MKS - Q4 2022
February 28, 2023
Transcript
Operator (participant)
Good day, thank you for standing by. Welcome to the MKS Instruments Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during that session, you will need to press star one one on your phone. 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 conference over to your speaker today, Mr. David Ryzhik. Mr. Ryzhik, please go ahead.
David Ryzhik (VP of Investor Relations)
Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Seth Bagshaw, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2022, 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 quarterly report on Form 10-Q for the quarter ended September 30th, 2022.
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 financial measures. Unless otherwise noted, all references to combined company financial measures reflect the combined results of MKS and Atotech Limited, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to the investor relations section of our website for information regarding our combined company results, non-GAAP financial results, and a reconciliation of our GAAP and non-GAAP financial measures.
As a reminder, in the fourth quarter, MKS updated its end market classifications, including replacing advanced electronics with electronics and packaging, reclassifying products and services supporting light emitting diode, laser diode, and solar markets from electronics and packaging to specialty industrial, and reclassifying Materials Solutions Division products and services supporting wafer-level packaging from semiconductor to electronics and packaging. For a detailed breakout of reported revenues by end market, as well as Atotech and combined company revenues by end market, please visit the investor relations section of our website. Now, I'll turn the call over to John.
John Lee (President and CEO)
Thanks, David. Good morning, everyone, and thank you for joining us today. We ended 2022 on a strong note, with revenue and EPS exceeding the high end of our guidance range. Of course, the first quarter did not begin the way we expected. On February 3rd, we identified that MKS had been a victim of a ransomware incident. We took immediate action to contain the incident, which has materially impacted our business systems as well as the operations of our Photonics Solutions Division and Vacuum Solutions Division, including our ability to process orders, ship products, and provide service to customers. The operations of our Materials Solutions Division were not impacted. Today, we're well into the recovery phase, and we've begun starting up the affected manufacturing and service operations, and we expect these operations will be restored over the coming weeks.
We plan to provide a more complete picture of the costs and related impacts of the incident on our first quarter earnings call, we do expect there will be a material impact on our first quarter performance. Our main focus today, of course, is on ramping up our production and service operations to meet the needs of our customers. I do want to take a moment to reflect on how enormously grateful I am for the efforts of the entire MKS team, from leadership to all key functional departments, in responding to and managing this situation. You always hear that the best prove the metal in the toughest moments, you often don't get to see that. I'm extremely proud of the unprecedented responsiveness, stamina, innovation, and resiliency demonstrated by our teams.
I also want to thank our customers, suppliers, and other business partners for their understanding, patience, and support through this difficult period. We're working hard to be fully back up soon, and I look forward to delivering on our commitments to all of you. Now, on to the business. I'd start by reflecting on the major milestone of 2022, which of course, is the addition of Atotech to the MKS portfolio. Atotech's critical process chemistry and equipment solutions across our electronics and packaging and specialty industrial markets further strengthen our position as a foundational technology solutions provider. We hit the ground running with Atotech. Our integration efforts have been progressing extremely well, and our initial engagements with major PCB manufacturing customers have been very positive. We look forward to demonstrating the value of our company's broader and unique capabilities to all of our stakeholders.
2022 also marked another record year for our semiconductor business, highlighted by strong demand across our vacuum and photonics portfolios. Our customers count on our broad domain and process expertise to solve their most complex challenges. We are uniquely positioned in the semiconductor capital equipment industry as MKS solutions are used in over 85% of the steps needed to manufacture a semiconductor chip. Operationally, during 2022, our global team navigated well through continued supply chain constraints and significant inflationary pressures. I'm proud of how we executed to meet those challenges while remaining focused on innovating across our portfolio to solve the industry's critical technology challenges.
While we believe macroeconomic challenges, along with expected pressures in WFE investment will persist this year, our 2022 achievements, combined with our leadership across a broad array of end markets, should significantly enhance our long-term potential to deliver sustainable and profitable growth within an estimated $25 billion addressable market. Let me discuss our results in more detail. We delivered fourth quarter revenue of $1.09 billion, adjusted EBITDA of $282 million, and net earnings per diluted share of $2. Sales to our semiconductor market exceeded our expectations as we executed well in responding to supply chain constraints and delivered on shipments better than anticipated. Our Photonics Solutions revenue set another record, reflecting continued customer traction and market penetration in advanced lithography, metrology, and inspection applications.
We were pleased to see our Optical Solutions business continue to gain traction across the EUV ecosystem for both lithography and inspection applications. Lithography, metrology, and inspection applications continue to grow as a percentage of our overall semiconductor revenue. For 2022, our revenue from these applications grew almost 30%, outpacing estimated industry growth rates. We expect this will remain an area of growth and investment for MKS. Moving to our electronics and packaging market, revenue was in line with our expectations of a sequential decline when compared to combined company results for the third quarter. As anticipated, softening in global electronics demand impacted sales of our chemistry solutions for advanced PCBs and packaged substrate applications.
Sales of our flexible PCB laser drilling equipment remained muted in the quarter, as expected, as customers continued to digest the strong growth and flex capacity added in 2020 and 2021. We saw encouraging signs of customer activity in our HDI PCB via drilling business. In the fourth quarter, we received a meaningful order for our Geode HDI tool, we are starting off the year well with a multi-unit order in the first quarter from a longtime Atotech customer. This is the first example highlighting the potential cross-selling synergies as we further integrate our businesses. For the full year, sales to our electronics and packaging market from the Atotech business grew by 3% when excluding the impact of foreign exchange and palladium pass-through. We're very pleased with Atotech's performance in a difficult near-term electronic device market.
Turning to our specialty industrial market, revenue was also consistent with our expectations and flat sequentially compared to combined company results for the third quarter. Our general metal finishing business continued to be impacted by lower automobile production volumes due to lingering supply chain constraints. In addition, some of our GMF customers were negatively impacted by disruptions associated with COVID-19 in China in the fourth quarter. That said, when excluding the impact of foreign exchange and palladium pass-through, Atotech's GMF business grew 2% year over year in the fourth quarter and 4% for the full year. Looking ahead to the first quarter of 2023, because of the impact of the ransomware incident, we're not able to provide our usual guidance at this time, but Seth will provide some color shortly. In summary, our fourth quarter results highlight our solid execution in a challenging environment.
2023 kicked off with its own challenges, as the ransomware incident has demonstrated. It also presents opportunity. As we execute on our recovery efforts, we will remain focused on our growth strategy across our end markets, which includes attractive revenue synergy opportunities. These markets feature powerful secular growth drivers, and as near-term industry headwinds abate, we look forward to capturing the valuable opportunities that lie ahead. I'd like to turn the call over to Seth.
Seth Bagshaw (EVP and CFO)
Thank you, John. I'll cover our fourth quarter and full-year results and provide some thoughts for our first quarter of 2023, including the preliminary impact of the ransomware incident. Starting with the fourth quarter, we delivered revenue of $1.09 billion, above the high end of our guidance range.
Revenue was down 5% sequentially and down 6% year-over-year, each compared to combined company results for the previous period. Excluding the impact of foreign exchange fluctuations and palladium pass-through, fourth quarter revenue grew 1% on a year-over-year basis compared to combined company results. Turning to our end market results, fourth quarter semiconductor revenue was $503 million, declining 6% sequentially and growing 2% year-over-year, each compared to combined company results for the previous period, which was better than our expectations. Despite headwinds from Patria supply chain constraints, as well as newly enacted U.S. export restrictions in the fourth quarter, our team executed very well in delivering to our customers.
Fourth quarter revenue from electronics and packaging market was $266 million, a decrease of 8% sequentially, and 19% year-over-year, each compared to combined company results for the previous period. Excluding the impact of foreign exchange and palladium pass-through, fourth quarter revenue declined 11% on a year-over-year basis compared to combined company results. On a sequential basis, this decrease in revenue is primarily a function of lower chemistry revenue resulting from the softer global electronics demand. Electronics and packaging revenue made up 25% of overall revenue in the fourth quarter. As we mentioned in our recent Analyst Day, we have a unique opportunity to combine our capabilities to optimize the interconnect as packaged substrates and advanced PCBs require greater integration due to trends in miniaturization and complexity.
We are very pleased with the initial reaction to the marketplace and our combined laser drilling and chemistry capabilities. That reaffirms our belief that we can deliver meaningful revenue synergies from the combination of our two companies as customers begin to focus on next-generation device design cycles. Moving to our specialty industrial market, revenue in the fourth quarter was $316 million, flat sequentially and declining 4% year-over-year, each compared to combined company results in the previous period. Excluding the impact of foreign exchange and palladium pass-through, fourth quarter revenue grew 3% year-over-year on a combined company basis. In the quarter, the specialty industrial market made up 29% of total revenue. As a reminder, our specialty industrial market utilizes our proprietary technologies in vacuum, photonics, and materials to serve a broad array of applications.
This share of expertise allows us to tap into some attractive secular growth opportunities, diversifies our revenue, and comes with healthy margins and cash flow. In the fourth quarter, consumables and service revenue across the three end market categories comprised 37% of our total revenue, up 3% year-over-year on a combined company basis, excluding the impact of foreign exchange and palladium pass-through. Looking forward, we expect this revenue stream to provide greater resilience in our financial model as we enter a period of cyclical and macroeconomic softness. Our services revenue, in particular, showed strong momentum led by our semiconductor market. These results are a byproduct of the actions we took several years ago, strategically reorganizing services to drive a more market-centric growth and profitability strategy. Turning to our margins, we reported fourth quarter gross margin of 45.9%, exceeding the high end of our guidance range.
We executed well in addressing continued supply chain constraints and inflationary pressures, also benefited from a more favorable product mix. Fourth quarter operating expenses were $242 million, up slightly from the midpoint of our guidance due to higher revenue volume. Fourth quarter operating margin was 23.6%, significantly above the high end of our guidance range, due to strong operating leverage in our financial model, along with favorable product mix. Our integration of Atotech is progressing well, we are on track to achieve our cost synergy target of $55 million within 18-36 months post-close. Fourth quarter adjusted EBITDA was $282 million, also above our guidance range. Adjusted EBITDA margin was 26%. Net interest expense for the fourth quarter was $75 million.
This was slightly lower than we anticipated, with variable timing of Fed rate increases relative to interest reset dates of our term loans, as well as higher interest income. Our tax rate for the fourth quarter was 20%, better than expected, due primarily to refinement of acquisition-related valuations estimates and a favorable geographical mix of income. Net earnings for the fourth quarter was $133 million, or $2 per diluted share. Consistent with our track record of deleveraging, we made a voluntary principal payment of $100 million in the fourth quarter. Ex in the quarter maintained strong liquidity with cash and short-term investments of $910 million and a revolving credit facility of $500 million.
We exited the quarter with gross debt of $5.1 billion, which included a voluntary debt prepayment, partially offset by a revaluation of EUR-denominated debt due to a strong EUR in the quarter. Our net leverage ratio exiting the fourth quarter, which we calculated on a combined company basis, was 3.4x based on trailing 12-month adjusted EBITDA. For the fourth quarter, operating cash flow was $184 million, and free cash flow was $130 million. Our capital expenditures in the fourth quarter were $54 million, an increase of $28 million compared to the third quarter, reflective of full quarter contribution from Atotech. Consistent with prior quarters, we had a dividend payment of $15 million, or $0.22 per share.
Moving to full year 2022 results, revenue was a record $3.5 billion, up 20% year-over-year from $2.9 billion reported in 2021. On a combined company basis with Atotech, revenue was consistent year-over-year. Through the impact of foreign exchange and palladium pass-through, 2022 revenue grew 5% for the combined company. Semiconductor revenue set another record in 2022, totaling $2.04 billion, growing 12% year-over-year. Excluding the impact of foreign exchange, semiconductor revenue grew 16% year-over-year. We delivered strong growth across our portfolio of vacuum and photonics solutions, reflecting our unique breadth in technology leadership. Electronics and packaging revenue was $1.1 billion in 2022 on a combined company basis.
Excluding the impact of foreign exchange, palladium pass-through, combined company sales declined 8% on a year-over-year basis. Atotech's business performed well in the electronics and packaging market, growing 3% year-over-year when excluding foreign exchange and palladium pass-through. Especially industrial revenue was $1.3 billion in 2022 on a combined company basis, excluding the impact of foreign exchange and palladium pass-through. Combined company sales grew 4% on a year-over-year basis. In 2022, on a combined company basis, the revenue split between our semiconductor, electronics and packaging, especially industrial markets, was 46%, 25%, and 29% respectively. Total consumables and service revenue amounted to $1.7 billion in 2022 on a combined company basis, up 5% year-over-year, excluding the effect of foreign exchange and palladium pass-through.
For 2022, on a reported basis, operating cash flow was $529 million, and free cash flow was $365 million. I'll now turn to our first quarter outlook. John addressed the current status of our recovery from the ransomware incident. Given that our affected operations are just starting to return to production and are focused on serving our customers, we're not able to provide our usual guidance for the first quarter. As you may have seen yesterday, we filed a notification with the SEC of an extension to file our 10-K. Given that we're in the process of restoring our systems, we require additional time to complete our annual report. As John noted, the incident has materially impacted our operations for our Vacuum and Photonics Solutions Divisions. The operations of our Materials Solutions Division were not impacted.
MSD revenues are spread across electronics and packaging, especially industrial markets. What we can share is that prior to the ransomware event, we were planning to guide total MKS revenue for the first quarter to be approximately $1 billion. This reflected widely publicized cyclical softness in the semiconductor industry, offset somewhat by a strong backlog coming into the quarter, continued weakening in global electronics spending impacted our electronics and packaging market, a modest sequential decline in revenue, especially industrial market. We estimate the ransomware incident will impact our first quarter revenue by at least $200 million. However, we expect to substantially recover this revenue by the end of the second quarter. Prior to the incident, we're also expecting gross margins of 44.5%, down from the fourth quarter levels due to lower volume and mix.
In terms of operating expenses, we're also expecting approximately $260 million in the first quarter, up from fourth quarter levels, primarily due to seasonal increase in compensation and fringe expenses, as well as continued investment into product development and customer-facing sales and marketing expenses. Our ability to continue to invest in critical initiatives has been a key strategic driver behind our long-standing ability to exit cycles in a stronger market position to continue to accelerate our customers' product roadmaps. We plan to maintain these investments. We're also keeping a close eye on macroeconomic industry trends, and our proven playbook for managing costs through cycles will allow us to adjust spending levels when and if needed. As an example, we've already executed approximately one-third of our $55 million Atotech cost synergy target within just a short period of time.
Just to run out expectations prior to the incident, for the first quarter, we expect our tax rate to be 27%. We currently expect our net interest expense to be $78 million. With that, I'll turn it back to John to wrap up.
John Lee (President and CEO)
Thanks, Seth. While the events of the last month have been an unpleasant distraction, they do not change the MKS story. Following an important 2022 in which we closed our strategic acquisition of Atotech and delivered strong financial performance, MKS is even better positioned for the future. We now address all of the core building blocks of advanced electronic devices, from the semiconductor chip, to wafer level packaging, to the packaged substrate, to the PCB, with enabling technologies that solve for miniaturization, complexity, and novel chemistry.
We do so with an enhanced business profile featuring the most comprehensive technology portfolio in the industry, spanning vacuum, photonics, and chemistry. Market leadership in 20 critical product categories across a balanced end market profile. A resilient business model with a significant mix of consumable and services revenue, and a larger addressable market. For all these reasons, we are confident that we are ready to capture a broader set of exciting market opportunities. I'd like to turn the call back to the operator for Q&A.
Operator (participant)
Thank you. As a reminder to ask a question, please press star one one on your phone and wait for your name to be announced. We also ask that you please limit yourself to one question and one follow-up. To withdraw your question, please press star one one again. Stand by while we compile the Q&A roster. Again, we ask you to please limit yourself to one question and one follow-up. One moment for your first question. Our first question will come from Jim Ricchiuti of Needham & Company. Your line is open.
Jim Ricchiuti (Senior Analyst)
Hi. Thank you. Good morning. So if we look beyond the ransomware incident, you seem to be suggesting you think you could pick up a significant amount of that revenue impact in Q2. I'm wondering how we might think about some of the other metrics that you outlined in the Q1 guide prior to the incident. In other words, you know, should we think in terms of those kind of expense levels and margins? Again, I'm not looking for guidance for Q2, but, you know, you've offered up this slide. I'm just wondering, you know, as we think beyond this into the June quarter, how we might think about some of these other metrics other than interest expense, which you have given some color on.
Seth Bagshaw (EVP and CFO)
Yeah. Thanks, Jim. It's Seth. I'll answer your question. I think you know, our view, we gave a little snapshot of the Q2 expected guidance prior to the incident, it gave you metrics for how to think of the business going forward. You know, obviously we've got a much different platform in terms of more resilient revenue stream from unit-based chemistry and service revenue. We've got many opportunities to grow the business in other multiple markets, and we'll continue to invest in the areas that really drive product investment as well as customer-facing opportunities like a sale to marketing. We have a lot of opportunities we want to invest in, and our goal is to exit any cycle stronger than we enter that cycle. You know, really no change in the business, as John mentioned.
This is kind of a, unfortunately, Q1 speed bump for us, very important. We continue to get our customers up, from operation side as well as the service side as well. We're really focused on, again, growing the business in the long term, making those investments.
Jim Ricchiuti (Senior Analyst)
Okay. My follow-up question, just relates to your specialty industrial business. If I heard you correctly, you're talking about a modest, I think, sequential decline. I'm wondering. You know, we don't have a lot of experience with that part of the business. Is that seasonal or is that macro related?
John Lee (President and CEO)
Hi, Jim, it's John. I'll take that. There is a little bit of seasonality to the automotive industry, but really it's end demand driven. I think if you read about supply chain constraints in automotive, you know, you can see that, you know, the first half, these expectations are that it's a little weaker in automotive than perhaps later. Of course, we don't know what will happen later, but really that's really what's driving most of that.
Jim Ricchiuti (Senior Analyst)
Got it. Thank you.
Operator (participant)
Thank you. One moment please, for our next question. Our next question will come from Sidney Ho of Deutsche Bank. Your line is open.
Sidney Ho (Equity Research Analyst)
Great. Thanks for taking my question. I want to start off with the ransomware event. You talk about at least $200 million of revenue impact in the first quarter. Most of that will be recovered by the end of second quarter. If you double-click on that, is that mostly impacting the semi business versus your other segments? The other part of the question is, do you think any of the revenue is perishable, whether it's potentially losing share to a competitor or that's an opportunity for your customer to cancel order based on what's going on in the broader market?
John Lee (President and CEO)
Sidney, thanks for the question. It's John. I would say that a lot of the revenue is of course semi-based. That's why, as you know, in the industry, you know, these critical subsystems that we make are co-designed with our customers, qualified by their customers, and so really difficult to displace. You know, we've had relationships with these customers for decades, they've been very supportive. We feel that, you know, all this revenue is easily recovered in terms of designs. I think that, you know, there are other revenue that could be lost a little bit, but, you know, those are very de minimis. We're really not worried about that, and we're gonna try to get those back as well.
Sidney Ho (Equity Research Analyst)
Okay. That's helpful. Thanks. My follow-up question is, if I look at the first quarter, you gave some color on in the pre-ransomware events, what you have guided, $1 billion down 8%. You gave a little comment on semi versus electronics packaging and specialty industrials. Just on an order basis, do you expect first quarter to be the trough for any of these businesses? Maybe you can comment on the backlog, what you're seeing into second quarter as well. That would be great. Thank you.
John Lee (President and CEO)
Sidney, we don't really comment on order rates. I think that you can surmise that because we would have guided $1 billion, the strength of the backlog is really carrying that, especially for the semiconductor industry, as you mentioned. We're really happy with the strength of our backlog. That we would have done, you know, much better. As I said before, whatever gets lost in Q1 because of the ransomware event, we expect substantially will be made up by Q2.
Sidney Ho (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you. One moment please for our next question. One moment. Our next question will come from Krish Sankar of Cowen and Company. Your line is open.
Krish Sankar (Managing Director and Senior Research Analyst)
Yeah. Hi, thanks for taking my question. I have two of them. First one, John, back to the prior question, you know, about pre-ransomware, you would have guided $1 billion thanks to the backlog. Is it fair to assume, you know, if you try to look at the, you know, the linearity to the year, your revenue should eventually follow the WFE pattern, in other words, your customers are lowering their inventory. In theory, semi should start slowing as we progress through after Q1 pre-ransomware. Is that a fair assumption?
John Lee (President and CEO)
Krish, I think that's a fair assumption, but I would point out though that because we're exposed to 85% of WFE, as you well know, you cover these companies, not all of them are behaving the same way. Some customers of ours in wafer fab equipment are saying, you know, they're gonna go down in Q1 and/or first half, and some have different rates at which they're gonna go down. Some are saying, no, it's still pretty steady in the first half, and some are saying it's going up for the whole year even. We're exposed to all those customers. In general, you're right. If WFE goes down, we'll go down. Our long-term model has obviously demonstrated that we can outperform WFE by 200 basis points.
We're a much broader company now, and we're exposed to different parts of WFE. I think that just allows us to be a lot stronger supplier to the ecosystem.
Krish Sankar (Managing Director and Senior Research Analyst)
Got it. Thanks a lot, John. A follow-up for Seth. Seth, just curious with this ransomware impact on the revenue, how does that affect your Term Loan A covenants?
Seth Bagshaw (EVP and CFO)
Yeah. As we talked about, exiting the fourth quarter, our net leverage ratio is 3.4x gives a lot of headroom relative to a 5.25x leverage covenant ratio, which is on the Term Loan A only, by the way, which is where we paid off $100 million in the fourth quarter. That covenant only tied the Term Loan A. That's $90 million exiting Q4. Looking ahead, we see headroom going forward as well. You know, that's an area we feel very comfortable with, quite honestly. That revenue moving from Q1, we believe substantially recovering Q2 will kind of offset that on a six-month basis. We feel very comfortable with the covenants going forward.
We'll kind of lean into that Term Loan A as well. It's kind of where we're gonna kind of de-lever more aggressively. I just wanna come back to one comment I had before early on as to respond to Jim Ricchiuti's call. I meant to refer Q1 pre-ransomware, you know, information relevant to Q2. Just wanna kind of clarify that point as well.
Krish Sankar (Managing Director and Senior Research Analyst)
Thank you very much, Seth.
Seth Bagshaw (EVP and CFO)
Yeah. Thanks, Krish.
Operator (participant)
Thank you. One moment, please, for our next question. Our next question will come from Joe Quatrochi of Wells Fargo. Your line is open.
Joe Quatrochi (Director and Equity Research Analyst)
Yeah. Thanks for taking the question. I wanted to understand the gross margin guidance or commentary for 1Q. Maybe if you could unpack that a little bit in terms of just like the moving parts there, because I would have thought that, I guess maybe it could have been a little bit better than that given, Materials Solutions should be a higher percentage of the total company revenue. I believe that has a higher kind of incorporate average gross margin, if you could just help us out there.
Seth Bagshaw (EVP and CFO)
Yeah, Joe, I'll take that. It's Seth. In the fourth quarter, we talked about a little favorable impact favorable on the mix for the quarter. That's why we're above the high end of the guidance range. The Q1 commentary, $1 billion. Most of the impact on the margin is really volume driven with a slight mix differential there as well. You're absolutely right. On the MSD side, those margin a little bit higher than our corporate average. Fundamentally, that $1 billion commentary has quite a bit of revenue in the Photonics Solutions Division as well as with the Vacuum Solutions Division as well. So really, the Q1 commentary is primarily volume driven with a little bit more normalized mix.
Joe Quatrochi (Director and Equity Research Analyst)
Got it. Then just, is there any sort of like cash outlay related to the ransomware attack that we should be aware of, I guess, when we think about that kind of back to your, you know, estimating the net leverage?
John Lee (President and CEO)
Yeah, Joe, appreciate the question, but we're really not going to, you know, provide any details on the ransomware investigation. Certainly, we are hiring experts to help us recover, and, you know, those are expenses. In terms of cash outlay, I think, you know, there's really no comment here.
Joe Quatrochi (Director and Equity Research Analyst)
Fair enough. All right. Thank you.
Operator (participant)
Thank you. Again, one moment please for our next question. Our next question will come from Mark Miller of The Benchmark Company. Your line is open.
Mark Miller (Senior Equity Analyst)
Thank you for the question. I just was wondering between the ransomware issue and also The expected macro slowdown, can you discuss how what happened with the backlog last quarter? Does the backlog indicate it's gonna be a front-end, back-end or basically an even year in terms of sales?
John Lee (President and CEO)
Yeah, Mark, it's John. I would say that, you know, as I said earlier, the guidance we would have given prior to the ransomware of $1 billion, a lot of that is on the strength of the backlog that we have, entering Q1. You know, we can't really predict what will happen after that for sure. Certainly the strength of the backlog allows us to we probably would have outperformed many of our peers in Q1 if the ransomware event hadn't happened.
Mark Miller (Senior Equity Analyst)
The margin profile, what's in the backlog, is that similar to what you've been seeing recently?
John Lee (President and CEO)
I think there's no change there, Mark. You know, same kind of customers. No, no real change there on the margin profile, Mark.
Mark Miller (Senior Equity Analyst)
Thank you.
Operator (participant)
Thank you. One moment please for our next question. One moment. Our next question will come from Steve Barger of KeyBanc Capital Markets. Your line is open.
Steve Barger (Managing Director and Equity Research Analyst)
Thanks. Good morning. You mentioned the Q4 Geode order and I think a separate multi-unit order. Can you talk about pipeline visibility into further orders from legacy ATC customers?
John Lee (President and CEO)
Yeah, Steve, I would say we talked about the 4Q order that was a multi-unit order. That was not with Atotech, you know, extra synergy, if you will. There was another order, which we did call out in Q1, which was a longtime Atotech customer that we really didn't have a relationship with. That was clearly a synergy. That happened a lot sooner than I was expecting, Steve, so I'll take it for sure. We have a long pipeline, that's reviewed with me, every month of other potential synergy opportunities going both ways. Areas where ESI could help Atotech and vice versa. These are, you know, you gotta look at these as multi-year efforts. You know, you talk to the customer, you get qualified, then they ramp.
You know, that's the kind of timeframe that, you know, you should think about. you know, every once in a while you get a bluebird like we talked about, in the call.
Steve Barger (Managing Director and Equity Research Analyst)
Got it. Can you talk about how ATC's recurring revenue stream performed during the quarter versus your model? Is that revenue stream running as expected to start the year?
John Lee (President and CEO)
Yes, it is. As Seth talked about, you know, excluding FX and Palladium, like everybody else in the industry, we are really pleased with how they did relative to the industry. We believe we maintained share in electronics and GMF, and so that's really met our expectations, and we're really pleased with how Atotech is performing.
Steve Barger (Managing Director and Equity Research Analyst)
Thanks.
Operator (participant)
Thank you. That will conclude the Q&A portion of the conference. I would now like to turn the conference back to David Ryzhik for closing remarks.
David Ryzhik (VP of Investor Relations)
All right. Thank you for joining us today and for your interest in MKS. Operator, you may close the call, please.
Operator (participant)
Thank you. This will conclude today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.