MKS Inc. Common Stock 2026 Q2 Earnings Call

Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Mi, 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 second quarter of 2026, 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 and in our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q.

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 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. Please refer to our press release and the presentation materials posted to the investor relations section of our website for information regarding our non-GAAP financial results and the reconciliations to our GAAP measure. Our investor website also provides a detailed breakout of revenues by end market and division. I'll turn the call over to John.

Thanks, Paretosh, and good morning, everyone. Momentum is continuing to build at MKS. Strong demand across all of our markets. Second quarter revenue and key profitability metrics came in at the high end or above our guidance ranges. Our Q3 guidance is supported by strong order activity that we expect will drive continued robust year-over-year growth. Against the backdrop of intensifying AI-driven investment across semiconductor and advanced packaging applications, we are demonstrating the strength of our foundational position. From vacuum, plasma, and power products that enable leading-edge etch and deposition applications to optical components and photonic subsystems for the lithography, metrology, and inspection markets to laser systems, proprietary chemistries, and chemistry equipment for the advanced circuit boards on which leading-edge semi devices are integrated. We are a leading enabler of advanced electronics. This is MKS at its core.

Our performance reflects the benefits of investments we've made and continue to make in broadening our capabilities and expertise, deepening our relationships with customers across the electronics ecosystem, and building out the global capacity needed to meet the unprecedented demands of this investment cycle. We're not only excelling in the current environment, but also generating new design wins that position us to capitalize on long-term growth opportunities. I'll review our Q2 end markets performance and Q3 outlook. Starting with our semiconductor market. Revenue was above the midpoint of expectations as we and our supply chain partners continue to ramp our operations. Revenue grew 19% sequentially and 28% year-over-year, which accelerated meaningfully from the 13% year-over-year result in Q1. Growth was broad-based across Deposition and etch products, including RF power for NAND upgrades and vacuum subsystems, plasma generators, reactive gases for advanced logic and DRAM applications.

Our photonics and optics solutions also continue to gain momentum in the Lithography, metrology, and inspection market. Overall, we continue to see strong order activity and very healthy order backlog that gives us good visibility through the second half of the year. We also continue to achieve design wins, including in advanced logic, where we are the process tool of record for dissolved gas applications, and in RF power, where we have segment share leadership in high aspect ratio dielectric etch applications. Our semi outlook for Q3 implies year-over-year growth will accelerate to over 50% with strength across our entire portfolio of solutions. This anticipated growth is an indicator of MKS' longstanding track record of WFE outperformance during improving investment environments. Turning to electronics and packaging, AI-related applications are driving a meaningful increase in investment. Revenue was above the high end of our outlook, up 19% sequentially and 44% year-over-year.

Laser drilling system sales into the flex PCB markets for advanced smartphones and peripherals were strong, and chemistry sales remained robust as well. In chemistry equipment, we said last year that order activity had been elevated for multiple quarters. It has moved another level above that. Our chemistry equipment demand is easily the strongest it has ever been, supported by AI server investments, including optical modules. Our visibility now extends through 2027. To meet this growing demand, we recently announced we are doubling the capacity of our Guangzhou equipment factory. Notably, in rigid PCB drilling, we're pleased to see increased order activity as the market embraces our differentiated capabilities and a compelling cost of ownership proposition. As we have noted in the past, our proprietary chemistry carries higher gross margins than equipment, and we have high chemistry attach rates with our equipment customers.

We believe the stage is set for continued attractive high-margin chemistry growth through this cycle. We continue to be actively engaged with customers on their future plans, which serves as a good and leading indicator for strong equipment orders. Overall, the growth we're seeing in E&P reflects our long-held view that the trends driving device scaling in semi would ultimately come to the advanced PCB market as device integration becomes a core requirement for advanced electronics. That day has arrived, and advanced PCBs are rising in importance as increasing layer count requirements and integration challenges extend to higher-end smartphones, AI servers, and other advanced electronics. In Q3, we expect electronics and packaging revenue to be up over 30% year-over-year, with AI-related investment partially offset by flex equipment-related seasonality.

Our flex market is typically down sequentially in Q3 ahead of the next design cycles, and we are coming off a very strong first half. I'd like to highlight how we are scaling in our semiconductor and Electronics & Packaging business to meet anticipated demand growth today and over the next several years. Near term, we are increasing our working capital investments to address rapidly accelerating demand in the current cycle. Longer term, capacity planning is also key. Our new Malaysia Super Center, which opened in Q2, can be expanded at our option, and we are building out our chemistry equipment facility in Guangzhou, as I mentioned earlier. These facilities will play an important role in supporting our future capacity needs, and their proximity to many of our customers will strengthen engagement as well as deliver performance benefits as the new facilities ramp.

Switching to our specialty industrial market, we delivered a strong quarter, up 8% sequentially and 14% year-over-year. Revenue has not been this high since 2023, driven by our datacom and defense markets. Performance across our remaining specialty industrial markets was steady in Q2. We expect strong performance in our specialty industrial market in Q3, led by the markets I've called out. We're pleased to see how our foundational enabling technologies extend beyond semi and Electronics & Packaging into adjacent opportunities that leverage our R&D spend and deliver strong incremental cash flows. Wrapping up, MKS is executing at a high level financially, operationally, and technologically. We've further broadened our capabilities and expertise to address key opportunities across the ecosystem, resulting in deepening penetration in areas like lithography, metrology, and inspection, and advanced PCBs at a critical time for the industry.

We're also making strategic investments to support our customers and drive profitable growth well into the future. Our customer engagement and design win activity underscores our role as a foundational enabler of advanced electronics who looks ahead and solves ahead. Thank you to our MKS team, our suppliers, and customers for your hard work and partnership. We are incredibly excited about what lies ahead. Now here's Ram to run through the quarter and our financial outlook in more detail.

Thank you, John. Good morning, everyone. We delivered an excellent second quarter and are seeing increased demand across all end markets. We remain focused on driving profitable growth with disciplined execution and continue to make the investments needed to capitalize on the growth opportunities that we see ahead. Let me begin by reviewing our Q2 results in detail. MKS reported revenue of $1.25 billion, up 16% sequentially and 28% year-over-year. Year-over-year growth trends accelerated through the first half of the year, and we expect that to continue in Q3 as demand increases across our end markets. Second quarter semiconductor revenue was $554 million, up 19% sequentially and 28% year-over-year. In addition to continued strengthening of demand in DRAM and logic, we saw increased momentum in NAND upgrade activity.

Collectively, this demand is driving strength across our key product categories, led by plasma and reactive gases and vacuum products, while also supported by robust growth in our power solutions, optics, and photonics offerings. Second quarter electronics and packaging revenue was $381 million, an increase of 19% quarter-over-quarter and 44% year-over-year. The very strong sequential improvement highlighted elevated demand across our portfolio, including chemistry solutions, chemistry equipment, and flexible PCB drilling sales. The even stronger year-over-year comparison was driven by demand for chemistry equipment, which continues to inflect higher. We are also seeing very healthy demand for chemistry solutions and flexible PCB drilling equipment. As the chemistry business continues to benefit from accelerating demand for AI-related applications. Sales in the quarter were up 21% year-over-year, excluding the impact of FX and Palladium pass-through.

In our specialty industrial market, second quarter revenue was $313 million, an increase of 8% sequentially and 14% year-over-year. The year-over-year growth was driven by datacom and defense applications, while the sequential improvements reflected continued momentum in datacom, as well as seasonal recovery following the Lunar New Year. Turning to gross margin, we reported second quarter gross margin of 47.6%. In addition to higher volume, we also saw a benefit from certain discrete items in the quarter. Excluding these discrete benefits, gross margin remained very healthy despite unfavorable product mix and accelerated investments necessary to address rising demand. Second quarter operating income was approximately $320 million, yielding an operating margin of 25.6%, which was up 480 basis points year-over-year and well above our guidance midpoint. operating expenses of $275 million were in line with our guidance.