MKS Inc. (MKSI) Earnings Call Transcript & Summary

Good afternoon, investors. Thank you for joining us today. And this is a meeting with MKS Instrument. Today, we are very pleased to have President and CEO, John Lee, from MKS to join us to have a fireside chat. Before we dive into the Q&As, just a few reminders. If you are joining from the -- a video showcase, on the left-hand side of your viewing screen, there are 2 links. The first one is called a Pigeonhole and this is the link you can click and submit your questions, the most relevant question for you. You can also use that link to see what questions are already there and vote for the ones that you want to be discussed. At the -- also at the left-hand side of the viewing screen, there is a second link, it's called Procensus poll. Please take that poll and answer some of those questions at the end of the discussion. So with that, I will start the conversation with John. John, thank you very much for joining us today.

So maybe the first thing to discuss is how has MKS as a company changed over the last few years? It's quite interesting that in this conference, MKS is still categorized as a U.S. semiconductor name in that section. And when we look at the revenue of MKS, it seems like more than half of that is something else. So could you help us understand what happened? What's the transformation of the company in the last 5 years?

Yes. Sure, Jay. And happy to be here at the Bernstein Conference. So semi has been our single market for most of the history of MKS, over almost 60 years now. And then in 2016, we did -- our biggest acquisition at that time was the acquisition of Newport Corporation. And what that did was it added Advanced Markets, lasers, photonics and optics to our revenue stream. It also actually expanded our semiconductor exposure. So even though MKS was about 1/3 of the critical subsystem market in semi, we actually did not participate in lithography or inspection because we didn't have optics and lasers and things like that. Newport actually brought that in. So Newport actually expanded our exposure to semi to include not just the vacuum companies like Applied Materials and Tokyo Electron and Lam, it also included companies like ASML and KT. So with that exposure, we are actually exposed to about 85% of the semi market -- equipment market. But more importantly, Newport brought in lasers and optics and photonics. That's half our revenue now. And that is addressing things like using lasers to manufacture very precise features, for instance, making a smartphone. Some of the features there are very finest features. So with that, we achieved 2 things: an expansion of our semi exposure, so a little less risky in that we're not exposed to just a couple of segments in semi, but all of WFE, and also expanding into different markets. And then we bought the company called ESI, Electro Scientific Industries, about a year ago. And that was the natural evolution of the Surround the Workpiece portfolio that came with Newport. Lasers and motion, optical subsystems into a systems company. And so ESI, of course, gives us the systems market. Again, though, focused towards laser microprocessing, making really precise products with lasers. And so we're now 50-50, Semi and Advanced Markets.

Okay. So you mentioned the journey of expanding into the advanced industrials. And from -- just to understand a little bit more, how do you choose the different types of technology to add to the industrial -- advanced industrial segment? And what are some of the other technology that might make sense to be added?

Yes. One of the things that we look for in terms of adding other types of products, either organically or inorganically, is to make sure that, that product is really differentiated, something that has a high barrier to entry. This is true for all of our products, including our semiconductor products as well as any future products. And so when we look at things like that, if we look at our laser portfolio, we're really looking at pulse lasers versus fiber lasers because pulse lasers are harder to copy. Our competitors are usually companies that are long-term western companies with lots of decades of laser design and internal coating capabilities. That's really hard to copy. And so when we look at new products to either acquire or grow organically, we're looking for differentiated capability and barriers to entry.

Okay. So that's the barrier. I understand you want something that's quite unique and without -- it's not a commodity, right? That's understandable. And how do you think about the synergies across the different business segments, the Motion and Light, the Vacuum and Analysis and the System business, how do you actually drive the synergy from those different businesses?

Yes. I would say like in the vacuum systems product lines, a lot of that synergy comes from being a one-stop shop to some of these large OEMs. So they know what we can do. They know we have a lot of potential solutions for them. And so we have just more discussions with them. And so you're leveraging the connections, the multiple connections you have with these OEMs because you could do more for them. In the light and motion group, we have Surround the Workpiece. We basically took the same blueprint to talk to large OEMs that are building laser tools where they need motion, they need optical subsystems, and obviously, they need lasers. So very similar that way. Now there are other synergies, though, when we bought the ESI group, our Equipment and Solutions Group, synergies there are slightly different. They're about having a systems company with its known application challenges and opportunities, being able to talk very intimately with a product group that is a specialist in some of those critical components, like lasers, motion and optical subsystems. Now synergy between those 2 road maps co-developed, we think, will allow us to differentiate new systems products as well as new laser motion and optical subsystem products and provide solutions that are better, cheaper, faster, more capable to the end customers.

Okay. It seems that the Semi Market, you've had there, you want to be a one-stop shop for the key technologies and customers, actually, buy the different components. They like -- they prefer to buy from one vendor, right? And then the ESI, that's mainly for the PCB manufacturing equipment, that's a different end market. And do you look at like more end markets beyond Semi and PCB to expand into other things and also try to become a one-stop shop in those end markets?

Right now, I think our systems market is really targeted towards a couple of very high-value steps in the manufacturing of PCBs because not all steps are -- require the kind of high technology, differentiated technology that ESI provides. So that is really kind of case by case. I think Surround the Workpiece, that is a one-stop shop for lots of OEMs. They prefer that because it gets them up to speed faster. They know that size does matter because when your teams are working together on multiyear development programs, we have to be able to support them even during cycles, upturns and downturns. That's something we've learned in Semi. We actually put a lot more attention on R&D development with our customers during downturns because that differentiates us from maybe customers -- or competitors who perhaps can't do that, can't afford to do that. And I think it's something that's appreciated more and more as our customers, our OEM customers have become larger, too. They need to be able to focus on what they're good at, leave a lot of the subcomponent R&D to good partners like us.

Got it. And when you think about the next 5 years, maybe, do you have a goal for how big the Advanced segment should be and what kind of profitability to achieve?

Yes. We have internal goals for the whole company, but it turns out that our Semi side as well as the Advanced Market side, they're all about mid-40s gross margin. They all have about 50% variable gross margin and about 40% variable operating margin. So there's a lot of leverage there in the story. All 3 divisions are similar that way. They have different volatility, some of them pretty stable, some are semi. But in terms of profitability, long-term goals, we certainly think that we can maintain this mid-40s kind of gross margin. As we scale, we believe that more of it will drop to the bottom line and the bottom line, profitability should increase. We hope to increase the gross margin as well, but that will depend on which kind of products we go into and/or in M&A. But those are kind of the goals we have when we do M&A, which is to look at the gross margin. It should be close to corporate average. Or if not, there's a reason and a way to get there. And then operating leverage, of course, I think, comes with just being good operating -- a good operating team. We actually can consolidate supply chains, factories, locations. So we're pretty good at that. So I'm not as worried of being able to get to good operating margins if the underlying gross margin supports the differentiated products that we like, which is in the 40s, in terms of gross margin.

Okay. What about the size, the goal of the Advanced segment as a percentage of total MKS?

For Advanced Markets, so we don't have a bright line there. If a big M&A opportunity came to us, let's say, in Semi, that is something we've always said made sense and it was actionable, we'd be happy doing that. The likelihood, though, of an opportunity coming to us in Advanced Markets is higher just because there are just more opportunities there. Because in Semi, we've done a lot of the rolling up over our 30-year history, whereas in Photonics, Lasers and Optics and Advanced Markets, there's still a lot of potential consolidation that can occur. And so just by the numbers, it's likely that there will be more opportunities in Advanced Markets for growing inorganically.

Okay. So in the laser market, you mentioned that you focus more on the pulse lasers. And the one reason is in other category, like continuous wave laser, you saw a lot of established players and don't want to get into that kind of competition. But for pulse laser, what are the main applications? And how do you see the growth outlook for that technology?

Yes. I think we're really excited about pulse lasers because one thing is that they're actually enabling things that could never be done before. So when you have a continuous wave laser, you're replacing something that's being done by an arc welder today or a sawblade today, cutting stainless steel, well. So you're replacing something that's being done today. And the growth, therefore, is determined by whatever the growth metrics are for that market, GDP, for instance, on the stainless steel that we need to cut every year. In pulse lasers, the applications are pretty much not determined by GDP. They're determined by need and value that a pulse laser adds to that manufacturing process. So for instance, the example is our ESI tool that drills 5,000 via holes in a flexible circuit per second. Because we can do that, those flexible circuits have very small holes. You can't drill those with physical drills anymore. You have to use a laser. Because you have a laser that can actually do that, you can make a lot more I/O connections in a much smaller space with a flexible circuit. And that's why you're smartphone is -- every year gets twice as fast for the same price because there's a lot more I/O and a lot more smaller features being manufactured using lasers -- pulse lasers. So we really look at pulse lasers as an exciting technology that enables things that we can't even think of today. So it's actually not limited by kind of GDP. It's really limited by the imagination of people as they design new tools and new products.

Got it. So from what you said, I think it's a very interesting concept. The automation technology or advanced industrial technology you have are enabling some of the downstream innovations rather than just expanding the capacity for the downstream, right?

Yes, exactly.

What are some of the end industry innovation that's most relevant for MKS business? You mentioned the smartphone generation, but what else are really driving this demand of more advanced industrial tools?

Yes. So I think the -- what we would call the data economy, that is really a big driver for many of our products and our divisions. There's a couple of things that come from the fact that there's an economy that's being generated just by the fact that we have more data. So if you have more data, because you have more automation than people are talking -- machines are talking to each other now, not human beings, right? So when machines start talking and communicating to each other, the data rates have to go really fast. That's 5G. That's why 5G has huge potential. Now when you can talk to each other faster, you need processors, chips that can actually process that information faster. So suddenly, you need more 5-nanometer chips, 3-nanometer chips. So that drives our semi business. You actually need more memory to store all this stuff. And so again, semi. And then when you are thinking about how all this might fall together into the consumer electronics kind of markets, which are huge, then you think about packaging. So even though I make a chip that's faster every year, I might have to start packaging different chips together because it's cheaper to do that than to make it all monolithically in one waveform. And people are doing that now. And because you're doing that, you need to push packaging technology to smaller features, more precision, more difficult to do. And that's why we think MKS is well positioned to take advantage of chips as they get smaller and more difficult to make. Packages, as they get smaller and more difficult to make. And then putting the whole thing together and then driving this data economy. So that's how we think about the biggest driver for some of our portfolio in MKS.

Got it. So given this type of growth driver that's linked to the innovation and some important trends in the downstream rather than capacity expansion rather than a multiplier of GDP, how do you think about the growth rate through the cycle for your company?

Yes. We break it down by different markets, so they grow at different rates. But I'll talk about semi first. So semi, wafer fab equipment, that has grown in the range now of kind of 5% to 6% annually on average. We've always grown 200 basis points above semi, WFE. And that will continue to grow, we think, because the WFE has always been measured as a CapEx intensity, as a percentage of the number of chips that are sold, semiconductor chips that are sold, and that's always been about 10% to 12%. So it is always between 10% and 12% of the number of chips being sold. Then, if the number of chips being sold increases by 5% or 6% a year, which is the fact, that's what's growing, then CapEx intensity should be growing over the decades. And the data tells us that, in 1990s, WFE annually was about $20 billion to $25 billion. In 2000s, it's grown from $25 billion to $35 billion. In 2010s, it's kind of from $35 billion to $45 billion. And now we're kind of $45 billion is a bad year now for semi. On Advanced Markets, I think it really depends on the area that we're targeting, which is micro processing, which is this smaller features using lasers. And we think that is certainly growing in the high-single digits kind of growth rates. So much higher than GDP, obviously. And we hope to -- we have grown -- outgrown that in the past. We don't have a long track record yet of being able to outgrow that over decades, like we do in semi, but that's certainly our aspiration. And so being part of a market that grows high single digits and then outperforming that, I think, it's a great place to be in Advanced Markets as well.

Got it. So in the WFE market, you described how MKS business outgrow the underlying WFE market, mainly through this increased CapEx capacity -- sorry, CapEx intensity, right? Is market share gain also part of the equation for you to outgrow it?

Yes. Actually, I would say that just the CapEx intensity growth, that drives WFE, but we outgrow that, right? So CapEx intensity, we should just ride with the tide there. But a big part of how we outgrow is market share gain. And also, more importantly, you can continue gaining market share because you have a broad portfolio. We believe that the broad portfolio we have enables us to pivot from one category of critical subsystem to another if the technology for semiconductor processing changes. An example there is, well, before, there was vertical NAND, RF power was a nice business, but it wasn't something that was going to outgrow. When vertical NAND occurred, we knew that RF power could be a huge driver because you have really high aspect ratios and you need higher RF power. So we invested in that 4 or 5 years ago. We gained share but also, that whole segment has gained share as well. And so we use our broad portfolio as a way to gain insights into where to place our bets so that we can continually outgrow the market. I think in the past, we were limited to vacuum components. We bought Newport. Now we're not limited. We have lithography and inspection and metrology. So now we can even shift bets between lithography and etch if we thought that was a good idea or vice versa.

Okay. Got it. Since we are on this topic of the WFE market, there is actually a question from an investor. What's your expectation for the WFE market this year in terms of growth rate and size?

Yes. Well, I think the answer would have been different in January than it is now. So we kind of think that it's in the high 40s, but really, there's a lot of unknowns there because the second half of this year is a lot of TBD. And it's a lot of TBD because we really don't know what the recovery from COVID-19 will be like, whether it will be a V-shaped recovery or U-shaped recovery, whatever shape you want. What we do know is that the first half was very strong, as we talked about, and the second half, it's TBD. I think I'd pivot to how MKS deals with this. So we've been in semi for 50 years. WFE -- predicting WFE, as I've quoted before as a fool's errand because luckily, you guys have to do it, I don't have to do it, I just have to best and react to it. I know it's going to go up and to the right on average. I know there are cycles. And I know I can't do much about the cycles. But I know what I can do is react to those cycles faster than everybody else. So that's why we make our manufacturing footprint tight and lean. We try not to vertically integrate whenever we can. We have flexible work processes and labor overtime and temp labor. So we're always ready to go up 30% in a quarter or down 30% in a quarter because that's what we've had to do for 50 years.

Okay. Got it. And you mentioned the uncertainty in the second half related to COVID-19. Is your visibility on the COVID-19 impact improving in the last 1 month, 2 months, if you compare the situation in May to the situation in March and April? How would you compare the situation right now?

Yes. I would say that from our own supply chain, risk is certainly better than it was 3 months ago, just because when we guided Q2 revenue, we had a midpoint of $485 million, which is lower than what we actually did in Q1. Q1, we overcame a lot of supply chain constraints and delivered above guidance. But we took it down a little bit in Q2 because at the time, we could see there could be some risk in the supply chain of our suppliers in countries like Malaysia and Mexico who are literally going through peaks in COVID infection at the time. We also have a factory in Mexico, one of our bigger low-cost country factories. And so every week, our supply chain gets better. People adapt. People figure out how to get around the constraints imposed by governments, not to avoid managing it. But for instance, going from 2 shifts to 4 shifts, so they're less dense during a shift, so people aren't infecting each other, but you go from 2 shifts to 4 shifts to get kind of the same capacity output. So visibility is a little better. People are reacting better. And so the impact of COVID and how we might react to it is a little better than it was 2 months ago. That's for sure.

Okay. Then you talked about the supply chain part. What about the demand part? Are you seeing more visibility? Or incrementally, how do you compare the trend in the last month or so?

Yes. I think there's puts and takes there. I think everybody has heard about data centers and PCs and all that to support remote work. Those have been good drivers. I think it's still a big unknown as to whether smartphone sales and things like that will be severely impacted or how much it would be impacted in the second half because we don't know yet how much of the recovery will come back and it's just a pushout versus true demand destruction.

Got it. So there is a question related to the pandemic, and we actually ask this question to every CEO joining the SEC this time. And the question is, as you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to cutting costs or increasing levels of investment? How do your prioritize shift?

I don't think the pandemic is going to make us change our priorities for growth. I think our ideas and our bets on RF power and semi and lasers and light and motion and HDI tools and E&S, those are all intact. We will continue investing in those because we believe those are great long-term growth drivers. So that's not a change in how we might invest in certain products. I think how we might look at business continuity is a little different now, right, because no one could have predicted a 100-year event like a worldwide pandemic. And I think it does make us want to look at factory footprints. And having it maybe a little more geographically diverse. And that doesn't mean moving away from some place. It means probably doubling up. And where we have businesses that have grown quite a bit where it still makes sense, you can have 2 factories. Or you can have 1 mega factory. It might be a better idea to have 2 decent-sized factories in 2 -- literally, 2 geographies.

Got it. And that's the pandemic -- I mean, after the pandemic, when you think about the use of cash, does that change? If not, do you have rough goal of what percentage of cash being used for acquisition? What percentage do you return to investors through buybacks or dividend? How does the cash policy respond to this?

Yes. That hasn't change -- I don't think the pandemic is making us change that, too, because even when the pandemic started, we saw a lot of companies in our space, take their revolvers. Actually drew down their revolvers. And we were like, wow, I don't think we need that, but let's go check. And we didn't need it, and we still believe we don't need it. So maybe it was our bunch of caution in some of these other companies. So we've always been fortunate to be able to generate a lot of cash. Our gross margins are healthy, our profitability is healthy. And so before the pandemic, we were delevering quickly as we usually do after an acquisition. After Newport, we delevered very quickly. Got to a certain point, took on some more debt for ESI, and we're continuing to delever there. I think we might hold off for a quarter or so just to make sure things can stabilize. But then we would continue our first goal of delever, that saves money. Second goal is to use the cash for acquisitions because we believe there are a lot of really good opportunities that make sense. And we think that will add more value to shareholders than using the cash, for instance, to buy back stock. We still buy back stock, we have bought back stock, but it's really opportunistic. It's not a goal in and of itself. We will continue supporting dividend. So we're one of the few companies that had a dividend in this space, in semi, when it started in 2011, I think. So we'll continue supporting the dividend and that use of cash. But really, our bias is towards acquisition with the cash because there are great opportunities to grow the company faster that way.

Okay. Well -- so actually, there are 2 questions related to your past acquisitions, just added from the investors. The first one is about Newport. Can you describe the key capabilities of Newport in the semi end market, especially in semi equipment?

Sure. Yes. Well, so as I said before, Newport brought in 2 customers that we could never really have a relationship with, we have had nothing to offer them, that was kind of ASML and KT. Those are the proxies for that business. But there are other customers that do that. So optical subsystem design and motion -- complex motion control design, those are the 2 main products that these kinds of customers value. They value some of our lasers, too, but mostly it's because of optical subsystems and motion. And so I think the difference between that division that supports customers like ASML and KT when it was managed under Newport versus now under MKS is that MKS has always viewed key accounts like Applied and Lam and TEL very differently than just other accounts because it's a different kind of bet you're making. It's a different kind of relationship management, and it's a long-term bet. And so we changed the approach that Newport had towards companies like ASML and KT to be key accounts. And we change in terms of how we support them. We change in terms of how we improve quality for them, expectations or semi OEMs are much higher. We're used to that from our MKS, legacy MKS days, that was not news to us. So we've been able to invest in our world-class optics effort. That's going to be our next 4 year bet, investing in those capabilities to provide more opportunities for ASML -- companies like ASML and KT to give us more design opportunities as well. So that is something that, I think, we operated differently but we got it from Newport, we're operating it differently.

Okay. And this is related to the EUV and some of the latest technology trends, like the new optic?

Yes, for sure, EUV, but this is also -- there's a lot of optics necessary for just regular deep UV. And those tools are still -- that market is still bigger than EUV. There's also a huge market for inspection using some of the same kinds of technologies that are needed to make EUV tools as well as deep UV litho tools. So those inspection tools are quite complex, the optics there are quite complex. Basically, you look at the same -- you're trying to see the same small thing, whether you're trying to print it or look at it. And so those are really great opportunities for us. And once you designed in, these are really complex things. It's sticky. It's sticky business. It's difficult for someone to displace you because it's such integrated subsystem to that tool.

Got it. Okay. The second question related to your past acquisition is on the ESI. And the question is, why do you feel the need to have vertical expansion into systems? And how do you allocate capital among the subsystems, laser component older systems? And how has ESI acquisition help you in any way?

Yes. Well, I think one thing is we should step back a little bit. The marketplace for lasers and systems companies is actually mixed. Almost every systems company has some component group. So ESI had a laser group, by the way. Some of our competitors in lasers have systems groups. And so some of our customers for light and motion have laser groups. So they buy our lasers, they use their own lasers. So it's kind of a much more mixed kind of industry where it's not dichotomized and separated where you do systems, you do subsystems, you do whatever below that and you make chips. So it's actually much more mixed. And I don't know if that will be the case long term. But I think the reason we thought we could add value by having ESI in the family is because we can actually accelerate the development of system solutions if we could actually have a less -- or a more transparent interaction between those product groups and the systems group. And so we're starting to see some of that as well. So that market is not like semi where we can never do that in semi, right, in terms of being a systems company and a component company. But in kind of the laser micro processing, that's kind of the way everybody is organized. And then you kind of collaborators here and kind of -- it's kind of a frenemies kind of approach. But I think it's really -- for us, it's not -- we want to be a systems company for every product, every step. It's really about niches where we can really add value because we have a supporting laser group and motion group, optical subsystem for that particular application.

Great. Got it. So MKS is, obviously, one of the more active companies in acquisition. And what are some of the secret sauce for your integration after you acquire a company? How do you ensure the integration is smooth and successful? We see many other companies run into a problem in the integration space.

Yes. Well, I think it probably goes back to the original culture of MKS. MKS is very much kind of a very flat organization. When I run a meeting, I bring my laptop in and I project if it's my meeting. I'll take the notes and publish the notes afterwards because that's what my predecessor did. It's not one of these companies where you have 10-people helping you set meetings with the other vice presidents. We're working vice presidents and working CEOs. And we believe that you should be able to get into the details, if you have to. We believe you should be accountable and you should be capable. And so when we buy a company, right away, we start looking into cultural changes, if we have to. And cultural changes are the biggest, most difficult change to make. With Newport, we had to do a lot of culture change. There wasn't that strength and accountability that we needed. And so that was a pretty long list, heavy lift for a couple of years. But the results were good. The people who stayed loved it because they've always wanted to be accountable when allowed to be, I guess. And people who didn't want to be accountable, left, and we said, that's fine, too. With ESI, the culture was much closer to what MKS was. So that wasn't a very heavy lift from a culture standpoint. It was, okay, how do we get synergies. That's just working on product synergies between groups. And so I think one of the secret sauces of MKS is we have to impose -- we have to decide which values are really critical for the whole company to be successful. You have to believe in them. And then you have to say, this is -- these are not compromisable. Other things, that's fine. If you want to be a Californian or Oregonian or Korean, it's okay. Local cultures and all that, that's fine. But there's some basic tenets on how we want people to think about their jobs and their responsibilities that aren't compromisable. We make sure that, that gets promulgated very quickly to the acquired company.

Yes. I want to ask a question since we are talking about Newport. And a question from my own interest. And I remember when I was doing like experiment in the laser labs many years ago, I used Newport, I used the Spectra-Physics and to have anything fixed, it's very expensive. So how important is the aftermarket, after service -- after-sales service market for your business? Roughly, how big it is and how important it is to MKS?

Yes. And so I'll speak to it from the broader all the service business that we have, multiple divisions. By the way, we'll give you a discount this time if you need to purchase. But in general, when you look at the V&A repair and service business for all those subsystems out there, you look at the Newport laser repair business in power meter calibration business, and you look at ESI's business, which is field service, right, you're sending FSEs out in the field, you add all that up, it's over $300 million out of our $2 billion. So kind of 15% of our revenue is service. It's very stable, it's profitable. Just like every other company service business, we're not going to say it's too profitable. It's just healthy. And we recently, about 1.5 years ago, reorganized it into a BU, a business unit, with a general manager and product marketing managers, so developing service. Before, it was more over the transom. Well, if you need a laser to be serviced, give us a call, and we'll send someone out there. Now it's more like, hey, you want to sign the service. When you buy the laser, do you want to sign the service contract, you have guarantee, you have the warranty for a fee, it's kind of like insurance, right, which is like you may not need it, and then you pay it for something you didn't need. But if you need a whole big replacement of the laser, you have it, right? So we're starting to look at service as much more of a driver from a business unit standpoint. So 15% of our revenue today, highly stable and very profitable.

Got it. So you mentioned that's a stable 15% revenue contribution. Do you think that will get -- the percentage will get bigger as your installed base becomes bigger and more service is needed when things become older and bigger?

Yes. I think it has actually. So we have a lot longer history with the V&A group, but that service business, just the V&A, Vacuum and Analysis group, that has actually grown over time faster than WFE. It's grown basically because of our installed base. And I think now -- but even then, we didn't have 100% market share. So now with the BU approach to it, kind of looking at, okay, where are we losing service? Why? Do we want to do anything about it? Can we do anything about it? So we think that there's still opportunity to grow even with the installed base we have today, let alone with increasing installed base. And there are very a few companies or customers that are just throwing away their old tools. Those tools that were bought 20 years ago are still running. And so that's -- you see that in the OEMs. AMAT and Lam have a great service business -- servicing tools that they sold 20 years ago and the life 10 years ago. So that installed base continues to make chips that are fine. You can make it with 20-year-old tools.

Got it. One more new question from investors is, can you discuss a little bit about the early stage start-ups? And where you may see opportunities to acquire? And how do you respond to those if identified?

Yes, so…

Not just to acquire but also in terms of the competition. The competition from early-stage start-ups and also the opportunity you see from those space?

Yes. So we monitor early-stage start-ups. We're always tracking them. Our strategic marketing group is always looking at to see if they're becoming threats or opportunities for acquisition. In general, if you look at our acquisition history, we've not bought start-ups. We've not even necessarily invested in start-ups with 1 or 2 exceptions, very case by case. We're kind of wanting companies to be kind of fulsome businesses. It's a real market. You've got real products, you have real customers. And then we'll pay you fairly for it. So if you were the founder, great, you get to make money off of your hard work and your risk taking. So we'd rather have start-ups to be the risk takers because that's what they're good at. And then for us, it's really to be aware of them, but really from an M&A standpoint, is to acquire companies where it's not going to be 1 out of 10 will be successful. It's already successful. How do we make it better is really kind of how we look at acquisitions and how we look at start-ups.

Got it. And you just mentioned the contract-based service. What's the traction of that type of business model currently? And do you envision that being an even more profitable model?

Yes. So contract services just starting -- the offerings are just starting in our legacy semi business because usually, it wasn't a contract. It was more parts -- when it comes over the transom, they send it in. The contracts business in fuel service for systems has always been good, but we think there's more opportunity to gain long-term service contracts for system. And then I think that's probably where we'll probably do a lot of the focus because we don't have 100% market share in that kind of installed base that we have. But we'll see also how it takes off with certain types of component type of products that we have at chip fabs and set.

Is it too early to say whether it gained good traction from that? Or do you need more time to assess?

I think it's early days, yes. I think it's still early days, but we're going to try to see if we can gain traction there. If the market says yes or the market has already said yes for systems. It's just about getting more share. The market, I'm not so sure it's going to say yes for components.

Got it. So one more question related to the near-term cyclicality, but not related to COVID-19 as it seems that 5G is currently driving very strong demand for many different products and also for MKS. But are you concerned about a pause of 5G investment sometime second half of this year or early next year, then the demand may fall off a cliff temporarily? Are you worried about that?

I'm not worried about that. I think that if it happens, then we'll respond just like what we always do in semi. And I'm not worried about 5G long-term for sure. Because I think we are still in very, very early innings. I think the 5G rollout, as you know, now is really kind of using the 4G network. It's not even using the new network that hasn't been built yet. And I think when that happens, then not only do you need a lot of components to build a new network, then your 5G phones take on another level of capability because you're using a true 5G network rather than using 4G network with a 5G phone. So I think 5G for us is really early innings. How we talk about innings and VNAND and things like that, I think it's -- we might not even have started the first pitch yet in 5G. I think it's going to have a long road because, like I said, we're not even using a true 5G network yet.

But in the -- for example for the ESI business, they are already supplying quite a lot of equipment that's related to the PCB used for 5G end devices, right? So that's part of the strong orders you saw last quarter. Is that right?

That's true. Yes, that's true. I think 5G phones, as we've talked about, have 30% more flex content than a 4G phone. And even if the number of units is flat, you have a 30% increase with some designs. And if units decrease because there's a COVID effect or demand push out or whatever, we're still happy that the amount of flex circuits are still increasing. So I think short term, there is optimism today for some of our product lines for that. But like I said, if 5G drops off in the second half, okay, then it will have an impact on us. But I think it's short term.

Got it. Got it. So another question on the current issue is with the increasing friction between U.S. and China, and you have started to restrict not only the tangible goods export but also the technology that have ranging in the U.S. with that kind of trend, what changes is MKS making to mitigate the increasing risk?

Yes. Well, I don't think we know enough yet to know which change to make. I think we are analyzing it just like everybody else in the food chain. I think there's still a lot of uncertainty as to how commerce will enforce it, right? Because we -- and we don't know because we haven't -- no one's gone in and said, I'd like to sell this to this guy, and they said, yes or no. So we don't know actually. We know what the order says. And -- but the enforcement of it is really the key in terms of, "Oh, you can still sell it. I just want to know, that's okay" versus, "No, you can't sell it." And then it's a very different scenario. So I think we're prepared for it in the sense that we already have a long history of products that are dual use. So we've always had products that are dual use. Think of lasers. So it's by power. Certain powers, you have dual use, so you have to go through the whole paperwork and get approval. Some of our pressure measurement tools, equipment are dual use. And so we've had to go through commerce. And so we have that process down. We have a pretty robust process to try to make sure that it goes to the customer that is legitimate and I think we can do that. If we had to do more of that, it's bureaucracy, but we can certainly do that.

So I have one last question. But before that, let me remind investors, at the end of the section, please take the Procensus poll and the link is from the left-hand side of the -- of your viewing screen. So the last question to you, John, is, as CEO, what are some of -- maybe 1 or 2 medium- to long-term risks you are most worried and you want to really get MKS to be prepared for?

Yes. I think the medium risk, we've kind of dealt with it a little bit, was, what if we grew to $5 billion in a short period of time. Can we scale? Can we scale our organization? Can we scale our functional leaders to 2.5x our current size in a short period of time? Now you might say, well, that's kind of aggressive. But if you think about April of 2016, we were $700 million. And by 2017, we were $1.8 billion. So that wasn't a very long time to go from $700 million to $1.8 billion. And it was pretty painful in terms of scaling, right? Everybody just worked a lot harder, frankly. But I think as you go to billions -- a couple of billions to multiple billions, I think one of the areas that we have done in the past -- in the recent 6 months is we've actually hired some key executives from much larger companies to run some of our biggest functions. These companies are companies like Danaher, Emerson Electric, Thermo Fisher, right? And they were pretty high up there. So they know what a $5 billion company looks like. They've managed it. So that's one of the areas where it's not -- it's a journey still. But I think we had a good start in terms of building a team, building the muscle so that when we become twice as large in a short period of time, you never know when that might happen because that M&A opportunity happens when it happens, we'll be ready. And so that's one of the areas as a CEO that I want to make sure we continue that progress so that we're ready, we're $5 billion ready, right, when it comes.

Good. Thank you very much, John. I think that's a great learning so many things from you. And I hope you have a good day.

Thank you. Great. Thanks.

Thank you, investors, for joining. Bye.

Bye.