MKS Inc. (MKSI) Earnings Call Transcript & Summary

Hello. On behalf of MKS Instruments, I want to welcome you to the MKS 2020 Virtual Analyst Day. We hope you and your families are safe and well. And we thank you for joining us today. My name is David Ryzhik, Vice President of Investor Relations. Before we begin, I would like to cover a few housekeeping items. The run time for today's event will be approximately 2.5 hours. We'll have about 2 hours of prepared remarks, including a 15-minute break, after which, we'll host a Q&A session. We have a full agenda today. You'll be hearing from John Lee, our President and Chief Executive Officer; Seth Bagshaw, Senior Vice President, Chief Financial Officer and Treasurer; and other senior leaders, including Eric Taranto, Senior Vice President and General Manager of the Vacuum and Analysis Division; Marc Tricard, Vice President and General Manager of our Optical Solutions business; Mark Gitin, Senior Vice President and General Manager of our Light and Motion Division; and John Williams, Vice President and General Manager of our Equipment and Solutions Division. We encourage you to submit your questions during the course of today's event through the Q&A window shown on the bottom of your screen, or you may e-mail me directly at [email protected]. And please be sure to include your name and company name in the space provided. We will answer as many of your questions as time allows. If we do not get to your questions during today's event, I will follow-up with you directly to get your questions answered. Before we begin, I'd like to refer you to our safe harbor for forward-looking statements slide and remind you that various remarks made during today's presentations 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 our safe harbor for forward-looking statements. And in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q for the company. 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 today's presentation, references will be made to non-GAAP financial measures. Please refer to the appendix to our presentation for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. Our presentation, including the appendix, is available on our company website at investor.mksinst.com. Let me now welcome John Lee, President and Chief Executive Officer. John?

Thanks, David, and welcome, everyone. As you know, this is my first Investor Day as CEO. I'm looking forward to sharing and updating the MKS story. 2020 has certainly been an historic year of surprises, challenges and opportunities. The MKS team has demonstrated incredible resilience, determination and teamwork throughout the year, and I have never been more enthusiastic about our future. When we finish today, I hope all of you will also share our enthusiasm. Now let's get started. Today, you'll hear about MKS' broad base of capabilities and businesses. The underlying theme is that we deliver highly differentiated solutions to complex problems that demand extreme precision. MKS products are valued because of the precise nature of what they deliver in applications that push the boundaries of possibility, such as vacuum integrity, plasma generation, power delivery, laser pulse control, photonics measurement, motion control and laser drilling. Today, we'll build on the concept of precision delivered which succinctly describes MKS' unique value proposition. And consistent with this theme, our goal is that you will walk away with some very clear and compelling takeaways. To kick it off, please take a look at this video. [Presentation]

So you can see that what we do is complex, and we've leveraged our technical expertise to grow our business and make it more diverse. We are enabling key technology trends with foundational solutions across multiple end markets. We are proud of what we've accomplished, having built a clear leadership position with an unmatched portfolio of critical semiconductor subsystems. But we think what's less appreciated is what we're doing in the advanced market space. We view our advanced markets as a close cousin to semi, and we'll explore in detail why that's true. Across both markets, we see significant opportunities to accelerate our growth, both organically and by M&A, where we have a strong, successful track record. Overall, we are focused on markets and applications where the enduring trends of miniaturization and technical complexity are long-term drivers of value creation. MKS has transformed since we last met more than 2 years ago. You can see a few metrics here that help tell the story. When you look at the numbers on the slide, they really fall into 4 themes: profitable growth, customer diversity, strong IP and technology capabilities and industry leadership. We are projecting to be well over $2 billion of revenue for 2020. And have grown at a 23% CAGR the last 5 years. The semi market is highly consolidated. But as we've expanded into advanced markets, our customer base has become much larger and more diverse. We now serve more than 25,000 customers in markets that include semiconductor manufacturing, advanced electronics manufacturing, industrial technologies, life and health sciences, research and defense. We have over 2,000 patents filed around the world. Our growing base of intellectual property is the engine that fuels our product innovation. And finally, our unmatched product leadership. We participate in many more product categories today than just 5 years ago, in a total of 15, where we are the #1 or #2 player. So that's MKS today. Now I'd like to spend a minute on how our company and people are aligned to go after future opportunities. I'm a strong believer in a mission-based business. And at MKS this especially important that we have a unifying mission and vision. As we expand our footprint and capabilities across markets. This was a priority of mine when I took on the CEO role. Having a clear and compelling mission and vision helps us maintain our focus on markets where we are differentiated and add value. It also helps our people better understand the direction in which we are heading. And along with our guiding principles, helps create a culture of diversity, innovation and teamwork. MKS is about enabling the technologies that transform our world, and we do this by delivering precision-based solutions from the chamber to the workpiece. Our mission is to make that happen through innovation leadership, deep partnership with our customers and a relentless drive to push the boundaries of possibility. Corporate social responsibility, including the ESG principles that are important to all of us is core to our company. These principles define at a fundamental level, how we do business today and how we will do business better in the future. It starts with our people and the communities where we operate. We have a strong gender and racial diversity at both Board and management levels. In addition to the numbers you see here, we believe diversity and inclusion training is critical for all employees, but particularly for our leadership in order to set the right tone at the top. We are also increasing our commitment to philanthropy and volunteer work. Safety and wellness are also priorities, and the pandemic put that commitment to the test. I'm glad to say we have implemented many new practices that make our work environments safer now and in the years to come. From an environmental perspective, MKS maintains a strong commitment to sustainability. Not only in our sourcing and manufacturing processes, but also our end solutions. We deliver products that enable clean energy and ensure environmental compliance as well as products that are inherently sustainable. Such as our dissolved ozone systems used to clean semiconductor and display substrates. Finally, we embrace key principles of good governance. We have a diverse, independent and refreshed Board more than half of which have been appointed within the last 3 years, and we believe we have achieved strong alignment of pay for performance. Now let's go into more depth on the MKS story. Historically, we've been known as a leader in critical subsystems for the semiconductor market, but we're now so much more than that. We have a proud history of cutting-edge innovation. MKS made its name by productizing the Baratron Capacitance Manometer in 1961. This product enabled precise pressure measurement of corrosive plasma etching processes. One of the foundational steps in semiconductor manufacturing. Since our IPO in 1999, we have methodically built our semi business, and our success has led to a transformational opportunity for long-term value creation with our expansion into advanced markets. Our 2016 acquisition of Newport was a bold move at the time. It put us into the photonics industry with an emphasis on laser-based processing, a new field for MKS. We then acquired ESI in 2019, adding a laser systems portfolio. Many ask why? But as you'll see in today's presentations, we see trends unfolding in laser-based manufacturing that will create opportunities similar to what we experienced in semi over the last 20 years. Trends that MKS is uniquely suited to address. In 2021, we'll be celebrating 60 years of sustainable and profitable growth, but we are just getting started. Here, we put a few numbers around the transformation to help illustrate our story. And the fact that we are a stronger, more diverse company with our advanced markets businesses. Over the past 5 years, our total revenue has increased nearly 3x from about $800 million to $2.3 billion using the midpoint of our most recent Q4 guidance. And looking at the sources of that revenue growth, advanced markets have grown more than 3.5x to $900 million. While semiconductor revenue has grown from about $600 million to about $1.4 billion. Much of the semi growth is organic, while advanced markets is poised to begin making significant organic contributions in the years ahead. We spend capital in 2 primary ways: innovation and M&A. M&A has fueled a lot of growth, especially in advanced markets over the last few years, giving us greater scale to invest more dollars into R&D. And we're spending those dollars wisely. You'll hear today about how our unique innovation structure enables us to target the right opportunities and enhance our strategic relevance to customers across the markets we serve. Advanced Markets also gives us expanded customer and market exposure, a healthy diversity that complements the consolidated semi customer base. All of this has translated to outstanding earnings growth. But the ultimate proof of success is the value we've created. Since 2015, our stock has appreciated strongly, clearly outperforming key indices. Let's look a little closer at where we are from a product and capability standpoint. We have a relatively balanced revenue split between semi and Advanced Markets. This split will fluctuate in any given year. With 2020 significant semi outperformance being one example. You're all well versed in our strength across key semi subsystems. This market continues to be critical to MKS. And we remain best positioned to capitalize on the next generation of semiconductor inflections, such as high aspect ratio structures, atomic layer engineering and high-density packaging. What a lot of folks may not appreciate is what we do in Advanced Markets. To the extent people are thinking about Advanced Markets, they're usually focused primarily on PCBs and our recent ESI acquisition. We're certainly excited about this area, and you'll hear more about it today. But we also enable many processes across other categories. For example, we provide laser solutions for solar and display manufacturing. As well as advanced packaging applications that require unprecedented precision. Some of our end market segments are GDP growers, such as research, but we make appropriate investments to maintain our strong position. We are very well positioned in many of these segments as a leader with global support capabilities and important technical knowhow. These products collectively add up to a strong, stable component of our advanced markets revenue. The breadth and depth of both our semi and Advanced Markets businesses are unique in the industry. Let's take a look at our positioning in each segment, starting with semi, where our Surround the Chamber strategy has been a huge success. As you can see, since we went public in 1999, we have assembled a portfolio of critical subsystems that surround the vacuum chamber through M&A and organic development. This deep vacuum expertise is an important differentiator that has allowed us to see inflections sooner and to respond accordingly. In 2016, we expanded our reach into lithography, metrology and inspection with the acquisition of Newport, which added critical photonics capabilities. As such, we now serve greater than 85% of all the Wafer Fab Equipment in every semiconductor factory. It's been a lot of hard work and execution over 20 years. But the results are compelling. 300% revenue growth in semi and a WFE market share expansion of 150%. And we are now executing the same playbook in Advanced Markets, which we call Surround the Workpiece. With Surround the Workpiece we are not only offering a complementary portfolio of critical subsystems, but driving technology integration. Which we believe uniquely positions us to solve our customers' hardest problems. And our Equipment and Solutions business is an important extension of our strategy, where we have strong cross collaboration with our Light and Motion division. Later this morning, you'll hear more about where the strategy is taking us in end markets such as advanced electronics. MKS has always been about combining innovation and M&A to build our broad base of capabilities. We're exceptionally proud of our M&A track record. We've completed 22 deals over the last 20 years. Some were large and defining. While others augmented the portfolio or brought in key technology capabilities. Either way, acquisitions are a critical part of our DNA. We have a demonstrated track record of improving the financial performance of acquired assets, integrating them efficiently and deleveraging quickly to enhance our capital flexibility. Two of our biggest acquisitions, Newport and ESI have fueled our advanced markets opportunity. The ESI story is still being written, but we hope you'll see today why it's critical to our business and why we're very excited about it. Beyond that, I want to reemphasize that M&A is core to how we have built the company, and you can expect us to continue as we extend our technology and industry leadership. The businesses we've built are poised for exciting times ahead. That's true for both semi and advanced markets. The long-term outlook for semiconductor equipment is strong, driven by stable or even increasing capital intensity. In Advanced Markets, our opportunity is emerging, and we are confident that it will be a long-term growth driver for MKS. As you know, we now live in a data economy whose growth continues to accelerate. Semiconductors are becoming a larger and larger contributor to global GDP, and that brings with it growth in Wafer Fab Equipment, but it's not just chip demand that fuels the MKS opportunity. It's also the way industries are transforming how products are manufactured. We are in the early innings of a major transition from mechanical processes to laser-based processes. New generations of more powerful and more precise lasers as well as optical and photonic capabilities are proliferating to meet the exploding demand for electronic devices with ever smaller form factors. These capabilities will be central to powering the connectivity and end product trends that will define the next evolution in our data economy. 5G and Internet of Things cut across both of our business segments. As they drive ubiquitous expansion of advanced electronics, which in turn creates a tremendous need for innovation in semiconductors and advanced packaging. At the root of these trends and market drivers are a few key customer challenges: miniaturization, increased device density and the novel materials required to address these challenges. MKS sits at the foundation of many of the solutions to these challenges. The challenges are common across our businesses. If you think about the key problems in semi, moving to smaller form factors, vertical scaling and memory and logic and new chemistries. These play out in much the same way in the precision manufacturing processes required for cutting-edge electronic devices and other advanced market applications. In semi, we solve these challenges through our deep expertise in power generation, plasma and reactive gas delivery, vacuum measurement and control and photonics. Photonics, in particular, also extends to advanced markets, along with our critical expertise around optics, motion control, lasers and laser-based systems. What we've learned in semi, combined with our new capabilities through acquisitions such as Newport and ESI, positions us to serve these -- to see these common challenges from a higher level. MKS has a unique approach to innovation, and it starts at the top of the organization. Many technology companies operate with a CTO leadership structure that drives the innovation agenda. Our structure is different. We don't have one CTO. Instead, we developed a flatter structure that we call the office of the CTO, or OCTO. The OCTO is made up of technology leaders across all our business areas within MKS. These leaders work closely together in a way that leverages subject matter expertise, broadens our capabilities and fosters an innovation culture in which we can tackle customer problems holistically. We believe that the OCTO is a key differentiator that enables better, more complete solutions, while simultaneously enhancing and benefiting from the increased scale of our industry-leading product portfolio. The OCTO structure is core to how we innovate at MKS. We think it fosters a virtuous cycle, where we bring a unique holistic view across our enterprise to address a customer challenge. This yields new solutions that win business and create deeper partnerships with customers. That, in turn, leads to an expanded portfolio of solutions through which we can identify and go after additional market opportunities. And the learnings from this expansion furthers our insights into new inflections, inspiring the collaboration process to repeat. This collaborative model also has a synergistic element that is critical to effective portfolio management. By putting together our best minds around innovation, we believe we make better R&D decisions in terms of prioritizing the opportunities with the highest potential returns. The end result is a strong, engaged and efficient innovation engine that powers MKS' growth across semi and advanced markets. That theme of focus and efficiency can be seen in how we are aligning our innovation road map with the key trends we see driving our businesses in the years ahead. And that's helping drive our leadership in the products and technologies that matter most in today's semi and advanced market applications. One example is RF power, which we identified as a critical enabler of the vertical NAND road map. Generating 110% year-over-year growth for the first 3 quarters of 2020. Another is plasma and reactive gas, where we're the #1 player at a time when our customers are moving to atomic layer processing. Reactive gas has been a core strength for more than 20 years, and we're investing into this opportunity to extend our leadership in ALD. And finally, as the electronics industry moves from mechanical to laser-based manufacturing, we're strengthening our unique combination of lasers, optics, photonics and systems expertise to drive the miniaturization road map. There are 3 core elements that form the foundation of sustainable advantage. First, we have a broad and differentiated portfolio, ranging across critical semi subsystems to precision laser systems that is unmatched in the industry. Second is our unique approach to innovation, led by our collaborative OCTO structure; and third, we embrace our vision of enabling technologies that transform our world. And in doing so, develop deep partnerships with customers, that solidifies an enduring source of competitive advantage. And our competitive position has helped to drive some compelling growth for MKS. Over the past 5 years, we've delivered revenue growth in our semiconductor and advanced markets of 19% and 29%, respectively. These reflect absolute compounded annual growth rates. Semi has been a successful story for us. Our Surround the Chamber strategy has enabled us to gain exposure to higher growth segments, capitalize on inflections and grow our SAM and share. Advanced Markets promise a similar opportunity. We understand the trends as well as anyone, based on what we've seen in semi over 2 decades. We have the right strategy and the right assets to position us for long-term success. As I mentioned earlier, both innovation and M&A have been important contributors to our historical and recent growth, and they will remain front and center as we continue to create value in the future. MKS is clearly in an excellent position to drive continued outperformance against our benchmarks across each of our 2 segments. We're leveraging a proven playbook that will continue to enhance our strong semi business, while capitalizing on the expanding adoption of laser-based manufacturing in advanced markets. We have broad-based market leadership spanning our core capabilities in our 3 divisions: Vacuum and Analysis, Light and Motion and Equipment and Solutions. And we operate with strong financial stewardship and discipline. Seth will talk more about this, but we are a company focused on continuous improvements that power incremental free cash flows that we invest wisely, harnessing the benefits of our unique approach to innovation. In closing, MKS is pushing forward as a technology leader with the broadest capabilities in the industry and a strong commitment to innovation and solving our customers' most difficult problems. We've turned our unique approach to innovation into a competitive advantage, and we've expanded our deep technical expertise with smart acquisitions. We are extremely well positioned in 2 markets. In semi, we're set to capitalize on strong secular trends. In advanced markets, we're executing the same playbook that we have used in semi with a focus on leading the move to laser-based processes and delivering extreme precision. And we're supported by our track record of execution and prudent capital allocation. With these strengths, you can see why we believe a transformed MKS is poised for an exciting future. Thank you. And now, Eric will talk about why we expect to continue to outperform in semi.

Thanks, John. I'm excited to share an update and insights on MKS' semiconductor business. Which has been and continues to be a core strength of MKS. First, a little bit about me. I've been with MKS for 23 years in various technical and management roles. I'm currently the Senior Vice President of the Vacuum and Analysis Division. I've also been part of our Office of the CTO since 2014 and have been chair since 2018. I'll cover a few themes in my presentation today. First, we'll demonstrate our strong outperformance in inherently dynamic market as well as our excitement about the strong secular growth drivers that should fuel continued outperformance. Second is our leadership in critical subsystems. We built a broad-based business, which uniquely positions us at the forefront of semiconductor market inflections. Third is innovation. Innovation is at our core. Solving our customers' most critical problems, builds deep customer relationships and broadens our portfolio, which results in sustainable competitive advantage. These 3 elements combined put us in a great position to continue our compelling outperformance track record relative to WFE. It starts with data. Data is dominating our lives more than ever, and it continues to drive our industry. In the MKS world, the explosion of data is driving higher memory bit density and more transistors per processor, which are lower power and higher performing. This creates increasingly more difficult customer challenges in which we are uniquely positioned to solve. The growth in data drives more semiconductor device revenue, which in turn drives more WFE spending. Here, we are presenting the correlation between chip revenue and WFE spending. And to smooth the cycles, we average over the 5-year periods. Semi chip revenue has shown impressive growth over the past 2 decades. And over the same period, WFE is growing at a similar rate. Today, we're in an era of growth in WFE that's eclipsing what we saw with the transition to 300 millimeters. And for the future, while we do not forecast WFE we expect WFE to grow along with chip revenue like what we have seen historically. In sum, more data requires more powerful chips, and those chips are more complex to manufacture, and that drives the need for our enabling technologies. And that need perhaps is best demonstrated by the fact that MKS now addresses more than 85% of WFE. We've assembled organically and through smart acquisitions, a broad base of capabilities across deposition, etch and wet processing. We have leadership positions in several key critical areas, including RF power, remote plasma sources, reactive gas generation, vacuum measurement and gas delivery. We're also now growing in lasers and optics, who most associate with our advanced markets businesses, but are also critical in metrology, inspection and lithography. Let's take a closer look at the breadth of our offerings on the next slide. By executing on our Surround the Chamber strategy, which John walked you through earlier, as well as by building out our capabilities in lithography and inspection, we have risen to the leading position in critical subsystems across a broad array of applications. Surround the Chamber is not something that we stumbled upon is a well thought out strategy that drives our business and technology road maps. Our broad expertise and the ability to deliver has made us the go-to supplier when customers have increasingly difficult challenges. For example, as the hard mask material changed to protect the wafer from higher RF power levels, we adapted our dissolved gas solutions to be able to remove the hard mask without damaging the wafer. And when wafer uniformity varied at the edge, we developed novel RF solutions to improve edge uniformity. And with the addition of Light and Motion, we have continued to increase our strategic relevance with key customers across lithography and inspection as new technologies such as EUV become mainstream. And the proof is in our results. Over the last 2 decades, we've grown our semi revenue 300% and expanded our share of WFE by 150%. We believe we are unique among semi subsystem providers and that our broad portfolio has allowed us to play a role in enabling every major semi inflection over the past 2 decades. When wafer size increased to 300 millimeters, we improved the precision of our vacuum products and developed our flow ratio control technology to solve wafer uniformity challenges. As device architectures went vertical, we saw the need for advanced RF power control. And when feature sizes shrunk, ozone was needed to deposit higher quality atomic layer films. And as the industry moved to EUV, we developed light sources and optics as well as dissolved gas systems for photoresist removal. When we look back, our critical subsystems enabled every key inflection and we'll continue to do so as new market inflections arise. And that critical role we play in the industry is proven by our track record of outperformance. Our expansion to encompass nearly all of wafer processing has put us in an outstanding position. Our Surround the Chamber strategy and our unique innovation model have enabled us to expand and extend leadership positions. This strengthens our insights around future inflections and enables us to get solutions to the market faster. We've demonstrated over time that we outperformed WFE by 200 basis points through the cycles. And that growth means that we have increased our share of WFE by 40% in the last decade alone. In fact, we estimate our semiconductor business has grown organically at a 17% CAGR over the past 5 years. A great example of how we achieved this outperformance is in our RF power business. Our success in RF power shows how we innovate and build leadership. As John mentioned earlier, our Office of the CTO is an important part of our innovation playbook. We quickly understand -- understood how the inflection of vertical scaling and memory would create a critical need for our RF power products. This drove our investment strategy to make substantial targeted R&D investments in this business, which resulted in new technology around multilevel pulsing, pulse shaping, edge uniformity and smarter control algorithms. We also architected our RF generators to drive faster development cycles, which enables us to deliver to our customer road maps. These factors have resulted in key design wins, which we are seeing bear fruit today, and we are focused on leveraging our dielectric etch innovations for vertical NAND to capture share in conductor etch and critical deposition processes. As our higher power, higher frequency, smarter control algorithms becomes necessary in these advanced processes. Again, the proof is in the results. We have grown our Power Solutions business by more than 110% year-over-year for the first 3 quarters of 2020. And we define our power business to include all of RF and DC generators in addition to our RF matches. And our RF power business will continue to be an important driver of our semi business as VNAND scaling continues. This is true even when single stacking reaches its limits. We see RF power levels in the chamber doubling over the coming 4 years, driven by increasing layer count and reduced process times in both single and double stacking processes. The increased power will drive increased complexity and the need for customer-specific control algorithms to manage the most difficult etching processes. These trends all play into our favor when you think about our key differentiators, which include our smarter algorithms, our modular solutions and faster development cycles. And I wanted to put some context on exactly how challenging it is to solve our customers' most difficult problems. In RF power, our solutions are enabling the etching of holes at aspect ratios greater than 55:1. This is equivalent to hitting a 0.25-inch target that is over a mile away. In plasma and reactive gas, where we are an industry leader, our technologies enable conformal deposition of materials, 1 atom thick across the entire wafer. In pressure measurements our manometers needed to detect deflections of 1/25 of an inch from over 0.5 mile away using amazingly accurate electrostatic sensing. And in optics, we enable focusing light to image features that are 10 atoms across. That's,10,000x smaller than the width of a human hair. Put all these together, and you can see why we are a leader in the critical subsystems that enable the next generation of inflections. And going forward, we're seeing new challenges and innovation requirements across the board in the next generation of wafer processing. The continued need for lower cost, higher density memory and lower power, faster transistors is driving changes in the device structures and the adoption of new materials, which in turn are driving process inflections and high aspect ratio etching, atomic layer processing and advanced lithography. As the only subsystem provider with across-the-board expertise in critical areas of vacuum processing and photonics, we are foundational to solving these pressing challenges. Our broad set of offerings are enabling today's key process inflections as aspect ratios increase, RF power is a critical knob in achieving results on the wafer. Higher peak powers for deeper and faster etches, and multiple frequencies and pulsing through the etch cycle for precise feature formation, uniformity and yield improvements. These knobs are our sweet spot in power and are why we win. Atomically, our processing requires precision in the delivery of our reactive gases to improve film quality. And as the industry moves to EUV from traditional lithography, MKS is in a strong position with our precision optics, our optical subsystems and our motion capabilities. In summary, our industry-leading breadth of expertise gives us a holistic view across the key process inflections and enables the ability to deliver custom-built solutions in close partnership with our customers. In our lithography, metrology and inspection business, we've been investing to develop our capabilities in optical design and manufacturing. As we are seeing an increasing need for higher performing, built to spec, optical designs and assemblies. We call it our world-class optics initiative, our WCO. My colleague, Marc Tricard, who leads this effort, would like to tell you a little bit more. Marc?

Thank you, Eric. I have been at MKS for the past 2.5 years and in the optics industry for more than 20. At MKS, I am an OCTO member and the VP GM of our Optical Solution Business, where one of our key growth strategies is indeed this world-class optics WCO initiative. WCO combines 2 key elements: significant investment in state-of-the-art equipment, covering all key aspects of optics manufacturing and assembly. Recruiting of high-level design, engineering and manufacturing experts, which, combined with MKS executions, allows us to create truly innovative, differentiated and proprietary processes that meet our customers' needs. Some specific examples include deterministic finishing technique, high-end metrology and high-performance thin film coating, particularly for the shorter wavelength pertinent to the semiconductor industry. Our lithography and inspection and metrology customers have 3 key needs: higher performance optics assemblies to increase throughput and power of their tool with a move to shorter wavelengths; shorter lead times and flexibility to quickly respond to changing demand; and of course, customers want cost-effective solutions. This WCO strategy has successfully resonated with semiconductor players that is demonstrated by double-digit new design wins with both existing and new customers, and an exciting pipeline of new opportunities. MKS is increasingly recognized as a supplier that can give customers an edge in their next-generation optical needs. We also expect WCO's reach to extend beyond semi and into advanced markets. This is very important because it will enhance our ability to manufacture critical optics that go into our lasers and laser system and also allow us to sell some existing applications such as defense. In the defense world, you often hear the term no more boots on the ground. For us, that often translates into more eyes in the skies. That's a market where we have a strong presence with our Ophir IR zoom lenses on UAV and drones. I'm now going to turn things back to Eric.

Thanks, Marc. Our world-class optics initiative is just another example of how we approach innovation in a holistic way. We understand our customers' most difficult challenges, and we work with them to develop solutions. This deepens our customer relationships and ultimately grows our portfolio and SAM. As we gain insights into future inflections, we applied the collective expertise of our product groups to drive new areas of innovation. Ultimately, this approach broadens our solutions portfolio and drives competitive advantage measured by faster time to market, deep customer relationships and the enhanced scale to continuously innovate in a dynamic market. Overall, MKS is an increasingly better position to address complex customer problems both today and tomorrow. We were strong in semiconductors, and we are becoming stronger. Our broad portfolio and leadership in critical subsystems, our ability to detect, invest and innovate to address market inflections, and our deep customer relationships will drive continued growth, outperforming the growth of WFE by 200 basis points. I want to thank everyone for the opportunity to share our view and conviction that MKS has never been better positioned to continue our leadership in the growing semiconductor market. We will now take a 15-minute break before my colleague, Mark Gitin, tells us why we are excited about our opportunities in advanced markets. [Break]

It's great to be here to tell you more about why we're excited about our advanced markets opportunities. A quick intro to me. I've been at MKS for 3.5 years, and I've been in my current role as Senior Vice President and General Manager of the Light and Motion division for the past 2 years. Prior to that, I was at Coherent for more than 20 years, where I held a number of executive management roles. You've heard from John that we're in the early innings of our opportunity in advanced markets. I'm going to walk you through the trends, what we see coming and how we're positioned. First, we have a strong belief in advanced markets because the miniaturization and complexity trends that have defined our semi growth are coming into focus in advanced markets. Second, this opportunity is really just beginning as we move towards a future where mechanical manufacturing processes shift to a laser-based world. And third, we see broad-based growth, led by advanced electronics applications that require this move to laser-based processes as next-generation technologies and platforms proliferate. In short, MKS is a more balanced company and ultimately more valuable with advanced markets. Most of you know us as a semiconductor company that has made this bold move into advanced markets through 2 large acquisitions. The key difference between the 2 markets is that advanced markets is about a decade behind semi, but the trends are the same. First is miniaturization. Geometries continue to shrink in semi. The same applies in advanced markets with the smallest, most challenging geometries being driven by advanced electronics. Then there's increasing complexity. For semi, you all know about vertical scaling for memory. In advanced markets, we call this higher density. Think printed circuit boards with smaller features, increasing number of layers and supporting multiple form factors. And third is novel materials to enable new capabilities on both sides. For example, in advanced markets, we have new materials that enable new 5G and millimeter wave antennas. To capitalize on these trends, we see in advanced markets, we have the benefit of a proven MKS playbook. As you've just heard from Eric, our Surround the Chamber strategy has enabled us to grow to serve 85% of WFE. Now we're executing our Surround the Workpiece strategy, which combines our components and subsystems with a full laser-based systems capability. This enables us to drive leadership across key segments that demand innovative lasers, optics and photonic solutions. In summary, the same trends of complexity and miniaturization that have driven our leadership in semi are now crystallizing in our advanced markets businesses, and we have the playbook to capitalize on this. The arrival of smarter electronics devices after the turn of the century has gradually forced a revolution in manufacturing processes as consumers have demanded smaller sizes, better battery life, increased processing power and more features such as better cameras and higher storage. This revolution accelerated once the first iPhone was introduced in 2007. In the past decade, the broad adoption of smartphones and the emergence of wearables, tablets and IoT devices began driving a move to laser-based manufacturing as these new devices required very small components and extremely fast processing. That evolution has accelerated in today's age of hyperconnectivity, where we always have our phones by our side. Since the iPhone launch, mobile subscribers have more than doubled globally from 3.30 billion to 6.75 billion, and the smartphones have become indispensable, demand for bandwidth and speed has exploded. That's why in the last decade, we've moved quickly from a 3G environment to 4G, and now we're at the dawn of 5G. This rapid migration is driving the move to a much broader adoption of laser-based manufacturing processes. And that is playing right into our strengths. This is now not just about smartphones. It's about a proliferation of devices that all create the challenge of delivering smaller form factors and faster processing. In addition, greater density is required to enable advanced features such as 5G and millimeter wave communications, biometric authentication, GPS and other sensors, wireless charging, multiple cameras, OLED displays and high-performance compute and storage. All those features our teenagers need to play video games while simultaneously watching YouTube, a movie and texting with their friends. This results in an exponential growth in the density of features such as via holes in each device and in the number of components per electronics device from hundreds per device to tens of thousands. And to enable this growth, we've seen a broad expansion in the use of lasers to drive electronics manufacturing from electronic package and camera module cutting to glass cutting and welding to flexible display cutting and drilling. All of this creates a simple equation, pointing to a growing opportunity for MKS in electronics manufacturing as the inflection to laser-based processing takes hold in the coming years. As laser-based manufacturing takes hold, the processes that enable it are only getting more challenging, and that's good for MKS. With our ultrafast lasers, we're able to precisely process materials by incredibly delivering the power of a nuclear power plant in a trillionth of a second. Our beam delivery solutions enable precisely sending a laser beam across the length of a football field to a target the width of a human hair and holding it there. That's a lot harder than Patrick Mahomes throwing bean bags in the State Farm commercial. With our precision motion systems, we're able to move parts at very high speed and stop with an accuracy within a few atoms. Our power meters can measure from 300 femtowatts to 120 kilowatts. That measurement range is equivalent to measuring power from one light bulb all the way to 100x the total sunlight on Earth. These are all extremely high-precision capabilities that play right into MKS' core strengths. And as we've moved into laser-based systems with our ESI acquisition, we're now able to integrate all of these capabilities. And our expanded scale and breadth enables us to invest at the necessary levels to drive industry leading innovation, leveraging the collaborative nature and broad expertise of our Office of the CTO, or OCTO structure that John discussed. Next, I'll walk through our Solutions portfolio in a little more depth on the next slide. As we've mentioned, we're leveraging a playbook very similar to semi as we build leadership and capitalize on the move to laser-based processes. Surrounding the workpiece is our comprehensive strategy that comprises laser sources, beam delivery and conditioning, motion, vibration isolation and process control. You can see here in the animation that the beam starts from the laser source, and propagates through a multitude of complex optics and beam steering systems. While the workpiece is isolated from vibration and at the same time, being moved in coordination at high speed. In addition, there are in-process monitoring solutions to provide metrology of the beam to ensure that the process continues delivering the desired precision. The Light and Motion Division supplies many of these components and subsystems that surround the workpiece to our OEM and end-user customers. And you can see to the right, how they integrate into full system solutions with ESI. It is very powerful to have the leading-edge laser component and subsystem capabilities together with systems and end-user process expertise in order to mutually drive the solutions road map and meet ever-increasing market demands. Our Surround the Workpiece strategy is unique in the industry, and we will continue to leverage it as we drive growth in our advanced markets. Our acquisition of ESI in 2019 and the creation of our Equipment and Solutions business is a critical piece that advances our Surround the Workpiece strategy. We acquired ESI to add deep systems expertise and technical understanding of laser material processing interactions. Think of the complexities around the interaction among lasers, numerous optical components, motion control and all the various optical measurements, all precisely optimized and synchronized to deliver the targeted results for the application. In the case of ESI systems, thousands and thousands of tiny holes are drilled every second to a near-perfect geometry. Solving for all of that complexity is what ESI does better than anyone else. And that's why it's now a critical part of the MKS portfolio. We have also leveraged core MKS technologies to improve ESI's products and market position. For example, lasers optimized for ESI were developed to maximize system-level capability. Similarly, we have customized optics and photonics integrated into ESI tools. We're now able to combine both systems and applications expertise to strengthen our presence in key segments of the advanced markets at the component, subsystem and full systems levels. Overall, ESI is critical to our strategy and it strengthens MKS' position as an innovator in advanced markets. Now let's take a closer look at the breadth and depth of our advanced markets businesses. Our advanced markets businesses serve hundreds of applications with a range of market sizes. But the commonality is that we are a leader in many of them. They're good cash flow businesses. They grow at rates similar to GDP or higher and they're stable and diverse. And we bring unique solutions to the table across all of them. That makes our position firm. Internally, we include Advanced Electronics as part of the Industrial segment. For today, we wanted to give a bit more insight into the advanced electronics opportunity. Overall, for our Advanced Markets businesses, we see a growth of GDP plus 300 basis points. And in the coming years, this growth will be led by advanced electronics as the move to laser-based processing accelerates. Let's run through each of the markets, starting with Research and Defense. In this market, MKS serves a broad set of applications. One example is surveillance, where MKS supplies optical assemblies for ultra-long range thermal imaging, both land-based and airborne, including in unmanned aerial vehicles or UAVs. These assemblies require extreme precision to enable night vision at distances exceeding 25 kilometers. Advanced Research is another example where MKS supplies a broad set of photonic and laser products for laser-based research and material science, chemistry, physics and other fields. Here again, the precision of our products is truly critical for cutting-edge science. Quantum research, in particular, quantum computing is a rapidly emerging field. MKS lasers and photonics play an important role in creating, writing and reading the quantum signals. Typically, this market is a steady group of businesses other than the recent COVID-19 related shutdown of Research Labs and universities. But as we discussed during our Q3 earnings call, this market has now returned to pre-pandemic levels. Overall, Research and Defense is a solid group of businesses with thousands of customers and a stable growth profile. Our life and health sciences business contains another group of applications where we're a leader and able to deploy our broad market expertise. For neuroscience, MKS ultrafast lasers and photonics are enabling precise 3D targeted stimulation and imaging of neuronal activity in live tissue. With this technology, researchers are mapping the physical and functional network structure of the brain, thereby developing an understanding of neurodegenerative diseases, such as Alzheimer's. MKS optics, photonics and lasers are enabling a broad range of high-performance medical diagnostics. For instance, in the fight against the global pandemic, MKS precision optical filters and lasers are widely used for COVID-19 PCR and antibody testing equipment. Another example application is ophthalmic surgery, where our ultrafast lasers and photonics deliver the precision performance needed for LASIK and cataract surgery. Let's now move to Industrial Technologies. We serve a number of highly specialized industrialized markets that leverage our core technologies. For datacom and telecom, MKS optoelectronic converters enable ultra-high speed, high sensitivity test and measurement of fiber optic links and devices up to 400 gigabits per second and beyond. In a completely different vein, MKS' vacuum and analysis solutions are enabling advanced deposition processes for the manufacturing of synthetic diamonds. These diamonds are useful for industrial applications and can be of such high quality to be used for fine jewelry. In high-power laser material processing, MKS products are used for precise beam and power measurement in the welding and cutting of batteries and other parts for electric vehicles. Next up is advanced electronics. Our Research and Defense, Life and Health Sciences and Industrial Technologies businesses are certainly excellent businesses, but we are most excited about the growth in Advanced Electronics. This business is comprised of a diverse set of attractive opportunities, and I'm going to give you a quick overview of 4 key areas. The area you're probably most familiar with is the printed circuit board market where we're the strong leader in flex PCB via drilling and have a great opportunity to build a beachhead in the developing high-density interconnect or HDI segment of the market. This market is all about delivering higher density and higher frequency PCBs at lower cost, serving a growing rave end markets from phones to wearables to connected devices, all poised to explode in a 5G world. The proliferation of electronic devices is also driving opportunity in components in advanced packaging. And the device revolution is pulling along innovations in display technology. The move to OLED creates opportunity for MKS as OEMs seek continued gains in yield and performance. And finally, the growing demand for renewable energy is driving long-term demand for solar solutions, which in turn creates the requirement for increased cell efficiency. MKS Technologies help enable a material improvement in cost as measured by dollars per watt per panel. MKS is able to go after this broad array of opportunities, thanks to the integrated solutions and systems capabilities that we've assembled under our Surround the Workpiece strategy. I'm going to turn the floor over to John Williams, who leads our Equipment and Solutions or E&S division, and he'll touch on the PCB via drilling opportunity within advanced electronics.

Thanks, Mark. Excited to share more details around what's driving our growth in PCB via drilling and how we're positioned. First, a quick note about me. I'm the Vice President and General Manager of the Equipment and Solutions business. I joined MKS as part of the ESI acquisition in February 2019. At ESI, I was Vice President of Marketing. And before that, roughly 25 years of various marketing roles and product management roles in semi CapEx companies. So let's start by diving more into the PCB market, and let's start with flex. We're the leader in flex PCB via drilling and have been for some time. As a reminder, flex PCBs are customized boards, they use flexible materials, and that allows deployment across an array of applications. They're increasingly important in a 5G world, because form factor is critical to fit more capabilities into same or smaller packages. If you haven't already done so, I'd recommend looking up a teardown of a current generation device. Flex circuits are PCBs, but they have to fold up like Origami. It's really amazing. The market is cyclical and seasonal as it's driven largely by smartphone cycles. As many of you know, there was what most would call a super cycle in 2017 and '18 when we were ESI. But as the chart in the upper right indicates, we believe we're going to be entering another up cycle as 5G takes hold. This next cycle will be enabled by key technology transitions as well as capacity additions necessary to support that 30% increase in flex content with 5G. And another step-up will come with move into millimeter wave band. These transitions include new materials for antennas and the need to place more smaller vias more accurately on each PCB layer. As circuits become more complex, you not only need more vias per layer, but you need more layers per PCB. And in many cases, you need more PCBs per device. Each of these transitions results in an increase in demand for our flex via drilling systems. Overall, the market for flex is vibrant, and we expect it to grow. We're the leader in the space, and with the full complement of MKS innovation engine behind us, we're well positioned to maintain that leadership. While we lead in flex, we also have a tremendous opportunity with HDI, and we're in the early stages of gaining traction. HDI or high-density interconnect PCBs are rigid rather than flexible, but they need via drilling in the same way, just in different materials. So we're bringing our knowledge and capabilities from flex drilling to HDI and bringing significant differentiation in the process. Our Geode product meets all the critical needs of PCB manufacturers for next-gen devices, such as highest throughput through optimized energy control and process flexibility, advances in quality achieved through our innovations in laser pulse management, and we deliver all of this in a small and lower weight footprint that helps optimize manufacturing space. In the end, all of this contributes to higher-yielded throughput and lower cost of ownership. The Geode adoption cycle is very healthy at this point. There are evaluations ongoing at multiple customer sites and increasing workload at our demo centers throughout Asia. From there, we're executing the MKS playbook of securing design wins, then converting those design wins into multiunit orders for volume manufacturing. We're gaining traction, and we're optimistic that this will continue in 2021 and beyond. In short, this is an exciting opportunity for us, and our positioning and differentiation creates an opportunity to claim a fair share of this large and growing market. With that, let me turn it back to Mark, who will highlight some other exciting areas within advanced electronics before wrapping up our discussion on Advanced Markets. Mark?

Thanks, John. Beyond printed circuit boards, MKS also has exposure to many other attractive growth opportunities in advanced electronics. For example, in OLED displays, MKS lasers and photonics are used to precisely cut, drill and repair these thin and sensitive materials with near 0 collateral damage. Our dissolved reactive gas, remote plasma and pressure products enable fabrication of contamination free OLED thin films. With the expanding use of OLED displays and smartphones, wearables and larger displays, MKS is well positioned to expand our business. For advanced electronics packaging, MKS lasers, photonics and systems are critical for cutting, patterning, drilling and testing of these increasingly high-density components for wearables and smartphones. Our power, plasma, flow and pressure products are similarly enabling higher precision singulation, etching and cleaning processes in the manufacturing of these components. With increasing component count and density, MKS products are integral to this important and growing segment. MKS technologies are also a critical enabler for higher efficiency solar cells. Across the MKS portfolio from Light and Motion to Vacuum and Analysis, MKS products enable significantly increased solar cell efficiencies and lower cost per watt generated. As the complexity of solar cells developed to further advance efficiencies and costs, MKS technologies are needed more than ever. Overall, you can see that not only do we have a broad array of drivers in advanced electronics, we're also enabling these opportunities with a range of our core technologies, not just lasers and photonics, but capabilities better known in our semi business, such as remote plasma, reactive gas and pressure measurement. So now you have a sense of the inflections and market opportunities that will drive the expected growth in Advanced Markets. I'll wrap up by reinforcing how we're positioned to capitalize and win. It all starts with our innovation engine. We are seeing the same trends that began unfolding in semi a couple of decades ago, crystallizing now in the Advanced Markets. Our collaborative innovation structure puts us in an ideal position to take advantage of these trends across our Advanced Market's applications. And having such a broad array of applications and customers deepens our insights into challenges faced by customers and the opportunities that they present. Through our Office of the CTO approach, we're able to leverage cross-organization expertise to solve challenges by delivering the precision that MKS is known for. One example case was for a key customer in flat panel displays who had a critical challenge to achieve a required level of precision for high-volume laser drilling and patterning. By pooling our capabilities across our optics and lasers groups, we were able to deliver the required precision and throughput by providing a holistic subsystem solution for the application. With our broad market presence and differentiated innovation model, we think we're in an outstanding position to lead the transition to laser-based manufacturing processes. While we've communicated our excitement around our Advanced Markets opportunity, we also know that events haven't yet played out as we expected a couple of years ago. Our growth path in Advanced Markets has been impacted in large parts by events out of our control. First is geopolitical uncertainty. This has impacted trade with China. Second, the advanced electronics market experienced the digestion phase in 2019 after benefiting from strong capital spending in the prior years. And this year, we've seen headwinds from COVID-19 that have impacted the research market, which is now recovering. While there has been a lot of focus on the headwinds in the markets, 2 things haven't changed. The secular trends are intact, and we're executing at a high level. The trends we've laid out for you are significant, more devices requiring laser-based processing, increased components per device and proliferation of laser processes across the electronics industry. And then on the execution side, we are innovating as illustrated by a large growing number of OEM design wins in picosecond UV lasers. We're also gaining design wins in our precision motion offerings. As for the ESI systems business, we strategically focused on flex and HDI PCBs. As we've highlighted earlier, we're seeing market adoption for our latest flex PCB tool, underscoring our continued leadership in that market. And with the Geode, we are very optimistic that we will gain significant share in the coming years in the larger HDI drilling space. We are strong and getting stronger as the secular trends take hold. We think we're in the early innings, but we have all the strategic pieces in place, and our position is only going to be enhanced in the coming years. Let's wrap it up here. The trends, our leadership positions and our core capabilities all add up to a bright future for Advanced Markets. We see growth at GDP plus 300 basis points over the next 5 years. Advanced electronics will lead the way, supported by our strong, stable and diverse array of applications across the business segment. Thank you. And now I'm going to turn it over to Seth, who will dive into our road map for long-term value creation.

Thanks, Mark, and welcome, everyone. You've heard a lot about the transformation of our business and where we're going. This section to pull that all together by talking about how we execute financially and create long-term shareholder value. Between the semi and Advanced Markets, we have many organic growth opportunities ahead, and we are confident we can augment that with disciplined M&A and continue to broaden our capabilities. Supporting our strategic efforts is a strong execution track record. We delivered ahead of schedule on acquisition synergies as well as delevering the balance sheet, we remain continuously focused on profitability improvements across all of our businesses. Our collaborative approach to innovation enables us to identify the best areas to allocate spend and get more out of our R&D dollars. Overall, MKS is well positioned to continue delivering strong free cash flow, which gives us optionality as we think about inorganic growth options. I'll also share with you today our updated long-term model, which demonstrates attractive earnings growth potential and returns on equity, supported by a diverse business and strong execution I've just highlighted. So that as the intro, I'll dive right in, starting with our track record. Over the last 5 years, we put together an enviable track record of strong revenue and EPS growth. Our 23% revenue CAGR is driven by organic growth, primarily in the semi market as well as acquisitions, notably Newport and ESI. Our 26% earnings per share CAGR has exceeded our revenue growth, and we expect our earnings growth to outpace revenue growth by a wider margin moving forward, which outline an updated long-term model. As impressive that this growth has been, we also recognize that we met with you back at our Analyst Day in 2018, our thinking at that time was that our growth would have been even stronger. Performance since our last Analyst Day has trended in many ways as we expected, but in other ways, we're not quite all the way there yet. We are very pleased with our track record in semi, we're gaining share and outperforming WFE and delivering strong growth after 2019 trough. We're demonstrating broad-based leadership across multiple critical subsystems, and Eric and the team have shared a few of the reasons why, including our strong momentum in RF power. As well as semi's performing, Advanced Markets isn't yet generating growth we anticipate. In 2019, we faced geopolitical headwinds and were also impacted by a digestion of strong advanced electronics capital spending in 2017 and 2018. In the first half of 2020, we faced headwinds from COVID-19 that have impacted our research market. The combination of these factors have impacted our Advanced Market's growth. But through all that, we've executed well on new product introductions and design wins across lasers, motion and PCB drilling systems. In fact, we are encouraged by the demand trends in our advanced electronics business, which we expect to serve as a key long-term driver of growth for our Advanced Markets. As John and Mark noted earlier, we're seeing the same trends that began unfolding in semi a couple of decades ago, now emerging in our Advanced Markets. Looking at profitability, we've driven strong margin expansion even during the COVID-19 pandemic challenges. In fact in our ESI and headwinds I've described, our incremental margin expectations are substantially intact from what we thought back in 2018 per ESI. On the balance sheet and cash flow side, the story is particularly strong. We're in excellent liquidity position with lots of flexibility and are on target to generate record free cash flow in 2020. As John highlighted, M&A is an important growth factor to us. Now let's turn to review of our execution on our most recent large acquisitions. In the last 5 years, we completed the 2 largest transactions in our history, both transformational and both creating the foundation for our continued expansion into Advanced Markets. As you've heard several times today, we acquired these assets because we saw the same trends coming to Advanced Markets that we saw in semi and believe MKS was uniquely positioned to capitalize. Both deals substantially broadened our portfolio, create scale and leverage in R&D and enhance our collaborative approach to innovation. We acquired Newport in 2016. It was a bold move for MKS. Some investors at that time, quite honestly, didn't immediately recognize the acquisition rationale. However, we believe most of you would now acknowledge that it has proven to be an outstanding transaction for MKS. We paid just $1 billion for Newport, executed on $38 million in synergies, above target and ahead of schedule, established a new beachhead in our Advanced Markets. Newport brought to us wide-ranging capabilities that are increasingly critical to Advanced Markets as well as the semiconductor market. Its first 4 years to September 30, we've improved on operating margin performance by 760 basis points, bringing up to nearly 19%. We achieved this by investing in product and operational capabilities, double down on customer focus and executed on a wide range of synergy opportunities. Looking at ESI, we face some questions less about strategic rationale but more along the timing of the acquisition, given the capacity digestion that the flex market was undergoing. Beside the early headwinds I've described, we're executing methodically here as well and are set up for exciting opportunities ahead as we move further into laser-based manufacturing processes that are critical to producing today's advanced electronics. ESI signed a $1 billion deal, and we again over delivered on synergies in under 20 months. And here, we've already doubled operating margins to 15%. ESI had some headwinds early on but from a strategic perspective, it was a great fit with MKS, especially in this case, we strongly believe is better to be a little early versus too late in capturing the long-term growth opportunities within the growing flex and HDI markets. I'd like to now dive a little further into how we effectively integrate acquisitions on the next slide. There are no big secrets. The reason we go to acquisitions is that we are disciplined and thorough in how we approach integration. Start holding everyone accountable and making sure leadership is invested in helping support the companies we bring in. For example, John Williams, you heard from today, came from ESI, is now a key member of the executive team. Through our OCTO approach to innovation, we're encouraging collaboration from day 1, as we follow acquired capability into our long-term product road maps. We move quickly on synergies. This is a direct result of a long-standing continuous improvement program, which I'll cover in a few moments. We also quickly integrated acquired companies to a well-established operational excellence and strategic planning frameworks. One case in point, we drove performance out of our Newport acquisition, by focusing on the high volume, high-margin opportunities such as lasers for microprocessing. We're applying the exact same playbook with ESI and focusing on the highest growth opportunities in the PCB market. We're successfully executing the rollout of our new HDI via drilling tool, the Geode. We're also maintaining our presence in MLCC test market and discontinuing certain low volume, low-margin ESI products in the semiconductor market, which allows us to redeploy internal resources to higher-growth areas. In short, by executing quickly and effectively enhancing the newly acquired management and technical expertise, we put MKS in the best position possible to capitalize on the long-term trends we saw when we acquired these businesses. The disciplined approach, the acquisitions is also supported by an ongoing focus on enhancing profitability across the organization. That discipline begins with sourcing, move through R&D to ongoing costs and tax improvements. We employ lean concept across the entire organization and never stop challenging ourselves to do even better. For MKS, we are delivering, which brings me to the part that is a major enabler, cash flow generation. Here, we show our free cash flow performance over the prior 2 decades and highlight 5-year increments to capture industry cycles. I think you'll agree the trend line is impressive. As reflection of how we would transform the company, even in our semi trough in 2019, our free cash flow was greater than our peak in any year in our history prior 2017. We generated strong through-cycle free cash flow. And as our industry has matured and evolved, become even stronger and are best positioned ever in terms of our ability to generate cash. With accelerated free cash flow generation, what are our thoughts on how we think about capital allocation? The answer is the easy one. It gives us lots of optionality. We pay close attention to how we put our cash to best long-term uses. We spent $3.8 billion over the last 5 years, with 70% of this capital reinvested in growth areas, both were acquisitions and R&D. Now the $800 million has gone to debt management and CapEx, as we keep the balance sheet flexible and ensure we're well positioned to drive outperformance. In terms of capital returns, we initiated our dividend in 2011 and increased it over time, and we use share buybacks opportunistically. We've been able to invest significant sums in driving growth, we've done it with strong free cash flow and prudent debt management following every acquisition. Let me talk a little bit more about our deleveraging philosophy. Here, we show how we move quickly to delever our balance sheet after large acquisitions to preserve optionality and help manage interest expense, all in the name of maximizing free cash flow and strategic flexibility. With Newport, we borrowed nearly the full acquisition cost and subsequently returned the net leverage ratio to 0 in 14 months. ESI is on a similar trend, as the right side of the chart suggests, we're ready for next opportunity when that might come along. One of the benefits of a strong execution is the ability to leverage our strong financial model to drive down interest rates and costs on our outstanding borrowings. And this slide tells that story. We've done a great job of managing interest rate down as much as possible, post our 2 transformative acquisitions. In the last 4 years, we've also completed 5 term loan repricings, which has further driven down our interest costs. And now let's see how all these efforts support our overall equity returns performance. Here, we show return on equity trends over the last decade. We're very pleased with the trend line, recent headwinds in Advanced Markets notwithstanding. We've averaged 18% return on equity over the past 5 years, and our trough year in 2019 is almost 3x higher than the prior trough in 2013, where we are primarily a semi company. This is a good proof statement in support of the increased strength and diversity of our overall business. Given the growth outlook we're sharing today, we think we're well positioned to continue to generate healthy returns on equity in the coming years. MKS has been a solid outperformer over the last 5 years. Here, we show outperformance versus NASDAQ, as well as a peer group index. We believe this outperformance validates our strategy to expand our business into new capabilities and markets. We have many additional opportunities looking ahead. Now let me translate we've heard today to our long-term financial model. I'll walk through our organic long-term model here, which we're framing a 5-year forecast. First, any forecast you see in our industry usually starts with a market size and related growth rates. We're determined to focus on what we can control. So for the semi market, our OEM customers have forecast out there. So let them take the lead of forecasting market growth rates. What we do know is that over the long term, we expect to outperform WFE by an average of 200 basis points. This is a historical track record, and we fully expect this to continue in the long term. In Advanced Markets, we'd like is its breadth and diversity. Most of these businesses are normally GDP growers, and we're well positioned with strong technical leadership. The advanced electronics opportunity, which enabled by a transition to laser processing, where we're uniquely positioned, offer significant outperformance opportunity. We expect our advanced electronics revenue to grow in a low double-digit CAGR and serve as a key driver of Advanced Markets, which we expect to grow at GDP plus 300 basis points. With the value proposition we provide to our customers, combined with our focus on continuous improvement, we're projecting incremental gross and operating margins at approximately 50% and 40%, respectively. We also expect to continue to manage interest expenses prudently as we've demonstrated in the past. The interest expense assumption includes current debt levels and interest rates for modeling purposes. Our final model assumption is tax rate, which we think the effective rate should be approximately 18% over the model period, absent any tax law changes or significant changes in the geographical mix of taxable income. When you add it all up, we anticipate growing our non-GAAP EPS organically at roughly 2x our revenue growth rate, highlighting significant operating leverage in our financial model to continue to expand our semi business as the Advanced Market opportunities we've outlined today take hold. To wrap up, as I laid out, we've proven our ability to deliver strong execution and performance over time. We're good at acquisitions integration, continue to drive incremental profitability throughout all aspects of the operations. This is one of our core competencies. And all this supports healthy free cash flow generation through cycles, which gives us optionality as we look at new opportunities to grow the business. We're excited about how we position the company in the earnings growth potential over the coming years as our vision for Advanced Markets plays out alongside continued semi outperformance. With that, I'll turn the call over to John for closing remarks. John?

Thanks, Seth. I started my discussion today with the concept of precision delivered. And I'd like to wrap it up with this concept in mind. The trends of miniaturization and technical complexity that we have seen in semi are only getting stronger. In Advanced Markets, they're just getting started, and we are uniquely positioned to capture opportunities across both market segments. But it's not just that we are in the right place at the right time, our unique innovation engine, our strategy of critical enablement from Chamber to Workpiece and our strong financial and operational execution will allow us to deliver long-term value creation and outperformance. On behalf of the entire MKS team, I want to thank you for taking the time to join us today. And now we have provided you with a stronger, deeper appreciation of MKS and why we are so excited about our future. With that, I would like to invite you to join us for a Q&A session.

Thank you, John. Before we begin the Q&A, let me just remind you that you can submit your questions using the Q&A window at the bottom of your screen or you can e-mail me at [email protected]. [Operator Instructions] We'll try to get through as many questions as we can today. But if we're not able to cover one of your questions, we'll be sure to follow-up with you directly afterwards. With that, let's kick it off. We'll start with Patrick Ho at Stifel. MKS is clearly benefiting from increased materials engineering intensity trends in its core subsystems and emerging opportunities on the power end. First, you have noted gains in the conductor etch segment of your power business. Do you believe more gains can emerge in conductor etch or are the challenges in dielectric etch going to drive future opportunities and gains in the power segment?

So thanks for the question, Patrick. So we believe it's both. We think that dielectric etch continues to grow, driven by the vertical scale structures that we see. We think that conductor etch is also a great opportunity for us because we have low market share but also because conductor etch is moving to more complex type of power solutions. So we look at both markets with great opportunities to grow. I'll ask Eric to comment a little bit on some of the RF challenges that we're seeing.

Thanks, John. As we talk with our customers about RF power, the need for manipulating the plasmas in the Chamber to produce results on the wafer is just becoming increasingly complex. And our ability to control the pulsing or the power and deliver those solutions faster is really enabling us to outperform in that market segment.

Great. And as a follow-up, post the Newport and ESI acquisitions, you've clearly improved total cash flow generation, which has helped in your deleveraging and investment strategies. First, how much more efficiencies can you extract within all of your business groups to more optimize the cost structure? And secondly, how much of an effect does the increased size and scale help in various aspects, such as supply chain, inventory management, et cetera, that have helped improve cash flow generation?

Seth, do you want to take that one?

Yes, happy to. Yes. So we have a long track record of having an executive level sponsorship to drive profitability improvements and begin back when Jerry Colella was CEO, probably 6, 7 years ago. And that's had a huge impact on our profitability. We apply the same playbook for the acquisition integrations. That's why we're ahead of schedule in terms of time and actual results in our integration and cost synergies. That activity is still ongoing today. It's, again, part of our core DNA. You can assume us to always drive that going forward. It's kind of, again, a daily activity for us. Hard to quantify exactly those dollar amounts because they are going on an ongoing basis, but we do drive profit improvements every year in a number of different areas. So that's been a strong growth -- cost -- partly driver for us as well. And the second part of the question, David, was?

Yes, how much of an effect does increased size and scale help in various aspects, such as supply chain, inventory management and cash flow?

Yes. Yes. We've taken a playbook. So MKS has a long history of being operational excellence on the supply chain. And when you're a $2.5 billion company [ worth ] $800 million company, you do have a lot more leverage in supply chain, you go in different areas in the world, really leverage our opportunity in the spend. So there definitely is an opportunity for us on the cost side as well as R&D spending and really across the whole organization. So scale is very important for us. It's been a big aspect of our success in the last couple of years..

All right. Great. So next question comes from Jim Ricchiuti at Needham. MKS has talked about achieving 5% to 10% market share of the HDI PCB drilling market. Based on recent wins and the number of customers you've either secured or expected to win, do you expect to exceed that target?

Yes. Thanks, Jim. That's a great question. And as you know -- some of you know, we had a press release this morning before market open on our second multi-unit, high-volume manufacturing HDI order. So we had talked about the last earning call about an order from a Japanese customer with multiple units going to Vietnam. So this is the second one. And these are market leaders in HDI. And so I think our short-term target, first couple of years, Jim, has always been about that [ 5% to 10% ]. I think you have a viable product at that point. And longer term, hopefully, we can grow that. Now I'll ask John Williams to comment a little bit on what he's seeing out there in terms of -- what customers are telling him about our tools.

Yes. Thanks, John. The feedback's been positive. We're executing the MKS playbook, right? Engaged with leading customers, showing the value and then get demos placed. They see the value real-time on their core, and then that converts to a design win and then that converts high volume. So the cadence is picking up, and we're really encouraged to be where we are and for what we see going into '21.

Thanks, John.

Right. And a follow-up from Jim is, we're all seeing the headlines in the EV market. Clearly, this will benefit semiconductor portion of the business as well as advanced markets. How do you see the opportunities going forward? And where might MKS expand to take advantage of the long-term EV opportunity?

Yes, Jim, that's a great question. Certainly, electric vehicles do require a lot more electronics, a lot more computer control of all the various subsystems on that automobile. But in addition, just the manufacturing of batteries, that in itself, that put -- brought in laser-based manufacturing. And I'll ask Mark Gitin to comment a little bit about what he's seeing in his business with respect to those opportunities in EV. Mark?

Yes. Thanks, John. We participated in a number of areas for electric vehicles with our Surround the Workpiece portfolio. For example, you mentioned, batteries, our measurement solutions are used for process control in the laser cutting and welding of these devices of the batteries. And we're really excited about the potential of this in the EV market.

Next question comes from Krish Sankar from Cowen. First one for Seth. When I look at the long-term model, if I assume WFE grows at a 5% to 6% rate over the next 5 years and GDP at 3.5%, it seems like your revenues will be around $3.2 billion to $3.25 billion and EPS around $12.50 to $13. Is that the right way to think about earnings power? Also, it looks like 50% incremental gross margin drop-through, gross margin only moves a couple of hundred basis points. Is this due to ESI resetting margins lower structurally? Or can gross margins get to 48% to 49%?

Okay. Great. Yes. Thank you, Krish. So not projecting growth rates in the industry, obviously. But at the $3.2 billion to $3.25 billion run rate using our model, I think EPS will be around $12.50 per share. So I would confirm that, if you assume that revenue assumption. And then look at the overall margins, the ESI division margins on a normalized level should equate to our corporate average, I think, 45-plus percent. So over time that will normalize as we made a line with the rest of the 2 divisions. And a bigger driver for us going forward, obviously, because of the 50% flow through on gross margin, it would be volume. Again, we've talked in the past about always leveraging our supply chain and finding ways to generate higher opportunities. Our internal goal is to be more aggressive. But we think the 50% flow-through is a good way of looking at it. And if you roll out that $3.2 billion revenue level and wrote down to a non-GAAP EPS, I think you're in that ballpark about -- you're about right spot on.

Great. And second one for John. You spoke about growth organically and through M&A. Do you feel like you have all the pieces in place to target the advanced markets. And would M&A be more to augment the Semi and advanced markets? Or would it be a third vertical?

Yes. Thanks, Krish. We certainly feel like we have a broad portfolio, both in our Semi markets as well as at advanced markets. No one really comes close to our broad portfolio. Having said that, we don't have everything that is needed there. And from an M&A perspective, there are certainly more opportunities in advanced markets, just because that industry has not consolidated as much as the semiconductor market, and so statistically -- we like both markets, but statistically, the chances of having M&A occur in advanced markets are higher just because there are more targets. Having a third vertical, it's also possible, which certainly not what we're focused on right now. We're really focused on Semi and advanced markets.

Next question comes from Mark Miller at Benchmark. Will the move to finer features, higher density devices require a change in lasers, detectors, et cetera, for the shorter wavelengths. Mark Gitin, maybe you want to take this one?

Yes, sure. Thanks very much. Yes, the shift to higher density devices drives the demand for shorter wavelengths, but as well as shorter pulses. And that's to process finer features in the new materials that are used for -- for example, for 5G. And this plays right into our strengths for precision-based laser manufacturing solutions -- from our lasers to the Surround the Workpiece portfolio solutions to the laser system. For example, in flex circuits and electronic components and packaging that are used for 5G, the UV wavelengths are increasingly needed to drill and cut the needed finer features and our lasers, photonics and laser drilling systems are really key enablers for this trend.

Thanks Mark. Next question comes from Tom Diffely at D.A. Davidson. What are some of the largest competitors already providing HDI drilling solutions? How big and diverse is the customer base in this space? How much share can MKS pick up here? And a few years ago, ESI talked about HDI being a $500 million market. Is that still the case?

Sure. I'll ask John Williams to comment on that.

Yes. Yes, HDI is a very broad application space. So there are a very broad array of customers producing a lot of different PCBs to varying degrees of complexity, right? We tend to focus on the high end of that. $500 million is still a good estimate. There were some ups in '17/'18 and some downs in '19/'20, but $500 million is a good estimate for now. And in terms of share, we've talked about a 5% to 10% goal. We feel like that's still attainable, and that won't be where we stop. Our intent is to surpass that. There's a couple of large competitors. They're both out of Japan. They haven't changed for a decade. They are the leaders and have been. And we believe that we brought differentiation over both, and so that's our plan.

And a follow-up from Tom Diffely for Seth. Can you please highlight the key factors driving only limited operating leverage over the past 5 years, so 26% EPS growth on 23% revenue growth? And what gives you the confidence in the operating leverage of 2x revenue growth going forward?

Yes. Good question. So if you look backward, the change in the last couple of years, we've acquired ESI, acquisition. So we brought on OpEx, and there's a lot of digestion in the industries. The revenue has been below the trend, the peak trend lines in '17 and calendar year '18. So ESI was kind of the delta in terms of high growth on revenue, and then a little bit of leverage on the EPS line. Now the baseline today, you take our current cost structure and quarterly results and this year results, all that OpEx in revenue is in our current baseline. And the variable gross margin on a consolidated level is 50%, which is our target going forward. Every division has a little different variable margin, but on a collective basis, that's a good way of thinking about it. And then when we grow the top line, the OpEx goes up between 5% or 10%, and we assume 10% in our model. Certainly, history is a little bit different with ESI acquisition. But clearly, going forward, at 50% variable gross margin and the 40% operating margin about today's cost structure. And again, I'll get too concerned about what division grows, it's a pretty good collective model, sums to the whole company. And again, we'll always strive to do better. Again, we do a lot of profit and cash recovery activities, lot of supply chain, product development. There's a host of activities we always pull levers on. But in the long-term operating model, that's a good way of thinking about it going forward.

The next question comes from Sidney Ho at Deutsche Bank. First one is for the Advanced Electronics Manufacturing segment that you expect to grow low-double-digit CAGR, what markets do you expect to drive most of the growth? And how much do you expect HDI PCB product to contribute to this growth?

Yes. Great question, Sidney. So in general, the advanced electronics markets are driven by today, a lot of consumer products. And the foster child for that has been the smartphone, certainly in the last few years. And going forward, we think smartphones will continue to be a big driver. But we're also seeing that other types of consumer products are moving to these small form factors. And this is driving that miniaturization trend that we talked about. So wearables, tablets and even some laptops. So these are the kinds of devices that are now incorporating more content, and therefore, the need for miniaturization, especially in packaging. And so that's okay, that's opportunity to not just our line motion Surround the Workpiece portfolio, but also our flex drilling and our HDI. So more and more of these devices are actually moving to HDI board -- rigid boards as well as flexible board. So that's a great opportunity for us. That's a trend where it's going to be good for every part of our portfolio in advanced markets.

Thanks, John. And the follow-up from Sidney is, how do you think about future M&A? What are some of the criteria that you focus on? And we'll focus on advanced markets or Semi's?

Yes. Well, in terms of advance market to Semi's, I think I answered that question earlier. But the criteria for us, Sidney, hasn't changed. One of the most important criteria that we look at is gross margin. And because that tells us whether they have a differentiated product that the market will pay for. And our entire portfolio is about differentiated technical solutions, where you can get that gross margin because you want to fund next-generation R&D. So that remains most important criteria for M&A. There are many other metrics we look at, ROIC, accretion, all that kind of stuff. And there's no bright line on those. We look at each opportunity strategically. But the one bright line is whether that target has products that have market differentiation.

Thanks, John. Next question comes from Paretosh Misra from Berenberg. In the semiconductor power business, can you discuss the current mix, i.e., conductor versus dielectric and matching networks? And how sustainable is this year's growth as we look into 2021?

Yes. Well, so we don't break out between our power and matching networks, et cetera. But we have defined power, and our market share in power, the same way we've always defined it. It's the same way market research firms define it. It's both RF, safety and matching networks. So I would say we're -- we don't participate in D.C. But our RF power and matching networks have both grown. We've talked about that 110% growth in 2020 versus 2019. Now that's -- it's a relatively easier comp. The 2019 was a down year. We know we're growing relative to our peers by significant margins based on public information. Now a question about the future, I think that's going to depend on WFE and dep and etch. And move to vertical features. So I think it's hard to tell if next year will be higher or lower. But I think long-term, we certainly expect dep and etch to be critical processes. And that the amount of our power and matching networks needed in those processes will continue to be a bigger part of the bond.

Thanks, John. And a follow-up from Paretosh. In your laser business, do you compete with Chinese players? And can you also discuss the mix in terms of continuous wave versus pulse, higher power versus lower power, fiber versus others.

Yes. That's a great question. So we are focused on pulse lasers, not fiber laser, high-power fiber lasers for welding and stainless steel cutting. We do participate in that macro processing market with the kind of portfolio, Surround the Workpiece portfolio that Mark talked about, measuring the laser power coming out of those types of lasers. But from a laser standpoint and from our Surround the Workpiece standpoint, we're really focused on pulse lasers. These are precision types of processes enabling precision types of processes. And in terms of competition, most of the competition in these highly difficult lasers to make and design and produce in volume, that's usually been western companies. Because you need a lot of IP, a lot of design experience. These are very difficult lasers to copy. And so while there are some Chinese companies and other companies that may be producing lasers at the lower end of pulse lasers, lower power, easier applications, we're really not participating in those anyway. And then we move away from other areas that become commoditized.

The next question comes from Joe Quatrochi at Wells Fargo. First one is M&A as a driver of growth was a common theme today. How should we think about the right level of cash you need on the balance sheet for day-to-day operations? And is there a target level of leverage you want to be at prior to making an acquisition?

Seth, do you want to take that?

Yes, absolutely. So on the cash side, probably about a $500 million number is quite sufficient to mingle the low if we have to. But that's kind of how we look at it internally. And then in terms of leverage ratio, I would say there's no, again, bright line target where we get down to a certain leverage ratio. We would then be able to do an acquisition. Right now, with actually in this quarter, probably a net leverage ratio, almost 0, certainly in the first quarter. And so our goal has been delever pretty aggressively. We do a fair amount of cash in the balance sheet as well, obviously. So I would say there's no real bright line, Joe. A number of factors. I think the biggest ones is really what's available. John mentioned the types of targets, which ones we'd like to acquire. And on the balance sheet, in the financial side, we have the capacity today to make an acquisition, obviously. And within the company, the bandwidth is there as well, integrated ESI fairly quickly. I think the team here has that capacity for acquisition as well. So -- and you mentioned optionality, that's kind of how we refer to that.

The follow-up from Joe is, we didn't hear much about your services business today. In the past, I think there's been an area you've talked about making some operational changes to better monetize opportunities. Has that changed?

Yes. No, Joe. So our services business is -- I think we've mentioned it before, it's well over -- it's in that $300 million range when we're at that $3 billion range. But I do think that we've made some important operational changes and capacity additions in our various service sites over the last couple of years. That's really helped and positioned us in a way to continue to grow there. I think our challenge right now is to continue getting our entitled share. I personally believe we have a lot of opportunity there. I think we have some great relationship with certain customers with respect to our service business. I think there's more opportunity there to grow.

Great. I have an investor question. Is your supply chain ready to handle $100 billion WFE? What are the most likely bottlenecks?

It's a great question. So I think the second part of that question is by when. So if you ask me today, today, we've seen record Semi revenues in the last year. And every quarter has been up into the right. And you can take run rates of all the various semiconductor equipment companies, and the kind of run rate is at $60 billion. I think that would be kind of generally agreed upon. The year might end up at -- between $55 billion and $60 billion, but the run rates now are pushing $60 billion, maybe above it as an industry. And as you know, whenever there's a ramp, MKS tends to do a lot better than the WFE industry, just because of where we are in the supply chain. So we talked about being 45% to 50% year-over-year increases relative to our revenue. And a lot of that is driven by semi. So you know from that data, that we can be, we can supply 50% more than what WFE actually needs today. That's not as sustainable yet to do that continuously. But we have these diverse capacity models that allow us to stretch quite a bit. Now when we're at $100 billion, that's a different story. I'm glad you said $100 billion because that will be a great place to be for WFE. We will certainly continue to make investments into all our various factories. We have a model where some factories are in the U.S., some were in low-cost regions, and we continue to invest in all those areas. From a supply chain standpoint, we've learned a lot from COVID, the pandemic. How resiliency is going to become even more important to our supply chain? I think we've all learned that. We've gone from just efficiency in our supply chain to now maybe we're going to have to figure out how to be more resilient. While maintaining that efficiency or at least minimizing the cost conditions to that. That is actually easier when we look for that. To the earlier question that set the answer. So when your -- our power business is 3x bigger than it was just 5 years ago, and then you have the ability perhaps to have 2 efficient factories rather than 1. And then you have the flexibility to have those 2 factories in different regions. So I think again, scale helps us leverage many things, including our supply chain.

Great. Thanks, John. Another question from another investor. How do you see your cost of innovation trending as capital intensity of manufacturing continues to rise? Do you foresee R&D becoming a burden for smaller scale competitors?

Yes. I'll take that as well. We've talked about this at various conferences. We know that as industries continue to push the boundaries of possibility, we like to call that in MKS, the problems that were solved 20 years ago are easier than the problems we saw 10 years ago, which are easier to solve than problems we're solving today. And when problems become more difficult to solve, we need to do a few things in R&D. You need to have R&D that's sustained over longer periods of time. So you can't just have projects that can finish in 6 months because some of these problems take years. You also need to spend more even just on these problems because they're difficult. They're more difficult to solve. And so I think it becomes more challenging if you don't scale, in order to solve these more difficult problems. And we like to be in industry that continue to push the boundaries because as these problems become more difficult then we can solve them as a natural barrier to entry.

Great. Thanks, John. I'll just wait a few more moments for any final questions. And we have a question from Scott Graham at Rosenblatt. In semi, with technology transitions accelerating and you're being well-positioned to them, why haven't you increased your 200 basis points outperformance versus WFE target?

Well, so as inflections occur faster, I think we have been able to outperform by 200 basis points. In some instances, Scott, if you look at the last couple of years, we've actually seen that actually. We'd like to be cautious about how we look at long-term trends over decades. The history tells us we've been able to do 200 basis points on average over multiple decades. That's how we look at things. The last 5 years, we've been doing a little better than that. A lot of it driven by multiple patterning vertical structures that helps our dep and etch where we're very strong. In the future, lithography may take a bigger role, and that's why we're investing in WCO. So I think our 200 basis points is just to give you guys a guideline and our internal growth targets. Certainly, we will strive to do better than that, but really it could be prudent.

Thanks, John. Scott has another question. Inbound, what level of organic sales do you need to reach the incremental 40% margin?

So I think our organic -- so when we have increases in sales, we have a 40% drop-through. I think that's the model that Seth is talking about. That's the -- the operating profit mild drop-through versus gross margin drop-through, which is 50%. So I think that is our model. So maybe I wasn't answering your question exactly, Scott, but we are at that model for incremental revenue.

Yes. That's an organic model for sure.

And 1 follow-up from an investor. As a follow-up to the R&D intensity question, what level do you assume in the operating target model?

I think we had like 7% or 8%, Seth, but you can harden it.

Yes. I think -- so model is not that granular in total operating profit. But I think it's safe to say you probably see R&D spend grow faster than SG&A for all the factors John mentioned. But we didn't break that level of detail on the operating model. We kept at kind of the gross margin level and then the operating margin level. But definitely, R&D is a focus for investments going forward. So we'll lean into that for sure.

I would also add that there are some areas, high-growth areas where R&D is double digit. So we look very carefully our entire portfolio, and we look at the best opportunities for us to invest in R&D. Even though we've grown and the R&D grown over the last several years in terms of revenue and opportunities, our R&D percentage has been relatively stable. And that's not surveying any kind of areas that we're investing in. If we need to add more, we will. But I came from R&D. I think we're not wasting R&D. I think that many companies waste R&D because they don't have a process to really evaluate opportunities. I think many companies do peanut butter R&D. I came from many of those. In a longer run, this is really work that is the responsibility of the executive team to look at opportunities and spend those R&D dollars wisely.

Great. Thanks, John. I have a follow-up from Paretosh Misra at Berenberg. What is the biggest end market for your optics business?

I'll ask Marc Tricard or -- yes, Marc Tricard, you run that business, why don't you answer that?

So today, we have a mix of semiconductor and within semiconductor both lithography as well as metrology and inspection. While in the advanced market, it's fairly broad-based, it ranges from aerospace and defense. Life and health science being also a big contributor.

Thanks, Marc. Great. And a follow-up from Patrick Ho at Stifel. EUV requires pressure and gas to power the lasers in their systems. What are some of the incremental opportunities in both your core, vacuum and analysis business? And then the optics end for your EUV lithography? How much does EUV help in the growth of these businesses?

Yes. So I would say there's EUV in general, Patrick. I think it's a great thing for the industry for Semi because it drives a continued transition to smaller features, and that drives all the other equipment that's needed to make advanced transistors. So that's how we look at EUV. It's good for the industry. What benefits us is -- so we -- so there's a vacuum chamber now, which is different for lithography. And we certainly have market-leading components in there, pressure measurement, things like that. And we're enjoying the same kind of market share that we have enjoyed in other vacuum chambers. The problem for EUV is there are orders of magnitude, more chambers and dep and etch than EUV. And so from a vacuum components standpoint, EUV doesn't drive the growth in our vacuum components business. However, EUV does drive new opportunities, more opportunities in our Surround the Workpiece because now there's optics, more optics. We've invested in that for both EUV and non-EUV lithography, as Marc mentioned. There's also vibration control and motion there. And so those are other opportunities, but they're part of our Surround the Workpiece portfolio. So EUV, I think, will probably drive more opportunities in WCO than necessarily our vacuum business just because of the number of chambers.

Thanks, John. And 1 quick follow-up from Krish Sankar at Cowen. The long-term target of incremental operating margins of 40% is lower than the current incremental operating margin. It seems like Krish wanted to clarify?

Yes. I would say it's definitely a longer-term view of the 40%. And I mentioned earlier on, we'll obviously seek to overachieve on that. And much of it depends on where we are on a ramp. So if we ramp the business, we are quite aggressively this year because the Semi over-performance will beat those numbers for sure. But I think that 50%, the 40% is really a long-term trend. I think to John's point, it's prudent is how we look at the long-term model. But certainly, our internal goal to be to overachieve on that. Like we've overachieved on growth rates historically as well.

Okay. Great. And I think we'll take the last question from -- a follow-up from Joe Quatrochi. You talked about advanced markets as being roughly 10 years behind semi, but the trends are similar. How do we think about the velocity of growth in those trends in advanced markets relative to where Semi's trends were 10 years ago. Are you seeing a larger tailwind?

Yes, Joe, it's a good question. I don't think we know yet, Joe. I think we wouldn't be surprised if advanced markets, the transition to laser-based processing grew as fast as Semi did from 2000 to 2010, that wouldn't be a surprise. If we grew faster, we wouldn't be surprised. If we're a little less, we wouldn't be surprised, but we know it will grow faster than it had been the 10 years prior for advanced processing. And I think we see this every day in our lives. Our consumer electronics that we have and our families have and our friends have, these devices continue to have smaller form factors with more capabilities put into them. The world is building out a new infrastructure for enabling 5G, and therefore, enabling -- continue enabling the acceleration of the data economy. So I think these are all just great trends. So I think 10 years from now, I'll tell you what the answer is, but it's certainly is going to be positive, but it will be hard to tell relative to what Semi did.

Great. Thanks, John. Well, that wraps it up for today. Thank you very much for attending the MKS 2020 Analyst Day. If you have any follow-ups at all or any additional questions, please feel free to reach out to me directly. We hope you and your families stay safe and well. And you have a wonderful holiday season. Thank you.

Thank you.