MKS INSTRUMENTS INC (MKSI)·Q1 2024 Earnings Summary

Executive Summary

• Revenue of $0.868B, above the midpoint of guidance; Non-GAAP EPS $1.18 and Adjusted EBITDA $217M both exceeded the high end of guidance; gross margin 47.8% was stronger than expected, with ~60 bps of nonrecurring tailwinds .
• Semiconductors ($351M) declined 3% sequentially but outperformed internal expectations on backlog conversion; Electronics & Packaging ($208M) fell 8% sequentially; Specialty Industrial ($309M) rose 1% q/q; consumables/services comprised 42% of revenue, supporting margin resiliency .
• Q2 2024 guidance: revenue $860M ± $40M, gross margin 46.5% ± 1pp, OpEx $240M ± $5M, Non-GAAP EPS $0.93 ± $0.26; segment guidance implies semi bouncing at the bottom with modest H2 improvement; Electronics & Packaging seasonally up; Specialty Industrial stable .
• Catalysts: strong margin execution and Atotech synergy realization (> $55M run-rate achieved), plus emerging AI-driven demand in advanced packaging and multilayer PCBs; near-term headwinds from muted NAND WFE and product mix drive a step-down in Q2 gross margin vs Q1 .

What Went Well and What Went Wrong

What Went Well

• Gross margin 47.8% exceeded the high end of guidance, driven by favorable mix, disciplined cost control, and ~60 bps nonrecurring benefit; operating margin (Non-GAAP) reached 20.2% and beat guidance as operating leverage flowed through .
• Non-GAAP EPS ($1.18) and Adjusted EBITDA ($217M, 25% margin) were above the high end of guidance; liquidity remained robust ($846M cash/short-term investments; $675M undrawn revolver) with continued voluntary debt prepayments .
• Photonics Solutions revenue for lithography, metrology, and inspection “remained robust” and continued momentum in “world-class optics” initiative; management emphasized positioning for AI secular growth across compute/memory architectures .

Quotes:

• “Adjusted EBITDA of $217 million and net earnings per diluted share of $1.18 both exceeded the high end of our guidance” .
• “We reported first quarter gross margin of 47.8%, exceeding the high end of our guidance range” .
• “We exceeded our Atotech cost synergy target of $55 million…at the earlier end of our expected time frame” .

What Went Wrong

• Semiconductor market still “bouncing along the bottom” due to historically low NAND equipment spending; pockets of inventory workdowns persist and drive sequential pressure in Q2 semi revenue guidance ($335M ± $15M) .
• Electronics & Packaging faced FX and palladium pass-through headwinds; HDI and flex laser drilling CapEx remains muted, with only slight improvement; recovery tied to broader PC/smartphone/non‑AI server demand .
• Q2 gross margin guided to 46.5% ± 1pp, stepping down vs Q1 on mix and nonrecurring benefits not repeating; Non-GAAP EPS guided down to $0.93 ± $0.26 .

Data points:

• Semi revenue $351M (-3% q/q); E&P $208M (-8% q/q); Specialty Industrial $309M (+1% q/q) .
• Nonrecurring gross margin items ~60 bps helped Q1 and won’t recur in Q2 .

Financial Results

Segment Revenue Breakdown ($USD Billions)

KPIs and Balance Sheet

Estimate Comparison vs Wall Street Consensus

† S&P Global consensus data unavailable at time of request due to provider rate limits. Values would be retrieved from S&P Global.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Positioning: “We are foundational to key suppliers of leading-edge process equipment in an era where AI is beginning to have a transformative impact on compute and memory architectures” .
• Photonics and advanced packaging: “Revenue from our optical solutions for lithography, metrology and inspection applications remained robust…world-class optics initiative” .
• Electronics & Packaging synergy: “Our unique combination of laser and chemistry expertise positions us for attractive growth in packaged substrates…complements our opportunity in high-density interconnect PCBs” .
• Margin drivers and mix: “Strong gross margins…favorable product mix and continued cost control…benefited by ~60 bps from certain nonrecurring items” .
• Atotech synergy delivery: “Exiting the first quarter, we exceeded our Atotech cost synergy target of $55 million…at the earlier end of our expected time frame” .

Q&A Highlights

• Memory/NAND inflection and capacity: Management sees signs of memory pricing/utilization improving; prepared to support a quick inflection; semi is “bouncing along the bottom” .
• Advanced packaging PCB complexity: AI boards up to 20 layers; tighter lines/spaces increase chemistry and laser drilling intensity; MKS unique in offering lasers + chemistry .
• Inventory and NAND node upgrades: RF power decks are upgraded for node transitions; benefits MKS even with chamber upgrades; NAND inventory burn-down still unfolding into H2 .
• Services and margin mix: Record service margins driven by product mix, pricing, and easing cost pressures; nonrecurring margin items were material/freight/duty recoveries .
• Deleveraging trajectory: Additional $50M prepayment in April; net leverage path to ≤4x depends on profitability/EBITDA ramp as cycle recovers .

Estimates Context

• S&P Global consensus estimates for Q1 2024 revenue and EPS were unavailable due to provider rate limits at time of request; accordingly, comparison vs Street is not provided. Values would be retrieved from S&P Global.
• Relative to internal guidance, MKSI delivered revenue above the midpoint; Non-GAAP EPS and Adjusted EBITDA above the high end; Q2 guidance raises revenue, EPS, and margins vs the prior quarter’s guidance, suggesting potential upward revisions to Street models if consensus assumes flattish H1 .

Key Takeaways for Investors

• Margin execution is the near-term driver: strong Q1 gross margin (47.8%) and Non-GAAP operating margin (20.2%) demonstrate pricing power and mix resiliency; watch Q2 mix-driven step-down and nonrecurring item normalization .
• Semi recovery remains gradual but levered to AI and memory: NAND remains a headwind, but node upgrades (RF power decks) and HBM/logic exposure position MKSI well for an inflection; Photonics remains robust and less cyclical .
• Advanced packaging is a growing secular leg: AI multilayer PCBs and packaged substrates increase process complexity, favoring MKS’ integrated lasers/chemistry/plating portfolio; early equipment order upticks tied to AI are notable .
• Atotech synergy realization and consumables mix underpin cash generation: >$55M synergy run-rate achieved; consumables/services at 42% of revenue support margins/cash conversion in muted CapEx environments .
• Balance sheet flexibility improving: liquidity >$1.5B, additional prepayments, net leverage 4.3x; continued deleveraging is tied to EBITDA ramp and working capital discipline .
• Q2 guide was raised vs prior quarter’s guidance across revenue, EPS, and margins; if Street assumes flattish H1, guidance implies potential upward estimate revisions and supports medium-term re-rating on AI packaging tailwinds .
• Trading implications: near-term hinges on evidence of semi backlog conversion and AI-related PCB equipment demand; monitor Q2 margin mix and services strength, and any acceleration in NAND node upgrades discussed intra-quarter .