Q2 2024 Earnings Summary
- MKS Instruments has maintained strong gross margins above 47%, reflecting the value of its proprietary and differentiated products. This is driven by a favorable product mix, including chemistry revenue, and improvements in their Vacuum Solutions Division and service offerings.
- The company is experiencing momentum from AI-driven demand in its Electronics & Packaging (E&P) segment, particularly in high-density multilayer PCBs for AI servers. Customers leveraged to AI are driving increasing demand, contributing positively to their business despite the AI-driven PCB market still being a small proportion of the overall PCB market.
- MKS achieved a strategic photonics win as part of their multi-year investment in world-class optics, which has allowed them to continue growing revenue in lithography, metrology, and inspection even during the current down-cycle. This supports their belief that they can outperform WFE growth.
- Softness in Specialty Industrial Market Exceeds Expectations: The company's Specialty Industrial business came in lighter than expected in the recent quarter, with revenues down more than anticipated due to lumpiness in some subsectors, which could indicate ongoing weakness in this segment.
- Limited Visibility and Flat Second Half Outlook: Despite some major customers expecting stronger sequential growth in the second half, MKS Instruments has limited visibility due to shorter lead times and now expects second half revenue to be relatively consistent with the first half, suggesting potential underperformance compared to peers.
- Delayed Recovery in NAND Spending and Prolonged Downturn: The expected recovery in NAND spending is being pushed out further than previously thought, with the company acknowledging they are "bouncing along the bottom a little longer," which could negatively impact future revenues in this segment.
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Gross Margin Improvement
Q: What's driving the gross margin improvement?
A: Our gross margin reflects the proprietary nature of our products. We had a good product mix, mainly MSD and chemistry revenue, which remained a good proportion. Gross margin was improving in VSD and service, though we noted some headwind in PSD. The range of 46% to 46.5% is the right way to think about our gross margin with the current mix. -
NAND Spending Outlook
Q: Are you seeing any indications of NAND spending picking up?
A: It's hard to predict, but NAND seems to be pushing out a little bit relative to earlier industry views. We're still bouncing along the very bottom for NAND, and when that market picks up, we'll certainly enjoy that pickup. Currently, we're bouncing along the bottom a little longer, consistent with the industry view. -
Second Half Visibility
Q: How do you reconcile customer indications of strong second-half growth with your muted Q3 trends?
A: Our lead times have been pulled in, which limits our visibility. Some customers have indicated a better second half, and if they need our equipment, we'll see that. But right now, we see the second half being relatively consistent with the first half. Notably, Q2 was much higher than we had expected coming into it. -
Specialty Industrial Trends
Q: Where are we cyclically in the Specialty Industrial business?
A: We view it as not cyclical, made up of different markets that sum up to something pretty stable. This quarter was down more than expected, but looking at longer-term revenue, it remains stable. It can be lumpy depending on sub-segments of the markets. -
AI Impact on PCB Market
Q: Are you still seeing momentum from AI in the high-density multilayer PCB business?
A: Yes, we see momentum from AI, and many of our customers are leveraged to AI. The proportion of the PCB market driven by AI is increasing, but it's still a relatively small proportion. PCs and smartphones remain the largest part, and there's still muted demand in those areas. -
Intel CapEx Reduction Impact
Q: Has Intel's CapEx cut impacted your outlook for the second half and 2025?
A: Intel's CapEx reduction didn't significantly impact our guidance. We consider all customers in the industry. While Intel's cut is a headwind, if capacity is needed, others will spend. We still think 2025 will be better, but it's hard to predict the impact on specific customers. -
2025 WFE Outlook
Q: Do you still expect WFE to be a strong growth year in 2025 despite Intel's CapEx cut?
A: While Intel's CapEx reduction is a headwind to WFE, if chip capacity is needed, others will spend. We still believe 2025 will be better, but we don't predict WFE going forward. It's very hard to do, and we rely on industry dynamics where someone else may spend if another doesn't. -
Atotech Synergies
Q: Can you discuss the early synergistic plating and chemistry design wins?
A: We've had two wins where Atotech won due to our laser group. These are the first two such synergies, resulting from efforts over multiple quarters. We're working on others that may turn into wins in the future. These are the first Atotech chemistry wins because of the laser group. -
E&P Performance Drivers
Q: What drove the E&P performance in Q2, and what's the outlook?
A: The E&P uptick was driven by both equipment and chemistry, with chemistry being the bigger driver. Our Q3 guidance is slightly down, mainly due to equipment, while chemistry is expected to be slightly higher than in Q2. This is consistent with what the industry is seeing. -
Growth Opportunities Outside Established Markets
Q: Are you seeing opportunities outside of automotive and other established markets in Specialty?
A: Some industrial customers outside automotive are more hesitant, but one area doing better is defense. Though it's a small percentage of our business, it has performed well in recent quarters. Overall, it's lumpy and depends on various markets within Specialty Industrials.
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