Qnity Electronics, Inc. (Q) Earnings Call Transcript & Summary

Chris Parkinson. I'm proud to lead the sector efforts here at Wolfe. And although they're already in meetings taking notes as good associates should, I'd like to thank them. [ Harris Fein, ] who's actually been on my team for 10 years. Lucky him. [ Andrew Oman ] has been all of my team since I actually joined Wolfe as well as [ Reed Halper, ] who's actually in the room, little does he know what he's gotten himself into. I'd also like to give a shout out to our sales force and corporate access desks for their efforts to make this event all come together. A lot of what happens here is all behind the scenes. We try to make it as slow as possible. So I sincerely thank them, especially for the late nights. And if you see Caroline outside, make sure to thank her because she's been absolutely wonderful. Listen, our event may not be in Florida in February, which I've argued for in -- my boss who's in the room has consistently said, it's just not possible. But hopefully, everybody in this room finds Wolfe's research content second to none why I agreed to join roughly 3 years ago, and I couldn't be happier. And I'm also thrilled to say this event continues to grow every single year. Actually, he was not in the room. Now he's in the room, so no one told him what I just said. Anyway, I'm going to give -- we're going to be up with Qnity in a few minutes here. I'm going to let John get set up. And once again, thank you all for attending.

Where do you want me?

Right there?

Okay.

Awesome. First up, very pleased to introduce Qnity Electronics, ticker Q. Today, we have Jon Kemp, who's the CEO. I've had the pleasure of getting to know John over the past few years, and I must say His enthusiasm for his company's future is unparalleled. He's passionate, even more than me. And he knows his products as well as the R&D team, which I always love about and he's been straight up delivering or shall I say, stacking quarterly results and outperforming its end markets since the spin of DuPont. We're going to respect them as well. They are upstairs. But honestly, there's no better way to kick off with John this morning. And once again, thank you for coming in full meeting scheduled the most requested meetings. So I think you can go ahead and get started.

Thanks, Chris. Happy to be here.

Awesome. So I'll start you off with an easy one. I don't think it's going to be a surprise to have many in this room that your end markets are looking pretty good for the next several years. When it comes to advanced architectures, stacking, layering all the lingo that we hear in the media, purity. Can you just give -- especially for the generalists in the room, just an overall overview on how those facilitate Qnity's growth algo?

Yes. So thanks, Chris. And maybe I'll take a step back because not every -- but we're still kind of getting our name out there and getting people familiar with who we are and what we do. So for those who maybe don't know Qnity, we're one of the largest pure-play material solutions leaders in the semiconductor value chain from chip fabrication to advanced packaging and interconnects to thermal management and APCs. And we're kind of really well positioned to be able to benefit from the significant market tailwinds associated with AI, high-performance computing and advanced connectivity. And in this era of AI-led transformation, materials innovation is more important than ever. And we're pleased to be working alongside some of the largest and most well-known technology leaders throughout the industry. What our materials do is -- kind of a few things to keep it simple, right? We pattern and polish, protect and connect both chips and circuits from the front end, all the way to the back end. And we support our customers with a local-for-local operating model that allows us to be very responsive and agile to them in the markets wherever they happen to be located. So when I think about the changes in technology for the last decade or for the last couple of decades in the semi industry, technological change has really been driven by Moore's Law, getting nodes smaller and smaller and trying to make transistors smaller and chips more dense to unlock performance in power. But as we reach the limits of Moore's Law, that will continue to be important. But increasingly, we're going from shrinking, making things smaller to stacking, putting chips together in combinations to chips together in new and innovative ways that will unlock the next frontier of computing. And Qnity is really well positioned at the center of that because of the breadth and the depth of our portfolio.

So I imagine this is probably the toughest question I'm going to have to ask you the entire fireside chat. But what are you the most enthusiastic about over the next year or 2? You're primarily consumables, you've got a great breadth of products, you've launched probably 3 or 4 new either innovative collaborations, a few new products that [ EUV ] comes to mind. It seems like your customers are asking you to do more and more. But what are you the most passionate about? I understand that's pretty difficult. But go ahead.

Yes. There's a lot of good things to be excited about in this part of the space, right? And it's in this area where materials innovation matters more than ever because almost all of the so much of the growth in the semi industry is really coming from the most advanced technologies, right? And that's really the key to -- Chris asked a little bit about our growth algo a few minutes ago, and the key to our market outperformance is really content and share gains in the most advanced technologies. And for me, what I'm most excited about is the investments that our customers continue to make to progress their technology road maps, and we help enable those technology road maps. So the fastest-growing parts of our portfolio are also the most -- the parts that are critical to the most advanced technologies. So I'll work that kind of from the front end, all the way to the back end. So you can see how that fits with our portfolio. On the front end, in particular, it's about chemical mechanical planarization, where we have a combination of pads, cleans and slurries that help to advance the especially leading-edge logic in the industry, kind of going -- excited about 2-nanometer scale up this year. If you go to the packaging side, we've got a full suite of solutions, including CMP from the front end but a lot of back-end materials, things like metallization, dielectric substrates and thermal materials to really help enable and unlock advanced packaging. And then when you get to the back end, it's things like thermal materials and metallization that are necessary for the most advanced circuit boards that are going into data centers and other AI applications.

So you've described Qnity as primarily the only company that is basically end-to-end in terms of chip fabrication all the way through the PCBs. You do have some fairly formidable competition in the U.S. Northeast Asia, China, what do you believe is the most, let's say, the largest differentiator in terms of communities, R&D, product development and customer relationships that you'd like to convey here today.

Yes. Look, there's a couple of really good competitors in this space, and we're happy by that because they force us to be better every day. When I think about what differentiates Qnity is really kind of the breadth and the depth of the portfolio. And what we're seeing, particularly as the market starts to become -- the process technology starts to become more complicated. Increasingly, OEMs are starting to get more and more involved in material selection and overall design decisions. And as the OEMs, whether that's the hyperscalers, the premium smartphone providers, automotive companies, they don't want to have to work with 15 or 20 companies throughout the value chain in order to bring an advanced system solution. And so when they start to work on the problems matter most to them, problems like signal integrity, device reliability and performance or thermal management, they'd rather work with companies that have an end-to-end view that can solve that problem along every step of the way and who intimately know the process technology of their entire manufacturing network. And that's proven to be a significant advantage for Qnity because we have those partnerships already and the number of OEM engagement continues to increase dramatically for us. When you combine that with a decades-long partnerships that we've got with the industry leaders and our local-for-local operating model that allows us to move fast and be agile in any type of supply environment, that's really kind of what differentiates us.

Yes. I think when a lot of investors familiarize themselves with the space, there's so much going on, especially those newer to the thesis, when you go across lithographic materials and etch and clean and deposition and pads and slurries and CMP materials, where do you find Qnity is the strongest in your portfolio? And perhaps, would you be willing to comment on perhaps 1 or 2 substrates for which you'd like to strengthen your position?

Yes, it's a good question. So when I think about kind of the process technology in the industry, where Qnity is best positioned is also is the spaces that are growing the fastest for us, right? It makes sense. So in the areas -- and I've talked about some of them before, truly in the CMP space with the combination of pads, cleans and slurries, has been the fastest-growing part of our chip fabrication business. Within advanced packaging, it's really kind of been within advanced packaging and interconnect, it's been the metallization and I see substrates. And then thermal, just to give you one data point, advanced packaging and thermal in the first quarter that we talked about a few months ago, both of those areas grew 50% year-over-year. Over the history of this business, it's been brought together the combination of really smart acquisitions over time that really have kind of 2 things in common, right? Innovation and technology leadership and strong customer centricity and partnerships. And really, when we think about continuing to add on attractive technologies, that would be complementary to our portfolio as long as they have those kind of characteristics we would be interested in continuing to build out the portfolio. We think the semiconductor and advanced electronics industry continues to be relatively fragmented. We'd be excited to add complementary technologies in semi consumables in advanced packaging or in thermal management into our portfolio, and those are the areas that we're focused on.

It seems as though in both of your businesses across Semi Tech and ICS, are these gravitational forces that are essentially foreseeing a mix shift into certain substrates. I'll let you kind of comment on what that is. But if you look at both of your segments independently, what do you think the mix is going to look like 2, 3 years down the road versus what it was prior to even the spin announcement a few years ago?

Yes. I think when you think about kind of where we sit today, the fastest-growing end market from a mix point of view in our portfolio has really been data centers, right? And that's no surprise with everybody with the boom and the infrastructure investment that's taking place in the space and cloud computing. And that has increased to about 20% of our portfolio. What I'm most excited about is I still think we're still in the relatively early days of the AI-led transformation and most of the early wins have come in data center and in the cloud. But as we move from the cloud to physical AI and the edge, I think there's plenty of opportunity to see an extension of AI applications in the rest of the industrial economy, whether that's in applications like factory automation, autonomous driving, communication infrastructure or even premium smartphones. I think what we'll see is a shift increasingly to more industrial parts of the economy, data center factory automation, even automotive, and probably kind of less orientation towards traditionally what's been the largest part of our portfolio in consumer electronics. So that's good from an end market diversification. The important point here is whether chips are going to data centers, smartphones or satellites were somewhat end market anoxic, we're going to win in all of those end market applications.

Switching to one of those many topics, and I would stress one of the many is there's been a lot of debate in terms of the sustainability of the data center build-out been some concerns about pull forward and selling activity. From Qnity's perspective, you do touch everything. Could you just talk about this is the sustainability of the growth algo over the next few years in terms of how you view it?

Yes. Look, as I said before, I think that we're in the early days of the -- AI has been the most transformative trend that I've seen in my career in the electronic space. And I think we're still in the early days of that adoption. Most of what we've seen so far has been in data center and cloud computing. I think cloud computing represents where where AI learned to think and to learn. And now as we go from cloud computing to edge computing and physical AI, it's about AI learning to do, right? And that's why industrial IoT, automation, autonomous driving, I think there's a lot more of growth opportunities out there that will start to scale up over the next handful of years. And you see a lot of folks in the industry talking about that. The interesting thing about that is that, well, up to now data centers and thinking and learning has consumed a lot of CPUs and GPUs and it hasn't as much touched the other portion than HBM. It hasn't extended to the other parts of the semiconductor ecosystem. When you move from the cloud to the edge, you start to -- you have to lower the cost of inference down to be more cost competitive and more reasonable so that the economics work. As you do that, you'll see a lot more custom chiplets and custom design of applications where you're combining different types of chips together. You may have a CPU and a GPU but you're going to pair that with a lot of discrete and analog chips around it in order to perform a specific function. That's going to be a tremendous growth accelerator for Qnity because whether -- we have more -- the most content in the most advanced technologies, but we're also really well positioned in all of the mature nodes as well. So as you get broader growth from AI across the industrial economy, we'll see that surge in demand benefit our portfolio.

You've recently increased your own guidance and your MSI outlook in terms of -- and obviously, we've been hearing this consistently from your customers. How should investors interpret kind of the cadence of the growth algo throughout the year you're seeing? And what as a new CEO, are you willing to actually embed in guidance versus what you're kind of a little bit more strained to get too optimistic on?

Yes, it's a good question. Look, our priority coming out of the gate as a new company and a new leadership team was to really establish a track record of credibility and strong execution. And I think we've now got 2 solid quarters under our belt. As we thought about guidance for the year, the framework that we used was really built on a couple of things. So first of all, we had a great start to the year and really proud of the execution that our teams were able to deliver and really driven kind of by the surge in AI-led demand. And we expect that to continue. When we look at the full year guidance, there was a lot of uncertainty back when we were -- back when we issued guidance as to what would happen. You had potential industry supply chain dynamics that we talked about a little bit earlier. You also had the geopolitical situation in the -- what was happening in the Middle East. And so we wanted to be prudent in our guidance with the understanding that if the conditions improved and our customers were able to scale up a lot of the technologies that they were excited about. And by the way, those customer conversations continue to go very well in terms of 2-nanometer technologies, HBM 4 technologies. Those conversations continue to be very positive if the market -- the general market environment is relatively stable and the market does better. We raised our guidance when we came out at the first of the year, our initial guidance was for 6% for the full year. We raised that guidance to be at the midpoint, a bit over 11%, 11.5%, so a fairly hefty raise to our guidance. That was really predicated on the strong start to the year as well as an upgrade in the MSI outlook for the year from mid-single digits to mid- to high single digits if the broader industry does better, I think we're really well positioned to continue our strong outperformance.

Just a little corollary question on top of that, and you hit on a few things on the advanced side of it. What are you seeing in mainstream markets right now in terms of operating rates and everything that's going on. It seems like there's hesitancy to fully embrace the inflection, Yet it seems like it's the first time in years, there is some sustainability to the growth algo.

It's a good question, and I think it's understandable. There's been sort of lots of false starts over the last couple of years in mainstream, right? But the tone of the conversation does seem to have shift. I would say broadly in the first quarter when we announced in the first quarter, there were 2 places that did better than we expected. The first was kind of in the ICS space driven by advanced packaging and thermal. But the second space that did better than what we were expecting was mainstream, right? And mainstream logic in particular, did better than expected in the first quarter, and we saw fab utilization rates that may be finished in 2025 averaging in kind of the mid-70s. We're kind of in the upper 70s and with some customers maybe even being in the low 80s. And we expect in the customer conversations that we're having, we expect steady improvement in mainstream logic a lot of conversation from our customers there around orienting some of their future growth opportunities to take advantage of some of the physical AI end markets that I've talked about before and that will structurally take utilization probably from the high 70s into the low 80s as we move throughout the remainder of the year.

In ICS, ICS as I would I would argue, at least from my seat, has been gaining in popularity and enthusiasm across the investment community. And as you know, I'd like to make my corny jokes about the term stacking. And I know how corny they are, to be clear. But can you just talk about the importance in terms of that trend within the industry and how your [indiscernible] specifically adheres to those trends and how you enable your customers to ultimately reach their goals.

Yes. I think the shrink to stack trend is really important because it really is, as the economics of shrink start to become more challenging, the economics and -- the only pathway to unlock the next frontier in computing from a performance and a reliability point of view is stacking and putting chips together in innovative and creative ways. But as you do that, that comes with fairly significant challenges. So each of those layers have to be perfectly flat and those connections have to be perfect in order to preserve the signal integrity and the reliability of the devices. And that kind of plays at the sweet spot of where Qnity's portfolio is positioned to make sure as we're polishing the surface of each layer and you're going to -- and I'll give you an example. When you go from -- say, if you think about the number of CMP steps and when you make a chip, right, as you go down that architecture road map, say, from 14 nanometers to 3 nanometers, you're doubling the number of CMP layers, but you're also increasing the process complexity along the way. So it's almost a doubling of materials intensity. And that means that products like what are in Qnity's portfolio are more important than ever. And we see that trend continuing as you get more and more capacity into advanced packaging. And that's one of the things that I think is maybe not quite as appreciated is when we think about adding semiconductor capacity. The frame of reference there is these giant fabs, right, that take 2 to 3 years to build and qualify. Advanced packaging can scale up much faster than that and our technology scale up even faster. So when people are bringing on new capacity to advanced packaging, they can typically do it much faster than they can in bringing up a traditional fab.

So you brought it down to 3 nanometers. I'm going to go for 2 and then [indiscernible]. Two-part question. Just how much of your R&D is now focusing on, let's say, 2-nanometer down to the [indiscernible] level in terms of gravitating your portfolio that way? And then could you just remind those that once again are newer to the story of what your relative balances in logic in terms of advanced versus mainstream and where you think it could be in a few years?

Yes. So maybe starting with the way we think about the R&D approach. Typically, for us, we're working kind of always 2 to 3 years out on our technology road map. So the 2-nanometer technologies that are scaling up this year, we actually won all of that business 2 years ago. So the stuff that we're working on today is 16, 14 and even 10 [indiscernible] nodes that we're really excited about. About 80% of our portfolio is oriented to logic and 20% is oriented to memory. Within memory, it's a little bit more kind of DRAM, HBM intensive versus NAND. And the reason for those -- some of those splits really comes down to where you see kind of CMP used more broadly in the process technology. It's much more extensively used in advanced logic and logic in general than in memory. But we're excited by node migrations and the most advanced technologies in both logic and memory [indiscernible] nodes in advanced logic is really exciting. HBM 4 is what we're working on. That was what we -- from an R&D perspective. We were working on that 2 years ago. Today, we're working on HBM 5 and 6. And in NAND, we're working on stuff that would be kind of 400 layer count and beyond kind of what they would call V10 plus.

Every time I see a press release from Qnity, I realize I have to read it pretty much immediately because I have to think to myself, this is where John is going to take the company. And I could list 7 or 8 of them, but 1 of the ones that sticks out and yes, I have to use the buzz term, but you did sign 1 in terms of materials development for NVIDIA back in March, if I'm not mistaken. Can you just add a little detail and it's across a few different products, if I'm not mistaken. Can you just talk in detail on just how we should be thinking about that relationship? Is that kind of going to be the benchmark going forward? Or how should we be interpreting that?

Yes. So we made a couple of OEM announcements, an innovation partnership with NVIDIA really focused on accelerating R&D capabilities. another 1 announcing that we had joined kind of Apple's advanced manufacturing program. If I take both of those together, I think they're doing is they're pointing to kind of the trend that I mentioned earlier around the perspective that OEMs are getting more actively involved throughout this entire value chain and ecosystem, and they're looking for the critical few partnerships that can help them to accelerate their product road maps and enable the most advanced manufacturing technology that will give them confidence that they can continue that cycle of rapid product launches as quickly as possible. And so that's where we're focused, at those OEM partnerships as well as with the partnerships with their manufacturing partners throughout the ecosystem.

So do you believe that's in -- and you've mentioned this in a few cases, but in terms of customers saying, John or Qnity, we need more from you or we'd love it if you had something rate -- that seems like it's relatively new, but our customers consistently coming to you and saying you need to expedite R&D. We need this, this and this from you. Is that basically now table stakes when you're doing it at the larger customers?

Speed is how we win in this market and in this industry. And so anything that we can do to go faster. It used to be that we were working on 18 to 24 months life cycles. Now it's 12 to 18 and some of the leaders are out there saying they want it to be even 9 months, right? And that's an extraordinary challenge to think about. Because each leap forward is unlocking the next frontier of computing, and so to do that with that type of pace that's where that local-for-local operating model and those deep trusted partnerships become so important because it's impossible to achieve that level of speed and performance without having deeply and being embedded early. And what I would say is the trend that we're seeing is getting engaged even earlier in the design process from the OEMs as well as from the fabs and the foundry customers, the time point at which we're being inserted into that conversation is earlier than ever and it's faster than ever, right? And as long as we continue to deliver, we've got a pretty good track record of delivering on those POR wins. Last year was a record year for us in terms of POR wins really across every part of our business. That's only strengthening those customer partnerships more and reinforcing their trust in us to bring us to that design table.

So out of the spin process, I know [indiscernible] a fantastic relationship there and a very complementary view. You're very complementary of them, but at the same time as the independents, especially given how rapidly the industry is evolving, has enabled you to a lot of things that perhaps could be done quicker than under mother DuPont and as a Philadelphia, and I wholeheartedly respect that. But could you just talk about some of those initiatives? It seems like you were able to get a clean room space, grow, be -- kind of your maneuverability is improving a little bit. Are there 1 or 2 things you'd like to highlight to the investor community today?

Yes. I think that certainly working closely with DuPont, we were set up for success coming out of the gate, and I think you've seen that in our recent performance. A couple -- we're working through kind of the -- really the -- the only remaining entanglement that we have of any importance is really kind of the IT system and some of the data and IT, and we're working quickly to work that through. But one of the things that we have built into the culture of Qnity around our core values is this principle of speed and being able to move quickly. And you saw it in the first quarter in some of the announcements that we made, whether it's with the OEM partnerships that were announced because those customers move fast and look, they don't want to negotiate that for months and months and months, right? When they're ready to go, they want to go. And similarly, the opportunity, clean rooms in this industry were so important and we had an opportunity to move -- in Taiwan to move very quickly with some facility investments to be able to serve some of the rapid growth of some of our largest customers. And that we were able to come together and even on something that required Board approval, it literally happened in a matter of weeks, not months, that we were able to move and secure advanced manufacturing capacity or R&D facilities, manufacturing facilities, warehouses and it happens to be across the street from 1 of our largest customers, and it was just a few weeks and something that it's really become kind of a flash point for our entire organization as a really a symbol of we mean it when we say we're going to move fast.

So this is my favorite one, and you can answer as quickly or as lengthy as you'd prefer, but you've been now a public CEO for roughly 9 months or 8 months. You've -- I think you have 1 of the full schedules here. Thank you for that, by the way. I know you've been on the road a lot, meeting with investors, just nonstop. Whether it's the sell side or the buy side community. What do you think are -- is there like 1 theme where you'd say, "Wow, I really wish the Street appreciated that a little bit more. Why isn't the sell side embracing this thematic a little bit more? Why are they overlooking at?" Is there anything that comes to mind?

Yes. First of all, we're really happy with the reception that we've had from the investor community. I think there's been a lot of interest. It certainly has kept me very busy and I'm excited by that, and the company continues to perform. And really what we're focused on is that execution credibility and kind of capitalizing on the market momentum. I think that I would come back to a little bit of where we started today, kind of the really understanding the importance of the end-to-end value of that -- of the breadth and depth of the portfolio and bringing end-to-end solutions from the front end all the way to the back end. And I think where that manifests itself the most directly is, for a long time, interconnects were perceived as a relatively unattractive part of the industry, right, and with good measure because for decades, it probably was. But as I think about where the industry is today and going forward, this interconnect space is advanced packaging and thermal space is one of the most critical sparks that will unlock the next frontier of computing, and be a catalyst for growth in many AI-led applications in the coming years. And so I think about it as a structural upgrade of the interconnect side of the portfolio. I think the semi side of the portfolio is relatively more and better understood but understanding the value and the contribution and the structural upgrade to the interconnect portfolio is, I think, something we spent the most time having the most conversations with investors. And they understand the value of the innovation partnerships, that deep partnership with customers and the local for local operating model whether it's been the pandemic environment, a tariff environment or the Middle East environment, that model has served us really well and allowed us to perform well in any economic environment. So I think that's kind of the things that we're focused on as we take this strategy in the company and really drive it forward.

John, I'd like to sincerely thank you for your time here today. Thank you very much.

Thank you so much.