MKS Instruments Q3 2026 Earnings Call Transcript

MKS Instruments (NASDAQ:MKSI) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

Access the full call at https://edge.media-server.com/mmc/p/88wzuvg5/

Summary

MKS Instruments reported strong Q3 2026 results, with revenue and EPS surpassing guidance, and a 700 basis points increase in operating margins year over year.

The company’s semiconductor market revenue grew 15% sequentially and 54% year over year, with strong demand across vacuum, photonics, and reactive gas solutions.

Electronics and packaging revenue increased 9% sequentially and 43% year over year, driven by AI-related chemistry and equipment demand.

The company secured a major customer win in advanced logic and is expanding capacity in China to meet demand, with bookings extending into 2028.

Specialty industrial market revenue grew 15% sequentially and 27% year over year, with notable strength in Datacom and general industrial markets.

MKS Instruments announced a $500 million share repurchase program and completed the sale of its Ophir Optics business, enhancing balance sheet flexibility.

The company’s Q4 outlook projects revenue of $1.49 billion with continued growth in semiconductor and electronics and packaging markets.

Management highlighted strong order activity, capacity expansion plans, and new design wins, particularly in AI-related applications.

Full Transcript

OPERATOR

Thank you for standing by. My name is Nay. I will be your conference operator today, and at this time I would like to welcome everyone to MKS Instruments’ third quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session, and to ask questions please press Star one. To withdraw your question, please press Star one again. Thank you.

Paretosh Misra (Vice President of Investor Relations)

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 Ramakumar Mayampurath, Executive Vice President and Chief Financial Officer. Yesterday after market close, we released our financial results for the third 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 Instruments 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 financials 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 a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division.

Now I’ll turn the call over to John.

TsengChung John Lee (President and CEO)

Thanks, Paretosh, and good morning everyone. MKS Instruments’ strong business momentum continued in the third quarter, driving revenue and EPS above the high end of our guidance. We also expanded operating margins by approximately 700 basis points year over year, demonstrating the leverage in our business as revenues scale. Each of our end markets performed at or above the high end of our guidance, and we continue to see strong order flow, providing us greater visibility into future demand.

Our guidance today points to a very strong finish to the year with continued robust year over year revenue growth driven by unprecedented demand across our key end markets. As AI-related investments accelerate across semiconductor manufacturing and electronics and packaging, we are capitalizing on our broad capabilities, long-term relationships with customers, and our ability to develop solutions that address the fundamental trends of scaling, stacking, and new materials. These same trends are driving complex requirements for memory and logic devices as well as the advanced circuit boards and substrates that integrate them.

We are uniquely foundational to enabling customer roadmaps across both markets. This position is also translating into new design wins that create opportunities to gain share and further expand our visibility into the AI supercycle. At our upcoming Investor Day in December, we look forward to sharing more about how and where we innovate and win. I’ll turn now to our Q3 end market performance and Q4 outlook. Starting with our semiconductor market, revenue was at the high end of our guidance range, up 15% sequentially and 54% year over year. Growth was broad based across our vacuum and photonics solutions, including power, pressure, microwave and plasma, and reactive gas solutions. We also secured a major customer win with a leading foundry selecting our dissolved gas solutions for advanced logic.

NAND upgrades continued at a healthy pace and, with greenfield capacity planned for 2028, our RF power outlook is robust. Design win activity remains solid, including an important pulsed DC power win for a significant conductive etch application. Overall order activity remains very strong, providing rapid revenue growth and excellent visibility well into the new year. Our semi outlook for Q4 points to accelerating year over year growth with continued strength across our product portfolio.

Customer conversations we are having give us confidence in our ability to continue outgrowing WFE during this period of elevated investment. Against this backdrop, some customers have noted certain constraints elsewhere in their supply chain. We plan several years ahead so that we and our suppliers are positioned to meet customer demand from a manufacturing perspective. We are preparing for WFE approaching $300 billion in 2028. Our Malaysia Supercenter will ramp over the coming quarters with room for further expansion. We also plan to expand Supercenter capacity in other key regions such as North America and Europe.

MKS Instruments has the depth, scale and financial strength to expand capacity across our own operations and supply chain while maintaining capex intensity within our targeted 3% to 5% range. Turning now to electronics and packaging, the business continues to deliver outstanding growth. Revenue was well above our guidance range, increasing 9% sequentially on top of a strong Q2 and up 43% year over year. Our chemistry equipment business continued to see record order volumes as customers expand capacity largely to support AI-related applications. Chemistry revenues grew 26% year over year excluding the impact of FX and palladium pass-through, the strongest growth in the history of the company.

That performance reflects strong AI-driven demand as well as increasing consumables revenue as the equipment we have installed over the past several quarters is qualified and moves into production. As a reminder, our proprietary chemistries have an attach rate of greater than 85% to our equipment installed base, generating years of steady revenue at gross margins well above corporate average. AI-related chemistry revenue represented 10% of our electronics and packaging chemistry revenue last year and is now tracking towards the high end of the 15% to 20% range we had talked about for 2026.

Including all of our E&P capabilities—chemistry equipment, chemistry, and laser systems—AI exposure is expected to represent approximately 25% of total E&P revenue for the full year, an approximately 180% annual increase in dollar terms. And as we’ve reported throughout the year, our momentum is accelerating. At the midpoint of our guidance, we expect approximately one third of our E&P revenue to come from AI in Q4, and we expect this to continue to increase as we help customers meet growing demand for AI applications.

Chemistry equipment sales were up more than 75% year over year in the third quarter, and we expect full-year sales of more than $300 million, over 50% above our historic annual peak. Current capacity is sold out through 2027, and to meet accelerated chemistry equipment demand, we are expanding capacity in Guangzhou, China, and this will double our overall capacity when completed, which we are targeting for Q3 2027. Across the electronics ecosystem, AI demand is increasingly challenging semiconductor innovation as well as advanced packaging, substrates, and PCB technologies.

As package sizes grow, layer counts increase and package architectures become more complex. We are leveraging our broad electronics and packaging portfolio to address these technological challenges. Looking ahead to Q4, order activity remains extremely strong across the board, with chemistry equipment now booking for deliveries well into 2028. We’ve also seen considerable new order volume for our laser systems for rigid PCB applications, including optical modules, with deliveries expected to accelerate significantly in 2027. These wins reflect years of coordinated go-to-market groundwork across our PCB laser drilling systems and chemistry businesses, which has positioned us well to meet the industry’s needs for innovation at just the right time.

We expect Q4 electronics and packaging revenue to increase over 40% year over year, driven by strength in chemistry equipment, AI-related chemistry, and rigid PCB laser drilling systems. On an annual basis, our E&P business is on track to grow nearly 40% in 2026 as AI continues to drive elevated capital investment across the PCB industry. As new equipment is qualified and ramps in coming quarters, we expect our larger installed base will support steady growth in our higher-margin chemistry consumables over the long term.

Turning to our specialty industrial market, revenue grew 15% sequentially and 27% year over year, well above our guidance range, led by strength in Datacom and improvement in general industrial markets. Automotive posted modest growth despite soft vehicle production, highlighting our value-add position in the market. The growth of these businesses in 2026 demonstrates our ability to extend our core capabilities into attractive markets. Looking ahead to Q4, we expect revenue to remain at this level following the significant growth we delivered.

Last month we announced that we entered into an agreement to sell the Ophir Optics business to TTM Technologies. Ophir Optics develops high-precision infrared thermal imaging and laser optics solutions for defense, security, and industrial applications. We grew this business organically, improved its profitability, and have agreed to sell it at an attractive valuation to an industry leader. For MKS Instruments, the transaction gives us balance sheet flexibility and shows how our specialty industrial activities enhance shareholder value creation.

Wrapping up, MKS Instruments is poised to end 2026 on a strong note, and we’re excited about what lies ahead. As the only company in our space broadly exposed to powerful transformative innovation in both semiconductors and advanced PCBs, we’re in a great position to significantly grow our business in the coming years. AI is not just driving investment, it’s pulling forward our customers’ technology roadmaps across the semi and electronics packaging landscapes, elevating the value of innovation for those who can deliver it.

As a foundational enabler of that innovation, the future is bright for MKS Instruments. I want to thank our outstanding MKS team for their tireless efforts to deliver for our customers amid unprecedented demand, and our suppliers, customers, and industry partners across the electronics ecosystem for their continued support and collaboration. Now here’s Ram to run through the quarter and our financial outlook in more detail.

Ramakumar Mayampurath (Chief Financial Officer)

Thank you, John, and good morning everyone. We delivered another very strong quarter driven by broad-based demand across all our end markets. Our results demonstrate our ability to translate high revenue growth into even better earnings growth through disciplined execution. We are driving strong operating leverage while continuing to invest in the multiple growth opportunities that we see ahead. For the third quarter, MKS Instruments reported revenue of 1.41 billion, up 13% sequentially and 43% year over year. As our guidance indicates, we expect strong demand across all our end markets to continue in the fourth quarter. Third quarter semiconductor revenue was 638 million, up 15% sequentially and 54% year over year. In addition to continued strength in DRAM and logic demand, we saw increased momentum in NAND upgrade activity.

Collectively, this demand is driving continued strength across our key product categories led by plasma and reactive gas solutions and vacuum products as well as accelerating growth in power solutions, optics and photonics. Third quarter electronics and packaging revenue was 415 million, up 9% quarter over quarter and 43% year over year, continuing its record growth. The sequential improvement was driven by higher chemistry and chemistry equipment sales, partially offset by typical seasonal decline in flexible PCB drilling system sales. The strong year over year growth was driven by demand for chemistry equipment, chemistry solutions and flexible PCB drilling equipment, underscoring our strong market position despite smartphone market softness.

As John mentioned, our chemistry business continues to benefit from accelerating demand from AI-related applications with sales up 26% year over year excluding the impact of FX and palladium pass-through and a record year over year growth rate in our specialty industrial market. Third quarter revenue was 360 million, an increase of 15% sequentially and 27% on a year over year basis. The year over year sequential growth was driven primarily by Datacom and General Industrial while our automotive business remains stable. We reported third quarter gross margin of 47.7% supported by higher volumes and a 30 basis points benefit from IEFA tariff refunds which we do not expect to repeat in Q4.

Our gross margin continues to expand driven by the value of our solutions as well as higher volumes despite modest headwinds from growing sales of lower margin chemistry equipment as well as costs incurred from the expansion of manufacturing capabilities. While we expect these headwinds to continue into next year, both are expected to become margin tailwinds longer term as chemistry consumables grow with our newly installed chemistry equipment and new capacity reaches full utilization.

Third quarter operating income was 393 million with operating margin improving approximately 700 basis points year over year to 27.8%, well above our guidance and our highest quarterly operating margin in over eight years. Operating expenses of 281 million were in line with our guidance as we continued to drive operating leverage in the business. Third quarter adjusted EBITDA was $434 million yielding a 30.7% margin and above the high end of our guidance.

Net interest expenses were $33 million compared to $45 million in the third quarter of 2025, reflecting the benefits of our first quarter financing actions as well as continued proactive principal prepayment. Our third quarter effective tax rate was 19.1%, slightly favorable relative to our guidance. Third quarter net earnings were $292 million or $4.18 per diluted share, more than doubling year over year and above the high end of our guidance. Let me now turn to our cash flow and balance sheet. We closed the quarter with over $1.6 billion of liquidity comprised of cash and cash equivalents of $676 million and our undrawn revolving credit facility of $1 billion. We generated strong free cash flow of 243 million, about 17% of revenue. We expect to continue to invest in CapEx and working capital through the year end to support organic growth with full year capital spending remaining within our target range of 3 to 5%.

With excess cash, we made a 50 million euro principal prepayment on our euro term loan in Q3. In addition, we made another $100 million prepayment on the USD term loan this month bringing total year to date prepayments to over $450 million. Our net leverage ratio at the end of Q3 was 2.4 times based on a trailing twelve month adjusted EBITDA of 1.3 billion, down 1.5 turns from a year ago and within our target net leverage of 2.5 times. With our stronger balance sheet and healthy business outlook, our board recently approved a 500 million share repurchase program providing flexibility to repurchase shares opportunistically.

Finally, we paid a dividend of $0.25 per share or $17 million. Let me now turn to our fourth quarter outlook. We expect revenue of 1.49 billion plus or minus 40 million, which represents a 44% growth over the prior year. Our fourth quarter outlook by end market is as follows. Revenue from our semiconductor market is expected to be 700 million plus or minus 15 million, revenue from our electronics and packaging market is expected to be 430 million plus or minus 15 million and revenue from our specialty industrial market is expected to be 360 million plus or minus 10 million.

Based on anticipated revenue levels and product mix, we estimate fourth quarter gross margin of 47.5% plus or minus 100 basis points similar to where we ended Q3 excluding IPA tariff refunds. We expect to continue to deliver strong operating leverage with fourth quarter operating expenses at 288 million plus or minus 5 million and increasing at a much slower rate than revenue. We expect fourth quarter operating income of 420 million plus or minus 29 million with an operating margin of over 28%.

We estimate fourth quarter adjusted EBITDA of 461 million plus or minus 29 million. We expect our fourth quarter tax rate to be approximately 9% and full year tax rate to be just over 16%. Based on these assumptions we expect fourth quarter net earnings per diluted share of $5.00 plus or minus $0.38. Our strong Q3 performance and Q4 outlook position us for an outstanding second half of the year. Order volumes are healthy, visibility is improving and strong execution is driving higher profitability and cash generation. While we invest in the business to address the strong growth cycle we see ahead in our semiconductor and electronics and packaging businesses. With that, operator, please open the call for questions.

OPERATOR

Thank you very much. So, ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your touchphone. You will hear a confirmation once your line has been placed in the queue. If you wish to withdraw your question, please press star followed by one again. And if you are using a speakerphone, we kindly ask that you lift the handset before pressing any keys. Please hold for a moment while we gather questions.

Our first question comes from the line of Matthew Prescott Cantor.

Matthew Prescott Cantor (Analyst)

Hey guys, thanks for taking the questions. I guess first, starting on the semi side, can you give a bit more color on that visibility that the customers are giving you today? Maybe how that splits between actual orders and forecasts and maybe your latest thoughts on MKS’s ability to outgrow WFE through 2027. What type of magnitude should we be thinking? Thank you.

TsengChung John Lee (President and CEO)

Yeah, good morning Matt, it’s John. So we are in obviously constant contact with all of the semi customers and they are giving us much better visibility than the past, extends out certainly into the 28 time frame. And those are guidance levels. The bookings and actual orders of course are in a shorter period of time because you actually need the details of actually what they need. But the visibility is great as you would expect during up cycles. MKS has always demonstrated that we outperform WFE and we see that happening now.

I think early in 26 it was a little slower start. I think the critical subsystems folks were trying to rev the engine, if you will, in our supply chains and now you’re starting to see that acceleration. And I think with the guidance we’ll probably grow something like 40% year over year. And then I think WFE is kind of in that mid-30s percent range and I think that will continue in 27.

Matthew Prescott Cantor (Analyst)

Great, thank you. And then I guess speaking on semis, can you offer some more color on the constraints that you’re seeing in today’s market? Are there any share opportunities that you see arising from this? Any problem areas for you guys in securing supply? Thank you.

TsengChung John Lee (President and CEO)

Yeah, I think there’s been reported shortfalls in certain commodities. And some of those commodities are things that we make as well. And so those are share gain opportunities for us. I think if you look at our delivery, our operations team has been doing a great job. We talked about our factory expansions and we’re well on our way to supporting 300 billion WFE. And, you know, I’d like to take a little time to also just remind everybody how much hard work this is for the entire supply chain.

We have thousands of suppliers, they’re all stepping up. We’ve asked them to double and then we’ve asked them to double again. This is not a small feat. Right. And so I think it shouldn’t be lost that we’re asking the entire supply chain to do something that’s never been done before. We may end this year as an industry increasing WFE by 50 billion just in one year. Of course, that was a slower rate in the beginning of the year than the end of the year.

So I think the accomplishments for the industry are really impressive.

Matthew Prescott Cantor (Analyst)

Thank you.

OPERATOR

All right, thank you very much. Our second question comes from the line of Chris Sankar of TD Cowen.

Chris Sankar (Analyst at TD Cowen)

Yeah, hi. Thanks for taking my question. John, you know, if you look at some of the big well known constraints out there, one is MFC, the other one is, you know, the rigid PCB drilling tool. You have a position in both of those and it looks like the constraint is coming from one of your Japanese competitors. I’m wondering, is there a chance for you to gain market share in both the MFC side and also the rigid PCB side?

TsengChung John Lee (President and CEO)

Yeah, I think for sure those are opportunities, especially since we’ve been delivering pretty well. I would say that in our prepared remarks, we did call out a little bit of the rigid PCB drilling business and how that has been very strong now and will continue to accelerate through 2027. And that is a lot of it driven by the fact that we’ve already been qualified. But there are constraints there and that’s opportunity for us. So yes, these are share gain opportunities, one of which we’re calling out already.

Chris Sankar (Analyst at TD Cowen)

Got it, got it. And then the other thing I just want to find out is that clearly you’ve been selling quite a bit of these tools this year on the E&P side. And my understanding is that the chemistry follows later. So is it fair to assume 2027, the chemistry revenues could be higher than 26 and what is its implication to gross margin?

TsengChung John Lee (President and CEO)

Yeah. So as you know, our gross margin for chemistry is higher than corporate average, significantly. And that remains the same. And so as that chemistry starts being put into the tools we have been delivering, we will get that tailwind in gross margin as the chemistry revenue increases. And I would say we are already seeing some of that chemistry revenue from the first tools that we have shipped several quarters ago. So that’s starting and obviously the shipment of tools has continued since three or four, maybe five, six quarters ago.

And so we expect that to accelerate in 27 and that chemistry revenue to come with that.

Chris Sankar (Analyst at TD Cowen)

Thanks, John.

TsengChung John Lee (President and CEO)

Thanks, Chris.

OPERATOR

Thank you very much. Our third question comes from the line of Melissa Withers. Go ahead.

Melissa Withers (Analyst)

Hi, thank you for the question. I guess following up on that gross margin point, can you help walk us through the different puts and takes as we go through next year? You’ve got some mix headwinds, you’ve got some capacity headwinds, but then you do have that chemistries piece and volumes are clearly going higher. So can you just kind of hold our hands as we walk through next year and how you’re thinking about gross margins?

Robert Eric Taranto (EVP & GM)

Yeah, sure. Hi Melissa, this is Rob. We are improving our gross margins as you noted. As we saw this quarter, we have improved it sequentially and year over year we continue to execute very well and we are translating that high revenue to higher gross margin, earnings, and cash flow. So in the past you have said we will be 47% plus and we are there now with the two headwinds you noted. That’s the investments we are making to improve capacity and capabilities and the mix impact from a fast-growing equipment mix.

So those two are masking our true underlying performance, if you may. In the near term, however, you know that this will turn to tailwinds in the longer term. We do have a path to a higher gross margin and that will come. The volume is certainly helping and ongoing improvement activities will help margins in 27. And in the near term we expect the margins to stay at these levels. But we do have a path to higher gross margins and we’ll talk more about that in a month in our investor day.

Melissa Withers (Analyst)

Perfect. Looking forward to that investor day. And then you called out in the prepared remarks the NAND upgrade spending. Maybe it seems like a rosier outlook on greenfield NAND spending for 2027. So can you give a little more color on these signals that you’re seeing in that market and kind of what’s changed and how you expect that to grow through the next couple years?

TsengChung John Lee (President and CEO)

Yeah, I think what we have seen is the NAND upgrade is in full swing. One of our biggest customers has mentioned that that’s been pulled in. And so we’re seeing that, we’re seeing the RF power that goes with those upgrades. So we’re really happy to see that. And of course this has no greenfields. And you know, the publicly announced greenfields are, you know, coming online kind of in the late 27, early 28 time frame. And so the equipment will go in, you know, hopefully a little bit before that.

So I think that upgrades will continue for the most part of 27, but then greenfields start taking off in the later half of 27 likely and into 28. And you hear every day, you know, another announcement about another NAND fab out in the future. So I think it’s a multi-year tailwind in terms of NAND equipment building that has to happen to support this AI infrastructure.

Melissa Withers (Analyst)

Thank you, both.

TsengChung John Lee (President and CEO)

Thanks, Melissa.

OPERATOR

Thank you very much. And our fourth question comes from the line of Steve Barger from KeyBanc.

Steve Barger (Analyst at KeyBanc Capital Markets)

You said chemistry equipment is sold out through 27, bookings extended to 28, and then the Guangzhou capacity doesn’t come on until the third quarter of next year. Can you help us frame the cadence of E&P growth next year? Like how much growth is constrained by available equipment capacity right now versus customer qualification timing? And just how should that larger consumable base allow chemistry revenue to grow faster than equipment revenue?

TsengChung John Lee (President and CEO)

Yeah, Steve, thanks for the question. I think I’ll give you a couple of pieces. So we are likely to grow chemistry equipment revenue to that 300 million range in 2026. And as we said in the prepared remarks, our historic peak has never exceeded 200 million. We hit that in 25 actually. And this year we’re at 300 plus and that’s without new factories. So that is really just using the factories we have, working with our partners, supply chain partners, to, you know, help us with their space, taking every bit of space we can while we prepare for the next set of capacity.

So and, you know, even though we’ve been able to increase our revenue by 50% without adding a factory, that is really why our bookings are booking out into 28. So there is obviously a constraint and, you know, we’ll try to pull in the Q3 2027 timeframe, but when that comes online, that doubles our equipment capacity. And so, you know, we’ll try to deliver that as fast as possible. And, you know, I think that will allow the revenue growth to accelerate towards 2H27 and on. Then the chemistry revenue, to your point, we have said it’s between 20 months to 30 months from the acceptance of a PO. There’s a six to eight month time frame to build the thing, there’s an installation period and there’s a qualification period at the customers and then there’s a ramp. As I said, some of that equipment that we shipped six or seven quarters ago is now seeing that chemistry revenue.

And we expect that to accelerate as more of that equipment gets qualified and that accelerates, especially if we continue putting more equipment in 2H27 and beyond.

Steve Barger (Analyst at KeyBanc Capital Markets)

Yeah, that is great detail. And looking forward, do you expect stability or maybe even improvement in attach rates as layer counts and process complexity increases? And can you talk about trends in chemical consumption per machine? Meaning are more complex boards driving higher chemical consumption per machine?

TsengChung John Lee (President and CEO)

Yeah, I’ll answer the second question a little easier. So each board is made one layer at a time, and so the consumption is pretty much consistent. It’s just that there are more layers and therefore more square inches of PCBs as layer count grows. So it’s really that. Now at the same time we’re making more complex PCBs so the chemistry is changing. We’re making different kinds of chemistries that allow you to fill smaller features, allows you to bond 80 layers together instead of 20 much better.

So all these technological innovations are occurring at the same time as we’re increasing the number of layers and shrinking the device sizes. And to your point, if you can provide that chemistry and that technology, it is much harder to displace that. There’s very little motivation to change that because it’s such a difficult process now. Kind of the same story as semi, the copy-exact idea in semi, which is it is so hard to make a chip work and there’s thousands of steps. You really don’t want to change anything. And I think we’re in a great position because the thesis for buying Atotech was to have the chemistry and the equipment knobs.

And when you have both knobs, you’re optimizing both. And therefore you’re going to come up with a solution that I think is much better and faster and harder to displace. And so we’re really happy with the position we’re in with our E&P business.

Steve Barger (Analyst at KeyBanc Capital Markets)

That’s great. Thank you.

TsengChung John Lee (President and CEO)

Thanks, Steve.

OPERATOR

Our fifth question comes from the line of Jim Ricchiuti of Needham & Company. Go ahead, please.

Jim Ricchiuti (Analyst at Needham & Company)

Hi, thanks. Good morning. You alluded a couple of times, I think, to this, but the growth that you’re seeing in chemistry, which I think you said was 75%, if I heard you correctly, in Q3, are you able to actually parse out how much of that is coming from legacy? Because you are beginning to see some initial revenues, I think you said, from the equipment that was installed over the last, call it six quarters or so, but any color on how much of that is coming from, if you will, the legacy hardware in the field?

Ramakumar Mayampurath (Chief Financial Officer)

Yeah, Jim, so I think what we said in the prepared remarks is that in Q3 chemistry revenue organically grew about 26% year over year. And of that, very little of it is this chemistry from new equipment that is just starting. So the vast majority of that chemistry growth is from installed equipment that’s already out there. I think that our year over year growth will be strong as well. And as equipment chemistry does come in with our equipment, you’ll see that percentage grow over time for sure.

And our growth rates for chemistry we think will also follow that.

Jim Ricchiuti (Analyst at Needham & Company)

Thanks for clarifying the growth in chemistry. That makes it a lot clearer with respect to the fact that you’re essentially out of capacity on the hardware side, even though you’re expanding. Have there been other options for customers that need capacity earlier or is this, do you think, more of an industry-wide phenomenon?

TsengChung John Lee (President and CEO)

Yeah, I think, you know, we talk to obviously the whole ecosystem of customers and I would just say that there are some that are much more aggressive in their expansion and some that are a little more measured, as you would expect, with a large fast array. But I would think, I would say that all of them are starting to accelerate. Whatever their original plan was, they are all starting to accelerate their pace. So there are some customers though that are making some really big investments and, you know, you probably follow them, and those are the customers that we certainly saw start earlier.

But now we see everybody kind of jumping in. Now,

Jim Ricchiuti (Analyst at Needham & Company)

John, any concerns that you see, and the question we get a lot is at what point do we get into an overbuild situation? And clearly the AI demand is driving this. But as you think about what you’re seeing in the market, do you have any concerns, what signs are you looking for that potentially things are, as you look out into 2027, potentially could get overheated on this side of the business since it is easier to add this kind of capacity?

TsengChung John Lee (President and CEO)

Yeah, yeah, you’re right, Jim. It’s a little faster to add capacity on the E&P side than the semi side. But I would say this: the things I look at are when data centers are built, are they turned on? So far the answer is absolutely yes. And then certainly if the people building those data centers are making money, and certainly they are. So I think those are the kind of signs we see now. We see the same thing, we hear the same things about, you know, pushback on data centers, etc. But the demand for the data centers and the ability to make money building those data centers is still very much intact.

And so those are the things we watch for, Jim, because, you know, we’ve been in semi a long time, you and us both, and we know the cycles change and they change fast. We’ve had a long history of being able to react very quickly because we’ve had to, having lived in semi for 65 or 75 years. And just a final point, our CapEx intensity is still very low, Jim. We’re doing 3 to 5% as our CapEx intensity while we’re building a semi fab as well as chemistry equipment factories.

So, you know, in terms of the financial strength we have, relatively small risk for us.

Jim Ricchiuti (Analyst at Needham & Company)

Got it. Thank you.

TsengChung John Lee (President and CEO)

Thanks, Jim.

OPERATOR

Thank you very much. Our sixth question comes from the line of Vijay Rakesh of Mizuho.

Vijay Rakesh (Analyst at Mizuho)

Congratulations on a good quarter and guide here. Just on the, as I look at your semis and E&P, looks like you’re growing a lot faster than WFE. It looks like growing almost 40% year on year. Given the visibility that you have out to 27, 28, you mentioned 300 billion WFE, would you expect the growth to kind of track in those same ranges as you go out? Just wanted to get some more visibility on those two big markets. Thanks. And a quick follow up.

TsengChung John Lee (President and CEO)

Yeah, thanks for the question, Vijay. I think I would comment on this. When you look at our growth rates in semi for the first 4/4 of ’26 relative to WFE, you’ll see that it took a couple of quarters to rev up and Q3 was the quarter where we started to materially exceed WFE. And that’s just because it takes time to rev up the entire supply chain. So we’re kind of in that phase where for MKS the engine is humming and we’re ready to continue accelerating that build and, you know, for the next visit, you know, for the next several quarters, if not a year or two, we see that we’ll continue to have to accelerate this.

This is the feedback our customers are giving us. And as we’ve said in the past, that’s usually the time when we overperform and exceed WFE by a large factor. So I think that’s kind of our expectations. Then to your point, at some point things flatten and the thing comes down. So I think that’s still far away. At least that’s the customer conversations we’re having. So I think you’ll start seeing us continue to accelerate our performance, overperformance relative to WFE in the coming quarters.

Vijay Rakesh (Analyst at Mizuho)

Got it. And just a quick one for Ram. When you look at the gross margin side, just wondering, are you seeing any ASP tailwinds on the equipment side or the material chemistry side? Given how tight things are, or given how some of the chemistry costs have gone up, I guess. Are you contemplating any price increases, ASP increases into like ’27, ’28? Thanks.

Ramakumar Mayampurath (Chief Financial Officer)

Yeah, hi, thanks… Can you hear me? So there are pockets of inflation that we are seeing. It’s not widespread so far and we always try and balance our cost and price. Cost is always a reference point for our pricing decisions. So it could increase in the second half and into ’27. But right now we are seeing certain pockets of inflation.

OPERATOR

Yes. Yeah, yeah.

TsengChung John Lee (President and CEO)

And Vijay, it’s John. I would say too that we’ve always tried to get value pricing for the technology we bring. And this is an environment where there’s a lot more need for that technology. And so we are continuing to do that and to accelerate that, you know, that value-based pricing.

Vijay Rakesh (Analyst at Mizuho)

Got it. Thank you.

OPERATOR

Thank you very much. Our next question comes from the line of Elizabeth Sun of Citigroup. Go ahead.

Elizabeth Sun (Analyst at Citigroup)

Good morning. Thanks for taking my question. I guess my first question is on the, if we look into next year. So this year semis and EMP are going at similar rates, both around 40%, and next year semis clearly outperforming WFE again. And just if I think about the growth in EMP, are you seeing again similar growth with the semi side or can you outperform or grow slower than the semi side?

TsengChung John Lee (President and CEO)

Good morning, Elizabeth. I would say this, the difference between the semi side and the EMP side is that the EMP side has a consumables component to it which does not grow as fast as a CapEx component. And I think that’s just normal, whereas the semi side is all CapEx. So the expectation would be that the semi side would, as we start accelerating, the supply chain revs up. That should grow faster than EMP, but not necessarily the equipment side of EMP.

As we talked about, the equipment side of EMP is sold out through ’27 and now we have lasers in it as well as chemistry equipment. So I think that’s the only difference, Elizabeth, I would call out: a CapEx-only market in semi and a consumables plus CapEx market in the EMP side. And so the growth rate should track those kinds of businesses.

Elizabeth Sun (Analyst at Citigroup)

Thanks, that’s helpful. And then on the supply chain side, obviously you are doing a much better job right now, giving a lot of visibilities to your suppliers. But I’m just curious, are you seeing any supply chain constraint right now for your own? And is this kind of like Q4 guide, and if we look into the next couple of quarters next year, is your growth kind of supply constrained? Obviously it’s very strong growth, but if there is no supply, can you do better?

TsengChung John Lee (President and CEO)

I would say this. Our supply chain is an incredible group of people that have really stepped up. We just had our supplier day, met with all the key CEOs. They are all behind us, investing and hiring people. I would say this, there’s always a golden screw. Something happens, a yield bust happens somewhere further down the supply chain that even our suppliers can’t control. That’s happening but still really relatively in control for us, at least in our supply chain.

So I would say the revenue and the guidance we’re giving is very little constrained from our supply chain, and that may change over time. But right now we believe that our supply chain is quite strong, maybe unique, in that they have been stepping up and helping us deliver to our customers.

Elizabeth Sun (Analyst at Citigroup)

That’s great to hear. Thanks, John.

OPERATOR

Thank you very much. Our next question comes from the line of Shane Brett of Morgan Stanley. Go ahead please.

Shane Brett (Analyst at Morgan Stanley)

On Krish’s earlier question on rigid PCB, would you be able to quantify how much of your E&P tools business comes from rigid PCB application at the moment? My assumption is the majority of your lasers are for flex. I’m asking this question because my understanding is that the TAM for rigid is multiples of flex. If you do have the capacity to deliver tools, just how big can this opportunity get for you in ’27 and ’28? Thank you.

TsengChung John Lee (President and CEO)

Yeah, Shane, good question. I think, you know, for flex, flex was pretty strong in Q3, but flex has that seasonality to it because of consumer product cycles. So we expect it to come down in Q4, kind of the low point Q1, and then it goes up in Q2, Q3. So we’re seeing that. So the guidance for the future rigid drilling is—or the laser drilling is—really rigid, and you’re right, the rigid drilling market is multiples times bigger than the flex market.

And so that’s a huge opportunity for us. And as you know, we started this business many years ago and have had some success, but not as much as we wanted. And now the market is giving us this opportunity and we’re working extremely hard, you can imagine, to expand our capacity, expand the supply chain for that particular product line as well. So we’ll report more on it going forward. And as we said, we expect that to accelerate through 2027.

Shane Brett (Analyst at Morgan Stanley)

That’s exciting to hear. And for my follow-up, I was going to ask about semi. If I look to prior cycles, share gains across subsystem players have been more about OEM or customer performance more than anything. But a lot of smaller suppliers haven’t been able to keep up with the OEMs this year and may have difficulty next year. But you guys have executed adding a lot of inventory in advance just beyond your end market exposure. Do you think your scale and execution has led to share gains this year and can contribute to outgrowth next year as well?

That is, are your OEMs giving you a lot more responsibility given the performance this year? Thank you.

TsengChung John Lee (President and CEO)

Yeah, that’s a question. I would say this, yes. OEMs, our customers, are certainly asking everybody, including us, if we can get more, if we can get more and deliver more. And I think in some of those opportunities they are share gain opportunities. I would say that quantifying it is a little difficult, but I would say it’s pretty small in ’26 because this is just kind of a recent phenomena, and we’ll see in ’27 if that becomes more material. The only thing we’ve talked about is laser drilling for sure.

But in semi, I think that could be a more interesting number. I think size does matter now. I think even we, as well as our customers, all think about our supply chains and their ability to scale. As I said earlier in the remarks, we never asked the industry to scale by $50 billion in one year. So in order to do that, you have to have companies that can actually make those kinds of investments in inventory and factories. And fortunately MKS has the financial strength to do that and we are doing that. You saw us taking a lot of inventory very quickly.

You’ve heard us talking about building the factories. So I think when you’re trying to grow at this kind of scale, $50 billion a year, you have to be big. And so if you’re not, or not willing to spend those investments, then I think you’ll get left behind for sure.

Shane Brett (Analyst at Morgan Stanley)

Great. Thank you.

TsengChung John Lee (President and CEO)

Thanks, Shane.

OPERATOR

Thank you very much. Our next question comes from the line of Wells Fargo, Joe Quattrucci.

Joe Quattrucci (Analyst at Wells Fargo)

Yeah, thanks for taking the question.

OPERATOR

Please go ahead.

Joe Quattrucci (Analyst at Wells Fargo)

Thanks. Maybe on the gross margin side, can you quantify just the impact within the guidance that’s related to the chemicals, equipment mix and capacity investments that you’re making? And then historically you guys have been kind of incremental gross margin around 50%. But given that chemicals continues to increase in mix, why should we not think about that being potentially higher?

Ramakumar Mayampurath (Chief Financial Officer)

Yeah. Hi Joe. Let me talk about near term versus longer term. In the near term, it is a mix between investments we need to make and the mix impact from the ramping chemistry equipment sales. And as we have said before, both these will turn to tailwinds. So in the longer term, to your second question, gross margin could be higher than 50% incremental on incremental sales. And we’ll talk more about that again on the investor day. But in the near term, we have ongoing programs to offset most of that in 2027.

There will be a meaningful impact, especially from accelerating chemistry equipment investments. Step up happened in Q2 and now will stay at these levels. There won’t be much incremental investments for building chip manufacturing capabilities into ’27. It will stay at these levels through most of ’27. But you will see some incremental impact from chemistry equipment accelerating sales. And we have a path to higher gross margin beyond that. We’ll get to the puts and takes of that again in the investor day.

But to your question, in the short term, we will maintain that 50% incremental gross margin on sales. In the longer term, it can be higher than 50%. I’ll also say that we are making great progress in our operating margin. Operating margin is well above the 40% we have talked about driving scale. And as that top line continues to grow, we’ll drive more scale out of our opex.

Joe Quattrucci (Analyst at Wells Fargo)

Thanks for that. And then, you know, you guys announced a $500 million share repo authorization. Historically, MKS hasn’t really been a big participant in share repurchase. So maybe can you talk about just the focus of excess cash flow for share repo versus debt reduction?

Ramakumar Mayampurath (Chief Financial Officer)

Sure. So we welcome that authorization. The $500 million authorization just gives us more optionality and flexibility. And as you noted, we are moving to a new phase now. The balance sheet is strong and that has happened mostly because of the cash flow we are generating and the disciplined approach to managing debt. So we have stayed focused on that for several quarters now. And we are moving to a phase where our balance sheet is now strong. And the growth we see ahead will further strengthen our cash position.

So making investments necessary to support organic growth and managing our debt will remain top priorities. But we actively look at opportunistic buyback going forward.

OPERATOR

Thanks. Thank you very much. And our next question comes from the line of James from Goldman Sachs. Go ahead, please.

James (Analyst at Goldman Sachs)

Good morning. Thanks for taking my question. I was wondering if you could maybe just comment on the outlook for 2027 for WFE up 35% or so. Do you see—clearly you’re not supply constrained—but I’m wondering if some of your peers are to a point where you see any problems with the industry actually achieving that from a supply perspective? I guess the question is, do you think there’s a point in time where your own shipments could get impacted because of supply constraints from others that are also selling into your customers?

TsengChung John Lee (President and CEO)

James, I’ll take a crack. I think that’s logical. I think what you say is logical. I think for our customers to build a whole tool, they need all the parts. If someone else can’t deliver a very critical part that we don’t make, let’s say, that will certainly constrain us for sure. And that’s really an industry commentary. Right. I think just as an anecdote, you know as well as we do, when we came into ’26, we thought 135 billion was going to be awesome, right from 115 billion WFE. And then that went to 145 and 155 and now people are talking about 160. And so what that says is everybody in the industry, everybody making all the parts, was able to come through. So I think we’ll see what happens. But certainly increasing another 40 or 50 billion will be a challenge.

But I think we are certainly going to be ahead of that and I think many of our peers will try to do the same.

Jim Ricchiuti (Analyst at Needham & Company)

That’s helpful. Thank you, John. And then maybe on the gross margin side, I know this may be something you cover at the investor day in a month or so, but can you maybe kind of comment on your ability to drive any kind of like-for-like pricing resets as we head into the calendar year 2027 and whether that can actually contribute to some gross margin uplift beyond the factors you already talked about?

TsengChung John Lee (President and CEO)

Yeah, I think as I said, we are continuously looking at getting value pricing for what we deliver. And those discussions, I would just comment, it’s an environment where it’s a little more conducive to those discussions. Just because everybody understands constraints, everybody understands that inflation is happening and everybody understands that those suppliers that can deliver — that’s another leg of value beyond the technology. So if a supplier can deliver, that is very valuable to our customers.

And so that gives us another leg up in terms of being able to have those pricing discussions. Thank you. Thanks, Jim.

OPERATOR

Thank you all very much. And our last question comes from the line of Michael from Bank of America.

Michael (Analyst at Bank of America)

Hi, thanks so much for taking my question. My first question is just on the competitive landscape, particularly in China. Are you seeing any meaningful domestic competitors from China, whether in chemistry equipment or laser drilling systems? I know in some cases these are probably customers as well, but are you seeing these customers more when you attempt to qualify at some of your local customers there? And also on the chemistry side too, has there been any sort of change in the competitive dynamics related to the chemistry consumable landscape within China as well?

Thank you.

TsengChung John Lee (President and CEO)

Yeah, Mike, I would say that for chemistry equipment we provide the industry-leading equipment that enables HDI and MLB processing. And so there are always competitors in China and other countries as well. But I would say when you’re pushing technology you kind of need the most advanced tools. So I think our position in chemistry equipment is very strong. With laser drilling, as we talked about, our market share had been very small in the past and now, while the technology has been qualified, the volume wasn’t there until now. And again, this was an industry constraint challenge that we are benefiting from, and we’re going to try to take as much share as we can. So that’s really more a commentary on the industry rather than a China-specific competitor or a non-China-specific competitor.

And then in terms of chemistry, I would say the same thing is happening. The chemistry needs to be better, needs to have more innovation in it. And those competitors are usually in other countries — U.S. competitors, Japanese competitors, etc., highly technological competitors. Many of our competitors in China in the past have been more on cost, competing on cost. And so as technology evolves — and that’s our strategy, right, which is to be in markets where technology continuously evolves — therefore we are always concerned about competitors, but really it’s about innovation competitors at this point.

Michael (Analyst at Bank of America)

Great, thank you. And I think you mentioned an important pulse DC power design win for a pretty significant conductor etch application. Could you talk about SMORCA share gain at an existing customer or new customer, and how do we think about the content on a dollar-per-tool basis maybe relative to something like your standard RF power product?

TsengChung John Lee (President and CEO)

Yeah, thanks for the question. So there’s an inflection going on in conductor etch using something called pulse DC, and that’s an opportunity anytime technology changes and inflections occur. And we’ve been using and doing pulse DC in dielectric etch, which has been our strength. And so, you know, we usually don’t talk about design wins until after we’ve won, and that’s why we’re calling this one out. This is with — obviously there are not a lot of potential customers there — it’s a customer of ours for other products.

But this particular application is something we were not in and is displacing the incumbent. And I’m not going to get into dollar terms, but I would say this: we called it out because we believe it will be significant in the future. But hopefully it’s just the beginning of the use of our technology, our pulse DC technology, in the conductor application. So that’s probably all I’d add to it, Michael.

OPERATOR

Thank you very much. There are no further questions at this tim