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spk00: Good day and thank you for standing by.
spk08: Good morning, everyone. I am David Rizek, Vice President of Investor Relations, and I am joined this morning by John Lee, President and Chief Executive Officer, and Seth Batchelor, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the first quarter of 2022, 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 our 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. Unless otherwise noted, all forward-looking financial measures excluding any contribution from Adatech Limited, the acquisition of which is still pending. 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 our website for information regarding our non-GAAP financial results, a reconciliation of our GAAP and non-GAAP financial measures, and certain pro forma financial information. Now, I'll turn the call over to John.
spk02: Thanks, David. Good morning, everyone, and thank you for joining us today. I'm very pleased with our Q1 results, especially given the significant industry supply chain challenges. First quarter revenue of $742 million was within 1% of the midpoint of our guidance range. Profitability was strong, with net earnings per diluted share of $2.71, exceeding the midpoint of our guidance range, and an increase of 6% year over year. We credit this profitability to excellent execution at our factories and an emphasis on cost control. while continuing to make targeted R&D investments across our portfolio. We believe our performance highlights prudent management of our expenses while still investing in the long-term growth of our business. While underlying demand trends remain very healthy, industry supply chain constraints are limiting growth, which is particularly true in our semiconductor business. Before I review the key trends across our end markets, I want to explain a change in how we will present our revenue. Beginning with this quarter, we have divided what we previously referred to as our advanced markets into two separate end markets, advanced electronics and specialty industrial. We believe this change better represents the end markets we serve and will enable you to better understand the key drivers of our business. There will be no change to our semiconductor market, which includes deposition, etch, lithography, metrology, inspection, wet clean, and packaging applications. In the first quarter, revenue from our semiconductor market comprised 66% of overall revenue. Advanced electronics represents revenue from advanced printed circuit board, solar, display, and electronic component applications. We view our advanced electronics market as a close cousin to the semiconductor market, each of which benefits from the same defining trends of miniaturization and complexity. We believe packaging technologies will become increasingly critical to enabling better performance, design, and cost of electronic devices, from high-end smartphones to electric vehicles to high-performance microprocessors for data centers and artificial intelligence. And advanced PCBs and package substrates are the next key drivers of these trends, underscoring the strategic rationale of our pending acquisition of Adatech, where we plan on leveraging Adatech's electroplating solutions and our advanced laser drilling solutions to accelerate our customers' roadmaps. In the first quarter, revenue from our advanced electronics market comprised 11% of overall revenue. Our specialty industrial market represents a broad array of industrial, life sciences, research, and defense applications. These are businesses that leverage our domain expertise in semiconductor and advanced electronics. They represent a collection of proprietary technologies with strong margins, In the first quarter, revenue from our specialty industrial market comprised 23% of overall revenue. Now I'd like to provide more detail on our first quarter results and my thoughts on second quarter demand trends. Sales to our semiconductor market declined 1% sequentially in the first quarter, in line with our expectations, reflecting continued supply chain constraints, as well as a temporary shutdown at our Shenzhen facility due to local government COVID-19 measures. Our operations and engineering teams continue to respond to these challenges with agility, flexibility, and determination in partnership with our customers and suppliers. Overall, semiconductor demand trends remain robust in the first quarter, with broad-based strength across our vacuum and photonics portfolio. We continue to see strong demand for our RF power solutions for dielectric etch applications, as well as for our dissolved ozone solutions for advanced foundry applications especially in new fab expansions. I'm also pleased to announce that we commenced the shipment of our new clean line solution in the first quarter. This innovative system is a compact remote plasma source used to reduce buildup of byproducts that arise from vacuum processing, which improves fab yields and lowers preventative maintenance costs. It is a direct result of our surround the chamber strategy as it leverages our expertise across our RF power, remote plasma, valve, and integrated process solutions teams to deliver a unique solution, which again demonstrates the strength of MCAS's innovation engine. We are seeing very positive interest from multiple customers. We also continue to see strong demand for our photonics solutions, with particular strength in our precision motion subsystems, securing design wins across multiple backend applications, including annealing and advanced packaging lithography. As we look to the second quarter, demand trends in our semiconductor market remain very strong. However, we expect supply chain constraints to remain a factor. Accordingly, we expect revenue from our semiconductor market to be consistent to slightly down as compared to first quarter levels. Before I discuss our advanced electronics and specialty industrial markets, I want to share my thoughts on 2021 critical subsystem market share data published earlier this month by the independent market research firm, Tech Insights, formerly VLSI. The report validated that MKS has continued to take share in the overall critical subsystem category in 2021. In fact, their research shows MKS is now the market leader in RF power supplies. This achievement was a culmination of many years of targeted investments, innovation, execution, and close collaboration with our customers. I'm extremely proud of the MK's team for achieving this milestone, which took hard work, dedication, and expertise. And we see additional opportunities on the horizon for RF power, fueled by continued industry investments into vertical scaling. Tech Insights also highlighted our share gains across other critical subsystem categories, such as RF matching networks, remote plasma sources, pressure sensing, residual gas analyzers, and linear motion subsystems. As a critical subsystem leader with the broadest set of capabilities in the industry, we are well-positioned to capitalize on many opportunities that lie ahead in the semiconductor market. Moving to our advanced electronics market, revenue in the first quarter declined 15% sequentially and 29% year-over-year. Declines were primarily a result of softer industry demand for flexible PCB via drilling equipment. we believe our customers have taken a risk-averse approach to expanding flex PCB capacity at this time, given the growing uncertainty resulting from factors such as supply chain constraints, geopolitical tensions, inflation risk, and its impact on consumer end demand. As we look to the second quarter, we expect revenue from advanced electronics to be down sequentially, led by continued softness and flexible PCB equipment spending, Excluding flexible PCB via drilling, our advanced electronics revenue is expected to be consistent with first quarter levels. Revenue from our specialty industrial market declined 1% sequentially but grew 2% year-over-year. We saw good sequential and year-over-year growth in life sciences applications, offsetting seasonal softness in research spending. For the second quarter, we expect revenue from our specialty industrial market to remain consistent with first quarter levels. Before I hand the call over to Seth, I wanted to share a few thoughts regarding our pending acquisition of Adatek. As you may have seen, on April 1st, we announced an extension of the date for completing the acquisition to September 30th, 2022. The strategic benefits of acquiring Adatek have become increasingly compelling as the trends towards advanced packaging continue to accelerate. We believe the unique combination of MCAS's laser drilling and Adatek's advanced electroplating solutions will allow MCAS to become a foundational enabler of electronic devices, spanning from the transistors on a chip to the interconnects in an advanced PCB. The defining trends of miniaturization and complexity that have driven continuous innovation in the semiconductor industry for decades are rapidly disrupting the PCB and package substrate landscape. And just like what we did in SAMI more than two decades ago, we are positioning ourselves to be at the forefront of these trends. We believe Adatech's general metal finishing business will fit nicely within our specialty industrials business, sharing the common thread of leveraging core domain expertise to address a wide variety of specialty industrial applications. We continue to work with China's State Administration for Market Regulation to obtain regulatory clearance, which is the remaining jurisdiction for which approval is a condition to closing. And we're looking forward to closing the transaction and welcoming the talented Adatech team to MCAS. With that, I'd like to turn the call over to Seth. Thank you, John. I will first provide additional detail on updated end market classification, then cover our first quarter 2022 results, followed by guidance for the second quarter. Let's start with advanced electronics, which is a key enabler of laser-based manufacturing solutions for cutting-edge electronics applications. This market includes flexible and HDI PCB via drilling, laser and vacuum processing solutions for solar and display applications, a number of other precision manufacturing applications for electronic devices. We believe our unique Surround the Workpiece portfolio of lasers, motion, optics, and other photonics solutions, combined with our applications expertise from our Equipment Solutions Division, provide us with a unique opportunity to be the go-to enabler of advanced electronics manufacturing. These applications offer attractive secular growth, although there may be some level of cyclicality, given this market is tied to capital equipment spending. Looking ahead, our pending acquisition of Adtech would add critical electrical plating solutions for advanced interconnects. With these solutions, along with our laser drilling systems, we believe we're well positioned to optimize the interconnect and accelerate customer roadmaps for next-generation electronic devices. We also believe Adtech's electronics business would add a large base of stable recurring revenue with a strong margin profile. For 2021, revenues from advanced electronics market comprised 15% of MCAS's total revenue, and on a pro forma basis with EdTech's 2021 reported financial results, it would have comprised 32% of overall revenue. A specially industrial market represents a broad array of leading technologies across industrial, life and health sciences, research, and defense markets. Examples of applications include vacuum solutions for synthetic diamond manufacturing, lasers for ophthalmic surgery, vibration isolation for advanced research, and infrared zoom lenses for both commercial and defense application. This market provides more stable revenues and strong margins in cash flow. In this market, we leverage product and technology capabilities that we developed from our investments in the semiconductor and advanced electronics markets. Adtech's general metal finishing business would fall into our specialty industrial market. Similar to our existing specialty industrial applications, there's important domain expertise in chemistry that is leveraged across a wide array of applications, such as surface finishing, in functional coatings for electric vehicles, renewable energy, and a host of other industrial and commercial applications. In 2021, revenues from our specialty industrial market comprised 23 percent of MCAS's total revenue. On a pro forma basis, PADTEC's 2021 reported financial results would have comprised about 27 percent of overall revenue. In addition to dividing our advanced market to two separate markets, we also modified the names of three divisions. Our vacuum analysis division is now our vacuum solutions division. Our light and motion division is now our photonic solutions division, and our equipment and solutions division is now our equipment solutions division. A historical snapshot of our results, broken down by our divisions, in new markets for the prior three years is available in the investor relations section of our website. With that, let's now discuss our first quarter results, and I'll look for the second quarter. Sales for the first quarter was $742 million. It declined 3% sequentially, but up 7% year-over-year. While overall revenue was below the midpoint of our guidance, we were very pleased with how we executed in the quarter, giving ongoing global supply chain constraints, as well as temporary shutdown of our CENGEN facility due to local COVID-19 restrictions. In the first quarter, semiconductor sales were $488 million, down 1% sequentially, but up 19% year-over-year, reflecting broad-based demand for my vacuum and photonic solutions. While supply chain constraints draw much attention these days, our relentless focus on innovation is as strong as ever. The market share gains we delivered in 2021 are a clear reflection of our ability to accelerate our customer roadmaps. We are innovating areas key to advanced semiconductor manufacturing, including vertical scaling, atomic layer processing, advanced lithography, metrology and inspection, as well as wet clean applications. We have significant domain expertise across each of these areas, and there are many cases where we combine our broad expertise to introduce new solutions that create new market applications, such as our clean line solution that John discussed. We have a long track record of gaining market share. We continue to leverage new opportunities. Moving to advanced electronics market, the first quarter was $82 million. It declined 15% sequentially and 29% year-over-year. The primary driver behind the decline was the softer industry demand for flexible PCB-V drilling equipment. As a result of the factors John highlighted, we expect demand for a flexible PCB-V equipment to remain relatively muted in the second quarter. This market continues to be a long-term secular grower, but given our exposure to the capital equipment spending of this industry, our quarterly revenue remains lumpy. For context, between 2019 and 2021, Plexil PCB equipment revenue grew at a 40% compounded annual growth rate. We continue to work closely with HDI PCV via drilling beta customers to drive further qualifications while continuing to generate interest from new customers. We have dozens of tools in high-volume manufacturing running 24-7, which is a clear validation of our technology. One of the attractions of this market is that it is sticky once you get designed in. While we would like to have made faster progress gaining share, we are encouraged by the customer conversations and the performance of our offerings. Moreover, we're excited about the growing attention on advanced HDI PCBs and packaged substrates and the role these play in optimizing performance, cost, and designs of advanced electronic devices. We expect this to become more critical to enabling high-end smartphone applications, those high-performance servers, wearables, electric vehicles, and other electronic devices. Importantly, these increasing market requirements align very well with MCAS and Adtex capabilities, and we believe our combined capabilities will allow us to optimize the interconnect and drive better and faster solutions for our customers. Turning now to a specially industrial market, revenue was $172 million in the first quarter, declining 1% sequentially but growing 2% year-over-year. On a sequential basis, we saw growth in life and health sciences and defense applications offset by seasonal softness in the research market. Our first quarter gross margin was 45%, which is at the midpoint of our guidance. As expected, we were negatively impacted by higher inflation, but we were pleased with how we executed our gross margin despite revenue being below the midpoint. While first quarter research and development expenses remained flat sequentially, reflecting continued investment in product development, first quarter operating expenses were down $3 million sequentially to $144 million and below our guidance range as a result of strong cost controls as well as the timing of certain equity compensation expenses, which will be reflected in the second quarter. First quarter operating margin was 25.6%. 100 basis points above the midpoint of our guidance to near the high end of our guidance range. Operating income was $190 million, up $11 million year-over-year. First quarter adjusted EBITDA was $211 million. Adjusted EBITDA margin was 28.4%. Net interest expense for the first quarter was $6 million, and our tax rate was approximately 18%. Net earnings for the first quarter were $151 million, or $2.71 per diluted share. Actually, in the first quarter, we maintained a strong balance sheet and liquidity position, with cash and short-term investments at a record of $1 billion, which well positions us ahead of the pending ad tech acquisition. Our term loan principal balance was $822 million at the end of the first quarter, We exited the first quarter with a $231 million net cash balance. In terms of working capital, day sales outstanding were 59 days at the end of the first quarter compared to 53 days at the end of the fourth quarter, reflecting the timing of revenue during the quarter. Inventory returns were 2.6 times at the end of the first quarter compared to 2.8 times at the end of the fourth quarter, which was impacted by supply chain constraints. These metrics, combined with the annual bonus payment, resulted in first quarter operating cash flow of $41 million and free cash flow of $22 million. Consistent with prior quarters, we had dividend payment of $12 million, or 22 cents per share. I'll now turn to our second quarter outlook. Even though business levels remain robust, we expect second quarter revenue of $730 million, plus or minus $30 million, primarily due to continued supply chain constraints. Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 43.5%, plus or minus one percentage point. Like many other companies, we're not immune to exceptional macroeconomic inflationary challenges impacting our markets. However, we have a strong track record of driving continuous improvement in our operating model We will continue to take all necessary steps to counteract these inflationary impacts over time. We expect operating expenses of $156 million, plus or minus $4 million. The sequential increase is largely due to timing of annual compensation increases. For the second quarter, net interest expense is expected to be approximately $6 million, and our tax rate is expected to be approximately 18%. Given these assumptions, we expect second quarter net earnings of $2.28 per diluted share, plus or minus 24 cents. Before I turn the call back to the operator, I'd like to share a few thoughts on our pending acquisition of Adatech. I am pleased to announce we successfully re-syndicated our debt financing earlier this month, following the expiration of the previous syndication. Our updated financing includes a term loan B with a $3.6 billion U.S. dollar tranche, In a €600 million tranche, both of which were substantially oversubscribed, we also diversified our lending base with a $1 billion term loan egg. Funding will coincide with the close of the pending acquisition of AdTech. Given the current debt market environment, the price was understandably somewhat higher this time around. However, we are very pleased with the final terms in the mix of debt capital we achieved. We believe the successful pricing demonstrates lenders' belief in the strong credit profile of the combined company. We are confident the cash flow generation of the combined company will position us to aggressively delever the balance sheet consistent with prior acquisitions. We're also pleased with AdTech's business performance as evidenced by their full year 2021 results released on April 4th. In fact, on a pro forma basis, 2021 adjusted EBITDA for the combined company would amount to $1.3 billion. Adatech has also performed slightly better than we expected when we performed our initial due diligence. Furthermore, we originally announced the acquisition. We say that we expected net leverage at closing to be slightly below 3.5 times. Given the extension of the timing of the transaction, this has paid cash flow generation for both MCAS and Adatech, we now anticipate a more favorable net leverage ratio at closing. MCAS is in a strong position to drive shareholder value creation by capitalizing on a number of attractive secular trends, and we believe Adatech would further enhance those efforts. I'd like to now turn the call back to the operator for Q&A.
spk00: Thank you. If you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please limit yourself to one question and one follow-up question. Our first question comes from the line of Patrick Ho with Stiefel. Your line is open. Please go ahead.
spk09: Thank you very much. John, maybe first off, I know there are a lot of moving parts on the whole supply chain and COVID-related issues. but can you give a little bit of color for the June quarter, what the bigger impacts are? Is it the ability to procure certain components, or the Shenzhen lockdowns and the after effects still impacting your ability to, quote, wrap up the facility there? And maybe as a follow-up to that, what's been the ability on your end to flex some of that capacity to, you know, what's the ability to flex some of that capacity to, I guess, open capacity?
spk02: Thanks, Patrick, for the question. I think I'll take the Shenzhen one. So our factory was closed for about a week or so because of the COVID-19 restrictions. So we did recover after about a week. And so that's factored into our Q2 guidance. But I would comment that the supply chain constraints are not getting better electronic components remain a big part of it, but also it's broadened to other types of materials, resins, specialty metals. And so we're factoring that into our Q2 guidance as well. In terms of moving capacity between factories, there are a few factories where we can do that, but mostly our factories are still running pretty well in terms of utilization because they're still constrained by supply.
spk09: Great. That's so fun. Maybe that's my follow-up question for Seth. In terms of gross margins, you guys performed really well despite the shortfall in revenues and the supply chain constraints. Can you just give some of the levers that are keeping gross margins at still pretty high levels, you know, given the current environment?
spk02: Yeah, thank you, Patrick. Yeah, I would say that obviously what we – produce, provide to our customer a high-value application. So I think what you're seeing is reflection on margin reflects, frankly, that value to our customers in the overall markets we serve. Kind of on the tactical level to your question, we have a number of levers. We've got a world-class operations team. We're really working to qualify potential other sources to mitigate some inflationary pressure. We do have some pricing ability. We've talked about that in the past. That we've definitely leaned into, and there's more opportunity there as well in the future. And, you know, we broad-based portfolio across a number of different markets, I think kind of mitigate some of the things that John talked about, you know, in some of the markets we serve. So it's a wide range of opportunities. It's a wide range of different levers we pull. I think fundamentally you'll see our margins go back up over time to historical levels. That's our goal for sure.
spk09: Great. Thank you again.
spk02: Thanks, Patrick.
spk00: Thank you. And our next question comes from the line of Jim Ricciotti with Needham & Company. Your line is open. Please go ahead.
spk01: Hi. Thank you. So if I look at the vacuum solutions business being down sequentially, guys, that was mainly supply chain and the COVID disruption, and that's, I assume, the area of the semiconductor business that you're a little bit more cautious about continuing supply chain issues in the June quarter.
spk02: Jim, yes, John, that's right. You know, give or take, it was about down 1%, you know, our semi-business. And that is where the majority of the supply chain constraints are hitting our business.
spk01: Okay. And if we look at the photonic solutions portion of the business and look at the way you're now characterizing that business, what I'm wondering is if you could provide some color on the – the non-semi-photonics business, how that's performing. For instance, are you seeing any signs of changing demand in the European part of that business, just in light of the geopolitical situation that we're experiencing there?
spk02: Yeah, Jim, thanks for the question. No, we've actually seen that part of the business of the photonics solutions division to be pretty stable. We don't have a lot of exposure of business to Russia, if you will, and nor a supply chain. And so the business has been actually pretty stable in the, as we talked about, life and health sciences, research and defense, and other industrials. Okay.
spk01: Thanks a lot.
spk02: Thanks, Jim.
spk00: Thank you. And our next question comes from the line of Scott Graham with Loop Capital Markets. Your line is open. Please go ahead.
spk10: Yeah. Hi. Good morning. Thanks for taking the question, John, Seth, and David. So I'm just looking at the weakness in the PCB business and, you know, you're alluding to your, you know, sort of the always CapEx weakening there. That's, you know, does seem to be a pivot versus where we were understanding, of course, that this is a lumpy business. How would we read that across when, you know, we're gearing up for an acquisition and, And just, you know, we're much more than doubling down in PCB. We're, you know, kind of 5Xing it, right? So I'm just wondering, you know, why should we be comfortable the next couple of quarters with, you know, the PCB business weakness and you're, you know, about to, you know, significantly increase the size of a business where the customer's capital spending is weak?
spk02: Yes, Scott, that's a fair question. You know, I always pivot to the fact that our strategies are always long-term, and when we look at advanced packaging and packaged substrates, we see that as a really attractive long-term opportunity for MKS, and that's why we are trying to acquire Adatech. When you look at our flex business, it is lumpy, and I think it's well known that, you know, smartphones and consumer demands and some of the The uncertainties have made our customers cautious in terms of adding capacity for Flex, but we also know that we are the leader in Flex PCB via drilling. There's been no loss of market share as far as we know. So we always look at the long term, and Flex business will come back. HDI business will grow. And if Adatech is part of the family, their business for electronics plating will also grow. So we're really looking at the long-term play with respect to advanced packaging.
spk10: Understood. Thank you. So I appreciate that, John. I suspect the same. The other question I had was about, you know, sort of price cost. And, you know, some companies look at price cost as pricing versus material. Some look at it as pricing versus, you know, company-wide deflation. However you look at it, it does look like the second quarter is going to be behind that curve. And so I know you mentioned that there's some opportunity for you in pricing. You know, kind of why does the gross margin sink that much? Why are we not increasing prices maybe a little bit faster, right, to, you know, buffer that second quarter gross margin? Maybe just, you know, talk about price cost in the context of your second quarter guide.
spk02: Yes, Scott, I think, you know, the inflationary costs have hit us pretty hard. It's hit everybody pretty hard. We have been leaning into price increases, but that does take some time to recover. And so the pace of which inflationary costs have hit us and the pace of our levers in terms of price increases, there's a bit of a gap, I guess. And I think you're seeing that in our guidance in Q2. But as Seth said, we expect that to recover over the next outer quarters as well. And, you know, we have a lot of backlog. And so the backlog is, you know, commitments at previous prices. And so there's a bit of a constraint in terms of how fast we can change prices, you know, versus, for instance, a consumable company where you can just change prices immediately or a chip company for that matter. And so we do have a little bit of a lag there. But be rest assured that we expect to recover that gross margin in the outer quarters.
spk10: And I appreciate that, John. Thank you. And I guess it'll be like a two-quarter event. But just to tuck in sort of a question 2A here, is there any reason why with demand so strong? Because it doesn't sound to me like semi is weaker, and that's where the supply chain is, you know, kind of hitting you the hardest. It sounds to me like the end demand is pretty strong. Is there any reason why we can't reprice the backlog?
spk02: It's always an option that we've looked at. And in You know, we have to balance that with, you know, partnerships and relationships with key customers. And so we look at that as well. But we also try to make sure that we're partnering in a long-term sense with our key customers. That's really important to us, that we maintain those long-term partnerships. And I think we get rewarded for that by our biggest customers. Just to add what John said is the market share gains we generated back in 2021 is kind of extensive with what John mentioned. Obviously, technology, seeing the right inflection points, investing ahead of that curve is a big driver for share gains. But the fact that our customers trust us and work with us I think is pretty important as well. So I would say it's a big-picture view is how we look at it.
spk10: All right, guys. Hey, thanks a lot for taking my questions.
spk02: Yeah, thanks, Scott.
spk00: Thank you. And our next question comes from the line of Joe Quattrochi with Wells Fargo. Your line is open. Please go ahead.
spk03: Yeah, thanks. Thanks for taking the question. Maybe one on the semi side. I'm just curious, you know, several of your customers are talking about diversifying their supply chains or qualifying additional critical subcomponents. Have you guys benefited from any of that type of practice in terms of, you know, being able to maybe gain some share in some critical applications that maybe you previously weren't?
spk02: Joey, it's John. Actually, we have. We have actually been the beneficiary of some of that behavior from our customers. And going back to Scott's earlier question, that's because our customers trust us and we partner with them. And so when they have constraints in their supply chain, MKS is one of the first companies to always come to and say, hey, can you deliver these other new products or more of the ones that are designed in? And so we actually have been the beneficiary of that. So we're working hard in our operations team to continue to deliver and overcome the supply chain constraints. But in this kind of environment, the operations team is going to be responsible for share gains, actually. Usually we get share gains from technology, new innovations, et cetera, and that's normal. But in this kind of constrained environment, our ability to gain market share because of our operational team's excellence and performance is really a great another lever for us.
spk03: That's helpful. And then just as a follow-up on the flex side, how would you characterize the industries or your customers' discipline relative to maybe the last down cycle? Have you seen them maybe pull back on the CapEx somewhat quicker or faster than the past cycle in terms of just, you know, kind of hoping to see a less of a peak to trough?
spk02: Yeah, no, I think this one is a little different than the last cycle, Joe. I think this one started off the year with kind of uncertainty. People weren't sure, customers weren't sure of their capacity needs because there was uncertainty by their customers in terms of the signals from them. And then as the quarter progressed, I think those uncertainties became realized and the inflationary expectations and its effect on consumer demand The geopolitics of Eastern Europe didn't help. And so those uncertainties became realized into kind of a risk-off approach. And that's what we're seeing right now in our flex market.
spk03: Very helpful. Thank you.
spk02: Thanks, Joe.
spk00: Thank you. And as a reminder, when asking your questions, please limit yourself to one question and one follow-up question. Our next question comes from the line of Krish Sankar with Cowan & Company. Your line is open. Please go ahead.
spk04: Hi. Good morning. This is Stephen calling on behalf of Krish. Thanks for taking my question. I guess the first one is a little bit more of a high-level. If you could talk a little bit about the linearity across the three businesses throughout the quarter. I guess just looking at the higher DSOs at 16 and a quarter, I'm kind of wondering whether – whether it was the semis business that saw some of the orders sort of floating near close to the end of the quarter due to the Shenzhen production impact, or if there were other interesting characteristics of the orders and sales across the other segments during the quarter.
spk02: Yes, this is Seth. I'll take that question. Yeah, I said in prepared remarks, the DSO is a little bit higher this quarter versus prior quarters because the – Linearity of revenue during the quarter. Usually we have a little more of a hockey stick in the back end, which is more a photonics piece of the business. But I think what you're seeing, what we saw in the Q1 is supply chain constraints. It was sort of a linear impact there as well. So I wouldn't say it's a timing of orders per se. I think it's more of how we got parts into the operations and how we shipped out products. That was more the linear impact, I think, on the quarter. And that drove up DSO. I mean, the aging is in good shape and everything else. It's really just the time of revenue in the quarter. It's more operational-driven than order-driven.
spk04: Got it. Thank you for that, Seth. Also, one more for you as well on the gross margin side. Just in terms of the sequential decline in gross margins, can you provide a little more color on what is the incremental decline change that's driving that? Is it partly mixed, or is it more the inflationary costs becoming a higher burden in the June quarter? Any additional call around that would be great.
spk02: Yeah, exactly. I'll take that one as well, Steve. Yeah, you're right. We're down about one and a half points sequentially, and it's virtually all inflationary pressure. There's a little bit of mix, too, because we mentioned the The flex, you know, the PCB via drilling revenue in Q2 will be relatively muted. It's a little bit of a mix there. But the lion's share of the sequential decrease is inflationary pressure. And we know where it's coming from, as John mentioned. We have actions in place. We're very committed to kind of, you know, get back to our historical levels. And, you know, that's certainly all hands on deck work on that right now. But that's what's driving, at least in the short term, the impact on Q2.
spk04: And given the magnitude of it, is it the higher cost, is it affecting the SME business more than the other two segments?
spk02: Yeah, correct. Yeah, so you'll see it in the vacuum analysis. Division is the biggest impact, for sure. It's affecting every division, but the vast majority is the SME piece of our business. Great.
spk00: Thanks, Ed.
spk02: Yep, thanks, David.
spk00: Thank you. And our next question comes from the line of Pertash Mishra with Berenberg. Your line is open. Please go ahead.
spk06: Thank you. Good morning. Your photonics business is holding up better sequentially and was up a lot on a year-over-year basis. So what are you seeing there? Has it been impacted less by these supply chain issues, or it's just better demand which is driving that?
spk02: Yeah, Paratash, you know, we strategically made some decisions early on when we bought Newport, which was to take the photonics technologies that we had and try to leverage that into some of the semi-markets where Newport was relatively less levered. And that, again, like our power, was a multi-year strategic decision. And we've been, you know, making progress with design wins over the last several years that we've talked about on these calls. And you're starting to see that. You're starting to see that a big part of the Photonics Solutions Division growth is coming from the semi-market. You see the special industrials being relatively stable, and you see the advanced electronics for the Photonics Division also relatively stable. But the growth, a lot of that growth, is driven by strategic decisions we made to put that technology for the semiconductor market.
spk06: Got it, got it. And then as a follow-up, in this specialty industrial segment or market, how should we think about the growth potential in that business? Is it similar to advanced electronics, or could it be lower than the electronics over the long run?
spk02: Yeah, no, that's especially industrial as we kind of look at it as a GDP-plus kind of business. So that is lower than what we expect with advanced electronics. But that's stable. much more stable, you can see in our guidance as well. It levers the research that we put into semiconductors and advanced electronics. And we only play in certain niches where we have value and where we can, you know, have that steady gross margin and cash flow from it.
spk06: Got it. Thanks, Ron. Thanks, Paritash.
spk00: Thank you. And our next question comes from the line of Hans Chung with DA Davidson. Your line is open. Please go ahead.
spk05: Thank you for taking my question. So first, is it possible to quantify, like, the impact from the supply chain constraint to our second quarter outlook? Like, how much of amount, like, for example, like, without the supply chain constraint, what we can do in terms of top line? And then what's the backlog? executing the March quarter versus three quarters ago.
spk02: Yihang, this is John. It's difficult to quantify exactly what the supply chain constraints are on the top line. I think that's your question. Suffice it to say, though, that our backlog is continuing to increase. We don't publish that backlog. Bookings also continue to increase. It's not a demand problem. It's not a backlog problem. It's a supply chain constraint problem. And so we're working real hard to try to increase our output every quarter. But as I said before, the supply chain constraints, they're not getting better. And they continue to surprise. We continue to react. We react better. We have better partnerships with our customers and our suppliers. But they continue to surprise. And I think we're also contemplating or including in our guidance the fact that there are COVID shutdowns now. We were affected by Shenzhen in Q1. As you know, there are potential effects of shutdowns in Shanghai and now Beijing. And we don't have factories there, but we have offices and certainly, you know, maybe third-tier suppliers have factories there. And so we're taking all that into account as we guide the revenue going forward.
spk05: Got it. Okay. And the next question is regarding your ARC power. the business. So you have gained market share for the past couple of years, I would say. And just kind of how much room for you guys to continue to gain share, particularly in the contract edge side of business?
spk02: Yeah, no, as you know, we've been talking about design wins and incremental share gains for many years. And I think You know, many of our long-term investors have stayed with us, and they've benefited from that. Many other investors didn't know who to believe, so they might have bailed out. Too bad for them. But we were consistent. We were determined. And you can see that, you know, this is something that doesn't happen very often in the semiconductor equipment market because of CopyXact. For us to be a distant number two in our power six years ago, to being number one in our power, you know, in my career, that has happened maybe two or three times in the entire industry. So that's a really significant change. And to your question, going forward, we see that continuing to grow. All that share gain that we talked about in terms of making us distance number two to number one was almost all driven by dielectric etch. We haven't even tapped into conductor etch, where we have some design wins, and we expect to continue to have more design wins. And so we think that our power will continue to grow and extend its lead in market share.
spk05: Thank you.
spk00: Thank you. And this does conclude today's question and answer session, and I would like to turn the conference back over to David Ruzick for any further remarks.
spk07: Thank you, Michelle. And thank you all for joining us today. And for your interest in MKS, operator, you may close the call, please.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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