MKS Inc. (MKSI) Earnings Call Transcript & Summary

So we have Seth Bagshaw, CFO; David Ryzhik, IR, sitting in a car dialed in for the call. Welcome to you 2. Thank you for joining us, despite the literal fire drill.

You got to admit we're doing anything we can for the fireside.

Yes, exactly. Hopefully, not a literal fireside.

So I did have some thematic questions. I think we'll pass those since we're running shorter on time and dig in right into some of these company-specific questions. And again, if anybody has questions, listening to this webcast, you feel free to send the questions through the portal, and I'll take a look. So first, I'm really curious about the power solutions business. You mentioned it was a record revenue quarter. I know you've talked about share gains. Can you talk about what's happening in power solutions and what some of the longer-term trends in that division are?

Yes, thanks. This is Seth, and just for everyone on the call, it's a false fire alarm. So...

Okay.

So on -- in the power segment.

All right. Hang on, guys. We're still getting some feedback. I don't know if your laptop is still open. Maybe since you dialed in, close the laptop and see if that helps.

Yes. Weston. The PC's off now, Wes.

Okay. Yes, that's much better. Perfect.

Okay. Yes. Yes. So the power solutions, yes, we talked in the last earnings call 1.5 weeks or so ago. So that was an inflection point, we saw probably 4 -- 4 or 5 years ago, where we're obviously already in that segment of the industry for semi. And we saw an opportunity to continue to grow that business. We put some engineering talent toward -- had a lot of C-level focus on that power solutions business really grow and kind of leverage that piece of the business. So we're really pleased to announce that we had record revenue in the past quarter. And the growth in that business outpaced our semi growth overall. And again, it kind of comes back to having us identify inflection points early. We're pretty exposed to 85% of WFE. In the power segment [ here ] we kind of liked a lot, again, 3 or 4 years ago. And a unique kind of solution we put in place. If you look at the 3D NAND, we've got a high aspect ratio etch established, those with multiple layers. In the first half, if you can do that, it's definitely a cost again for our end customers. So that is really the application that we're most proud of in terms of the memory in 3D NAND market. And again, it dates back to a number of years ago, we saw the opportunity and put resources to work on it.

Okay. It -- and I know you've been winning some business. Is it kind of hit or miss on solutions that you'll win meaning the revenue growth will be lumpy? Or do you expect a fairly steady growth rate? What -- I mean, what's your expectation over the next 2 or 3 years?

Yes. Yes, the conductor etch mark, you're right. So these design wins we have, we think it will take probably 2 or 3 years for high-volume manufacturing. And that will obviously depend on our customer getting design wins at the end device manufacturer, but these are design wins today, Tool of Record. And our view is the volume, pipeline manufacturing will really be probably a 2- to 3-year time horizon.

Okay. So we can get an acceleration of revenue in a couple of years.

Correct. Yes.

Okay. All right. And another topic I wanted to dig into is just the world-class optics. I think you mentioned that on the last earnings call. It sounds like a newer opportunity. I was wondering if you could just explain it to us a little bit. And sort of maybe tied into an expected growth rate and your opportunity over the next few years?

Yes. So it comes about our Light and Motion Division. That was probably Newport acquisition that completed back about 4 years ago. And you might recall, a Newport Corporation, now the Light and Motion Division, that the 2 major semiconductor customers that were brought across were ASML and KT. And when Newport serviced those key accounts, I would say, it maybe was not one of the key priorities in the Newport Corporation portfolio. And we rolled those customers to a key account program that we have in Tokyo Electron or Lam and Applied Materials. And since the acquisition, we kind of revitalized that semi business. And the world-class optics is a way of kind of leveraging more opportunity and get design wins within those 2 major semi customers. And it really strengthened our optics capability. We're making a number of investments in there that weren't done in prior years. We'll invest more going forward next year as well. The design wins that we're getting today and in the future, again, it will take a while to get to high-volume production. But we're very bullish about that piece of Light and Motion portfolio, especially in the semi market. That has been a key focus for the last several years and certainly going forward as well. We've got double-digit design wins, by the way, in that marketplace.

Who are you displacing? Is it in-house manufacturing? Or regional suppliers?

Yes, really can't comment exactly who we're displacing, but they are just hard design wins we've got.

Okay. All right. That's helpful. I also wanted to touch on the laser business. I think on the last earnings call, you mentioned the business was stable. I had been thinking it was a little softer just due to the broader industrial slowdown. So I was wondering if maybe you could just help walk us through the moving parts in the business, the midterm outlook? And why you think this is a growth business over the longer run?

Yes. So in the past quarter, we said that the softness in the advanced market is really driven by overall industrial applications, not on the laser portfolio. So when you look at the advanced market, we break it down a couple of subcategories. The laser revenue was very consistent for the quarter. So we feel good about that. The softness we saw... [Technical Difficulty]

All right. I apologize, everyone, we're still having some difficulties, Seth and David had called in from their cell phone. And so we're working on it right now. We're trying to get them back on. And just please hang tight. All right. I think we're live again. I apologize to everyone listening. We're having technical difficulties. Like I said, there was a fire alarm, so we're doing this from the MKSI parking lot on a cell phone, and I think it's kind of [ cut it ]. So Seth, we were talking about lasers, and you were talking about some of the recent trends in lasers versus advanced Industrial. And then you cut out. I'm not sure if you finished your comment.

Yes. Thank you, Wes. So we apologize, everybody, for the technical difficulties here. Yes. So in the quarter, advanced markets were as you'd expect in the second quarter. And any softness we saw there was really related to overall industrial applications, like the GDP-type exposed applications, so non-laser. And then some of our customers were deemed nonessential by local government agencies. So the orders and shipments couldn't occur to those customers as well. But overall laser [ portfolio ] was pretty stable for the quarter, very optimistic about that. And then on the long-term opportunities, again, we're exposed primarily to the microprocessing segment lasers, where you get these low-energy, high-pulse lasers, high precision. And those applications, to give you a good example, the ESI acquisition we did about a year or so ago, uses pulse lasers to drill, for example, 5,000 vias in flex PCB, very high precision, 35 microns, very -- again, very high-precision applications where you limit thermal damage. And that long-term opportunity is in that laser portfolio, we feel very strong about, very robust. We're also exposed, in general, to the whole laser ecosystem. And by that, I mean, if you look at fiber lasers or pulse lasers sold by even our competition, we provide technology to measure the quality of laser beam, whether it's operating the right wavelength, is the [ wave area ] of the beam appropriate for the work teams. And we have a whole list of product portfolio to kind of help measure that and help our end customers. So the microfrosting piece, we're very optimistic about, very bullish about and then the overall ecosystem we're exposed to as well. So that's kind of the laser story in a nutshell. And we think in the third quarter, those other industrial applications, we feel like they may come back in the third quarter, which should be kind of encouraging for us. But we're overall viewing advanced markets relatively flat Q3, Q2. And our guidance of lasers is midpoint.

Related to the laser outlook, can you talk about the picosecond laser and what need that fills in the marketplace? And then maybe if you could just touch on your longer-term growth expectations in the laser market because I know that's one that has been a little bit impacted by [ trade in ] industrial, even though we're certainly exposed to microelectronics.

Yes. As Seth said, we're pretty bullish on microprocessing and the miniaturization of electronics, and the picosecond laser strategy is a part of that, Wes. We have a very low footprint there, and we introduced some new lasers in 2019. And picosecond is 1,000x shorter pulses than nanosecond. So we can address applications with more precision. And so we've talked about some design wins that we've received already in the picosecond laser space, and we're pretty excited. About this. So we're going to continue to focus on that. But it's not just the picosecond story, we have a nanosecond laser line, which we think we're the market share leader. And we also have a femtosecond line, which addresses a different set of applications. So this is a part of our overall strategy on pulse lasers.

Got it. And remind us the longer-term growth expectations in the laser-related business?

Yes. We haven't outlined a specific growth rate CAGR for that business. But we think, overall, the pulse laser market, just the lasers is about a $700 million market SAM today and growing. So -- but we haven't disclosed the growth rate of that market.

Okay. Good. Let's spend a minute. I know we're short on time, but I do want to touch on the PCB market. You talked about recovering PCB flex demand. I'm just wondering how sustainable that is through the back half of the year and through next year and what you think about flex PCB market growth for the next several years?

Yes. So the PCB market, there was a fair amount of capacity put in the marketplace back in calendar year 2017, 2018. And we knew in '19 through at least early part of 2020, some of the capacity is being absorbed in the marketplace. So -- and then second quarter, we had a very good ESI quarter, E&S division quarter, where flex came back in Q2. So the flex market overall, we believe, is about $150 million normalized market, growing kind of mid-single digits. We've got very high share in that marketplace. The way it works is typically the flex decision in terms of capital buying occur, Q1 and Q2, and it gets seasonally soft in the third quarter. So again, Q2 in that division, we did about $65 million of revenue. And the gross margin was north of corporate average and good operating profit because the flex content was very good. So we think that Q3 will come down a little bit seasonality just due to the normal market dynamics in the flex market. We kind of -- was fully working our way to excess capacity and again, kind of a $150 million, $200 million market size is kind of how we look at the flex market. And then the other thing that's a driver kind of a top of that would be if you look at the 5G phone rollout, we believe that on a 5G phone, the flex content to get to 30% higher than a 4G phone. So that will be, again, a secular driver that 5G will drive on the flex PCB market. And so we feel, again, very strong about that opportunity going forward.

Okay. So my impression is that the bulk, maybe the majority of your flex PCB business is with one major customer. And so do you expect with the 5G ramp that you would also have the [ downwind ] of expanding your customer base in addition to the greater content per phone?

Yes. Certainly, we don't deal as much with the end customers, but certainly, we think the PCB industry, the flex PCB industry is going to benefit from 5G. So if more smartphone OEMs adopt flex in their form factors, that's good. So our job is to provide just the technology. And one thing to keep in mind, unit volume and device content is one aspect, one catalyst for us, but technology transitions are another. And so as vias are becoming smaller, as materials are changing, that's driving some demand as well. And so we believe we're positioned on both fronts.

Okay. All right. That's helpful. And then I would love an update on the HDI PCB opportunity. I know that's in your market. You have some tools out. I think performance has gone pretty well. So could you update us on your expectations for that market?

Yes. So this -- 2020 is a year of kind of data testing and qualify tools out with the end customers, and that's proceeding very well, and we've got some good opportunities there and good feedback from the end customers. And that market is substantially larger than the flex market. We believe it's about a $500 million market today, our share is 0. So we think there's a great deal of opportunity for us. And the tool we released about 1.5 years ago is higher throughput, it's a lighter and smaller platform, it's getting some traction with beta testing. And we think any revenue coming from that product portfolio will probably be sometime in 2021. But again, it's a good market. There are 2 incumbents. We think our product offering has substantial benefits to the end customer. And so we're actually very optimistic about that [ upgrade ] going forward. But this is a year really beta testing, qualification. I think any revenue that we'll see will really be a 2021 opportunity for us.

Okay. Good, good. Can you maybe help us get a feel for how that revenue could ramp? Are these chunky wins? Or sort of gradual ramp if you do win some business that might come online in 2021?

Yes. So there are like probably 10 or 11 major HDI manufacturers. So obviously, you can get to those individuals pretty quickly or those companies and kind of get the tools out there. So depending how fast they ramp, that will be at the end -- the deciding factor on our revenue ramp. So it's hard to say linearity or what volume. We have said in the past, if we don't get at least 10% share in that marketplace over a multiyear period, that would not be -- we deem that to be not successful opportunity for us. So give you a sense of the magnitude that we're looking for, and we'll try to obviously do more than that. But it's really too early to say kind of the trajectory and the timing of that? Again, it's more of a 2021 opportunity for us at this point.

Okay. All right. That's helpful. I hate to say it, but we're out of time. We've gone a little bit over. And so we probably need to wrap it up, even though I feel like we just got started. Thank you, guys, for dialing in despite the fire drill and the fire alarm, and we really appreciate your participation.

Yes. Thank you, Wes. Thanks for your help as well. Take care.

All right. Thanks.

Thank you.