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Operator
Ladies and gentlemen, thank you for standing by, and welcome to the MKS Instruments third quarter 2020 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, David Ridgick, Vice President, Investor Relations.
David Ridgick
Please go ahead, sir. Thank you. Good morning, everyone. I'm David Rizek, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market closed, we released our financial results for the third quarter of 2020, which are posted to our website, mksinst.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 the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q for the company. 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 non-GAAP financial measures. Please refer to our press release for information regarding GAAP. our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. Now, I'll turn the call over to John.
David Rizek
Thanks, David. Good morning, everyone, and thank you for joining us today. In the third quarter, we delivered record revenue of $590 million, which is above the high end of our guidance range. Non-GAAP net earnings were $107 million, or $1.93 per diluted share, which is at the high end of our guidance range. Before I discuss our results and market trends in more detail, I want to take a moment to acknowledge the tireless efforts and dedication of MKS employees around the world who achieved these record results, especially in such a challenging environment. Our employees continue to display amazing resilience in dealing with the extraordinary circumstances resulting from the global COVID-19 pandemic. Yet, this did not impact their focus on serving customers, maintaining productivity, executing on our innovation playbook, and most importantly, showing compassion and caring towards each other. One of our strongest guiding principles at MCAS is to win as a team, and that's what we did. Now let me discuss our third quarter results in more detail. Sales to our semiconductor market grew 12% sequentially as we experienced strong demand across our portfolio of critical subsystems, most notably in our power solutions business, where we achieved another record revenue quarter. We are extremely pleased with our sales and technology execution in power, delivering over 110% year-over-year growth for the first three quarters of 2020. Demand for our market-leading plasma and reactive gas solutions continues to be strong, especially in semiconductor deposition applications. The reliability, compact footprint, and cost of ownership advantages of our remote plasma sources have led to several large orders in the quarter, in atomic layer deposition and plasma-enhanced CVD applications. Our dry ozone systems continue to gain traction in advanced deposition processes, and our dissolved ozone and dissolved ammonia systems are seeing strong demand for wet-clean applications at leading edge foundry nodes. Our broad portfolio and unique capability to solve the most critical challenges around the vacuum chamber have set us apart from our peers. However, our semiconductor growth strategy goes beyond the vacuum chamber, and we continue to expand into lithography, metrology, and inspection applications, where we are leveraging our broad optics, motion, and photonics expertise. In the third quarter, we secured several additional design wins through our world-class optics initiative, and we continue to engage with key OEMs to help solve their toughest problems. As we look into the fourth quarter, we expect demand in our semiconductor market to remain strong. We are pleased with our results in our advanced markets, which grew 4% sequentially, better than we anticipated. We saw a seasonal decline in PCB drilling applications as expected. However, this was offset by stronger demand in our research and life and health sciences markets. During the past few earnings calls, we've talked about the long-term opportunity we see in precision laser processing. particularly for advanced electronics manufacturing. I would like to highlight three key drivers that underpin our excitement around this opportunity. First is the expansion of devices that require precision laser processing. Five years ago, precision lasers were used mainly for smartphone electronics and solar panel manufacturing. Now we are seeing precision laser processing expand to wearables, tablets, autonomous vehicles, and many other electronic devices. Second is the significant increase in the number of electronic components per device. Five years ago, we were dealing with hundreds of components in a smartphone. Today, we are dealing with many thousands. Third is the continued expansion in the types of laser-based processes being deployed for precision manufacturing. Our customers are finding new ways to use lasers, for example, in laser doping, surface functionalization, and micro-welding. We believe the confluence of these drivers offers an attractive growth opportunity where we are uniquely positioned with our Surround the Workpiece portfolio of lasers, optics, photonics, motion, and laser drilling systems. We are particularly excited to have announced our first multi-unit order for our new high-density interconnect PCB via drilling tool. Our customers are installing our tools for volume production. This is an important milestone for MCAS as we enter into this $500 million market with a strongly differentiated tool. We are happy with the sequential revenue growth in our advanced markets in the third quarter, and we anticipate demand trends in the fourth quarter to remain consistent. Before I turn the call over to Seth, please note that MCAS will be holding a virtual investor day on Thursday, December 10th. We plan on providing more insight into our growth opportunities, strategy, and long-term financial model. Stay tuned for more information in the coming weeks. And now I'd like to turn the call over to Seth. Thank you, John. I'll cover our third quarter results and provide additional detail on our fourth quarter guidance. Sales of third quarter were a record $590 million, up 8 percent sequentially, and up 28 percent year-over-year, and above the high end of our guidance range. This strong performance reflects continued strength in our semiconductor market, as well as sequential growth in our advanced markets. The third quarter semiconductor sales were a record $359 million, up 12% sequentially, and up 61% year-over-year, reflecting strong industry fundamentals. We saw strength across our product portfolio, but in particular, our power solutions business posted another record quarter, which marks the second consecutive quarter of triple-digit year-over-year growth in this business. Sales to advanced markets were $231 million, up 4% sequentially, driven by improvements in research and defense in life and health science markets, which more than offset the expected seasonal decline of FlexPCB products. In our second quarter earnings call, we know that our research market, been impacted by COVID-19-related university and research lab closures, had stabilized relative to the first quarter. We are pleased to announce that in the third quarter, revenue from our research market grew over 30% sequentially, led by university reopenings, and has now returned to pre-pandemic levels. As John mentioned earlier, we received a multi-unit order for our geode HDI system earlier in the third quarter. And following successful installation and customer acceptance, we recognized revenue in the first unit in the third quarter. For the quarter, the revenue split between our semiconductor and advanced markets was 61% and 39%, respectively. Third quarter non-GAAP gross margin was 45.1 percent, which is slightly below the midpoint of our guidance, primarily due to product mix and inventory charges for certain discontinued products within our light and motion division. We also incurred high variable compensation costs due to our strong financial results. We expect these items to return to more normalized levels in the fourth quarter. Non-GAAP operating expenses for the third quarter were $129 million, flat to the second quarter, reflecting a continued focus on cost control, even with high anticipated revenue volumes and variable compensation. Third quarter, non-GAAP operating margin was 23.1%, a sequential increase of 150 basis points, reflecting strong financial leverage in our operating model. We continued to generate additional cost synergies from the ESI acquisition, We are pleased to announce that exiting this quarter, we have further increased these savings and have now realized a total of $18 million of annualized cost synergies. This amount is above our original target and remains well ahead of schedule. Non-GAAP net interest expense in the third quarter was $6.3 million, and a non-GAAP tax rate deflected a favorable geographic mix of taxable income was 17%. Non-GAAP net earnings for the third quarter were $107 million and $1.93 per diluted share. Now, turn to the balance sheet. Exiting the third quarter, we maintained a strong balance sheet liquidity with cash and short-term investments of $716 million in $100 million of incremental borrowing capacity under an asset-based line of credit subject to certain borrowing-based requirements. our net leverage ratio further decreased, highlighting our ability to generate strong EBITDA and cash flow. Since the closing of the ESI acquisition in February of 2019, our net leverage ratio has decreased from one times to 0.2 times exiting the third quarter, and we anticipate continued reduction in our net leverage ratio exiting the fourth quarter. Consistent with prior quarters, we made a dividend payment of $11 million, or 20 cents per share, In terms of working capital, day sales outstanding were 56 days at the end of the third quarter compared to 64 days at the end of the second quarter. Inventory turns were 2.6 times compared to 2.4 times in the second quarter. We remain focused on improving our cash conversion cycle and following a record second quarter, third quarter operating cash flow and free cash flow again set new records at $152 million and $123 million, respectively. Free cash flow was 21 percent of revenue for the quarter. I'll now turn to our fourth quarter outlook. Based on current business levels, we estimate that our fourth quarter revenue of $600 million, plus or minus $25 million. Based on anticipated product mix in revenue levels, we estimate fourth quarter non-GAAP gross margin of 45.5 percent, plus or minus one percentage point, and non-GAAP operating expenses of $133 million, plus or minus $4 million. For the fourth quarter, non-GAAP net interest expense is expected to be approximately $6 million, and a non-GAAP tax rate expected to be approximately 17 percent reflect anticipated geographic mix of taxable income. Given these assumptions, we expect fourth quarter non-GAAP net earnings of $2 per diluted share, plus or minus 20 cents. I'd like to now turn the call back to the operator for Q&A.
Operator
Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question and one follow-up. Please stand by as we compile the Q&A roster. Our first question comes from Tom, definitely with DA Davidson, you may proceed with your question.
Tom
Yes, good morning. Thanks for taking the call. So maybe just the first question on the HDI market. Congratulations on the first production order there. But I think you remind us, why is it that you're winning in the marketplace? What are the key drivers that we should be looking for for this market going forward? And what type of seasonality do you typically see in that market?
David Rizek
Yeah, Tom, it's John. So we've talked about before some of the features that we have that make it highly differentiated. The first one is throughput, higher throughput than what's out there. Second of all is also the footprint and weight. And so those have been very valuable to some of our customers with respect to manufacturing, putting it into manufacturing locations. In terms of seasonality, it probably does follow a little bit of the consumer electronics seasonality, so similar to Flex. And that's how we look at it. And that hasn't really changed as well. And, you know, it's still a $500 million market of which, as you know, we only have just begun to gain some of that share. So we're really excited about the potential growth there.
Tom
Okay. I guess with all that in mind, how do you think this rolls out over the next couple of years from your participation in the market?
David Rizek
Right. So right now, as you said, we have very little share. We've been working on design wins with our beta customers in 2020, as we've discussed in the past. And so we were set up very well with those customers for the next cycle, which should begin in in 2021. So as we do that, as we gain those kinds of customers and volume, we'll continue working with other customers or those customers that we already have with different design wins as well in terms of different processes. So I think 2021 will be kind of the first year where we'll see some of those design win work that we've achieved this year turning into revenue.
Tom
Okay, great. And then as a follow-up, When you look at the success you've had in the power market, are a lot of these tools going into the memory market where if we would expect that memory recovery over the next year or two, you'd see some further acceleration of your success in that marketplace?
David Rizek
That's correct, Tom. A lot of our power is leveraged towards memory, is leveraged towards OEMs that are strong in memory. It's also leveraged towards OEMs that are based out of Korea. as well as North America. So as memory picks up, we should see that benefit. We are slightly more leveraged to NAND versus DRAM, so that does change the mix a little bit in power. But in general, memory is good for us.
Tom
Okay. Thank you. I'll hop back in the queue.
Operator
Thanks, Tom. Thank you. Our next question comes from Sidney Hall with Deutsche Bank. You may proceed with your question.
Tom
Thanks for taking my question. A couple of them. On the SEMI side, obviously very impressive growth, up 60% year-to-date, year-over-year. If revenue is flat, to your point, maybe slightly better, you're still looking at maybe 45% plus for the full year, obviously much stronger than the wafer fab equipment market itself. Consider where you are in the supply chain. Do you think you can continue to outgrow the WFE market next year? In other words, do you think maybe the inventory at your customers are at normalized level exiting this year?
David Rizek
Good question, Sidney. I mean, typically, as you know, we outrun semi during the ramp. We always outgrow, and then in the downturn when there's inventory correction, we would underperform. But net-net, we always look at our target of growing faster than WFE by 200 basis points, which is still our model and which we've demonstrated over the last 20 years. So I think if WFE continues to grow, we may still outperform. If it flattens out, I think then we kind of leverage, and then, of course, if it turns down, we'll probably underperform. But we really look at WFE growth longer term through the cycles and how we perform there, and that's always been about 200 basis points above WFE CAGR.
Tom
Okay, that's helpful. Maybe switching over to the advanced markets, if you look at Q4, I understand there's a lot of different businesses in there. What are the areas that you think that are still below a normalized range? I know you talked about research back to normal, but I'm thinking about along the lines where we had some capacity over the past couple of years that may start seeing shortages.
David Rizek
Yeah, you know, I think we do have a lot of different markets in that advanced markets bucket, but industrials They're not levered to consumer electronics. Those are also a significant part of our advanced markets. And, for instance, automotive, things like that, industrial manufacturing, those are the kind of markets that have been depressed because of COVID. And we're starting to see signs of those coming back up. You see some of the other calls from other companies levered to automotive and starting to see life there. So that's an area where we haven't seen that pick up yet, but we expect that to also pick up as well.
Tom
Okay, maybe one last for me. On the gross margin side, Seth, you described the reason why the gross margin is lower than the midpoint for Q3. But for Q4, with revenue expected to be at record high again, anything you would highlight at that gross margin line, that could be a headwind as compared to your prior gross margin peak of 48%. That may or may not go away in the next couple quarters.
David Rizek
Yeah, thank you, Sydney. So I would say if you look back to 2018, there is in a current P&L, the run rate's obviously the duties from the trade friction between the U.S. and China. And that's probably about 30 to 40 basis points versus if you go back several years ago, that's certainly a piece of it. And then obviously the fourth quarter here would have the ESI revenue in there as well. It went back to, you know, pre-acquisition 2018. It was only really V&A and light and motion. So not quite apples to apples, I would say. But other than that, we expect the margins being the fourth quarter to be more normalized. We saw in Q3 it was really unique items that were kind of unique to the quarter. And, again, we think those will normalize back in the fourth quarter. And they're all in the light and motion division, as I mentioned in my prepared remarks.
Tom
Great. Thank you very much.
Operator
Okay. You're welcome. Thank you, and as a reminder, please limit yourself to one question and one follow-up. Our next question comes from Scott Graham with Rosenblatt. You may proceed with your question.
Scott Graham
Hey, good morning, and thanks for taking the question. Nice quarter. Thank you. Thanks, Scott. I was just wondering, sort of a follow-on to a prior question about how you're doing in memory with you being more skewed toward NAND than DRAM. I was just sort of wondering with DRAM kind of maybe catching up in the memory market over the next 12 months, at least that's trade expectations, that could potentially cut into your outperformance of the market. I was just, John, wondering if you can comment on that and if there are any plans maybe to push some sales thrust into the DRAM market as it improves.
David Rizek
Yes, Scott, I think it's really a marginal shift between NAND and DRAM. We are highly critical to certain process steps in VNAND, and that has driven that over 110% growth for the first three quarters and in power. But the rest of our portfolio is fairly evenly levered between VNAND, DRAM, as well as Foundry. So the outperformance is really mostly due to power in DNAN. But the rest of the portfolio is pretty much evenly levered between DRAM and NAN.
Scott Graham
Okay, gotcha. Thanks. That's very helpful. Then another question is just sort of maybe a market question for you, John. You know, a lot of things going on, you know, a lot of headlines around Intel, 7 nanometer, you know, ASML, SMIC. Would you maybe... pull together those comments and those headlines as well as maybe what your customers are saying next year about WFE. Is there maybe going to be a quarter or two of potential air pocket in WFE next year? Is that what you're hearing from your customers from these issues? Or is it maybe steady as she goes? What are you hearing?
David Rizek
Yes, Scott. So we don't guide out more than a quarter. But in general, when you hear the public statements of our customers and their customers, it's been fairly positive for 2021 relative to 2020. We don't have any reason to dispute that. As you see in our guidance for Q4 in our commentary, we see SEMI continuing to be strong in our Q4. And so we will certainly monitor that very closely. But longer term, There's a lot of static, lots of things going on, but we still go back to the fundamental belief that somebody has to make the chips, and therefore WFE is going to grow through the cycles. And then when we supply to those companies that supply the tools for WFE, we just want to grow our share of that. And so whether it moves from one company to another or one country to another, Longer term, I think we're not as concerned because of the differentiated product portfolio that we have.
Scott Graham
Thank you for that. I agree. I do have one final question that I hope to squeeze in here, and that's really kind of off of commentary that we're hearing from others, both competitors and otherwise out there, is that with COVID cases rising, and the potential for there to maybe to be some rollbacks here and there. I know we're much more surgical on that these days. But U.S., Europe, and I know you're not big in Europe, but Japan, there's been another outbreak there. I guess my question simply is, how much do you think, John, your business is affected by sort of on-site capacity? If you follow what I mean.
David Rizek
Yeah, no, we certainly were affected by the first phase of COVID in terms of, you know, factories having to reduce capacity. Some are suppliers' factories having to shut down for a couple weeks at a time and then, you know, coming back at only reduced capacity. You know, everything's kind of normalized now for our factories, our suppliers' factories, but it's certainly a concern of ours looking forward. If COVID starts becoming an issue again, either in our factory locations or our suppliers. So it's certainly something we're watching very closely, Scott. I would say, though, that we, along with, I'm sure, most of the industry, at least now, it's not a surprise. We have processes in place. We know what to do. We know how to separate shifts. We know how to test. We know how to isolate. So at least those processes are not going to be something we're trying to figure out as we're going along. But it still can have an effect, certainly, if some of these areas see some very large shutdowns.
Scott Graham
Hey, thanks a lot.
Operator
Thanks, Scott. Thank you. Our next question comes from Patrick Cove. It's people. You may proceed with your question.
Scott
Thank you very much, and congrats on a nice quarter. John, maybe first off on the semiconductor end. Can you describe any other additional power solution wins? I think last quarter you talked about, you know, getting into the conductor edge side of things with, you know, high aspect ratio. Can you talk about any other types of application wins that you've achieved with your OEM customers?
David Rizek
Yeah, good question, Patrick. So we don't talk about it too much, but deposition tools also require RF power. And that RF power has also been transitioning into more complex, more difficult types of RF power delivery. And so that's also now becoming a great opportunity for us and a share of the power story. So we have the dielectric etch for VNA and high aspect ratio. We have conductor etch in certain of our OEMs. And I think that position will become increasingly more important as those processes can be enabled with different kinds of RF power solutions. So that's another area for future growth. And this takes time, Patrick, but it's certainly a positive for RF power in SEMI.
Scott
Great. That's helpful. And maybe as my follow-up question in terms of the advanced markets, you've talked about in the past consumer electronics. We're starting to see, at least from the device side, some signs of stabilization and a potential recovery. I guess what's the trickle-down effect for your, quote, light-in-motion solutions that target the consumer electronics market, and when would they potentially turn if the device markets start turning positive?
David Rizek
That's a good question, Patrick. I think we saw the normal cyclicality occur in the Q2 timeframe when we imported ESI, Flex, Revenue, you saw the peak there. And then Q3, as expected, it went down. That's a normal cycle. I would comment, though, that in Q, right now, we're starting to see a little more inquiries than what we would expect normally in a Q4 timeframe with respect to our normal customers asking for potential new capacity in case they had to increase that capacity. So I think that's a reflection, Patrick, of potentially – better sell-through of, you know, new smartphones, for instance, new tablets, new wearables. So I think that's a good sign, and it's a little bit of a sign for potentially a good setup for 2021. Great.
Scott
Thank you very much.
Operator
Thanks, Patrick. Thank you. Our next question comes from Chris Senker with Talon. You may proceed with your question.
Patrick
Hi, thanks for taking my question. I have two of them. First one, John, looks like some of your U.S. Semicap customers have gotten a letter from the government to require a license to ship to SMIC, but since you also have Japanese, Korean, and Chinese Semicap customers, I'm just kind of curious, from your vantage point, are you guys kind of agnostic to what happens between U.S. and China Semicap relations, or do you think it eventually will catch up with you folks to add a follow-up?
David Rizek
Well, I would first say, Krish, that we're following all the government regulations with respect to ECCNs and restrictions on shipping to entities that are on that list. And right now, us as well as our competitors are allowed to ship to OEMs globally. And I wouldn't want to comment on whether that's going to continue or not, but right now that is something that we're allowed to do. And if it changes, we'll certainly follow those guidelines.
Patrick
Got it, got it. And then I have a question on the equipment and solution side of, I guess, the PCB business. With smartphones kind of like 5G beginning to take off, your equipment and solution revenue seems to be still pretty choppy. So I'm wondering, is it at some point you should see a cyclical uplift? Do you still think that because of the Consumer electronic seasonality is kind of going to be a little choppy over the next several quarters.
David Rizek
Yeah, Chris, thanks. And, you know, I read your 5G phone reports. Your smartphone build-out phone reports are very useful. I would say that today we still view it as cyclical. But as more and more consumer electronics need these laser processing tools, certainly Flex as well as HDI drilling tools, you may potentially see more of a smoothing out because it's not just one cycle. There could be, for instance, you can even see it now where certain phone companies are not just releasing one type of phone in one season. They're actually releasing it in the spring as well as in the fall or the Christmas season. So that would certainly drive towards a less cyclical kind of industry. But that remains to be seen. But today we still see it as the consumer electronics cycle.
Chris
Thanks, John.
David Rizek
Thanks, Chris.
Operator
Thank you. Our next question comes from Amanda Scarnati with Citi. You may proceed with your question.
SMIC
Hi, good morning. I just want to follow up on SMIC. We've been hearing that they've been sort of stocking up on components and spare parts in anticipation of even more restrictions from the U.S. government. Can you talk a little bit about any direct sales that you might have to SMIC and if you're seeing sort of anything unusual happening there?
David Rizek
Hi, Amanda. It's hard for us to say. Our China revenue in general, not just SMIC, is stronger than even in Q2 and stronger this year than certainly last year. How much of it is stocking versus direct needs, it's hard to tell. But the majority of our revenue to China probably goes through our OEMs. And that's really hard to tell then for us in terms of whether it's going to SMIC or somebody else. So I wouldn't be surprised if there's a little bit of caution in stocking, but it's hard for us to tell.
SMIC
And then LAM on their earnings last week commented that they had to kind of pare down their earnings a little bit because of the restrictions by the U.S. government, and we expect to see that from other U.S. suppliers as well. Are you seeing any sort of pullback in demand at the leading U.S. OEMs? or are things just kind of continuing on in anticipation of strong WFE next year?
David Rizek
Yeah, I listened to the LAM call as well, and I heard that commentary. I think the only comment I can make, Amanda, is our guidance for Q4 and our commentary is that we see SEMI as continuing to be strong, so in the fourth quarter. Whether that continues or not going out, we really don't know, and we don't guide that. But as I said earlier in the commentary, Many of our customers are looking at a pretty good 2021, expecting a good 2021 versus 2020. Great.
SMIC
Thank you.
Operator
Thank you. Thank you. Our next question comes from Jim Ricciuti with Medium & Company. You may proceed with your question.
Jim Ricciuti
Yeah, I had a couple of follow-up questions. Just regarding the Plex PCB drilling business, you alluded to some increased inquiries from customers. I'm just wondering, You know, with the better smartphone shipments in Q3 and obviously some important launches, do you have any sense of what the capacity utilization looks like in this market? And I'm just wondering with these launches, which typically have higher flex PCB content, I'm wondering how you're seeing this play out. When you would anticipate seeing that pickup in orders, would it be late in Q1?
David Rizek
Yeah, Jim, it's a good question. So these inquiries are a little unexpected relative to the normal cycle. And to your point, which is a good one, is that some of these later, more recent phone launches are high-end ones that have a lot of flex content, and that's probably the reason why we're getting those inquiries. You know, it probably really depends on, you know, whether they really need extra capacity in the short term, near term, like perhaps even within the quarter. But I would expect it's probably earlier in the year, 2021, than maybe we would have normally seen in past years. In past years, as you know, our Q2 quarter is usually the peak in terms of deliveries of these tools. And maybe we'll see a little bit pull in there. But it's hard for us to tell now because they're just today, just to encourage Jim.
Jim Ricciuti
Okay. And then the follow-up question is just with respect to the – the non-semi-related portion of that light and motion business. You know, you're seeing some nice recovery. You alluded to research defense. I'm just wondering, was some of this improvement sequentially potentially catch-up from some of the closings as related to COVID?
David Rizek
Potentially, Jim, but I think the life and health sciences growth was actually because of COVID, right? There is some catch-up because some of the medical procedures that were what we call discretionary during, you know, the COVID period, they've become, you know, they've come back. And so there's a little bit of catch-up there. And then research, as we said, is not necessarily catch-up. It's just gone back to, you know, what we have seen pre-COVID. So those are the main drivers, Jim, for the L&M non-semi, if you will, advanced market growth quarter of a quarter.
Jim Ricciuti
And you mentioned industrial automotive. My impression was that that former Newport business had less exposure to those markets. Has that changed?
David Rizek
No, I think we still have less exposure there than consumer electronics, but we do have exposure there because we don't necessarily have the kilowatt fiber laser business, but we have a portfolio of products that go around the workpiece that are used in that market as well.
Scott
Got it. Thanks.
Operator
Thanks, Jim. Thank you. Our next question comes from Mark Miller with Benchmark. You may proceed with your question.
Jim
Congratulations on a quarter, another good quarter. Just was wondering, as the events market is starting to show some rebound, if they continue to grow, How does that impact your gross margins? Does that lower your gross margins somewhat as advanced markets becomes larger?
David Rizek
Yeah, Mark, it's that. So we look at the visual level, so we don't have the split by the advanced markets, because if you look at the visual piece, it's pretty fair to say that light and motion margins are above the corporate average, and L&M has sort of a higher proportion of advanced markets. So I would say it's probably slightly higher if you look at kind of the L&M piece of the business. Now, E&S, you know, volumes there have a big impact. And as we said before, a lot of capacity is still being absorbed in the flex market. But the new flex tools, you know, have, again, you know, good margin going forward as well. So I guess to kind of recap, it's probably a little bit better than corporate average on a normalized basis, but not substantially so.
Jim
You mentioned some design wins in optics. Can you give a little more color or break that down a little bit more in terms of the design wins?
David Rizek
Yeah, Mark. You know, we've been investing in what we call our world-class optics and CapEx for a couple years now, hiring talented process engineers to develop these processes. So some of these optics wins are with several customers. So you can imagine lithography, inspection, normally those kinds of customers. But there are other customers who may be developing you know, other types of optically-based tools that might be even attached to a vacuum chamber. And so while it's still highly focused on lithography and metrology-specific OEMs, it is broadening to other kinds of customers as well.
Jim
Thank you.
Operator
Thanks, Mark. Thank you. Our next question comes from Weston Twigg with KeyBank Capital. You may proceed with your question.
Mark
Okay. There are some good questions on power growth and triple digits growth year over year sounds really big, but I honestly don't have a good handle on how much revenue this is contributing, and I was wondering if you could help us narrow down the band in terms of how big power is as a percentage of business. Yeah.
David Rizek
Yeah, Wes, you know, if you look at kind of third-party data of market share, that's probably where you'd find it. It's, you know... Hundreds of millions. So I'll leave you to go find that. But it is triple digit that's integrating over the first three quarters of this year versus last year. And I would say it's not just reaching triple digit. It's significantly more, certainly in the Q3 timeframe. So I'll leave it at that.
Mark
Okay. That's helpful. And then similarly, on PCBs, I'm not as familiar with that market. I know there's some seasonality, but if you look into Q4, would you expect another double-digit percent sequential drop in PCB revenue? That looks like what we've seen over the last couple of years. Is that what you would expect this year as well?
David Rizek
Normally, Wes, that's what we would expect, and that's kind of the normal seasonality. But as I said in the answers to the earlier questions, we are seeing more inquiries with respect to those kinds of tools. And as I said, perhaps some of those turn into real orders, and perhaps some of those turn into real orders within the quarter, driven by some of the smartphone demand. But we really don't know that yet. We're guiding towards that. the normal expected Q4 for ENS.
Mark
Okay, that's really helpful. Thank you.
Operator
Thanks, Wes. Okay, our next question comes from Joe Quattrotti with Wells Fargo. You may proceed with your question.
Wes
Yeah, thanks for taking the questions. On the power business being up 110% year-to-date, is there any way you can parse that out, the growth? Obviously, the market has rebounded quite a bit from NAND Flash. What's the growth been from just the better market versus some share gains?
David Rizek
Well, I think it's a little complicated because obviously share gains can be where you're particularly strong and if those markets grow like NAN has. But I think we know that we've gained share also in Conductor Edge. We believe we're gaining now some share in Deposition as well. So there's both, Joe. And so there's share gain because you're in the right space, and that space is growing, and there's share gain because you're just taking share in the spaces that are, you know, growing normally. So that's the way I would characterize our power growth.
Wes
Okay. And then as a follow-up, you guys had good cash generation this quarter back to, you know, pre-ESI acquisition cash levels. So how do we think about what's the right level of cash that you need to run the business on a day-to-day basis?
David Rizek
Yeah, so this is Seth. So I would say you're right. We have plenty of cash in the balance sheet in this quarter. We said earlier on when the COVID-19 pandemic hit, we would kind of hunker down and build cash to be relatively cautious, and obviously we've performed very well in the last couple of quarters. A lot of good effort around the company to kind of reduce our cash conversion cycle. I would say it's a little hard, bright line. Probably somewhere 400 million plus would be plenty of cash to run the business. The reason I have that level in mind is there's a number of things we like to execute on a regular basis. We want some optionality in the balance sheet, but we don't need 700 million to run the business right now. It's a level probably 700 million less than that, but there's really no bright line. That's how I kind of look at it at a high level.
Wes
Great. Thank you. Yep.
Operator
Thank you. And as a reminder, to ask a question, you'll need to press star one on your telephone. Our next question comes from Paratash Misra with Berenberg. You may proceed with your question.
Chris
Thanks. Uh, good morning. Uh, I just wanted to go back to the power revenue question earlier. And, uh, More generally, if you could give some more color on your current mix in the vacuum and analysis business, like what are the biggest pieces, power, I guess, vacuum, reactive gases, any color on that would be great.
David Rizek
Yeah, Paratouch, this is John. So our vacuum and analysis business, power and plasma are big drivers, but also our portfolio of pressure and flow of vacuum valves, pressure control. And so, you know, together they're all large components of our, you know, over $1 billion semi-components business for vacuum. So, you know, we really don't split it out, but certainly power has been a big driver of the growth. But if you took power out, the rest of the portfolio is also growing quite well. As Seth said, we're 61%. year over year in semi, and as we said, power is that 110% of it, of power growing. But even if you factor that out, we're well over 50% in the rest of the portfolio as well.
Chris
Got it. And then as a quick follow-up, if I could go back to the comments about world-class optics. Any sense you could give us just how big that business is right now? Is it like $10 million to $20 million range or annual, or is it already bigger than that?
David Rizek
I would say that our business in lithography, metrology types of OEM business is comfortably over $100 million, so it's much bigger than what you had just said.
Chris
Got it. Thanks, John.
Operator
Great. Thanks, Paritosh. Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to John Lee for any further remarks.
David Rizek
Well, thank you for joining us today and for your interest in MKS, and we look forward to having you join us at our Virtual Investor Day on December 10th. Again, thank you very much. Operator, you may close the call, please. Thank you, ladies and gentlemen.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
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