MKS Instruments - Q2 2024

Executive Summary

• Q2 revenue was $887M (high end of guidance), Non-GAAP diluted EPS $1.53 and Adjusted EBITDA $228M; results benefited from stronger in-quarter demand conversion in Semiconductor and Electronics & Packaging and lower OpEx versus plan.
• Gross margin remained robust at 47.3% despite start-up costs in Photonics; GAAP EPS was $0.33, with ~$0.14/share tailwind from interest savings following the May convertible and Term Loan B paydown.
• Q3 guidance: revenue $870M ± $40M, Adjusted EBITDA $206M ± $23M, Non-GAAP EPS $1.43 ± $0.28; segment mix guided to slight sequential declines in Semi and E&P; Specialty Industrial flat.
• Balance sheet actions are a key stock catalyst: $1.4B 1.25% converts in May, $110M voluntary term loan prepayment and loan repricing in July, reducing annualized cash interest by ~$17M and positioning net leverage (4.6x) to improve as end markets recover.

What Went Well and What Went Wrong

What Went Well

• Strong execution drove upside: revenue at the high end, Adjusted EBITDA above guidance, and OpEx below expectations due to lower compensation/benefit costs and third-party spend timing.
• Management quote (CEO): “Revenues of $887 million were at the high end of our guidance while Adjusted EBITDA exceeded the upper end of that same guidance”.
• Early synergy/design wins: strategic photonics win tied to world-class optics, plus initial chemistry design wins in E&P, showing the combined laser/chemistry value proposition.

What Went Wrong

• Specialty Industrial revenue fell ~7% sequentially, below guidance expectations, reflecting softness in certain vacuum and photonics categories despite stable automotive GMF chemistry.
• Photonics gross margin headwind from start-up costs for the strategic optics program; manufacturing efficiency and cycle times are expected to normalize as volumes ramp.
• Market demand remains muted; NAND recovery pushed out, leaving Semi bouncing along the bottom and reducing visibility given shorter lead times and higher in-quarter conversions.

Transcript

Operator (participant)

Welcome to the MKS Instruments Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the call over to Paretosh Misra, Vice President of Investor Relations. Please go ahead.

Paretosh Misra (Head of Investor Relations)

Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Michelle McCarthy, Vice President and Chief Accounting Officer. Yesterday, after market close, we released our financial results for the second quarter of 2024, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 2023. These statements represent the company's expectations only as of today and should not be relied upon as representing the company's estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements.

During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP, other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the investor relations sections of our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of revenues by end market and division, please visit our investor website. Now, I'll turn the call over to John.

John Lee (CEO)

Thanks, Paretosh, and good morning, everyone. Let me start by welcoming Paretosh to MKS as our new Vice President of Investor Relations. Paretosh brings strong experience in both investor relations and sell side research, where he covered MKS earlier in his career. I assume a number of you may already know Paretosh. We're glad, we're glad to have him on board. You'll be hearing from him soon. In addition, we are making very good progress on our search for MKS's next CFO. I hope to have news to share in the not-too-distant future. MKS delivered a strong second quarter, with revenue of $887 million at the high end of our guidance and EPS of $1.53, exceeding the high end of our guidance. Our EPS included approximately 14 cents of interest expense benefit from our recent convertible note offering and Term Loan B paydown.

But even without this tailwind, we still exceeded the high end of our guidance. Our results reflect a continued excellent financial execution, which positions the company well for the eventual end-market recovery. In addition to our revenue and earnings performance, we maintained strong gross margins above 47%, reflecting the value of our proprietary and differentiated solutions, as well as our consistent focus on cost control. Our operating expenses were better than guided as a result of lower-than-expected compensation and benefit costs, primarily related to the timing of new hires and prudent management of third-party spend. Our solid execution extended to the balance sheet, where we continued our long-standing track record, proactively managing our leverage. During the quarter, we closed an upsized $1.4 billion convertible note offering at a fixed coupon rate of 1.25%.

We used approximately $1.2 billion of the net proceeds to pay down our Term Loan B, which significantly reduced our cash interest expense. The transaction was also structured to mitigate potential dilution to our existing shareholders through capped call transactions, which Michelle will discuss in more detail. The convertible note offering also positioned us to reprice our Term Loan B in July, and we made a $110 million voluntary prepayment on that loan in connection with the repricing. While we are pleased with our financial execution, we continue to see muted market demand. Given our stronger-than-expected results in the second quarter, we are now expecting second half revenue to be relatively in line with first half revenues. We're very encouraged about our market positioning, and we believe we are continuing to gain share within certain product categories.

Highlights include a strategic photonics win in our semiconductor market that we expect will ramp over the next several quarters. We also achieved some very early-stage revenue synergies and design wins in our electronics and packaging market. The breadth and depth of our proprietary portfolio of products and solutions, combined with our strong customer relationships in the semiconductor and advanced packaging markets, put MKS in a great position when our markets recover. Now I'll review our performance in our three end markets. In our semiconductor market, revenue increased 5% sequentially. Similar to our first quarter results, the higher revenue trend was primarily driven by in-quarter demand conversion. The second quarter year-over-year comparisons are distorted, given that the prior year quarter reflects recovery from the ransomware incident in Q1 2023. Starting in the third quarter, year-over-year comparison should be largely normalized.

With the exception of NAND, we're seeing early signs of improvement, especially in DRAM and logic foundry, in support of artificial intelligence-related investments. As device makers step up investments in key areas, such as high-bandwidth memory and new logic architectures like Gate-All-Around, MKS is well positioned to leverage our broad technology capabilities to solve the most difficult challenges. Our Vacuum Solutions products enable the critical etch and deposition processes that help semiconductor manufacturers achieve high throughput and yield as chip architectures become more complex. In our Photonics Solutions, we provide key subsystems to lithography, metrology, and inspection applications, currently one of the highest growth areas of WFE investment. As I mentioned earlier, we had a strategic photonics win through our World-class optics initiative, with initial unit production starting this year.

This is a great win for us that highlights how we integrate multiple MKS technologies to create a unique solution that no one else can provide, and is an example of how we have continued to outperform WFE in this category. Until we fully ramp production of this product over the next several quarters, we are seeing some slight pressure on our Photonics Solutions division gross margin, which is reflected in our Q2 results. That said, this is an exciting win for us that we believe will drive strong revenue over the long term, provides a great opportunity to showcase our unique innovation capabilities. In the third quarter, we expect semiconductor revenue to be down slightly on a sequential basis. This reflects our continuing view that we are bouncing along the bottom of the industry cycle.

We remain in very good position for the next industry upcycle, given that we are a critical enabler embedded with all key customers, and have the broadest exposure of any subsystem provider. Turning to electronics and packaging, we saw double-digit revenue growth quarter-over-quarter. Our revenue performance was led by chemistry sales with some seasonal strength relative to Q1, which included the Lunar New Year. Q2 results also included higher equipment sales sequentially. At present, demand is primarily driven by investment in AI servers, which represents a small but increasing proportion of the total server market. We are expecting electronics and packaging revenue in Q3 to be down slightly on a sequential basis, while we wait for stronger signs of PC and smartphone market recovery. We are excited by how our combined laser and chemistry capabilities can drive new growth opportunities.

We are continuing to make good progress in the LEO satellite space, including achieving a synergistic design win in copper plating in Q2. We've also notched an early synergy win in chemistry with a key player in the smartphone supply chain. These are individually small deals from a revenue standpoint, but represent early proof points that our combined laser and chemistry capabilities are resonating with customers. We continue to believe that our electronics and packaging business will be increasingly driven by the same trends that drove our semi business, namely miniaturization, complexity, and chemistry. At this point, some of you attended a recent visit to our tech center in Berlin to learn more about our optimized interconnect offering that underpins the strategic rationale of our combination with Atotech.

We are the only player who combines laser drilling expertise with plating tools and chemistries to best enable key technology inflections at the substrate and PCB levels, and we are leveraging our broad combined relationships to increase customer engagement. In our specialty industrial market, revenues decreased about 7% sequentially, with softness in vacuum and photonics products for select specialty categories, but stable automotive revenues in our general metal finishing business. As a reminder, our specialty industrial market is comprised of numerous applications that span several end markets, and leverages our proprietary technologies and related R&D investments within semiconductor, electron, and electronics and packaging, providing strong incremental margins and cash generation. As we await the broader industrial market recovery, chemistry from our Material Solutions division provides a relatively steady, consumable-driven source of revenue with strong margins, contributing to both our electronics and packaging and specialty industrial markets.

It's also an area of innovation for the company, as industrial customers increasingly seek sustainable and environmentally friendly solutions. A great example of this is the suite of solutions we have developed in trivalent chrome to provide the automotive market a more sustainable path from the hexavalent chrome that has been used in automotives for decades. We believe we are a leader in pioneering end-to-end solutions for OEMs that deliver sustainable surface processing through cost-efficient applications. And we received two new orders in Q2 for our TriChrome solutions. Another innovation in general metal finishing is our equipment recycling solutions, where we can extend the equipment life through chemistry reformulations and innovative equipment processing solutions, creating investment savings and environmental benefits for our customers. We have had multiple design wins here in recent months.

Looking ahead to Q3, we expect revenue in our specialty industrial market to be in line with Q2. Let me wrap up by saying we are pleased with our execution and performance in the second quarter. We are taking the steps necessary to drive profitable growth and improve cash generation as demand remains fairly stable across our end markets. Consistent with our historic performance, we're confident in our ability to outperform WFE when the market recovers. We have the broadest product portfolio spanning both the semiconductor and electronics and packaging markets, and we leverage our expertise across these markets to solve our customers' hardest problems.... Our breadth gives us a unique view into upcoming inflections, and that makes us an important resource across the entire advanced electronics ecosystem. Now, let me turn it over to Michelle to cover our second quarter financial results in more detail.

Michelle McCarthy (VP and Chief Accounting Officer)

Thank you, John, and good morning, everyone. For the second quarter, MKS reported revenue of $887 million, up 2% sequentially and at the high end of our guidance range, driven by better-than-expected Semiconductor and Electronics and Packaging revenue. Second quarter Semiconductor revenue was $369 million, up 5% sequentially and well ahead of our expectations, primarily driven by stronger-than-expected in-quarter demand conversion. As John mentioned, the year-over-year comparison for Semiconductor is not meaningful, given our second quarter 2023 results include recovery from the ransomware incident in the first quarter of 2023. Year-over-year comparisons should be largely normalized, starting with the third quarter. Second quarter Electronics and Packaging revenue was $229 million, an increase of 10% quarter-over-quarter and 2% year-over-year.

This result was led by seasonal strength in chemistry and higher equipment sales. Excluding the impact of foreign currency and palladium pass-through, chemistry sales grew 19% year-over-year, as we are seeing some recovery from industry-wide softness in the second quarter of 2023. In our Specialty Industrial market, second quarter revenue was $289 million, a decline of 7% sequentially and just below our guidance expectations. Revenue can fluctuate from quarter to quarter as a result of trends within the multiple end markets served, but overall, has been generally stable over the last 4 quarters. Similar to our Semiconductor market, the year-over-year comparison is distorted as a result of recovery from the ransomware incident. Turning to margins, we reported second quarter gross margin of 47.3%, representing the high end of our guidance.

Gross margin was down sequentially, as expected, due to favorability from the non-recurring items in the first quarter, as well as product mix, including the impact of startup costs related to the world-class optics win in our Photonics Solutions division, as John discussed. Our margins continue to reflect the strength of our differentiated product portfolio. We continue to prudently manage our costs with second quarter operating expenses of $227 million, coming in well below our expectations. This was driven primarily by lower compensation and benefits expenses, especially with regard to the timing of planned new hires, as well as lower third-party spend. We are proud of our long-standing track record of managing our cost structure throughout market cycles, which allows us to balance investing in our business with near-term profitability and cash generation.

Looking ahead, we expect operating expenses will increase from second quarter levels, but remain below our earlier expectations of a $240 million-$250 million run rate for the balance of 2024. Second quarter operating income was $192 million, yielding an operating margin of 21.7% and above the high end of our guidance, driven by higher sales, strong gross margin, and lower operating expenses. Second quarter adjusted EBITDA was also above the high end of our expectations at $228 million, with a 25.7% margin. Net interest expense was $69 million, below our guidance of $79 million, reflecting interest savings from the May closing of our $1.4 billion convertible note offering and Term Loan B paydown.

As a result of entering into capped call transactions, we expect there will be no dilution to shareholders in the event of any conversion of the note, until our stock price exceeds $237.42, which was double our stock price when we announced the transaction. We used $1.2 billion of the net proceeds to repay borrowings under our Term Loan B facility, which, based on current interest rates, will save over $75 million of annualized cash interest and reduce our effective interest rate by over 100 basis points. We expect those cash savings will accelerate the deleveraging of our balance sheet.

In addition, the convertible note offering positioned us to reprice the remaining balance of our Term Loan B in July, reducing the interest rate by 25 basis points and saving an additional $9 million of annualized cash interest. Second quarter net earnings were $103 million, or $1.53 per diluted share, well above our guidance ranges. These results reflect the strong operating performance in the quarter, as well as the $0.14 per share of interest expense reduction from our recent convertible note offering and Term Loan B paydown, as well as a lower-than-expected tax rate of 20.5% for the quarter. The benefit from the convertible note offering and Term Loan B paydown represents only a partial quarter, given our execution in mid-May, and is expected to represent approximately $0.27 of earnings per share in the third quarter.

Free cash flow was $96 million, and unlevered free cash flow was $156 million. We closed the second quarter with more than $1.5 billion of liquidity, comprised of cash, cash equivalents, and short-term investments of $851 million, and our undrawn revolving credit facility of $675 million. Gross debt was $5 billion, and our net leverage ratio was 4.6 times, based on our trailing twelve-month adjusted EBITDA of $904 million. We expect to continue to prioritize debt paydown with our excess free cash flow, as evidenced by the $110 million voluntary debt paydown made in July, in parallel with our term loan repricing. This prepayment resulted in an $8 million reduction to our annualized cash interest based on current interest rates.

To put perspective around the impact of our debt actions this year, we entered 2024 with an annual interest expense run rate of approximately $330 million. With the actions we've taken year to date and the recent reduction in the Euribor rates, that value has been reduced to approximately $240 million. During the second quarter, we paid a dividend of 22 cents per share, or $15 million. With that, I'd like to turn the call back over to John, who will review our outlook. John?

John Lee (CEO)

Thank you, Michelle. Let me now turn to our third quarter outlook. We expect revenue of $870 million, ±$40 million, reflecting the better-than-expected second quarter and a continued slow path to market recovery as we continue to bounce along the bottom of this industry cycle. We now expect second half revenue to be relatively in line with first half levels. By end market, our third quarter outlook is as follows: Revenue from our semiconductor market is expected to be $360 million, ±$15 million. Revenue from our electronics and packaging market is expected to be $220 million, ±$10 million, and revenue from our specialty industrial market is expected to be $290 million, ±$15 million.

Based on anticipated revenue levels and product mix, we expect third quarter gross margin of 46.5%, ±100 basis points. We expect third quarter operating expenses of $235 million, ±$5 million. As we continue to manage expenses, we believe $235 million is an appropriate run rate for the fourth quarter as well. We estimate adjusted EBITDA of $206 million, ±$23 million. As Michelle mentioned, the recent convertible note offering and term loan B paydown is expected to be accretive by roughly $0.27 per share in the third quarter. We expect a tax rate of approximately 16.5% in the third quarter, and we expect to remain on track to achieve a tax rate of 20% for the full fiscal year.

Given these assumptions, we expect third quarter net earnings per diluted share of $1.43 ± $0.28. I'm proud of how our team has navigated the cyclical softness in our end markets while delivering for our customers and our shareholders. This, along with our differentiated product and technology portfolio, tied to key secular trends in our end markets, positions us well for the next cyclical upturn. With that, operator, please open the call for Q&A.

Operator (participant)

Thank you. At this time, we will conduct a question and answer session. Again, as a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Joseph Moore of Morgan Stanley. Your line is now open.

Joseph Moore (Managing Director and Head of US Semiconductors Research)

Great, thank you. Looked like gross margins in the quarter were stronger than at least we expected, and your Q3 guidance was pretty good. Can you talk about the puts and takes and what's driving that gross margin improvement?

John Lee (CEO)

Yeah, good morning, Joe. You know, I think the gross margin is reflective of the proprietary nature of our products. I think there was a good product mix again, mainly MSD. Chemistry revenue remained a good proportion of the revenue, but also gross margin was, you know, improving as well in VSD, as well as service. And we did note a little bit of gross margin headwind in PSD. So that kind of range of 46% to, you know, give or take 100 basis points, 46.5%, that's really, you know, the right way to think about our gross margin with the current mix that we have today.

Joseph Moore (Managing Director and Head of US Semiconductors Research)

Great. Thank you. And as a follow-up, separately, can I ask about, on the semi side, are you seeing any indications of NAND spending, picking up, you know, either second half this year or early next year?

John Lee (CEO)

Yeah, I think you know, it's hard to predict that, but I think we read the same things you guys read, and I think NAND does seem to be pushing out a little bit relative to maybe the industry view earlier in the year. So I think we're still bouncing along the very bottom for NAND. And as you know, we have some great proprietary solutions there, so when that market picks up, we'll certainly enjoy that pickup. But right now, Joe, I think we're a little more you know, bouncing along bottom a little longer, and I think that's consistent with the industry view.

Joseph Moore (Managing Director and Head of US Semiconductors Research)

Great. Thank you.

John Lee (CEO)

Thanks, Joe.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Vivek Arya of Bank of America Securities. Your line is now open.

Michael Mani (Equity Research Associate)

Hi, this is Michael Mani on for Vivek Arya. Thank you for taking a few of our questions. First off, I think some of your major customers in the semi market have reported so far indicated a relatively strong sequential growth into the second half. So I guess how can we reconcile this with some of the more muted trends we're seeing in Q3? And what signs should we look for at these customers before a more sustained upturn can occur? Is it largely a function of utilization, or are there other signs we should monitor?

John Lee (CEO)

... Thank you. Yeah, Michael, I think, you know, one of the things that's happening now in the industry and with MKS is that our lead times have been pulled in, which is good. They pulled into kind of the normal historical lead times, which are pretty short, and that does limit our visibility a little bit. And as we noted in the call this time as well as last quarter, there is a lot more of the, you know, unexpected, if you will, in-quarter conversions because our lead times are shorter. And so I agree that some of our customers have, you know, indicated that there may be some, you know, better second half, and, you know, we'll see if that happens to us, for us.

But certainly, if they do, and they need our equipment, we'll see that. But right now, the best we can see is that, kind of second half, first half is relatively consistent. And I would note, as we said in the prepared remarks, that Q2 was you know, much higher than we had expected coming into Q2.

Michael Mani (Equity Research Associate)

Got it. Thank you. And next, could you share any more color on the strategic photonics win in the quarter? Once this fully ramps over the coming quarters, how much could this potentially contribute to growth next year? And is there any way to frame the long-term opportunity in the optics photonics market for MKS? Thank you.

John Lee (CEO)

Yeah, I think this is just the latest example of a multiyear strategy we've had of investing in world-class optics. We believe that we have a unique capability in the industry because of our broad product portfolio, and we can integrate many things together that no one else can. And so this is a big win, and we're happy to have gotten it. There is always the startup costs, you know, cycle time is longer in the beginning, and manufacturing efficiency is a little less efficient in the beginning until you start making more units. As you order more parts, obviously, pricing of the supply, the parts, goes down. So we do have a little headwind on that in the beginning, but that's kind of normalized.

So I think it's just part of our bigger effort in world-class optics, which I, I think we'd point out, our revenue in lithography, metrology, and inspection has continued to grow, even during this current down cycle, and that's part of the reason why, you know, we continue to believe we can outperform WFE growth.

Michael Mani (Equity Research Associate)

Thank you.

John Lee (CEO)

Thanks.

Operator (participant)

One moment for our next question. Our next question comes from Melissa Weathers of DB. Your line is now open.

Melissa Weathers (Director Equity Research)

Hi there. Thank you for letting me ask a question. I wanted to talk about the specialty industrial business. Can you summarize where you think we are cyclically in that business? I think it came in a little bit lighter than what I thought in the recent quarter. So, how do we think about that business cyclically? I know there are a bunch of different moving parts within it.

John Lee (CEO)

Yeah, thanks for that question, Melissa. I think we look at it as not cyclical. It's made up of a bunch of different markets that, you know, tend to sum up to something pretty stable, and we've seen that over, you know, the past several quarters. It can be lumpy, and this quarter was down a little more than we had expected, as we said. I would look at this, I would kind of look at the longer term revenue for specialty industrials. That's why we look at, you know, kind of a year at a time. And when you look at it at that perspective, it is still very stable. So it can be lumpy, depending on, you know, some segments, sorry, of the markets.

Melissa Weathers (Director Equity Research)

Got it. And then on the E&P side, I think last quarter you talked about an uptick in demand for high-density multilayer PCBs related to AI servers. How is that business trending? Are you still seeing momentum from AI?

John Lee (CEO)

Yeah, I think we do. You know, many of those customers that are more levered to AI are our customers, and we see that momentum. Many of them are public companies, 'cause so you can see what they're saying. You know, the good thing is that the proportion of the PCB market that is driven by AI is increasing, but as we noted before, it's still relatively a small proportion of the PCB market. PCs and smartphones and non-AI servers are still the largest part of it, and as you know, there's still a little bit of muted demand in PCs and smartphones.

Melissa Weathers (Director Equity Research)

Got it. Thank you.

John Lee (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Jim Ricchiuti of Needham & Company. Your line is now open.

James Ricchiuti (Senior Analyst)

Hi, thanks. Good morning. Hey, John, I wanted to go back to the E&P performance in Q2, which was a little better than expected. It sounds like it was both equipment and chemistry related. I wonder if you can give a little bit more color on which was the bigger driver to that performance? And then I have a follow-up question on E&P.

John Lee (CEO)

Yeah, good morning, Jim. You're right, Q2, the uptick in E&P was driven by both equipment and chemistry, but chemistry is by far the bigger driver, Jim. And as you know, our guidance in Q3 is slightly down, but you know, just to give everybody a little more color, it's really because of the equipment that's slightly down. The chemistry is still, as we expect, Q3 being you know, a little higher than Q2. So I just want to give everybody a little color that that's consistent probably with what the industry is seeing.

James Ricchiuti (Senior Analyst)

Got it. That's helpful.

... Yeah, there are expectations, as you, as you know, that we could see a better refresh cycle for smartphones next year. I'm not gonna ask you if you agree with that, unless you wanna offer some perspective. But if that's accurate, I'm curious, which parts of the business are you gonna—is gonna lead that recovery from a booking standpoint? Is it gonna be, you know, the PCB drilling business, followed by the chemistry? Or is chemistry more—it sounds like that's more book and ship. And, you know, when could you see a possible uptick in orders if we're in that kind of a scenario?

John Lee (CEO)

Yeah, it's a great question, Jim. You know, if there was just steady business and people weren't adding CapEx, obviously the chemistry utilization and the chemistry bookings, which happen right when we ship, by the way, so there's really not a lag, would be the first indicator. But you raise a good point. If there was, you know, a big upcycle, if you will, in CapEx investments, we would have to see those bookings with the lead times that we have on laser systems. You know, and we don't report bookings, so I think... But to your point, you're right. If there is a buildup that requires new CapEx, we should see that in equipment sooner than just reutilization rates.

James Ricchiuti (Senior Analyst)

Okay. Thanks a lot.

John Lee (CEO)

Thanks, Jim.

Operator (participant)

Thank you. The next question comes from Krish Sankar of TD Cowen. Your line is now open.

Krish Sankar (Managing Director and Senior Research Analyst)

Yeah, hi. Thanks for taking my question. I told them, one, John, you know, your kind of outlook on September quarter, I mean, it kind of jibes with kind of what your customers have said also. But I'm kind of curious, the biggest delta between them and now is the fact that Intel cut CapEx, and I'm just wondering how much of that has had any impact, if any, in the second half of this year, and more realistically, in calendar 2025?

John Lee (CEO)

Yeah, you know, I think, you're right. Intel did have their call, and it guided CapEx down a little bit in 2024. I'm not sure that really, impacted our view of the guidance. Our view obviously is made up of all the customers in the industry. But I think in the... You know, when you think about the industry, everybody is kind of thinking, 2025 is gonna be good, but the, the time in which it does turn up is, is pushed out a little bit. I think that's what we're, what we're seeing, and, you know, that's why we're looking at second half kind of being very similar to first half.

I think coming into the year, Krish, we were all hopeful, we didn't know, that there might be, you know, a stronger, hockey stick towards the end of the year. And as the year progressed, I think, that has gradually come down, and I think right now, our best view is that second half, roughly the same as the first half.

Krish Sankar (Managing Director and Senior Research Analyst)

Got it. I mean, maybe let me ask the question a different way, John. You know, Intel also gave a calendar 2025 CapEx number, which is down 17% year-over-year. Baking that in, are you still in the camp that WFE will be a strong growth year next year?

John Lee (CEO)

Well, I think that is certainly, you know, a headwind to all WFE. But as you know, if someone's not spending on WFE, as long as the chip revenues are needed and the capacity is needed, someone else will be spending the CapEx as well. So I still think that 2025 will be better. And you know, we don't really predict WFE going forward. It's very hard to do, and thankfully, you guys have to, and we don't. But I still think 2025 will be better. But in terms of, you know, an impact on a specific customer, I don't think I could really, you know, really predict what that will be on 2025.

Krish Sankar (Managing Director and Senior Research Analyst)

Got it. Got it. And then a quick follow-up on the Atotech side, John. You know, obviously, the Atotech business does have some exposure to Intel, but you also have some exposure to some of these AI chips, which are seeing some delays with CoWoS. I'm kind of curious, has that really changed your perspective on, Atotech's advanced packaging opportunity into next year?

John Lee (CEO)

Yeah, no, I think you know, the next generation PCBs and substrate work that we're doing, you know, with our most advanced customers, that's still a couple of years out anyway. And your commentary is really about, you know, utilization rates today and any impacts from, you know, any kind of specific customer commentary. But as we said in the answer to an earlier call, a question, you know, we still see that AI-driven chemistry business is good. It's just that, you know, we have to put that in perspective in terms of the proportion of AI chemistry relative to the chemistry for the entire PCB market.

Krish Sankar (Managing Director and Senior Research Analyst)

Got it. Got it. Thank you, John.

John Lee (CEO)

Thanks, Krish.

Operator (participant)

Thank you. Our next question comes from Joe Quattrocchi of Wells Fargo. Your line is now open.

Joseph Quattrocchi (Director and Senior Equity Research Analyst)

Yeah, thanks for taking the question. I just wanted to kind of understand the second half versus first half, now expecting flat. I think, you know, as I think about, like, the beat, the magnitude of the beat in 2Q, and then kind of where the Street previously was modeling kind of a low single-digit increase, half on half, for second half, it seems like the, you know, flat half on half is a bigger change in the magnitude of the beat in 2Q. So I'm just kind of trying to understand, is there anything else that changed aside from, you know, the upside that you couldn't put up in 2Q, particularly in semi?

John Lee (CEO)

Yeah, Joe, I don't think there was a big change. You know, we kind of looked at every quarter through the year as kind of bouncing along the bottom. As I said earlier, coming into the year, we kind of expected, with the industry, that there would be more of an uptick in the second half, but slight, as we said. And now I think, you know, most in the industries have said that there is a bit of a push-out. And so whatever the consensus had for us and for the industry in Q3 and Q4 is probably more muted, that's for sure. And this is, you know, our best view right now. So I think, you know, not much change. I think we're just bouncing along the bottom.

I think the only change is we're probably bouncing along the bottom a little longer than we thought we might at the beginning of the year.

Joseph Quattrocchi (Director and Senior Equity Research Analyst)

Got it. And as a follow-up, can you talk a little bit about the early synergistic plating and chemistry design win that you saw in the quarter? Was that, and does that include MKS, like, laser drilling as well, or is it just on the Atotech side?

John Lee (CEO)

Yeah, we've talked in the past about laser drilling wins as synergistic. The ones we mentioned this time were Atotech wins synergistically. And as you know, as we've said before, if Atotech and MKS were already in that customer, and we both won, we don't count that as synergy. It's really the case where either the legacy MKS laser guys were in and Atotech wasn't, and if Atotech wins, then we count that as a synergy. And that's really what we're talking about with these two wins we called out.

Joseph Quattrocchi (Director and Senior Equity Research Analyst)

That's helpful. Just to be clear, is that one of the first kind of MKS-led wins then?

John Lee (CEO)

It is. It is. The other ones we've talked about in the past, as you know, were the Atotech bringing in the laser group. So these are the first two. Now, remember, wins take a while, right? Because you're qualifying, you're testing, et cetera. So we have been working at this for multiple quarters, and we have other things we're working on right now that hopefully, in the future, will turn into wins as well. So yes, these are the first two, Atotech chemistry wins because of the laser group.

Joseph Quattrocchi (Director and Senior Equity Research Analyst)

Helpful. Thank you.

John Lee (CEO)

Thanks, Joe.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. One moment for our next question. Our next question comes from Steve Barger of KeyBanc Capital Markets. Your line is now open.

Steve Barger (Managing Director and Equity Research Analyst)

Thanks. I know there's a lot of variables to this question, but in general, if you sell a new plating system and it gets to full run rate, how can we think about what that adds to consumables in terms of percentage to the base chemistry business? Or maybe you can talk about it in terms of dollars per system. I'm just trying to understand the relationship between new equipment installs and consumable uptake.

John Lee (CEO)

Yeah, Steve, thanks for calling. I know you're probably on an airplane or somewhere, but, I would say this, the ASPs of the equipment, the CapEx, depends on how, how big it is, number one. But if you take one, you know, one- maybe one of our biggest plating tools, and we're talking about electronics versus GMF, it could be $2 million, or so. Now, the chemistry is, I would say, think of it as an order of magnitude less per month. Or, and so, you know, there's chemistry in all these, tanks, but that chemistry lasts forever. So that's kind of the way we think about it. We can give you a little more, color on that, going forward.

So I just don't have the top, off the top of my head, because it does vary by the chemistry, by how much of the chemistry we have. And then, of course, the gross margins could vary slightly depending on the chemistry. So, you know, I think when we get the CapEx in, we're just, you know, really happy about the longer term prospects of that chemistry, and that could be 30 years of chemistry revenue.

Steve Barger (Managing Director and Equity Research Analyst)

Right. Yep, great. That's, that's a good start. And a lot of industrial end markets are soft right now, but are you seeing opportunities outside of automotive and the other established end markets in specialty that could give you a little revenue leverage to the cycle when it does improve?

John Lee (CEO)

Yeah, I think it is lumpy, and I would say you're right. Some of the industrial, industrial customers outside of automotive seem, you know, seem to be a little more hesitant, if you will. But I would say in one of the specialty industrial markets that seems to, you know, have been doing a little better was defense. And we've probably mentioned that a couple times over the last couple quarters. But, you know, as I said, that's a small percentage of our business, but it has been doing well in the last couple quarters. So that's one I would call out, but as again, it's really made up of multiple, multiple markets, our specialty industrials revenue.

Steve Barger (Managing Director and Equity Research Analyst)

Understood. Thanks.

John Lee (CEO)

Thanks, Steve.

Operator (participant)

Thank you. As a reminder, to ask a question, you need to press star one one on your telephone. One moment, please. This concludes the question and answer session. I would now like to turn it back to Paretosh Misra for closing remarks.

Paretosh Misra (Head of Investor Relations)

Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.