MKS Instruments at JPMorgan Conference: Strategic Moves Amid Tariff Challenges

On Wednesday, 14 May 2025, MKS Instruments (NASDAQ:MKSI) participated in the 53rd Annual JPMorgan Global Technology, Media and Communications Conference. The company highlighted its strong Q1 performance, exceeding guidance in revenue, gross margin, and EPS. However, it also addressed challenges posed by tariffs impacting its gross margins. MKS’s strategic focus on semiconductor advancements and debt reduction underscores its commitment to long-term growth.

Key Takeaways

• MKS Instruments exceeded Q1 revenue, gross margin, and EPS guidance.
• Tariffs are expected to reduce gross margins by 100 basis points, with mitigation strategies in place.
• The company is focused on semiconductor advancements, particularly in NAND technology and electronics packaging.
• MKS paid down $426 million in debt in 2024, aiming for a net leverage ratio of 2.0.
• Investments are ongoing in lithography, metrology, inspection, and chemistry equipment.

Financial Results

MKS Instruments reported a strong Q1 2024, surpassing guidance in several key areas:

• Revenue exceeded expectations, although specific figures were not disclosed.
• Gross margin remained above 47% for the fifth consecutive quarter, achieving this with $3.6 billion in revenue.
• EPS also exceeded the high end of guidance.
• Tariffs are anticipated to impact gross margins by up to 100 basis points, with strategies in place to counteract this effect.
• Operating expenses were $254 million, with a slight reduction expected in Q2.
• The company generated cash equivalent to 13% of its revenue in Q1.

Operational Updates

MKS is strategically positioned in the semiconductor market, benefiting from technological advancements:

• The company anticipates outperforming Wafer Fab Equipment (WFE) growth by 200 basis points, despite a $250 million revenue headwind from China restrictions.
• MKS is capitalizing on NAND technology upgrades, which are driving growth in WFE.
• The lithography, metrology, and inspection business is growing at a 20% compound annual growth rate, reaching a $300 million revenue run rate.
• Electronics and packaging are driven by high-end packaging for AI servers, with strong growth in chemistry equipment bookings.

Future Outlook

MKS Instruments is committed to maintaining a strong financial position through strategic investments and debt reduction:

• The company aims to continue its pattern of debt repayment, having already paid down $426 million in 2024.
• MKS targets a net leverage ratio of 2.0 over the next several years.
• The Specialty Industrial segment, while not a significant growth driver, contributes positively to cash flow and offsets R&D expenses.

Conclusion

For a detailed account of MKS Instruments’ strategic initiatives and financial performance, refer to the full conference call transcript provided below.

Full transcript - 53rd Annual JPMorgan Global Technology, Media and Communications Conference:

Peter Peng, Small and Mid Cap Semiconductor Analyst: Let’s get started. Hello, everybody. Thanks for joining our fifty third annual TMT conference. My name is Peter Peng, small and mid cap semiconductor analyst for the firm. I’m pleased to have John Lee, president and CEO, and Ram Mayaparov, CFO at MKS here with us today.

Gentlemen, if you can just start off off with an overview of MKS instruments and then a summary of the March and June outlook, and then we can kick off the q and a.

John Lee, President and CEO, MKS: Yeah. So thanks, Peter. Thanks for having us. So some of you know MKS, but for those of you who don’t, MKS is, almost a 65 year old company. We started in just a semi market, and we were making instruments at the time, thus the name MKS Instruments.

These instruments would control things around a vacuum chamber. And then when we moved into semi, of course, vacuum chambers became quite important in the semiconductor equipment industry, and so that’s how we became market leader in surrounding the chamber was our motto. So anything that surrounded a vacuum chamber that was critical, controlling pressure, controlling flow, measuring things, we thought was part of a portfolio that made strategic sense for us. And so we’re private until February, and then at that point we went public, did a series of acquisitions, probably 10 or 15, just in the vacuum space for semiconductor equipment. And then in 2015, we did one of our biggest acquisitions that moved the company from just a semiconductor equipment company only to something much broader in terms of foundational technology, and that was the acquisition of Newport Corporation.

Newport had also done a lot of consolidation in their market, photonics, optics, lasers. So together, we became the broadest portfolio of foundational technologies that address not just the vacuum equipment part of semiconductors, but also lithography, metrology, and inspection. And the combination of those customers allows us to to say that we are in 85% at every piece of equipment at every fab in the world with multiple subsystems. Because you just add up Applied Materials, Lam, Tokyo Electron, ASML, KLAs market share, and you get 85%. And we’re on every one of their tools with multiple subsystems.

And then, we did a couple more acquisitions later as we saw this change in Moore’s Law. Moore’s Law was running out of gas, and people were dividing cores up to get another ten years, and then that started running out of steam. And so then they started putting chips together. And when you put multiple chips together, you still want them to act like they were one big chip. Otherwise, you don’t really get that performance boost.

And this led to the era of heterogeneous integration. This is where we are. This is what enables AI. This is what NVIDIA shows. Every time they talk about all their AI chips, they hold up a board.

Right? They don’t hold up a chip. They hold up a board with lots of chips on it. That interconnection, those boards, that’s very, very complex. It can be 20 to 40 layers of different interconnecting layers with copper, small lines and spaces.

And when we did the acquisition of Electro Scientific Industries, this is laser drilling of those PCBAs making those holes. And then we did the acquisition of Aditech in 2022, our biggest acquisition to date, and that was adding the chemistry capability and the chemistry equipment capability to make those heterogeneous PCBs. And so today, we are foundational to Moore’s Law and more than Moore’s Law because everything now that drives that is no longer just semi. It’s the packaging of the semi. I think we were early.

We said that when we did the acquisition. No one really kinda understood that. They get it now. And so we address 70% of all those steps for making that dense interconnect. So 85% of all chips have multiple MKS equipment on it.

70% of all steps in making that interconnection is addressed by MKS equipment, laser equipment, as well as chemistry. So that’s where we are today. Q1.

Harlan, Unidentified speaker: Yeah. Recap of Q1. So Q1 was strong.

John Lee, President and CEO, MKS: You know, we exceeded guidance in all metrics, top line, bottom line. We were really proud of the fact that the gross margin held up in a quarter where there’s a lot more equipment revenue. And usually equipment’s a little lower gross margin than chemistry revenue. So we were I think it’s the fifth quarter in a row, Ram has pointed out, where gross margin is now over 47%. A few years ago, we did our five year model at analyst day, and the long term model in five years at 5,600,000,000.0 in revenue was 47% gross margin.

We’re already there at 3,600,000,000.0. So a lot of work on pricing, a lot of work on efficiency of factories. And so we’ve made some good progress there even though the top line hasn’t helped us. I think also EPS was a good story for us, exceeded the guidance, exceeded the high end of the guidance actually. We’ve worked hard on things like tax rates as well as, of course, the OpEx.

And so Q1 was a strong quarter. We guided relatively flat, I call it, in terms of top line. We do have a little bit impact from tariffs. We’ll probably talk a little bit about that, and we call that out during the call. So otherwise, pretty steady right now for our markets as of today.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Okay. Why don’t we just kind of start off with the the near term stuff on the tariffs because that’s been very topical and top of investors’ mind. So Liberation Day was just, you know, a month ago, and your customers are facing numerous uncertainties. Some of them are spending and strategic spends less likely to get cutbacks, such as node migrations, AI accelerated compute. But then there are other segments like industrial, automotive, and the consumer focused smartphone and PC that could likely get impacted by tariffs.

I think you have a very unique vantage point given that you have three different business segments. And so what have you kind of observed over the last several weeks in terms of your customer discussions? Any any, you know, noticeable discrepancy among the, you know, your customers in your different end markets?

John Lee, President and CEO, MKS: Yeah. Have to say it’s been pretty consistent. So when I talk when I think about the semi market and the packaging market that goes with semi, that’s been pretty consistent. It hasn’t really changed because of the tariffs. Certainly, that’s that’s what we said in the earnings call for our q two guide.

And a lot of those investments are strategic, as you know. No migration from one layer one x x NAND to two x x NAND going from, you know, three nanometer to two nanometer to even beyond that. So that really has no we haven’t seen any changes there. Where we have seen some effects that are macro related, some of it caused by tariffs, some of it not, is in some of our industrial segment. So just normal industrial markets as well as automotive.

Automotive, of course, is impacted by tariffs. And so we have seen those two markets be a little weak, that affects our specialty industrials market segment of MKS. But the semi part and the packaging, electronics and packaging, have been pretty steady, and really no changes to really call out at this point.

Harlan, Unidentified speaker: Mhmm.

Peter Peng, Small and Mid Cap Semiconductor Analyst: And then just on the direct tariff costs. Your gross margin guidance includes 100 basis points of gross margin impact, and it’s primarily impacting your vacuum business. If you can just kind of elaborate on what the assumptions that you’re making and then some of the near and longer term mitigation strategies. And then I think earlier one of your peers also talked about because of the recent trade easing that this could be a worst case scenario in terms of that. So are you seeing that as well?

Ram Mayaparov, CFO, MKS: Yeah. So like you said, Peter, we have baked in up to 100 basis points in our gross margin for tariffs. Our goal is to mitigate the tariffs as much as possible and then get into any commercial actions if needed. So it’s a broad area of things we are working on. We also have a global footprint.

And if we know for sure these are the rules and these are here to stay, we can make the changes in the supply chain and rewire our supply chain to make sure that the tariffs are mitigated. But that comes with some cost, so we want to make sure that we have definite clarity before we get into those steps. But for now, we are doing all we can to mitigate the, short term impact of tariffs and our actions will also include some commercial actions as needed selectively to pass those through. So we are confident that we can come up with mitigation plans to overcome the tariffs impact and keeping close touch with the developing rules as they come along. And in the long term, we are committed to a 47% gross margin with or without tariffs.

John Lee, President and CEO, MKS: And the announcement Monday is certainly helpful, right, for the quarter, right? But as I said as we said, that can change tomorrow. Who knows? Okay.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Starting with your semiconductor business. Your your, you know, your large customers have largely reiterated their, you know, view of a mid single digit percentage WFE revenue outlook for 2025, kind of highlighting the strength in leading edge foundry and logic, NAND technology upgrades and strong spending in advanced DRAM and HBM. Just kind of you historically highlighted a 200 basis points premium to WFE. Kind of based on your visibility and discussion with customers, how are you assessing your relative performance against this, you know, mid single digit WF yield?

John Lee, President and CEO, MKS: Yeah. So some facts, of course. If you take our q one semi result, and our midpoint of our q one semi guide, half over half, you know, first half twenty five versus first half twenty four, we’d be up 15%, okay, just in semi. Now, two factors there. One is, let’s say WFE is up 5%, give or take.

That’s kind of, you know, consensus number. So we would enjoy that because of our position in semi. But also, as you recall, we were still getting our inventory being burned down at our customers in ’24. And so when you compare ourselves to ourselves, it’s going to be better than the just the market of 5%. And that’s typical.

That’s what happens on the downturn. Our inventory burns and we underperform. In the upturn, we overperform as they restock and prepare for the ramp. We’re still committed and we think we have avenues for that 200 basis points outperformance of WFE. There has been a huge headwind, though.

Right? We are down about $250,000,000 out of our 2,000,000,000 peak semi revenue because of the restrictions to China. So we can’t sell to certain companies there that that our competitors that are not US based can and are selling. So that’s just headwind for us. And so that’s why we’ve gotta look at other ways to grow, lithography, metrology inspection, going after, you know, more RF power in different segments, going after different regions where we’re not as strong.

And so we’ve got a little more headwind now, but I think the strength of MKS’s portfolio, you know, we think we can still do that. Mhmm.

Peter Peng, Small and Mid Cap Semiconductor Analyst: On on the NAND technology upgrade, your customers are starting to upgrade from 100 plus layers to 200 plus layers, eventually 400 layers, right? And we’re starting to see this drive an inflection in NAND WFE. How do you anticipate the trajectory Right? You have a pretty strong market leadership in RF power, and so maybe if you can just give us insight on how you’re thinking about the technology upgrade for the year.

John Lee, President and CEO, MKS: Yeah. I think, you know, even ninety days ago today, the change is actually in the NAND part of the market for us. Ninety days ago, we were hoping upgrades would happen. We were sure that our inventory was burning off, but we weren’t sure if it was gonna be burned off to the point where our customer would need to pull more inventory. Ninety days later, those have happened.

Upgrades are happening. Our inventory has normalized, so they are pulling. And so we’re benefiting from that. You can see in our numbers in Q1. And I think going forward, any upgrades does benefit MKS because, you know, when you upgrade, you have to upgrade with something that’s already there.

The only installed base is from, you know, Lam, and RF power is us. Right? And so so that’s helpful when these upgrades occur. There’s there’s also been a greenfield as well, and and some some of the end users are talking about future greenfields. So but the for the benefit for us is RF power is the biggest part of the bomb for us.

Greenfield’s even better because then we have the surround the chamber portfolio also benefiting because it’s a brand new tool versus just an upgrade of the RF power. So I think depending on the future of, decisions by, you know, all the NAND makers, that will determine whether, the NAND upgrades continue at pace, accelerate, or decelerate. We just don’t really know that because I don’t think anybody knows that until, until those companies decide.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Mhmm. You know, one of your lead customers just recently talked about, you know, you know, for for the two third of the installed base that’s still in the hundred layers to to convert into 200 layers, that would, you know, drive a $40,000,000,000 of spending just to convert. And so maybe if you can just give us some qualitative or quantitative, thoughts on how that would translate into to MKSI.

John Lee, President and CEO, MKS: Yeah. You know, typically, in general, our vacuum portfolio is anywhere from one and a half to two and a half percent of the BOM of our customers. It depends on our market share and particular components. So that gives you a range. We’re not gonna call out exactly our power.

And so you gotta do that math, and that’s market share leadership. And so if one of our customers is seeing $40,000,000,000 for themselves, then if we’re seeing, take it 1.5% to 2.5%, that’s the opportunity for us if they see $40,000,000,000 Okay.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Just relatedly, we guys ask this question quite a bit. On the opportunities between just the upgrade and greenfield, how would you kind of compare the revenue opportunities between these two opportunity set?

John Lee, President and CEO, MKS: Yeah. Yeah. Well, as I said, the RF power is the biggest part of the BOM for us. And so in a upgrade, that’s usually the main thing that’s being upgraded from the MKS portfolio. In a greenfield, they need everything else, the the pressure measurement, valves, flow delivery.

And so, so we just get another enhancement from that. We’re not gonna break out, you know, how much is RF power versus that. It depends on the chamber sometimes, by the way. It depends on our market share, but greenfield is certainly better.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Perfect. Let me just pause here to see if there’s any questions.

Harlan, Unidentified speaker: Yeah. If I look at the trend of some of your customers Applied Materials, KLA, Lam, Tokyo Electron, they all seem to be focused on moving towards these more integrated systems, right Applied calls their system like integrated material systems where they’re integrating multiple chambers, deposition, etch and so on. In addition to that they’ve got all this integrated metrology. I would think that that would be a pretty big benefit for the MKSI team because you’ve got so much more vacuum requirements, you’ve got so much more RF requirements, you’ve got so much more metrology requirements, and all being sort of, you know, optimized and integrated into this single system. Do you view that as sort of a content gain opportunity as you look at some of these next generation opportunities?

John Lee, President and CEO, MKS: Yeah. Think the that’s right. It’s a good observation, Harlan. I think the bigger the the way we view it is that as things get more difficult, there’s a need for more critical subsystems. Critical subsystems that measure things more precisely, deliver things more precisely, etcetera.

So when you’re integrating things together, the idea is you’re not breaking vacuum. Because when you break vacuum, you know, oxygen gets on the wafer, stuff happens, and that’s not good. So so that’s just an indicate one of the indicators of of of complexity in making things more difficult to do. Now in that, there’s a lot more precision and control, moving things around. And so those are opportunities.

Things like our optical thermometry, measuring the temperature of the wafer. We bought that company a few years ago. That, in the past, was like, you know, some chambers needed it. But now it’s like most etched chambers need that. And I think the same I’ll take the the the opportunity to talk about the same trend is happening in electroplating of PCBs.

So, one of the tools, pieces of equipment that, Adutek makes, m s MKS now, that no one else makes as well is something called horizontal plating tool. It’s 50 meters to a hundred meters long. Why is it that long? It is because the the panel that’s being plated is continuously submerged through different process steps for 50 meters or a hundred meters. It never breaks vacuum.

It never breaks the surface of water or liquid, and that is a huge advantage of so many other tools, you do one stat. You gotta take it out. Now things have happened. And then you put it back in, and the interface of these connections of copper to copper is just not as good. That’s exactly why Applied is doing the PVD tool that, you know, has everything connected together.

The same trend is actually happening is already happening in electroplating for advanced PCBs. Thank you. Historically,

Peter Peng, Small and Mid Cap Semiconductor Analyst: you’ve been very strong in the dielectric etch market. I think your last Analyst Day, you kind of discussed some penetration opportunities in the conductor etch market. Maybe you can just share your progress in this area.

John Lee, President and CEO, MKS: Yeah. Yeah. You’re right. You know, we were a distant number two in RF power, you know, seven or eight years ago. We had, you know, low share in conductor etch and dielectric etch.

We made a lot of progress in dielectric etch driven by vNAND. And so, you know, 2022, we’re number one in RF power because NAND was a great year. In connector etch, we have a couple of design wins we talked about in the past. There’s still much smaller revenue streams than our dielectric etch RF power dielectric etch. So we haven’t made the same progress we made, frankly, because there’s just a lot more to do in dielectric etch, and we were really focused on that.

So I think I look at that as an opportunity. And things are changing, and those are areas of opportunity. For for instance, a lot of people have talked about something called pulse DC power instead of RF power. Just two different ways of delivering power to an etch chamber. And pulse DC is changing and being used in conductor etch now.

And that’s an area where it’s an opportunity for us as well as everybody else because something’s changing. Right? It’s not just a a CIP of what’s already out there. And so we think that conductor edge can be a future, good opportunity for us. Remains to be seen.

These things take multiple years. You designed in. The the toolmaker has to get their tool designed in, and then an end user or chipmaker has to go make build a fab from it. So so I think the progress is mostly in dielectric etch for the last eight, nine years. A little bit of conductor etch, but that’s where the opportunity is for us.

Ram Mayaparov, CFO, MKS: Mhmm.

Peter Peng, Small and Mid Cap Semiconductor Analyst: You know, one area that you’ve been gaining a lot of traction is in the process control and lithography application. Right? You know, revenue has been growing at a 20% CAGR, and it’s almost a three it’s a $300,000,000 revenue run rate business. Maybe just discuss some of the design win pipeline and share your perspective on how large this business can eventually get over time.

John Lee, President and CEO, MKS: Yeah. So, you know, when we acquired Newport Corporation, they had they were they were in lithography metrology inspection, but it was just one of many markets that they were in. And we, being a semi company, said that’s an opportunity for us because the two big customers there, they don’t have a lot of competition. Right? So if you get design in there, you’re likely gonna win.

And so that’s why we invested in that. But to do that, invest. You have to invest in equipment CapEx. You have to invest in process engineers to develop coding recipes for the optics. You have to invest in a lot of optical design engineers because these these pieces of equipment are very complex, and they want those customers want customers want to certainly outsource subsegments, you know, subsystems.

And, basically, you have to have your own kind of, optical engineering team with coding machines and capability. So we did that investment, and that’s why we drove it from a hundred 50,000,000 to 300,000,000 over the last five years. There’s still it’s still I would characterize it as still early innings. You know, you can just look at 300,000,000 for LMI, lithography, metrology inspection. The vacuum side is anywhere from, you know, 1 to 2,000,000,000 depending on the cycle for us.

And when you look at WFE, well, how much is vacuum based tools and how much is lithography, it’s probably 60% vacuum based and 40% LMI. Right? So it doesn’t mean we’re gonna get the same percentage in each of our customers, but that is the opportunity. Got

Peter Peng, Small and Mid Cap Semiconductor Analyst: it. Okay. That’s great. So, you know, your mix of business have shifted over time. It was very memory centric, you know, and and and over time, I think, given the kind of the weaker spending trends and some of the progress that you’re making in the foundry and logic space, it’s becoming more balanced.

I think in the longer term, I know, how do you think your your your mix is gonna look like, you know, if memory WFE do rebound? Do you think it’s more balanced over time, or is it gonna, you know, go back to historic?

John Lee, President and CEO, MKS: Historically, it was balanced. This is going back ten, fifteen years of because we didn’t really, you know, care. It was a vacuum based chamber. But you’re right. Over the last eight years or so, five years, more and more memory.

We’re more memory centric because of our success in vNAN with RF power. That was a big driver of it. And our relative lack of success in lithography metrology inspection. And so now NAND is gonna be probably a little less, you know, than the peak NAND spends in 2022.

DRAM looks like it’s still going well, especially with HBM driven by AI. And then our our efforts in lithography, metrology inspection, that’s mostly foundry, you know, weighted. So right now, I think in last year, we were actually 60% foundry logic, whereas in the past, it had been flipped. In the past, we’ve called out 55%, you know, was was memory, NAND and DRAM. And that had been true for several years, but now it’s it’s shifted a little bit just because of NAND and DRAM were lower.

I think going forward, it feels like fifty fifty. It really does. And that’s okay. That’s that’s not a bad thing. Right?

And I think the idea of being 85% levered to semi is we don’t care if one decade etch and dep are outgrown because of multiple patterning because EUV isn’t ready. And we kind of won’t care now in the future when EUV is ready and people are spending more on litho metrology inspection, which was the last five years. Right? And then if you look at the next five years, it’s like, oh, well, maybe it’s gate all around. Maybe it’s backside power, more depth and edge.

Okay. You know, we’re exposed to 85 WFE, and I think that’s a healthy approach to the industry. We care if WFE goes up. If it goes up, if we can outgrow it, then that’s the strategy for us. Maybe

Peter Peng, Small and Mid Cap Semiconductor Analyst: switching the, electronic and packaging business. Right? There’s a lot of exciting growth in this area. You know, you highlighted, you know, back end high bandwidth memory, AI compute servers, edge devices, the low earth orbit satellite applications. Maybe you could just rank order the top three or four applications that you feel most excited, and then what and how mature are those to your, you know, overall business?

John Lee, President and CEO, MKS: Yeah. So for our electronics and packaging market, that is you know, a lot of it is really driven the acceleration is driven by the high end packaging part of the PCB industry. So the PCB industry has three segments we like to characterize it. Multilayer boards, that’s kind of the old, if you will, PCBs. Think refrigerators and washing machines.

The that’s a third of the market. The middle third is something we call HDI, high density interconnect. PCB is the same thing. Think of smartphones. So smaller features, more layers.

And then the higher end is what we call package substrate. Again, organic PCBs, and that’s for servers, advanced PCs, and now AI servers. And that is growing at high single digit to maybe even double digit CAGR now. HDI is kinda growing mid single digit CAGR. And then MLB is GDP.

And the only exception now that’s happening is and so that’s the biggest driver for us, I think, is AI, and the and the packaging. AI, for sure, we knew was driving the most advanced PCBs, but we’ve talked about several quarters now of equipment orders, chemistry equipment orders for MLB and HDI. And at first, we were puzzled. We’re not making more refrigerators as far as I can tell. Right?

But AI boards on package substrates need to be then connected to the rest of the world via HDI boards and MLB boards. And so that is where we’re seeing three quarters now of strong bookings for that equipment, which comes with our chemistry. Because a lot of these customers either already have the capacity and need more or want to get into that AI stream. MLB people who have always been in MLB now can actually play in AI. Right?

And some of them are making those bets. I think low Earth orbit is a nice niche kind of play. Although, you know, every every month we hear someone else ready to start a company to launch, you know, thousands of satellites into space. So we are the laser drilling tool prop tool record for making those PCBs. So so when you think about 5,000 satellites with the PCBs, that’s not what we’re talking about.

We’re talking about the hundreds of thousands of dishes that are one big PCB, very complex, that are looking at all those satellites. That’s what’s driving the volume right now. And so as more and more companies look at lower low Earth orbit, I think that’s a nice small, relatively small part of our business now, but growing rapidly as well. So AI and and packaged substrates, that’s the biggest driver today.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Mhmm. Maybe just following up on the three consecutive quarters, just positive booking trends in your chemistry equipment sales. You have a pretty high attach rate with the chemistry sales. Maybe you can just provide some insights into your customer buying patterns and what that might mean for your chemistry sales you know, over the next several quarters?

John Lee, President and CEO, MKS: Yeah. So our strategy always with our equipment is it comes 100% with our chemistry. That’s that is true. Five years later, there’s a little degradation, but we hold about 85% of the chemistry for the duration of that tool. So that’s good for future chemistry revenue when we’re shipping our tools out.

As you pointed out, we’ve had three good quarters of chemistry equipment bookings. And, you know, last two quarters, you’ve seen the revenue come in. As I said, these tools are unique in that only we’re making them. They’re complex. They they do things that our competitors cannot.

And I think maybe another thing to point out is you can buy someone else’s equipment, and sometimes that happens. We lose the equipment. Oftentimes, still win the chemistry because they’re trying to win advanced packaging for AI. Right? You if you wanna compromise on equipment, you you you really need good chemistry now.

If you really want high yield and high throughput, why not take the equipment and the chemistry that’s already been optimized together? And the equipment’s better than any piece of equipment out there right now. So I would say right now, we’re really happy with the chemistry market share for these advanced applications. Extremely happy. Equipment, we’re we’re also very happy, but the market share is not a % there.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Moving on to to the last business, the specialty industrial, which doesn’t really get too much attention. Right? It’s a pretty well diversified business encompassing defense, health care, automotive, and just broader industrial markets, and it’s free cash flow generative. And so, you you talked about the kind of the macro impact impacting some of the, you know, softness in in the industrial and auto. So, what sign or metrics are you need to see before you can kind of call a bottom and a recovery in this business?

John Lee, President and CEO, MKS: Yeah. Maybe I’ll let Ram answer that.

Ram Mayaparov, CFO, MKS: Yeah. Sure. So like you said, Peter, first of all, let’s clarify that it is not a commodity business at all. It’s a high margin business. It helps with our cash flow.

And it also helps share some of the R and D cost because most of our R and D goes to the semiconductor and electronics and packaging businesses and specialty benefits from that investment. There are a number of segments that go into that particular market. There’s health care, there is lasers that go into various applications, There’s general industrial segments and there’s auto, auto and general industrial being the two biggest within the specialty industrial business. And as you know, both of those have been not doing well for several quarters now. PMI is a good index to look at, and just the auto production is also a good index to look at.

And we hope we are at the bottom of that trend, but we haven’t really seen a huge recovery there at all. Like I said, we are happy to keep that business, although we don’t see much growth because it’s very profitable and it also generates cash. So as the top line comes back to more normal levels, you’re going to see that multiplied effect of the bottom line.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Okay. So on the financial side, there’s some OpEx step up in 2025 that you kind of focus on some of these longer term growth initiatives. Maybe if you can just elaborate on some of these longer term projects and what you’re targeting or specific applications.

Ram Mayaparov, CFO, MKS: Yeah. So if we take a step back and if you think about last two years, twenty twenty three to 2024, our gross margin grew by 190 basis points and our operating income grew by 180 basis points. And it’s a combination of both commercial actions. It’s a testament for the value we bring to our customers, our pricing stability and the design and the differentiation that our R and D team brings. And also manufacturing excellence operations, that continuous improvement actions that go on both in manufacturing and procurement and some design.

So we are very confident of our gross margin improvements. OpEx, on the other hand, has stayed flat. There’s been no increase in OpEx between 2023 and 2024. To Peter’s point, we are investing a little bit in OpEx. We have given a range of $250,000,000 to $260,000,000 a quarter for this year, and that’s in anticipation of some of our conversations with our key customers and the growth we are seeing ahead of time.

Most of that investment goes towards some basic infrastructure improvements and also in people. And in Q1, we came to we finished in the middle, $254,000,000. In Q2, we are guiding to the lower end of that range. And we are laser focused on the spending there. We first look for reallocation of resources before we look for new dollars, for sure.

But it’s mostly to prepare that platform for the growth that we see that’s coming, because especially because we have been invested in the last couple of years.

John Lee, President and CEO, MKS: Yeah. In general, so many opportunities for us to invest in. They’re in lithography, metrology inspection. They’re in power still in the vacuum section. They’re in chemistry equipment.

So having this broad portfolio targeted to very fast moving markets, it’s good to have the scale we have and the profitability financial model we have because we can actually really target tens of engineers into a different area right away. Many of our competitors can’t do that, right? And we have multiple of those opportunities all the time. And so it’s just good to have that broad portfolio, but still focused on, you know, semi and electronics and packaging and having the size to be able to invest in that.

Peter Peng, Small and Mid Cap Semiconductor Analyst: You guys have done a pretty good job of deleveraging and actively repaying debt, refinancing your term loan. Just given the uncertainty in the macro environment, how are you thinking about debt paydown? And is that two point zero net leverage ratio something that’s still achievable over the next several years?

Ram Mayaparov, CFO, MKS: Certainly. So just following through the P and L conversation, we’re very happy to see that clean bridge from P and L to cash flow. Our cash generation has been very strong. And it’s a combination of operational performance improvements and working capital management. In 2024, we paid down $426,000,000 on top of the $50,000,000 mandatory payments towards our debt.

In Q1, our cash generation was 13%, one hundred % of net earnings converted to cash at about 13% of revenue. And in addition to paying down $100,000,000 towards the debt in January, we also repurchased some stock because it was a very strong quarter of cash. And the stock repurchase was accretive and it helped offset the dilution for the year. We are committed to making another payment towards our debt in this quarter, so that pattern that we had last year will continue. And debt repayment and strengthening the balance sheet remains our focus.

And going back to what I said before, the cost correction that we have done, as the top line comes back to more normal levels, you’re going to see cash flow generation multiply, and we are able to accelerate our debt repayment when we get there.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Perfect. We’re out of time, that wraps the session. Thank you, gentlemen, for Thank you.

John Lee, President and CEO, MKS: Okay. Thanks.

Peter Peng, Small and Mid Cap Semiconductor Analyst: Thank you.

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