MKS Instruments Q2 2026 Earnings Call: Complete Transcript

MKS Instruments (NASDAQ: MKSI ) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

6% including certain discrete benefits. 35 billion. Strategic initiatives include scaling operations with new facilities in Malaysia and Guangzhou to meet growing demand, especially in the chemistry equipment sector, and maintaining a focus on deleveraging and disciplined financial management. Full Transcript Paretosh Misra, Vice President of Investor Relations Good morning, everyone.

I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Ram Mehpark, Executive Vice President and Chief Financial Officer. com. As a reminder, various remarks about future expectations, plans and prospects for MKS Instruments 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 non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non-GAAP financial results and reconciliations to our GAAP measure.

Our investor website also provides a detailed breakout of revenues by end market and division. Now I'll turn the call over to John. C. Lee, President & Chief Executive Officer Thanks, Paretosh, and good morning, everyone.

Momentum is continuing to build at MKS Instruments. Strong demand across all of our markets. Second quarter revenue and key profitability metrics came in at the high end or above our guidance ranges. Our Q3 guidance is supported by strong order activity that we expect will drive continued robust year-over-year growth.

Against the backdrop of intensifying AI-driven investment across semiconductor and advanced packaging applications, we are demonstrating the strength of our foundational position. From vacuum plasma power products that enable leading-edge etch and deposition applications, to optical components and photonic subsystems for the lithography, metrology and inspection markets, to laser systems, proprietary chemistries, and chemistry equipment for the advanced circuit boards on which leading-edge semi devices are integrated, we are a leading enabler of advanced electronics. This is MKS Instruments at its core.

Our performance reflects the benefits of investments we've made and continue to make in broadening our capabilities and expertise, deepening our relationships with customers across the electronics ecosystem, and building out the global capacity needed to meet the unprecedented demands of this investment cycle. We're not only excelling in the current environment, but also generating new design wins that position us to capitalize on long-term growth opportunities. Now I'll review our Q2 end markets performance and Q3 outlook.

Starting with our semiconductor market, revenue was above the midpoint of expectations as we and our supply chain partners continue to ramp our operations. Revenue grew 19% sequentially and 28% year over year, which accelerated meaningfully from the 13% year-over-year result in Q1. Growth was broad-based across deposition and etch products including RF power for NAND upgrades and vacuum subsystems, plasma generators, reactive gases, advanced logic and DRAM applications. Our photonics and optics solutions also continue to gain momentum in the lithography, metrology, inspection market.

Overall, we continue to see strong order activity and very healthy order backlog that gives us good visibility through the second half of the year. We also continue to achieve design wins, including in advanced logic where we are the process tool of record for dissolved gas applications, and in RF power where we have segment share leadership in high aspect ratio dielectric etch applications. Our semi outlook for Q3 implies year-over-year growth will accelerate to overall over 50% with strength across our entire portfolio of solutions.

This anticipated growth is an indicator of MKS Instruments' long-standing track record of WFE outperformance during improving investment environments. Turning to electronics and packaging, AI-related applications are driving a meaningful increase in investment. Revenue was above the high end of our outlook, up 19% sequentially and 44% year over year. Laser drilling system sales into the flex PCB markets for advanced smartphones and peripherals were strong, and chemistry sales remained robust as well.

In chemistry equipment, we said last year that order activity had been elevated for multiple quarters. It has moved another level above that. Our chemistry equipment demand is easily the strongest it has ever been, supported by AI server investments including optical modules. Our visibility now extends through 2027, and to meet this growing demand we recently announced we are doubling the capacity of our Guangzhou equipment factory, and notably in rigid PCB drilling.

We're pleased to see increased order activity as the market embraces our differentiated capabilities and a compelling cost of ownership proposition. As we have noted in the past, our proprietary chemistry carries higher gross margins than equipment, and we have high chemistry attach rates with our equipment customers. So we believe the stage is set for continued attractive high-margin chemistry growth through this cycle. We continue to be actively engaged with customers on their future plans, which serves as a good leading indicator for strong equipment orders.

Overall, the growth we're seeing in EMP reflects our long-held view that the trends driving device scaling in semi would ultimately come to the advanced PCB market as device integration becomes a core requirement for advanced electronics. That day has arrived, and advanced PCBs are rising in importance as increasing layer count requirements and integration challenges extend to higher-end smartphones, AI servers and other advanced electronics. In Q3 we expect electronics and packaging revenue to be up over 30% year over year with AI-related investment partially offset by flex equipment-related seasonality.

Our flex market is typically down sequentially in Q3 ahead of the next design cycles, and we are coming off a very strong first half. I'd like to highlight how we are scaling in our semiconductor and electronics and packaging business to meet anticipated demand growth today and over the next several years. Near term, we are increasing our working capital investments to address rapidly accelerating demand in the current cycle. Longer-term capacity planning is also key.

Our new Malaysia Supercenter, which opened in Q2, can be expanded at our option, and we are building out our chemistry equipment facility in Guangzhou. As I mentioned earlier, these facilities will play an important role in supporting our future capacity needs, and their proximity to many of our customers strengthens engagement as well as delivers performance benefits as the new facilities ramp. Pushing to our specialty industrial market, we delivered a strong quarter, up 8% sequentially and 14% year over year. Revenue has not been this high since 2023, driven by our datacom and defense markets.

Performance across our remaining specialty industrial markets was steady in Q2. We expect strong performance in our specialty industrial market in Q3. Led by the markets I've called out, we're pleased to see how our foundational enabling technologies extend beyond semi in electronics and packaging into adjacent opportunities that leverage our R&D spend and deliver strong incremental cash flows. Wrapping up, MKS Instruments is executing at a high level financially, operationally and technologically.

We've further broadened our capabilities and expertise to address key opportunities across the ecosystem, resulting in deepening penetration in areas like lithography, metrology and inspection, and advanced PCBs at a critical time for the industry. We're also making strategic investments to support our customers and drive profitable growth well into the future. Our customer engagement and design win activity underscores our role as a foundational enabler of advanced electronics who looks ahead and solves ahead. Thank you to our MKS team, our suppliers and customers for your hard work and partnership.

We are incredibly excited about what lies ahead. Now here's Ram to run through the quarter and our financial outlook in more detail. OPERATOR Thank you. At this time we will conduct a question and answer session.

As a reminder, to ask a question, you will need to press star-11 on your telephone and wait for your name to be announced. To withdraw your question, please press star-11 again. Please stand by while we compile the Q&A roster. Our first question comes from Steve Barger at KeyBanc Capital Markets.

Steve Barger, Analyst at KeyBanc Capital Markets Hey, thanks. Good morning, guys. I'm going to start on the NAND tool upgrade. You know, you've talked about that activity will contribute in coming years, but greenfield NAND I think is even better business.

Can you update us on what the upgrade cycle looks like and how that bridges to greenfield projects you may see entering equipment planning? C. Lee, President & Chief Executive Officer Morning, Steve. Yes, Steve, so we did mention that we are seeing upgrade activity in Q2.

We certainly expect that to continue. It can be lumpy, but we know that the industry is certainly trying to increase capacity in NAND. And then of course there's been some announcements of greenfields and those factories, as you say, will be even better for our power as well as the rest of our portfolio. And those factories, fabs, will be coming in towards the end of '27, beginning of '28.

So that's the plan right now. So between now and then we would expect continued upgrade activity. Steve Barger, Analyst at KeyBanc Capital Markets Got it. Can you compare the magnitude of dollar spend for a new leading-edge tool versus an upgrade?

C. Lee, President & Chief Executive Officer Yeah, we haven't really disclosed that, but I would just say that the RF power part of that upgrade is the largest part of the BOM in terms of cost and therefore opportunity for MKS. That's why when there are upgrades we benefit from that. Of course if it's a brand new tool, we would have the rest of the semiconductor portfolio around that tool, so that would be better.

But the RF power content is large. Steve Barger, Analyst at KeyBanc Capital Markets Got it. And then one quick follow-up. Really appreciate the commentary on visibility into '27 in electronics and packaging.

As we've gone through earnings, some of your biggest semiconductor customers said visibility is the best it's ever been for their business. Can you talk about lead times and visibility into 2027 on the semi side? C. Lee, President & Chief Executive Officer Yeah, sure.

We're in constant communication with our customers. As you know, they have given us their plans, expect much further out than normal, and we are building capacity and inventory and scaling our factories and getting the labor in to meet those anticipated increases from our customers. So we are planning to make sure that we're not the constraint. Lead times right now for us are still kind of normal.

So we're executing really well given we're already a couple of quarters into the ramp. So of course we've got to manage many suppliers. But right now our supply chain is stepping up. Steve Barger, Analyst at KeyBanc Capital Markets Understood.

Thanks. C. Lee, President & Chief Executive Officer Thanks, Steve. OPERATOR Our next question comes from Bhavish Lodhya, BMO Capital Markets.

Bhavish Lodhya, Analyst at BMO Capital Markets Hi, good morning. Can you give us an update around the ramp of Penang, Malaysia and Tainan capacities as you ramp up those sites? And are you still comfortable with the $180 to $200 billion of WFE that you can support with those plans? C.

Lee, President & Chief Executive Officer Thanks, Bhavesh. Yeah. Malaysia has started ramping. In fact, we could say that the first revenue shipments have occurred there.

It's still early days. Of course we've said in the past that we did not need Malaysia for 2026 to meet the 2026 demand. So Malaysia is ramping up to meet the 2027 demand. And then beyond that, we had talked about capacity planning last quarter that we would need Penang as well as perhaps other sites.

Right now we have reconfigured things so that we believe that when we fill out Penang we will be able to support a WFE in that $200 to $250 billion range, which is an incremental improvement from what we said last quarter. And of course in addition to that, we announced the doubling of capacity in our MSD chemistry equipment factory in Guangzhou. Bhavish Lodhya, Analyst at BMO Capital Markets Got it. And question on your specialty industrials platform, it's a nice step change in the earnings growth profile.

Your guidance seems to indicate it's going to grow in the high teens in 3Q. Can you touch on some of the end markets or sectors that are helping? I know you called out a couple of them, but it looks like those have to be very strong for the overall platform to grow in the high teens. Maybe talk about the durability of those earnings.

Are there any timing benefits, and how should we think about the baseline of this platform into the next year? C. Lee, President & Chief Executive Officer Yeah, thanks for that. I think we called out two of the sub-markets, and that was Datacom, data communications.

Now again that's driven by AI. So communications testing for AI data centers, that continues to be strong. We expect that to continue to be strong. You know, it should follow, for instance, the AI investments for the industry.

The other segment we called out was Defense. And that has continued to be strong and grown over the last several quarters. And that's really a market where, you know, it probably depends on your view of defense. But those two markets continue to remain strong.

That's why our guidance for specialty industrials in Q3 remains strong. So that's the color we can give you. The other sub-markets, one is automotive. That's kind of bouncing along, no degradation, no material improvement either.

And then industrials, that is also we're seeing incremental improvement there, but not to that same order of magnitude as Datacom and Defense. Bhavish Lodhya, Analyst at BMO Capital Markets Thank you. C. Lee, President & Chief Executive Officer Thank you.

OPERATOR Our next question comes from Matthew Prisco at Cantor. Matthew Prisco, Analyst at Cantor Hey guys, thanks for taking the question. I guess first on the E&P side, how should we be thinking about the chemistry growth potential moving forward given this continued equipment strength? Is this something we look for meaningful growth inflection in 2027, 2028 as those systems move to high-volume manufacturing?

And any update you can provide on the AI contribution as a percentage of those revenues? C. Lee, President & Chief Executive Officer Yeah, Matt, maybe I'll start with the AI contribution. We had said '24 is 5% AI chemistry as a percentage of our chemistry overall, then 10, and this year 15 last quarter.

I would say it's incrementally better. So think about 15% to 20% as the right number now, chemistry as a percentage of our chemistry for AI. So that's one update. I would also say that the equipment business, the chemistry equipment business, is growing very, very fast.

We did talk about the fact that we have visibility through 2027, which gives us the confidence to build that Guangzhou factory, expand that capacity. I would say too that we have said the percentage of chemistry or the amount of chemistry that comes out for every dollar of equipment sales is in that 20% to 40% range. That's still true. But maybe the update here for your modeling is that we're selling a lot more of the higher-end pieces of equipment, fundamentally because AI boards are more difficult and you need higher-end equipment.

Those come with higher ASPs. And so mathematically that 20% to 40% range, think of it at the lower end now. And that's just a math problem. The chemistry is still there, but the ASP of the equipment is higher now.

Matthew Prisco, Analyst at Cantor Perfect, that's helpful. And then on the debt side, we're seeing strong sequential growth in 2Q guided, strong sequential growth in 3Q, voluntary prepayment kind of staying the same. And I understand you're investing in supply to meet demand, but can you maybe give us updated thoughts on strategy around deleveraging?