x respectively. We're not asking you to endorse these specific figures, would be helpful if you could comment on the similarities, right, and key differences you're seeing this cycle versus the last few cycles.
Yeah, great question. I think, maybe before I get to that, longer term, we've been able to outperform WFE CAGR by 200 basis points throughout through the cycle. Now, during the upturn in a cycle, we outperform because we have to make our stuff first before our customers can ship their stuff to the chip fabs, that's typical. The numbers you quoted, I think some differences this time. Number one, NAND is not as big a part of this cycle.
As of now, than it was in those, other two cycles. We also didn't have really much of any lithography, metrology, and inspection, and the amplitude of cycle swings in lithography, metrology, inspection are a little less than deposition and etch, so keep that in mind. Of course, China. We used to have much more revenue in two Chinese equipment OEMs. That has mostly gone out of our numbers because of the geopolitics of the semi industry. Those Chinese equipment OEMs used to be a very, you know, pretty small part of WFE. Now they're not as small a part, so the denominator got a little bigger, right? I would think about those three things. Keep those three things in mind as we think about how we will outperform WFE this year.
Next year is shaping up again to be a very strong spending year as well. Our preliminary estimates put WFE spending at about $165 billion, so up another sort of 20%. You know, if you're doing, again, the initial stages of the ramp, as you articulated, you're typically shipping well above end demand. Based on your discussions with your largest customers, how much visibility do you have into next year's demand profile, right? We were, for example, talking with one of the larger semi cap equipment guys last week, one of your big customers. They're talking about customers giving them sort of eight-plus quarters of worth of demand visibility. I'm wondering if that's translating into extended visibility for the MKS team.
Yeah. Certainly, there's always a little more extended visibility during a ramp, and that's normal. We only got a quarter out. Obviously, you saw our Q2 guidance was, you know, up versus Q1. I would say this, we're in very close constant communication with all the big customers in semi. We have to be, right? They have to give us that visibility so that we can prepare our supply chain and our factories to meet that demand. I would agree that right now, as an industry, we feel that this cycle looks like it has much more legs.
could extend much longer because the fundamental driver is AI. As of right now, that is certainly something that's continuing to grow all the way from the CSPs, all the way down to people providing the boards, and the systems, and therefore the chips and the packaging. Right now we are preparing for the, you know, potential that, you know, you hit $165 billion-$180 billion WFE in 2027 and beyond that.
Perfect. You articulated a very broad portfolio, vacuum, RF power, microwave power for NAND applications, plasma reactive gas offerings for advanced logic and DRAM, photonics and optical solutions, right? For one of the areas that we really like, which is process control and lithography. I think last time you provided us an update, you were about 60% foundry/logic, 40% memory. Looking ahead, if memory WFE sees a strong recovery in the coming years, do you expect your mix to revert back towards more kind of historical levels or kind of stay more biased towards foundry and logic?
That's a good question. I think it will depend. You know, we do have a little more weight towards NAND because of our market share in NAND equipment. In general, we've been able to outperform because we're addressing 85% of WFE.
We're addressing every part of WFE, foundry, logic, DRAM and NAND. We have been, you know, if you look at our growth rates year-over-year on a quarter basis, we're already outperforming WFE without much NAND. I think, you know, that's our expectation. I think if you look at, you know, the outgrowth, we're really exposed to a lot more steps. I think one of the things that is true this time is there's a lot more depth etch.
That's right.
It's an inflection in the industry. A lot more chips going vertical, and that's really a little less litho. You still need a lot of litho, but a lot more depth etch processes. We have been traditionally strongest in the depth etch part of the semi market.
On NAND in particular, like I said, vacuum products, strong market leadership, RF power, you tend to benefit as customers upgrade from layer counts, right? We've gone from 100 layer. We're seeing the transition to 200 layers. Some of your customers are already talking about the migration to 300+ layer sort of NAND architectures. We are starting to see that inflection in NAND wafer equipment spending. Some of your large customers have suggested roughly sort of $40 billion of NAND upgrade cycle in front of the industry, which may now be getting sort of pulled forward, right? Given your strong NAND heritage, how should we think about that opportunity set in sort of NAND going forward?
That's a great question. When you're upgrading your equipment in order to address higher layer counts or even more precise holes, you can go from TLC to QLC type of NAND. One of the biggest critical subsystems that must be upgraded is RF power, which is a product line that we have that gives us a little bit more, you know, % of the BOM. Upgrades, we benefit from. You're right, one of our customers said this looks like it's pulling in. $40 billion, of course, is their SAM.
That's right.
Is obviously not that. The upgrades are a great sign that the industry has to meet this NAND need. I think one of the things that's important, you may get to later is that the need for NAND has increased, driven by AI, and that's a relatively new thing that's happening. Which has also now driven a lot of the, our customers' customers to think about capacity expansion for NAND. You saw one big customer say they are going to build a new fab dedicated to NAND in that mid-2028 timeframe.
Right.
If that's manufacturing in 2028, tools have to be in, you know, six months before that. That is a great sign for Greenfield NAND in addition to the upgrades, as you said, that are pulling in.
On the sticking with the semiconductor side, we hear many of your customers now starting to architect what they call these integrated material system solution, IMS, right? These are platforms that integrate like seven different process steps into a single platform, right? Surface treatment, deposition, etch, clean, in-line metrology without breaking vacuum, right? It seems like these kind of platforms are potentially very attractive for the MKS team because it integrates like all of your technologies into a single platform, right? Their customers, what do they benefit from? They get better performance, better yield, better defectivity, better throughput, lower footprint. Has this IMS evolution improved MKS' sort of dollar content capture per platform?
Yeah, I think in general that's true, this idea that you have to integrate more things together.
Right
To have better yield, right? The performance that you need. In general, that requires more process control, more measurement, more precise delivery. In general, that goes to the strengths that we have in deposition etch metrology inspection. In general, we love that. We love that increasing complexity. I would also point out that in PCB manufacturing.
we're seeing the same trend. One of the pieces of equipment that we supply, we're the market share leader in PCB manufacturing equipment. Our equipment there is 100 meters long. It's a continuous inline process. PC boards run through it, and it's always kept under liquid. It's the kind of same idea as under vacuum.
Yes.
You don't expose it to air and things, different things happen. That's one of the reasons why we've been successful. We can actually allow all these wet processing steps on a PCB over 100 m so that in beginning you have holes drilled in PCBs, in the end, you have copper filling and lines and spaces on these PCBs in a very high yielding, small feature kind of event. It's exactly the same thing that Harlan, you mentioned.
Right
In semi.
You talked about your entry traction in process control and lithography. For those of you that don't know process control, process control is measurement, which we call metrology and an inspection. Everybody knows lithography. Revenues for the team growing at roughly a 20% CAGR, reaching about $300 million revenue run rate for MKS. Presumably, this segment of the market has been, you know, longer lead times, probably less susceptibility to inventory whip saws. You know, longer term, given the focus on leading edge applications, rising process control intensity. It also appears to have some very strong tailwinds for the team. Do you see this business sort of growing in line with the overall semiconductor franchise from a mid to longer term perspective?
Yeah, absolutely. From a mid to longer timeframe perspective, we certainly see that. In fact, we, five years ago, took action because our market share in lithography metrology inspection was not as high as our traditional market share in deposition and etch, and there was a lot of opportunity there that was missing. This is because, you know, the previous company that we bought felt like, you know, they didn't want to be too levered to semi. We're already in semi. We love semi. We know that the key customers in lithography metrology inspection have very high market share. If you're designed in, you'll be designed in for a long time.
Right.
To your point, we were $150 million 5 years ago, going to $300 million. It's a little bit of a flat area for the last couple of years, but we're seeing the same kind of trends now as they have also announced that their revenue is going up. We're seeing those bookings correlate to that.
Yeah. Obviously we follow our European team follows ASML, the leader in lithography. We follow here in the U.S., KLA, which almost has a monopoly-like position in metrology and process control and the innovation that's coming out of these companies. I think KLA said, like, they were launching like 13 new platforms and products this year as well as some of their competitors. A lot of innovation happening in this space. Probably a very good opportunity for the MKS team as well.
It is. You know, as you know, we have the broadest portfolio of serving vacuum equipment as well as now lithography metrology inspection. Some examples of that would be optics.
Optical subsystems, lasers and motion. Motion, precision motion is also very important, more and more important, in lithography metrology and inspection. You also remember that, you know, the lithography machines now have vacuum in them, which is kind of interesting.
Right.
We love providing.
Right
For vacuum. That's another opportunity as well. Having that broad portfolio has been part of our strategy because we just don't know what inflections will occur. No one knows.
Right.
I've been in semi for 65 years. Well, not that old yet. A long time. I can't predict what kind of inflections will happen because there's so much innovation going on in our industry. When those inflections happen, new critical subsystems or different critical subsystems might be more important. If you have that in your portfolio, you can actually go invest and take advantage of those growth opportunities. The basic example was when NAND chips went vertical from flat horizontal NAND flash to vertical.
Yeah.
That required a lot more RF power.
Right.
We made an investment. It was three years before we saw $0.05, right? You got to hire engineers, develop it, work with a customer. They have to make a tool. It has to go to a chip fab three to five years. That's the kind of horizon, investment horizon we have as a company.
On the, on your internal manufacturing, you're set to open your new super center facility in Malaysia, I think it's this June. With production facility closer to some of your largest customers, which is obviously very beneficial. Malaysia, I would assume is a lower cost, manufacturing region. Could you just share with us some of the color on what the capacity ramp's gonna look like and any expected margin benefits?
Yeah, I'll let Ram take that.
Yeah, I can take that. Given all the discussions we've had on demand so far, we are very pleased with the timing of the Malaysia plant. We took advantage of the down cycle and set up the plant over the last couple of years. It's turning out to be one of our largest facilities. It's in about 17 acre plot with about 500,000 square feet of built capacity so far with opportunities to expand further, if you may. The proximity to customers, like you mentioned, is very attractive and the suppliers as well. We hope to take advantage of the developing ecosystem there to make that a super center and do more than semiconductor there. Opening is in June this year.
From a cost point of view, the early part will be an investment phase.
Those costs are embedded in our guidance.
Yes
In the early part of the, this remainder of this year, if you may. In the back end, once that plant starts fully running, we certainly expect to have benefit to our gross margin. You probably know we have an Investor Day we have scheduled for December 14 this year, and we'll give you a lot more on the long-term margin implications in that.
Perfect. Looking forward to that. Before we move on to some of the next sections, does anybody in the audience have any questions? I would just request if you do have a question, just wait for the microphone. Any questions? No? Okay, let's let's turn it over to the team's Electronics & Packaging franchise. I'll let Mayur take over.
Yeah, before you start, Mayur, I just wanna point out on Malaysia, we do not need Malaysia to meet $140 billion WFE.
Okay.
That's just important for that.
Let's move over to the E&P business, which is about 30% of sales. When we look at the CapEx trends of the top PCB companies, aggregate spending appears to be up roughly 30%-40% year-over-year in 2026. You have a strong portfolio across PCB drilling, electronics planning equipment, and electronics chemistries. Could you discuss what you're seeing this CapEx cycle, how sustainable you think it is, and how you're positioned to capture this upturn?
For our E&P, Electronics & Packaging business, there's two parts to the CapEx story. One part is our flexible laser drilling, and that's really driven more by smartphones. We've had a good year this year from what we've publicly announced. You can see that some of the high-end smartphones are pretty well. That's consistent with that. Our market share there is number one by a good margin. The second part about CapEx in E&P is chemistry equipment.
This is the equipment I mentioned earlier that's a football field long. It's necessary and required to build some of the most challenging pieces of PCBs that are needed for AI. You're right. There has been a lot of investment from our customers. They are showing confidence, obviously, in the future and in expanding capacity. We have now probably talked about seven quarters of strong bookings in our equipment business. It is a cyclical business. In the old days, it probably was up a year and down two, and up a year, down two.
For the last seven quarters, the bookings have been very strong. We've talked about that. The last quarter's earnings call, we also mentioned that the bookings are strong. I don't know, Ram Mayampurath, if you have anything to add to that.
I think you covered it. I think what we like about the business, it's in the quarter it happens, the equipment sale happens, it's a little dilutive to our gross margin. It's a mixed impact because the equipment margins are slightly lower than our corporate average. It's a good problem to have because the chemistry that follows, the attach rate for the chemistry is very high, and the chemistry that follows the equipment sales is at a very high margin, well above our corporate average. It's just promises future good business once the equipments are out there.
Great. Within the chemistry business, which is about 2/3 of total E&P revenue and is a more stable business, you noted that AI currently represents about 10% of the business and exited at around 15%, and you expect that to remain in that kind of range in 2026. This kind of suggests that AI-related chemistry business could nearly double year-over-year this year. Given the continued increase in complexity of the AI server substrates, this will continue to drive a positive mix shift. What kind of growth rate should we think about for the business going forward?
Yeah. In 2024, the chemistry revenue that was attributed to AI was about 5%. 2025, it was 10% on average, as you mentioned. That was a doubling. We said that in 2025, it was 10% on average, but quarter on quarter on quarter on quarter it was increasing, right? Exiting 2025, it was lower than 15%, but on average 10%. We have said that we expect in 2026 that chemistry revenue that's AI is to be 15% on average.
Again, probably quarter, quarter, increasing. Now in terms of long-term growth rates, AI is the fastest part of our chemistry growth rate. You know, we had talked about in the past the PCB manufacturing industry market divided into thirds. A third is multilayer boards, kind of older technology. A third, HDI, high density interconnect boards, think smartphones. A third, packaged substrates, think servers, advanced PCs, and obviously AI servers. The growth rates were kind of GDP plus for MLB, mid-single digit for HDI.
High single-digit for packaged substrates. Right now everything is a plus on top of that, because AI turns out that it's not just driving the high-end packaged substrates. It's also driving HDI boards, it's also driving MLB boards. We've talked about the number of layers of boards. MLB boards used to be, there only needed to be four or five layers for dishwashers and washing machines, but for AI, they're 20, 25 layers. For HDI, there might be 10 or 15 layers for smartphones, but now they're pushing 20-25. For packaged substrates, 10 layers in the past for PCs, and now it's 15-20.
When you combine all those layers, the number of layers to enable AI, putting all those chips together so they can communicate with each other and to the outside world, has gone from kind of like 30 to 40 to 60.
The industry's working on 80 to 100 today, right? Beyond. The size of the board is increasing. We, as in terms of our consumable business, is a square inch play. Each layer is made 1 at a time. If they're larger boards, that's great, more square inches. If more layers, more square inches.
On top of that, the features are getting smaller. It's harder to do. The chemistry's more expensive. Fewer people can deliver that kind of technology. Three different things driving our consumable business in the E&P business.
You know, there are concerns about memory-related headwinds in consumer end markets. You noted no material impacts to date and suggested AI-driven growth could help offset potential consumer weakness in the back half of the year. Could you walk us through your chemistry segment's current end market exposure? For example, AI data center versus consumer versus industrial, automotive, and smartphones, and how you expect that mix to evolve over the next year.
Yeah, I would say this. you know, we have market share leadership in PCB manufacturing. We're number one. That means we're exposed to everything. Therefore, you know, if the number of units of smartphones goes down, we will see some of that. As I've said in the past, we're exposed to the higher end part of the smartphone market.
AI is growing so fast that if there was a decrement in the number of units of the lower-end smartphones because of memory pricing, I think AI will be more than enough to make up for that. We are exposed to everything, there's a little bit of headwind there that we should always keep in mind, certainly if the number of units of lower-end smartphones goes down. Now, that is when supply is not meeting demand as well. That need will eventually catch up in the future as well.
Let's turn to your specialty industrial business. It's a well-diversified business spanning defense, healthcare, automotive, and broad industrial markets, strong free cash flow generation. Obviously, we cover 20-25 of the largest broad-based semiconductor companies in the world, and we've seen those companies go through the cyclical inflection starting kind of second half of last year, improving as we move into this year, and we see a synchronized sort of cyclical recovery across all of the segments that I just mentioned. For you guys, revenue growth inflected positively in the December quarter with momentum continuing to the June quarter. How sustainable do you think this recovery is, and what are some of the key drivers supporting it for the MKS team?
Yeah, I can take that. You're right, Harlan Sur. It is, it's a bundle of several businesses. Like you said, we have defense, we have research, we have life health sciences, there's general industrial lasers, auto, which is mostly GMF business, what we call general metal finishing business. First of all, let me say that it's a very profitable segment.
High margins. Cash flow is very good. The segment benefits from the R&D work done in our core segments, which is in our semi and E&P. Within these businesses, from a revenue point, we seem to have stabilized around $290 million-$300 million a quarter. We think that the trough is behind us. It's come out of its lowest point and seems to have stabilized, which is a good thing. Within the business, the auto is the biggest segment. That's a drag. As you know, auto has been weak for several quarters in a row.
Yes.
On the other side, the datacom business and the defense business in particular are the ones that are growing within our specialty industrial. Puts and takes, it's hanging around $290 million-$300 million a quarter. We're happy to see it stabilize now. Anything you wanna add, John, or?
Yeah, the datacom, by the way, is a high-growth area because we make a certain product that allows people to build test stations that test data communication speed, right? As you can imagine, data communications is a big part of how AI servers are talking to each other as well as AI data centers talking to data centers.
One of the potential new facets to that business is the emergence of these quantum computing companies. There's several different architectures out there, obviously, as many of you know, that are attacking this quantum computing dynamic. We'll only visit your quantum customers' manufacturing facilities. We see your tools across their footprint, right? From things like the vibration isolation tables, to the laser and optical components, right, that control the physical qubits. Could you quantify your current revenue exposure, revenue growth rate, to the quantum end markets and highlight some of the key products you supply into this segment of the industry?
Yeah, sure. You know, I think it's another example of new things happen, new markets happen, new inflections happen. Quantum being very interesting area, obviously, that has a lot of potential applications for not just communications.
Computation and sensors, right? I'm glad you guys, one of your folks walked through a lot of those factories. You would see a lot of those products.
Yes.
A lot of these are, I should say, laser-based, or surround the work piece kind of products. Vibration isolation, keeping things still, optomechanics moving, you know, different parts of the laser train, and then the lasers, et cetera. Quantifying that amount, I would still say it's in the low, you know, double digit, maybe was single digit just a few quarters ago.
kind of going to double-digit now. That's the range now. We have seen it grow, and so from a low base today, and we'll see how that progresses over time.
Oh, perfect.
Just wanna touch on your capital structure. You've been actively repaying debt and currently at around, you know, 3.5x net leverage. You've outlined a near-term goal of reducing that leverage to somewhere in the range of 2-2.5x which you could potentially reach by year-end or in early 2027 if de-leveraging continues alongside the sustained growth fundamentals. How should we think about your priorities for capital returns once you achieve that target range?
So you're right. We've made a lot of progress in managing our debt. That's a combination of two things. One is our free cash flow has been very strong, and two is we have prioritized debt repayment as our number two priority, number one being investing in growth. The capital allocation strategy so far has been very simple: invest in supporting organic growth, manage your debt. That has stayed consistent for several quarters now, and we've made great progress. With the top line growth that we expect to see, we can accelerate that debt prepayment. For the remainder of the year, that will continue to be our capital allocation strategy till the debt levels get down to where we need it to be. Beyond that, it just gives us more flexibility.
We can go to a much more balanced capital allocation strategy, which will include, after investing in ourself and managing debt, inorganic growth opportunities and also returning cash back to shareholders opportunistically through buyback or dividend. We'll share more about that again in our capital market day. For now, our focus continues to be paying down debt and getting leverage down to where we need it to be. The team has executed well on your surround strategy, right, across semiconductor, PCB manufacturing processes. What areas do you see as sort of most complementary to the portfolio going forward, and how are you thinking about M&A priorities, criteria, portfolio adds, key technology adds, and so on?
I would say, you know, first off, there are really no missing parts to our portfolio. We have the most, the broadest portfolio in semiconductor vacuum, lithography, metrology, inspection, and then of course PCB manufacturing. However, having said that, there's always something out there that could make sense. You know, we did Photon Control, which is temperature sensing using fiber optics inside etch chambers, something we didn't do. I would say that, going forward, we'll be very disciplined about, you know, M&A. We were disciplined about M&A in the past and walking away from certain big deals. We will continue to do that.
I think, though, that maybe what's different, a little bit different, this time around versus maybe the last 20 years is, in terms of M&A, we actually now know that we can actually perhaps do it faster.
Yeah
As fast and a lot cheaper organically. We made some big bets in the past. They have turned out mostly to be great. Investing in ourselves, to Ram's point, could be a better path in some cases than just straight out M&A, but we'll keep both options open.
Yeah. Great. Well, we're just about out of time. John, Ram, thank you for participating in our conference today. Look forward to monitoring the execution of the team as the year unfolds. Thank you very much.
Yes. Thank you, Harlan Sur.
Thank you.