MKS Instruments (MKSI) Q3 2025 Earnings Call Transcript

Date: November 6, 2025 | Source: Investing.com (transcript) / MKS Investor Relations

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Paretosh Misra (VP, Investor Relations, MKS Instruments): Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Ram Mayampurath, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the third quarter of 2025, which are posted to our investor website at investor.mks.com. As a reminder, various remarks 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 yesterday's press release, our most recent annual report on Form 10-K, and any subsequent quarterly reports on Form 10-Q. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Now, I'll turn the call over to John.

John Lee (President and Chief Executive Officer, MKS Instruments): Thanks, Paretosh, and good morning, everyone. MKS delivered a solid third quarter with revenue and EPS in the upper half of our guided ranges and healthy results across each of our three end markets. Third quarter revenue of $988 million was up 10% year over year, driven by strong demand in our semiconductor and electronics and packaging end markets. We continue to demonstrate strong execution in delivering value to our customers' most critical needs. Net earnings per diluted share totaled $1.93. We also continue to take advantage of our improved cash flow to reduce our leverage with another voluntary prepayment of $100 million on our term loan completed in October.

MKS is uniquely positioned at the forefront of accelerating innovation and enabling the advanced technologies that power the AI era. Increasing device complexity is creating significant challenges and opportunities in both the semiconductor and advanced packaging markets. We are differentiated in our ability to serve many critical applications with our comprehensive portfolio of semiconductor capital equipment subsystems, advanced packaging chemistries, and advanced packaging equipment systems.

Starting with our semiconductor market, we reported solid revenue growth year over year, driven by continued strength in our products supporting deposition and etching applications, which are increasingly critical for advanced memory and logic manufacturing. Our dissolved gas systems for advanced logic applications were also a solid contributor to our performance, and our services business continues to contribute steady year-over-year growth. Lower NAND upgrade activity, which was expected after a very strong second quarter, drove the sequential decline in semiconductor sales. However, our leadership in power delivery remains as strong as ever in this space. We expect fourth quarter semiconductor revenue to remain flat on a sequential basis, which would translate into a healthy double-digit year-over-year growth for 2025.

In electronics and packaging, revenue exceeded the midpoint of our expectations, growing 25% year over year. This strong performance reflects continued momentum across our portfolio, driven by robust demand for our chemistry solutions and, in particular, our chemistry equipment. The investments we have made over the past several years to position MKS to optimize the interconnect in advanced electronics are now paying off as we gain momentum in AI-related applications. Today, our chemistry revenue growth reflects our position as a leader of the most advanced packaging technologies used in high-performance computing applications. AI is driving these incredibly thick boards, many, many layers of HDI boards, and we're uniquely positioned at the forefront of accelerating innovation, with our proprietary chemistry as a key revenue generator.

Ramakumar Mayampurath (Chief Financial Officer, MKS Instruments): Thank you, John. Let me start with a summary of our Q3 results. Third quarter revenue was $988 million, up 10% year over year. Semiconductor revenue was $415 million, up double digits year over year and down sequentially, as John noted, due to lower NAND upgrade activity following a very strong second quarter. The year-over-year growth was driven by strength in many product categories, including our vacuum products and plasma and reactive gas businesses.

Third quarter electronics and packaging revenue was $289 million, up 9% sequentially, driven by growth in our chemistry and equipment businesses. On a year-over-year basis, sales were up 25%, driven by growth in chemistry, chemistry equipment, and flexible PCB drilling equipment sales. Chemistry revenue was up 10% year over year, excluding the impact of FX and palladium pass-through. In our specialty industrial market, third quarter revenue was $284 million, an increase of 3% sequentially, mainly due to the improvement in the industrial market. Revenue was down 1% on a year-over-year basis.

Third quarter gross margin was 46.6%, just above the midpoint of our guidance. Gross margin was stable relative to the prior quarter, with tariff impacts of about 80 basis points, 35 basis points better than last quarter, offset by a higher mix of chemistry equipment sales. Third quarter operating expenses were $256 million, at the high end of our guidance and higher sequentially, primarily as a result of an increase in variable costs, mostly related to employee incentive compensation tied to stronger business performance. Third quarter operating income was $205 million, with an operating margin of 20.8%.

Third quarter adjusted EBITDA was $240 million and above the midpoint of our expectations, with adjusted EBITDA margin of 24.3%. Net interest expenses were $45 million, in line with our guidance. Third quarter effective tax rate was 17.9%, just below the midpoint of our guidance. Third quarter net earnings were $130 million, or $1.93 per diluted share, and above the midpoint of our guidance. Free cash flow generation was very strong at $147 million, representing over 100% of our net earnings and 15% of our revenue. Through the first three quarters of 2025, we generated cumulative free cash flow of $405 million. We invested $50 million in capital expenditure in the quarter. We expect CapEx to sequentially increase in Q4 but fall within the low end of our annual CapEx guidance of 4%-5% of revenue.

We closed the quarter with approximately $1.4 billion of liquidity, comprised of cash and cash equivalents of $697 million and our undrawn revolving credit facility of $675 million. As John highlighted, we made a voluntary principal prepayment of $100 million in October. In total, we have made $400 million in voluntary payments thus far in 2025. We exited the quarter with gross debt of $4.4 billion and a net leverage ratio of 3.9 times, based on our trailing 12-month adjusted EBITDA of $953 million.

Finally, during the quarter, we paid a dividend of $0.22 per share, or $15 million. Let me now turn to our fourth quarter outlook. We expect revenue of $990 million, plus or minus $40 million. By end market, we expect semiconductor revenue to be $415 million, plus or minus $15 million. Revenue from the electronics and packaging market is expected to be $295 million, plus or minus $10 million, which would be up 16% year-over-year at midpoint. Revenue from our specialty industrial market is expected to remain relatively steady at $280 million, plus or minus $15 million. We are guiding gross margin of 46%, plus or minus 100 basis points. The sequential decline is due to higher chemistry equipment sales in the mix and lower chemistry sales due to seasonality, partially offset by lower tariff-related impacts. We anticipate our mitigation actions will nearly offset tariff costs, dollar for dollar, beginning in Q4. However, these costs are passed through at zero margins, and we anticipate tariffs will continue to dilute our gross margin in Q4 and moving forward by approximately 50 basis points. We remain confident in our plan to deliver our long-term gross margin objective of 47% plus.

We expect fourth quarter operating expense of $255 million, plus or minus $5 million. We expect fourth quarter adjusted EBITDA of $235 million, plus or minus $24 million. We expect tax rates of approximately 2% in the fourth quarter, benefiting from certain favorable discrete tax items, and bringing our full-year tax rate to just over 14%. We expect fourth quarter net earnings per diluted share of $2.27, plus or minus $0.34. Wrapping up, MKS has executed at a high level through the third quarter, and we are expecting this momentum to continue in Q4. With our broad portfolio of products, strong secular tailwinds, and an improving balance sheet, MKS is in a great position as we look to 2026. With that, operator, please open the call for Q&A.

Questions & Answers

Melissa Weathers (Deutsche Bank): Hey, there. Thank you, guys, for letting me ask a question. I think first I want to touch on the E&P side. You said a couple of times in your commentary that equipment orders generally precede chemistry orders, and that can take about 6 to 12 months. You also mentioned that chemistries were at, I think, a record year in 2025. Any color on how we should be thinking about the chemistry's flow-through into 2026 after all the strong equipment sales?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah, Melissa, it's John. Thanks for the question. We're not really guiding 2026, obviously, for chemistry or for the company. I would say this. The equipment that we are building and installing now puts us in a very good position for additional chemistry revenue starting in 2026 and forward. We really look at the whole market and its growth, and we've kind of said in our E&P market, we would grow 300 basis points above GDP. That was what we said at the analyst day, and that was made up of higher growth substrate business, mid-single-digit HDI business, and GDP-type MLB business. Obviously, when we gave those numbers, AI was not in the mix, right? I think, generally, things are better. Our ability to hit the 300 basis points above GDP, our longer-term target, we're very confident in that fundamentally because we are shipping a lot of that equipment, and a lot of that chemistry that goes with it will help us get to those longer-term targets.

Jim Ricchiuti (Needham & Company): Hi, thanks. Good morning. I'm wondering if you could give us a little bit of a better sense within the E&P business. If you could comment on Q3 or nine months, how much of that growth is actually coming from equipment, which admittedly has been strong and we know can be a little bit lumpy?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah, thanks for the question, Jim. I think we've said historically, when we looked at the MKS business, equipment can be anywhere from 5% of total revenue to 15%. I would say, because of the last four quarters of really strong orders and therefore revenues, we're towards a higher end of that range and maybe a little higher than that. It is really going to be probably a historic four quarters or a year for the equipment business.

Shane Brett (Morgan Stanley): Thank you for letting me ask a question. I want to follow up on that E&P question earlier, but considering that your chemistry sales for this year are up high single digits, some back-of-the-envelope math indicates that your tooling business could be almost doubling this year. One, is that kind of the right way to think about it? Just how much visibility do you have on equipment sales on a go-forward basis?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah, Shane, I think your math is roughly right with respect to the equipment business for chemistry equipment. I think what we can say is that we've had four strong quarters of bookings for that chemistry equipment. We can look out, certainly, the lead times of our equipment are 4-12 months. We have added some capacity to some of our equipment factories. We look forward to a couple more quarters, at least, of large equipment builds. We know that we have the backlog for that.

Krish Sankar (TD Cowen): Yeah, thanks for taking my question. I had two of them too. John, just to follow up on the previous question, if you do assume that in the second half of next year, let's just take a timeframe and say in Q3 of next year's inflection, in theory, should you not start seeing it one quarter earlier, or do you think there's something else different this cycle?

John Lee (President and Chief Executive Officer, MKS Instruments): No, in general, I think that's still true, Krish. If our customers are shipping in Q3, for instance, to your assumption, then we would certainly see that at least a quarter ahead of time. Our lead times have come back to historically low lead times, anywhere from 4-8 weeks, sometimes 12 weeks, depending on how complex the system is. Even a 4-week timeframe and 8-week timeframe, we do see a lot of in-quarter turns, as we talked about in the last couple of quarters. Yes, I don't see any changes to that assumption, Krish.

Michael Mani (Bank of America Securities): Hi, thanks for taking my question. On E&P, could you help us parse through. When you look at your growth drivers, what is exactly secular versus more idiosyncratic to MKS? It seems like a lot of the HDI and MLB momentum reflects some of this secular uptake in the AI. With Atotech, you're able to go into many of these opportunities to sell in both equipment and chemistry. Is there a share gain overlay aspect to it that you're seeing?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah, I think it's both, Mike. The regular growth is, we're an industry leader in it, and more square meters of PCB boards than the chemistry, we're going to just enjoy that. I would say the thing that is different this time and that's beneficial for MKS is that AI is driving these incredibly thick boards, many, many layers of HDI boards, substrate boards, as well as MLB boards. As we talked about, a lot of the equipment orders that we have gotten tied to AI for HDI and MLB are because our equipment is uniquely qualified to process much thicker boards. We had to make modifications to the equipment. We did, and then we got those orders. Now, as we said, we have very high attach rates of chemistry to our equipment. If we are unique in being able to supply that equipment versus our competitors, we're also going to get that chemistry, as we talked about in the call.

Matthew Prisco (Cantor Fitzgerald): Yeah, thanks for taking the question, guys. I guess to start, how do you see the NAND lumpiness playing out over the next handful of quarters? Kind of what are the primary moving parts you are focused on here as determinants for the linearity of that upgrade cycle?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah, Matt. I wish I knew. I would say this. We have plenty of capacity, manufacturing capacity, to meet any kind of uptick in either upgrades or greenfields. I think one of our key customers has said there is a large opportunity still of upgrades just in the 2026 and maybe beyond timeframe. I think overlay on top of that, the industry discussion of NAND pricing is just a tailwind. The discussion by many of the chipmakers that NAND is now constrained. What is exciting is potentially a new application for NAND, driven by AI again, of course, which is solid state drives using more NAND for AI. That would drive another layer of growth. I think we are ready. It is lumpy. It can be lumpy. We will certainly try to guide you guys as best we can.

Steve Barger (KeyBanc Capital Markets): Thanks. Good morning. John, you alluded to some of this already, I think, but we've been reading that CoWoS or other packaging formats are evolving from organic interposer to RDL. From your perspective, is that just switching from one format you enable to another, or is that evolution good for you due to more layers or smaller features?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah, I think the industry is certainly working hard on various configurations for this redistribution layer, the RDL layer, using CoWoS, CoWoS-R, CoWoS-L. I would say this. That RDL layer is more complex as we move to organic layers. That's good for us. That's our traditional strength, organic layers versus silicon. When you go to organic layers, the RDL layers increase a little bit, maybe from one layer to two or three. That's good for us. I think the bigger picture are the 40 layers beneath that that are all the substrates and PCBs. That's really the largest growth factor for us. That used to be 20 layers. Now it's 40. As we work with our customers, they're already looking at 80 layers. Think about that. It's gone from 20 to 40 just in the last couple of years, and we're working on 80. Each of these layers is made one at a time. You can imagine the challenges of yield, making sure that when you put 100 layers on top of each other, that it still yields the same as if you had four. Those are great challenges for the industry and opportunities for us.

Faravijay (Mizuho): Hi. I'm Faravijay. Thanks for letting me ask a question. Maybe the first one on revenue by geo. Can you just highlight what types of trends you're looking at, split by geo?

John Lee (President and Chief Executive Officer, MKS Instruments): Hey, Dave, just to make sure I understand your question, you wanted some color on revenue by geography? Certainly, a lot of Asia is driving a lot of the growth, for sure. As you know, some of that's coming back to the United States as well as to Japan and Europe as people start onshoring chip fabs and packaging fabs for that matter. I think the other larger geographic trend is the China plus one trend as things move to Southeast Asia. As you know, we are building some factories in Southeast Asia to meet that demand because our customers are moving there. I think there is a lot of geographic movement in the industry today.

Joe Quatrochi (Wells Fargo): Yeah. Thanks for taking the question. Maybe one on the Semi side. Given the entity list affiliate rule, it looks like it's delayed. Have you seen any change in order patterns or discussions with your customers?

John Lee (President and Chief Executive Officer, MKS Instruments): Yeah. Thanks for the question, Joe. Not really, because I think when that rule came out, we did not have — I don't think the industry had time to react. Some of our customers have said the impact is X, Y, and Z. Now it is delayed. As you know, the tariff environment is kind of a wake-up every day, and it changes. We really have not had any kind of different discussions with our customers based on that specific rule.

Paretosh Misra (VP, Investor Relations, MKS Instruments): (Closing) Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please.

Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.