MKS Inc.

Good day, and thank you for standing by. Welcome to the MKS Instruments for First Quarter 2021 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 1 on your telephone. Please be advised that today's conference is being 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 Rejek, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. I am David Rejek, Vice President of Investor Relations, and I am joined this morning by John Lee, President and Chief Executive Officer, and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the first quarter of 2021 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. 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. All of these financial measures will be non-GAAP other than revenue. Please refer to our press release for information regarding 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. Thanks, David. Good morning, everyone, and thank you for joining us today. We delivered another rapid quarter with revenue of $694 million and net earnings per diluted share of $1.56 million. Both were above the high end of our guidance range. Our strong results were driven by robust demand across both our semiconductor and advanced markets. We're also very pleased with the margin expansion and operating leverage in the quarter, leading to a greater than 60% year-over-year increase in net earnings per share. Sales to our semiconductor markets strengthened further in the first quarter, exceeding our expectations, growing 5% sequentially and 32% year-on-year. we saw a broad-based demand across our vacuum subsystems portfolio, generating record revenue in our pressure, flow, and valve solutions businesses. We also delivered another exceptional quarter in our power solutions business, as well as robust sequential growth in our plasma and reactive gas business. We continue to harness our photonics expertise across a number of semiconductor applications. And in the first quarter, we secured multiple design wins in our world-class optics initiative. We also had a meaningful win in our precision motion business for an advanced wafer packaging application. You have heard us talk a lot about how our broad portfolio, unique innovation engine, and operational excellence have enabled us to outperform the markets we serve. Earlier this month, VLSI, an independent market research firm, reported that MKS gained more than 2% of share in the overall critical subsystems category in 2020. In fact, I'm very proud to say that VLSI also reported that we gained almost 10% of share in the RF power category in 2020 and are now neck and neck with the historic market leader. We also extended our leadership in remote cloud resources by gaining more than 6% of share. Finally, we also took share in the pressure gauges, and valve product categories. This third-party validation of our performance in 2020 further solidifies our decades-long model of market share gains and clearly demonstrates the strength of our technology roadmaps, the agility of our operational capabilities, and the breadth of our customer relationships. It is a privilege to lead the great teams that delivered this success. In fact, as I think about the long-term opportunity in our semiconductor market, the following powerful secular trends remain intact. First, the demand for chips will continue to grow, driven by the explosion in data and the need to store it, transmit it, and process it. Second, it's not just more chips, but more leading-edge chips, and that places additional demands on the capital equipment ecosystem to drive technology breakthroughs. And third, these breakthroughs need to occur faster as product iterations are increasing and development cycles are shortening. All of this equates to a compelling long-term growth profile for capital equipment spending, but also means that those companies that execute on innovation faster and smarter while staying operationally nimble will outperform. This has been MCAS' key to success for the past few decades and will remain so moving forward. In the near term, demand in our semiconductor market remains robust, and we expect our semiconductor revenue to grow sequentially in the second quarter. Now, moving to our advanced markets. Revenue in the first quarter exceeded our expectations. We delivered strong sequential growth of 6% and year-over-year growth of 27%. Our strong top-line results were driven by growing demand in advanced electronics manufacturing, which is fueled by precision laser processing. Within advanced electronics, we continue to see healthy demand for our flexible PCB via drone solutions as a result of growing capacity needs and technology transitions associated with new 5G smartphones, which carry higher flex PCB content. In the first quarter, we secured two design wins for our high-density interconnect via drone solution, one of which is with a large multinational PCB manufacturer. Demand for our pulse nanosecond, picosecond, and femtosecond lasers continues to increase as we are seeing growing interest across PCB, advanced packaging, solar, and display applications. We are very pleased with the momentum we are seeing in our advanced markets and anticipate revenue in the second quarter to grow sequentially. Finally, I wanted to share a few thoughts regarding our prior efforts to acquire Coherent. While we believe the combined company would have offered a compelling value proposition, we have always been disciplined acquirers, and our M&A strategy will remain rooted in our commitment to shareholder value creation. In fact, we could not be more excited about our current portfolio in photonics, which we are executing well in our position to capitalize on the growing need for miniaturization and complexity. We consider the combined revenue from our light and motion division and the advanced markets component of our equipment and solutions division to best characterize how we think about photonics revenue. This means that in the first quarter, we generated $257 million in photonics revenue, which grew 25% year over year, and we expect further sequential growth in the second quarter. Our photonics business, with an annualized run rate of over $1 billion, will remain an important area of growth and investment at MKS, With that, I'd like to turn the call over to Seth. Thank you, John. I will cover our first quarter of 2021 results and provide additional detail on guidance for the second quarter. Sales for the first quarter were a record $694 million, up 5% sequentially, up 30% year-over-year, and above the high end of our guidance range. Our record performance reflects another quarter of strong semiconductor demand as well as the continued acceleration in our advanced markets. In the first quarter, semiconductor sales set yet another record at $412 million, up 5 percent sequentially and up 32 percent year-over-year, reflecting broad-based demand for our vacuum photonics subsystems. As John mentioned, we are very pleased to recognize that VLSI for market share gains in 2020 in the total critical subsystem category including significant gains in RF power supplies and remote plasma sources, as well as gains in other critical sensitive categories, such as pressure gauges and valves. Including our strong performance and power solutions, the combined revenue of our other products from the semiconductor market reached another quarterly record. This strong growth and significant market share gains are a clear validation of our unique surround-the-chamber strategy, our long-standing successful track record of operational excellence, and our deep commitment to market-leading innovative solutions, all of which we expect will position us to outperform WFE by 200 basis points, as outlined in a long-term model we provided at our analyst day. For the first quarter, sales for advanced markets also set a record at $282 million, up 6% sequentially, and up 27% year-over-year, led by continued acceleration in advanced electronics applications. Demand for our market-leading flexible PCB-V drilling solutions accelerated further in the first quarter, and this followed a particularly strong fourth quarter. Our customers continue to turn to MKS to enable leading-edge flexible PCB manufacturing applications, and this is driven by large part by 5G smartphones, We're also seeing growing interest from wearables in 5G-based station applications. Revenue from MLCC test systems also remained healthy in the first quarter, as our customers continue to expand capacity. Within the HDI market, we've completed all shipments and installations of systems from a previously announced multi-unit geode order in December, which are all now operating in high-volume manufacturing applications. In addition to design wins that John referenced, we've seen increased interest at our demo centers from other key HCI PCB manufacturers, and are working closely with their critical technical teams to transition them to beta customers. In the first quarter, we also saw accelerated demand from our pulse laser and surround the workpiece portfolio for advanced electronics applications, largely driven by PCB, display, solar, and advanced packaging applications. As stated on Analyst Day, the transit monetization and complexity in SEMI that we foresaw decades ago are now driving growth in advanced markets and uniquely positioned in the broad photonics portfolio across both our light and motion and equipment solutions divisions. In fact, as John highlighted, our photonics revenue, which is the revenue from our light and motion division, combined with the advanced markets component of equipment solutions division, is now over a $1 billion annual run rate in the first quarter. And the advanced markets portion of our photonics revenue now exceeds $850 million annual run rate and grew 30 percent year-over-year in the first quarter. For the first quarter, the revenues split between our semiconductor and advanced markets was 59 percent and 41 percent, respectively. First quarter gross margin was 46.4 percent above the high end of guidance, up 70 basis points sequentially, and up 170 basis points year-over-year. The strong performance was due to higher volumes and improved product mix. First quarter operating expenses were $143 million, up $5 million sequentially, primarily due to higher variable compensation resulting from a strong financial performance. However, we remain within our guidance range reflecting continued overall cost control. First quarter operating margin was 25.8%, up 110 basis points sequentially, and up 530 basis points year-to-year, which reflects a strong operating leverage in our financial model. Net interest expense for the first quarter was $6 million, and our tax rate was approximately 17%. Net earnings for the first quarter were a record $143 million and a record $2.56 per diluted share. On a year-over-year basis, our EPS increased 66% or more than two times our revenue growth rate. This strong financial leverage exceeded our long-term target operating model that we announced at our analyst day. Exiting the first quarter, we maintained a strong balance sheet and equity position. with cash and short-term investments of $910 million and $100 million incremental borrowing capacity under an asset-based line of credit subject to certain borrowing-based requirements. Our term loan principal balance was $831 million at the end of the first quarter, and we exited the first quarter with a $78 million net cash position. In terms of working capital, day sales outstanding. We're 55 days into the first quarter. compared to 54 days at the end of the fourth quarter, and inventory returns were 2.9 times in both the first and fourth quarter of 2020. We remain focused on improving our cash conversion cycle, and our first quarter operating cash flow was $127 million, a 69% year-over-year increase. Free cash flow for the first quarter was $100 million, a 55% year-over-year increase. Existing with prior quarters, we have given a payment of $11 million for 20 cents per share. I'll now turn to our second quarter outlook. Based on current business levels, we estimate second quarter revenue of $740 million, plus or minus $30 million. Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 47%, plus or minus one percentage point, and operating expenses of $146 million, plus or minus $4 million. For the second quarter, net interest expense is expected to be approximately $6 million, and our tax rate is expected to be approximately 17 percent. Given these assumptions, we expect second quarter net earnings of $2.92 per diluted share, plus or minus 26 cents. I'd like to now turn the call back to the operator for Q&A.

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