Date: May 7, 2026 | Source: Motley Fool (fool.com) / company press release
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John Lee (President & CEO): Thanks, Paretosh, and good morning, everyone. 2026 is off to an outstanding start for MKS. First quarter revenue, gross margin and EPS all came in at the high end or above our guidance ranges, and our Q2 guidance shows that we expect this momentum to continue, driven by strong bookings across our end markets. In the semiconductor market, MKS has a long-standing track record of outperforming WFE in up cycles. We are in an excellent position to capitalize on chip makers' ambitious AI-driven CapEx plans, which are accelerating technology inflections that enable more complex vertical structures in semiconductor devices.
In Electronics and Packaging, our leading position in chemistries and chemistry equipment sets us up for long-term growth with strong margins. Similar to semi, AI is driving increased complexity and layer counts in advanced circuit board manufacturing. Together, this translates into rising deposition and etch intensity in semi and more equipment in chemistry for PCB plating. And our specialty industrial portfolio is expected to continue delivering steady performance over the long term with incremental cash flow generation. We are well equipped from a capacity perspective to support the demand growth we are seeing today, and we are positioned to support higher levels of growth into the future as we prepare to open our new supercenter facility in Malaysia this June.
MKS' strong position is a function of a broad portfolio of foundational technologies, strengthened by design wins through the down cycle that are now powering results as demand increases. Starting with the semiconductor market. Revenue for Q1 came in just above the high end of our expectations, growing 13% year-over-year and 7% sequentially. The sequential revenue growth was the best we've seen in some time, driven by our vacuum and power products serving deposition and etch applications, our plasma and reactive gas offerings for advanced logic nodes and our photonics solutions targeted to applications in lithography, metrology and inspection. Notably, our Power Solutions growth reflects increasing NAND equipment upgrades. As a result, we expect semiconductor revenue to accelerate, growing high teens sequentially and over 25% year-over-year.
Turning to Electronics and Packaging. Revenue surpassed the high end of our expectations, up 6% sequentially despite normal seasonality related to the Lunar New Year and up 27% year-over-year. This strength was led by flex PCB drilling systems following consumer electronics seasonality as well as continued strong performance in chemistry and chemistry equipment. We continue to see a very robust order environment for our laser drilling equipment, chemistry and chemistry equipment. The strength we are seeing is primarily in flex for smartphones and wearables, but also for rigid PCB laser applications related to the low earth orbit satellite market. Overall, our performance in Q1 and guidance for Q2 indicates that we are not currently seeing any material impact from higher memory pricing on the consumer electronics end markets.
In Specialty Industrial, performance was steady as anticipated with a modest sequential decline primarily due to seasonality, but an 8% growth year-over-year, driven by strength in certain applications such as Datacom and defense. As we look to Q2 and beyond, we believe we are in an excellent position. Our visibility is improving in a rising demand environment and the fundamental trends of rising complexity and increasing layer counts favor MKS across our key end markets. Now I'll turn it over to Ram.
Ramakumar Mayampurath (CFO): Thank you, John, and good morning, everyone. We delivered an excellent first quarter. MKS reported a revenue of $1.08 billion, up 4% sequentially and 15% year-over-year. First quarter semiconductor revenue was $466 million, up 7% sequentially and 13% year-over-year, driven by strengthening demand, especially in DRAM and logic and foundry applications. The sequential increase was led by our vacuum products and plasma and reactive gases offerings. We also saw an uptick in revenue related to NAND upgrade activity, which benefits our RF power business.
First quarter Electronics & Packaging revenue was $321 million, an increase of 6% quarter-over-quarter and 27% year-over-year, reflecting higher flexible PCB drilling and chemistry sales even with the seasonal impact of the Lunar New Year. In our Specialty Industrial market, first quarter revenue was $291 million, a decrease of 2% sequentially, reflecting Lunar New Year seasonality, up 8% year-over-year. Turning to gross margin, we reported first quarter gross margin of 47%, which is the high end of our guidance. First quarter operating income was approximately $235 million, yielding an operating margin of 21.8%, which is well above our guidance midpoint. First quarter adjusted EBITDA was $277 million, yielding a 25.7% margin and also at the high end of our guidance.
We started the year strong with first quarter net earnings of $157 million or $2.30 per diluted share, which is above the high end of our guidance. We closed the quarter with $1.5 billion of liquidity comprised of cash and cash equivalents of $569 million and our undrawn revolving credit facility of $1 billion. Free cash flow was $29 million. As a reminder, Q1 is typically the low point of the year due to timing of variable compensation payments. Net debt at quarter end was $3.6 billion, resulting in a net leverage ratio of 3.5x.
Let me now turn to second quarter outlook. We expect revenue of $1.2 billion, plus or minus $40 million. By end market: semiconductor revenue is expected to be $550 million, plus or minus $15 million; electronics and packaging $350 million, plus or minus $15 million; and specialty industrial $300 million, plus or minus $10 million. We estimate second quarter gross margin of 47%, plus or minus 100 basis points. CapEx for the year is expected to be in the range of 4% to 5% of revenue. We expect second quarter net earnings per diluted share of $2.90, plus or minus $0.30.
John Lee: Thanks, Ram. We are planning to host our next Investor Day on December 14 of this year in New York City. Now operator, let's open the call for questions.
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James Ricchiuti (Needham): Are you still shipping to demand in semi, or seeing production ramp to build inventory ahead of the stronger cycle?
John Lee: Customers have been very clear about what they need for their quarters and their desire to build inventory. I assume some of it is to build inventory at this point. You can see from our guidance that our supply chain has revved up and we're starting to accelerate our factory builds.
James Ricchiuti: What's driving the strength in laser drilling, and how does the E&P equipment pipeline look?
John Lee: Two drivers. One is the advanced smartphone build — high-end smartphones are driving our flexible PCB drilling. The other is AI, which is driving the larger E&P market, including chemistry equipment. We're seeing continued strength in both.
Steve Barger (KeyBanc): NAND tool upgrades — what's the mix of upgrades vs greenfield?
John Lee: We did start seeing some NAND upgrades. Regarding DRAM and logic foundry, most of that is greenfield — new tools for advanced nodes. Some upgrades continue, but most of what we're shipping now is for more advanced tools for advanced nodes.
Melissa Weathers (Deutsche Bank): How much WFE can you serve? Can you frame the next couple of years?
John Lee: For 2026, WFE is in that $140 billion range and we can meet that — we put in capacity a couple of years ago for $125 billion WFE with a 25% to 30% surge. We're fine for 2026. We have already started ordering equipment to expand capacity for 2027 needs, which is in that $170 billion to $180 billion WFE range. We don't need any new buildings, especially with Malaysia coming online.
Matthew Prisco (Cantor): How have customer conversations evolved, and your ability to outgrow WFE?
John Lee: MKS has demonstrated historically the ability to outgrow WFE during a ramp — we have to ship our stuff first before our customers can ship theirs, and customers want to build inventory. The industry thinks this cycle is going to be a lot longer than previous cycles, which drives us to build inventory even more.
Matthew Prisco: Drivers of the better-than-expected gross margin?
Ramakumar Mayampurath: Volume helped in Q1 and continues in Q2. Operational excellence programs work on product cost. VSD (vacuum systems) is ramping with gross margin slightly below corporate average, but great Op income. We're taking into account inflation on key raw materials like palladium. We're guiding 47% plus or minus 100bps.
Yiling Sun (Citi): How big is AI as a percentage of your chemistry portfolio?
John Lee: Last year we said about 10% on average, growing quarter-on-quarter. Coming out of the end of '25, it was on the higher end, closer to 15%. That's the range we're seeing right now — AI ~15% of chemistry revenue.
Yiling Sun: Updated gross margin goal?
Ramakumar Mayampurath: Our goal was 47% plus — we're still yet to get to that plus factor. That will be our primary objective — stabilize a 47% plus number. Ongoing programs on manufacturing excellence, procurement and design improvement, plus volume. There are headwinds from inflation, but we'll continue to drive it forward. More color at Investor Day.
David Liu (Mizuho): Tariff impact on the June guide and rest of year?
Ramakumar Mayampurath: We have neutralized the tariff cost dollar for dollar. We're still seeing a little bit of gross margin impact from the math, about 30 to 40 bps, included in the Q2 guide.
David Liu: Can you size the LEO rigid PCB opportunity?
John Lee: The LEO market is growing very quickly. We were designed in as a process tool of record for laser drilling several years ago and maintain that record. As that market grows, we benefit. It's a subset of the rigid PCB market, but with healthy growth and more players entering.