Q2 2020 MKS Instruments Inc Earnings Call
Okay US instruments second quarter earnings conference call at this time, all participants will be in listen only mode. Later, well have a question and answer session and instructions will be given at that time I.
I would now like to introduce your host for today's conference. They they whichever vice President of Investor Relations. Sir. Please go ahead.
Good morning, everyone I'm, David Ryzhik, Vice President of Investor Relations and I'm joined this morning by John Lee, President and Chief Executive Officer, and Seth Bagshaw, Senior Vice President and Chief Financial Officer.
Yesterday after market close we released our financial results for the second quarter of 2020, which are posted to our website www dot MKS I N S T dot 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 into most recent annual report.
On form 10-K, and any subsequent quarterly reports on form 10-Q, four the company.
These statements represent the company's expectations only as of today and should not be relied upon as representing the companys 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 non-GAAP financial measures. Please refer to our press release for information regarding our non-GAAP financial results.
And a reconciliation of our GAAP and non-GAAP financial measures now I'll turn the call over to John.
Thanks, David.
Hi, everyone and thanks for joining us today.
Okay. That's delivered strong second quarter revenue of $544 million above the high end of our guidance range.
Non-GAAP net earnings were $89 million or Dollarssixty two per diluted share, which was also above the high end of our guidance range.
As we noted on our Q1 earnings call second quarter guidance assumed a negative impact to revenue.
Hope in 19 shelter in place disruptions.
However, our factory constraints east throughout the quarter by working closely with our suppliers, we were able to deliver strong results.
I'm very proud of our worldwide team, how we continue to manage through cobot 19 challenges not compromising our relentless focus on serving our customers.
The company 19 pandemic remains fluid and we continue to monitor its impact on our global operations and will respond as necessary.
Sales to our semiconductor market grew sequentially driven by all product categories, but most notably by our power solutions business.
One of the strengths of our surround the chamber strategy and brought your expertise is our ability to see technology inflections on the horizon.
To proactively address these market needs.
Several years ago, we decided to strategically invest in our power solutions business in order to solve the critical etch challenges presented by extreme vertical scaling.
I'm happy to announce that in the second quarter, we delivered record revenue in this business.
Demand for our market, leading pressure measurement solutions was also strong and we secured several design wins on a dance deposition and etch tools.
Our plasma reactive gas portfolio continues to gain traction and atomic layer deposition and advanced what clean applications in L.D., we secured two design wins for our remote plasma sources, one of which includes a key design win at a leading OEM.
We also secured several design wins for our dissolved reacted gas solutions, which are becoming more important in an increasing number of applications for leading edge semiconductor manufacturing.
Our optical components and subsystems are a key strategic growth initiatives within our semiconductor market.
We see an attractive opportunity to strengthen our optical capability.
To help solve critical challenges across lithography metrology and inspection applications and we are investing accordingly in what we have termed world class optics.
Very pleased to announce that we have already secured double digit design wins over the past 18 months.
As we look into the third quarter, we expect some cancer demands remain healthy and we estimate our semiconductor revenue to increase sequentially.
Within our dance markets, we experienced strong growth in PCB drilling applications offset primarily by lower revenue from certain industrial applications. As a result of the softer macro environment and government restrictions on customers, whose businesses were designated as non essential.
As a reminder, within our advanced markets, we are especially excited about the long term opportunity in advanced electronics manufacturing, which is a key driver of precision laser based processes.
Enable miniaturization and increased functionality.
I'm curious is positioned to be a key beneficiary of these trends.
Given our unique portfolio and expertise across lasers optics, <unk> photonics motion and laser based assistance.
In the second quarter, we secured a meaningful laser design wins for a solar application with the key OEM customer and we see continued strong interest in our lasers across the PCB display in advanced packaging applications.
Moreover, we have secured more than 10 design wins in the first 12 months since introducing our new Pico second you'd be lasers, several in the second quarter alone.
Revenue from our equipment and solutions division exceeded our expectations led by strong demand for a flex PCB via drilling system.
Well unit volume and content or important drivers of such PCB capacity demand.
Requirements also drive technology transitions, such as the need for smaller and more accurately place because as long as advanced materials specifications for Fiveg antennas.
We believe we are well positioned to address these critical technology transitions, leading edge capstone less PCB solution.
Testing of our new high density interconnect drilling tool continues to progress that's plant and we have received positive feedback from our beta customers. In fact, we're pleased to announce that one of our beta customers had success, we qualified our HDR tool, which represents a major milestone for MKS and a key validate.
One of our HDR technology.
As a reminder, 2020 remains a year focused on qualification of our beta tools and we're optimistic we will begin generating meaningful revenue in 2021.
We are encouraged by the overall stability in our advanced markets. During the second quarter. So we expect this ability to continue in the third quarter as we project seasonal softness in our flex PCB systems business.
Offset by a recovery in revenue from certain industrial applications.
Before I turn the call over to so I'd like to comment on the recent changes in export rules announced by the department of Commerce, which went into effect during May and June.
Our global team has completed the world to ensure compliance with the new rules if carefully evaluated these regulations and we currently do not expect them to have any significant impact on our financial results.
We will continue to monitor and respond to any changes in the regulatory environment as necessary.
Now I'd like to turn call over to set.
Thank you John will cover our second quarter results they provide additional detail a third quarter guidance.
Sales for the second quarter $544 million up 2% sequentially and 50% year over year.
This strong performance reflects continued strength in our semiconductor market.
As well as exceptional efforts and managing shelter in place restrictions throughout a worldwide manufacturing and service operations.
The second quarter semiconductor sales were $321 million up 3% sequentially and up 50% year over year, reflecting strong industry fundamentals.
Sales were to dance markets with $223 million consistent with the first quarter.
As John mentioned strengthen advanced electronics manufacturing applications led by demand for a flexible PCB drilling systems were offset by lower revenue from certain industrial applications.
Addition, revenue from our research market was consistent with the first quarter levels, which was better than we anticipated as to me it appears to have stabilized.
For the quarter revenue split between the semiconductor and a dance markets was 59% in 41% respectively.
Second quarter non-GAAP gross margin was 45.3%.
Sequential increase of 60 basis points in 180 basis points above the midpoint of our guidance range due to higher volume.
In favorable product mix.
Non-GAAP operating expenses were $129 million you sequential decrease reflecting our continued focus on cost control, even with higher than anticipated revenue volumes.
Second quarter non-GAAP operating margin was 21.6%.
A sequential increase of 110 basis points, reflecting strong theme to leverage in our operating model.
Non-GAAP net interest expense for the second quarter was $7 million and our non-GAAP tax rate, which reflects the higher U.S. mix of taxable income was 18.5%.
Non-GAAP net earnings for the second quarter $89 million or $1.62 cents per diluted share, which exceeded the high end of our guidance range.
In the second quarter revenue from our equipment solutions Division was $64 million, a sequential increase of 25% driven by strong demand for our flex PCB via drilling solutions.
We expect revenue from our equipment solutions division to decrease sequentially, the third quarter, reflecting typical seasonal decline in the flex PCB drilling market.
Equipment solutions non-GAAP gross margin increased 90 basis points sequentially to 46.5% in the second quarter driven by product mix in higher volume.
Last quarter, we announced the integration of the OSI acquisition was substantially complete and we achieved our target of $15 million of annualized cost synergies well ahead of schedule.
We're pleased to announce it actually this quarter, we increased these savings if now realize they totaled $17 million an annualized cost synergies.
Now turning to the balance sheet, that's in the second quarter, we take a strong balance sheet liquidity with cash and short term investments of $607 million in $100 million incremental borrowing capacity under an asset that credit subject to certain borrowing base requirements.
Our net leverage ratio further decreased 2.5 times, highlighting our ability to generate strong EBITDA in cash flow.
Also in the second quarter made a dividend payment of $11 million.20 per share.
In terms of working capital days sales outstanding was 64 days at the end of the second quarter.
Compared to 65 days at the end of the first quarter.
Inventory turns with 2.4 times compared to 2.5 times in the first quarter.
Free cash flow for the quarter. It was a record at $118 million were 22% up revenue included $21 million of capital expenditures.
Operating cash flow of $139 million was also the record for the quarter.
I'll now turn to our third quarter outlook.
Based on current business levels, we estimate that are rather than third quarter could range from $535 million to $585 million.
We estimate that are non gap, a third quarter non-GAAP gross margin could range from 44.5% to 46.5%.
Like anticipated product mix in revenue levels.
Third quarter, non-GAAP operating expenses could range from $126 million.
$134 million.
R&D expenses could range from $41 billion to $44 million.
In FCD expenses could range from $85 million to $90 million.
Non-GAAP interest expense estimated to be approximately $6 million.
And our non-GAAP tax rate expected to be approximately 18%.
Given these assumptions third quarter non-GAAP net earnings could range from $86 million to $108 million.
Or $1.55 cents to $1.95 cents per diluted share.
I'd like to now turn the call back the operator for Q1 day.
Certainly ladies and gentlemen, as a reminder to ask a question.
The press Star one on your telephone.
Question. Please press the pound.
Once again, so I wanted to ask a question.
First question comes from the line of Patrick Ho Stifel. Your line is now open.
Thank you very much and congrats on the nice quarter a job maybe first off you mentioned the gains you made on the power solutions business, particularly for etch applications can you detail just a little more color on the types of etch applications that they're in R&D for like high aspect ratio.
At shoes, and some of the more complicated processes that we're seeing today.
Hi, Patrick you have to comment on that I think historically, we've had a strong leadership and dialectic edge for high aspect ratio at processes. That's continued but in addition to that we were also seeing meaningful revenue now and conductor etch and so its combination of both majority is still a dialectic etch for.
Hi aspect ratio, which we're seeing both now.
Great that's helpful and maybe on the advanced market side, obviously, the macro economy is having some pressure on some of these industrial markets do you believe that that's the only variable that will eventually.
Cause a turn in that business or are there other I guess, a company specific or industry specific variables that we should be looking out for.
Yeah, I think are the only other thing I would point out Patrick is any kind of trade tensions that either will ease up or well could get worse. So that we had noted in the past has affected you kind of the das markets as well so that would be an additional one that we always keep but keep in island.
[noise] Gray and find a question for me for Seth in terms of Opex.
Been strong.
During the June quarter, and looks like it continues to be managed well going into September not part of that probably is also less travel and less expenses on some of those type of.
Areas, how do you look at op ex particularly as the environment starts to normalize somewhat and you get to cool back to normal conditions, where you know travel picks up again and things of that nature.
Yes. Good question Patrick So you are DNA is obviously means the cost structure pretty.
Actually no matter what part of the cycle. We're on so there's definitely some savings in the quarter for to your point lower travel. It's also higher compensation in the quarter, because we're performing better than we expected coming into the year. So I think those wouldn't net out in the second quarter in in Q3 as well. So I would say looking forward there will be a little exam.
To pre called levels, a little more travel, but they're really not significant numbers relative to current run rates and the business.
Great. Thank you again.
Yep likes Patrick.
Thank you and our next question comes from the line of Krish Sankar Cowen and company. Your line is open.
Yeah, Hi, including my question. Another couple of them John just one of the pulled up on the public supply you said, you're seeing traction and conductor etch and.
Look at the industry incrementally the spending on the memories and it's coming from now and so that's kinda probably ties in with the condo construction. So I just wanted to basically the true and if that's true how will your public supply business trend as the memory mix shifts toward de though.
Yeah, I think some that is true krish or some of the conductor etch is being driven by NAND, but I think the those can customers will also be equally effective or have share. When it goes the DRAM. So I think between V NAND and DRAM I don't expect.
Large difference logic would be probably a different story.
Got it setting up and then I know you see a good clarity into this but do you think at some point either.
Picking up of this year, you'll semi OEM customers like Bill in mid three or do you think they're going to just to be let's see first why did you think they're going to be more.
Pragmatic about it.
It's tough to say the history of said that inventory always gets built up after multiple quarters of up into the right.
I don't really can't comment on what our Oems are doing at this moment, but that tends to just go that way as people start getting ready to make sure that they have enough material.
In their factories.
Got it and then John if I can just squeeze then a question on the non semi business on the PCB drilling pad is the demands to me smart phone are you seeing other application and then in September you said the needs of business is going to recover do you think that the cyclical inflection for the industry laser business is it do too early to call. It.
Thank you.
Yeah, I would say before the flex PCB drilled and that's really driven by flex circuits and that is still mostly driven by smartphones, but as we've commented in past other peripheral types of devices like air pods, and I pads and things like that are also having increasing their flex content.
So I think it's still mostly smartphones, but other devices are also driving it.
Then with respect to recovery lasers, as we have talked about its really about pulse lasers for us versus fiber lasers.
And so I think.
We're just happy with the current status things have stabilized Bristol.
Working very closely with OEM partners, there and that activity it hasn't really changed stabilized.
Thanks, John.
Thanks, Chris.
Our next question comes from Jim.
Needham and company your line is open.
Hi, Good morning up just question on the equipment business sounds like you're seeing some deceleration there you've had a couple of really strong quarters I'm wondering what kind of monocytes you have in that business. If you look out beyond the next quarter or so are you seeing.
Perhaps some signs that maybe we're in for a longer pause or do you expect that to the bookings to start picking up again.
Hi, Jim is John I assume you can trigger every front that the semiconductor market right.
Yeah, I'm, referring to the flex.
Business, China, It sounds like you've got some couple of good quarters in the with the aside business and I know that business can be a.
Clearly oh volatile quarter to quarter, but what do you see in terms or what are you hearing from your customers. If you look out over the next couple of quarters.
Yeah, I think you know generally.
As expected you know you use you have some of this discussion in Q1, you see some orders picked up and you see some delivery and then of course Q2, the big quarter.
And so I think that's what you're seeing now I think if you kind of look at Q3.
It's usually goes back down and then it's really determined by weather you know that smartphone cycle really picks up beyond the expectations of what our customers expect to build today and so it can actually go back up a little bits or or as we expect it will go down and that's really going to be depend.
Then on how popular some of the new models the phones are and whether smartphones in general start picking up and in the second half of the year.
Got it and then on the advanced markets side of the business I'm looking at that business again ex the 70 piece Youre.
Expecting some recovery in the industrial it also sounds like.
We've heard this from others as well, but it's been a little bit more challenging getting into some of the research and labs.
Because of cold. It are you anticipating that freeing up a little bit as you look out into the second half.
Yeah for a week, especially research we were expecting that we would have a full quarter's worth of limitations on getting into research labs in Q2, and we didn't see that we actually saw it stabilize relative to Q1, which did see you know kind of half a quarter's worth of those kinds of restrictions.
Kind of expecting it to be stabilized going forward. Some regions started opening up and some regions.
Take a little longer so with respect to research, we kind of a planning on being stable going forward.
Got it thank you.
Thanks, Jim.
Thank you.
Income from a line of Sidney Ho with Deutsche Bank. Your line is open.
Great. Thank you very much for the questions.
My first question is I see that the a and in terms of revenue guidance for Q3, I see that the range of that guidance is now back to the more normal levels of $15 million.
Is that an indication that you guys feel there won't be much of an impact from that disruptions from Nida you all operations all your supply chain and maybe its is just related that how would you characterize your visibility for system prequaled at levels.
Maybe in terms of backlog coverage or lead times, what other metrics you want to share.
Yes. This is a soft so you're right we did tighten the range up this this.
Third quarter back to pre covert levels and you're right. That's indication we feel supply chain operations are much more yes really in better shape now than entering the second quarter. So that's a and that's why we overachieved in the quarter as well. So that's it's true statement.
Ability I would say, it's still very similar I mean, you know for the semi side of the houseware turns business a little well book in turn a lot in the same quarter.
That's true in the light and motion division as well. So I think the visibility is similar now that was before I think it we said just getting prepared remarks, and John section. This still with covert 19, a level of fluidity out there that will gap to be aware of it because of.
I would say right now nothing.
Uniquely different there, we're seeing visibility now there wasnt a pre pre coffee level.
Great maybe follow up to that do you think your shipment in Q3 is now reflecting D and consumption by your customers or this had reflects some sort of catch up demand from the previous two quarters on the Conversely to asset same question do you think they may be some inventory build play customer because last night wanting to customers did talk about.
Building some inventory to meet a Q3.
This is John I could take that I think as you know, we kind of front run our OEM customers. So yeah. We've shipped a lot in Q2 as we're talking about today, we expect that Q3 will ship even more slightly more.
So I really can't comment on how much inventory, they're building versus getting their their equipment out.
Certainly seems to be a strong market right now and Ah.
Earlier.
As the you know the market goes up into the right and continues there's always a little bit inventory build but we're still kinda in the early innings of the just the cycle.
Okay. That's helpful. Maybe one last one for me maybe sticking with the semi side a base in the first three quarters, including you know Thequarter guidance, you will semi business will be out 40, 50% and year over year first as a market. It's more like a 10% to 20% I mean, we've seen that kinda outperformance before in like let's say 2017.
But that's when W.F. He was a lot stronger, especially for memory is still wait to parse out your growth rate this year between market growth, maybe little bit inventory restocking.
Maybe some market share growth and then maybe whether that's from existing products and new products that you guys talk about will be the our power deals and solutions whale, the et cetera, just trying to understand how how to think about that did the difference between a yield growth into market growth. Thanks.
I'll take a stab at density so you're right we are over cheating versus EFI estimates in it in the year to date, so far and as John mentioned some of that is typically a pre run on inventory at a ramp environment.
But for the launch or we have outperformed the semi markets. While reasons you mentioned technology provide is essential for next nodes and technology application. So in the long term, we do we do outperform the fee estimates or actuals in the industry just hard.
You are really quantify that kind of a nine month caught.
So it's really a little bit of a building around its market share gains is growth in the power solutions business and we again the long term outperformed demographic. So its number of those factors in there, but it's just hard to quantify in kind of nine months wise, what those pieces are.
Great. Thank you.
Yes.
Thank you and then next question comes from a line of Amanda Scarnati Citi. Your line is open.
Hi, good morning.
First question I have is on China, and where are you seeing any sort of signs of a pull enough demand head of these commerce Department regulation, taking place I know you said, you're not seeing any sort of material impact from the regulations and so what do you think any of your customers were kind of taking all that more of a cautious approach.
Hi, Ben It's John Yeah, We look we look at that all the time and.
It was always a little variation, but we're certainly not seen any kind of large move in that kind of direction. You know we talked a lot of these customers of all time.
We still think they're ordering for what they need and not trying to pull and so that's that's been our view today for our business in China.
Great and then on the PCB side of the business can you just help me understand the seasonality in that business, we look I sort of three Q4 smartphone.
Yeah suppliers for the chip that typically tends to be a stronger seasonal quarter, and we're certainly seeing that and guidance coming up this quarter. We're calling person you know seasonally down September quarter, you just talk about how that transmission work and the PC. Besides the best for you.
Yeah, I think its a.
Easy to explain I think you know our customers are the people who need tools, our tools to make pcbs and so of course as you pointed out those smartphone makers need their parts in that Q3 timeframe, which means that the factories that make those parts how that equipment in kind of.
During the Q2 time frame. So that's really kind of how we look at that Quarterized change difference between when our PCB equipment sales goes up versus the industry, what chip revenue for smartphones goes up.
That makes sense.
Yes, I thought.
And then the last question I have I could squeeze it is on the power side of the business are you starting to see any significant growth from logic and foundry I know you mentioned that you are certain kept them conductor etch stuff there and is there any growth that you're seeing from there's a sort of expected for maybe 2021.
Yes, no as I mentioned earlier the.
Growth in powerful conductor etch isn't your question is still mostly a memory driven at this point for us.
Hi, Thank you.
Thanks him into.
Thank you next question.
From the line of Joe.
With Wells Fargo Your line of open.
Yeah. Thanks for taking the question congrats on solid results, maybe first and if you could kinda talk about Oh, the 10 Pico second laser Wednesday, you've had how should we thinking about the timing of a ramp of revenue for those over the next few quarters.
Joe So I'll take a crack at that I think lobbyist design wins for lasers, I can't turn into a you know the volume revenue quite quickly actually it just depends on the various customers and so it's hard to I'm kind of expect that but it's certainly not in that kind of timeframe.
For like semi design wins, where it could be a couple of years before you see volume a these can actually turn.
Within six months 18 months I think that it's kind of the sweet spot so maybe longer than some could be even quicker.
Also wanted to clarify a little bit you know when we say we we.
I saw some industrial.
Markets that were a little league in Q2 it wasn't it wasn't in the lasers are laser business has been actually very consistent and strong.
That's helpful and then on the semi side you talked about a you know securing a number of wins a around optics over the last 18 months can you talk about what's driving that and just you know is that an area of investment going forward that maybe we should think about a larger focus on.
Yeah. Thanks, a question I think that is an area of focus for us. So those 18 or those those design wins over the last 18 months.
We're all we only count the ones that we want because of the investments. We've made that were different from before so we had other design wins, but that was with our previous technology. So we actually invested in new technology processes, new capabilities in process engineering talent.
And so they're very specific investments, we made and you know at Emcare, we'd like to we'd like to keep track of things. So that investment is really tracked towards these design wins and so basically what we're expanding our capabilities. So that we can serve those customers with capability, we were not able to before and so that's really exciting.
For us.
Thank you.
Thanks, Joe.
Thank you and once again, ladies and gentlemen, if you do have a question at this time.
The star in the number one.
So.
Our next question comes from Mark Miller with Benchmark Company. Your line is open congratulations wonder quarter in the gardens. It's impressive I'll just wanted to talk a little about the margins margins came at upside to the guidance by about 180 basis points, you indicated mixon volumes in terms of mix, specifically what drove the higher than expected.
Margins was the power solutions.
I would say Mark in general the volume was lot high we expect incentive that's the number one drive in terms of normal margins to your point, we usually see it but at 50 cents variable gross margin in this quarter as more thinking the 80% range sequentially versus Q1, the factories are running.
You know more efficiently now because we work through our supply chain constraints with over 19, Yeah. That's a big factor and then we mentioned that prepared remarks, the DNS division the flex PCB market those margins were north of 46% to corporate average and so that's kind of mix, we're talking about a in that that one.
Example, so its volume its efficiency in the factories and it's yes, Yes division had a real strong.
You know margin quarter as well.
Just interested about yeah personally this PCB drilling strength, and especially with smartphones kinda depressed I'm, just wondering where that's coming from specifically.
Yeah works, John even though a volumes for smartphones is depressed relatively speaking a the flex content or some of the more advanced phones can be significantly higher per unit and so that's that's kind of whats driving I think a this but you know even though smartphone numbers.
Our depressed still large numbers and so.
The capacity is still needed in the industry and so those two drivers.
Its content per unit as well as just the fact that it's just a lot of units or even though it's less than what people that expected.
That's because the industry stressed the transition of Fiveg phones.
What opportunities that does that create for you.
Yeah, I think we've talked about in the past you know, we think that in certain fiveg phones, the amount of flex content to be a 30% more that in a fourg phone.
And that's a huge amount of.
Opportunity for us for flex PCB drilling. So so that's how we look at Fiveg, but more broadly fiveg also drives more memory contents, both a flash and DRAM, it's certainly drives more advanced processing Gpus, and so five gi and that trend towards.
That certainly drives our flex PCB business the units division it drives our chip division the DNA division because of those three types chips.
Also drives our light motion division because.
Phones, and you're going to OLED and we have a lot of laser processes that are used for manufacturing displays. We also have a lot of lasers that are used for manufacturing some of them very small components.
Within the next generation smartphones that are just flex.
Are you starting to see some traction coming from five to your expect more of that later this year.
That's hard to tell because you know when somebody's ordering you know a flex tool, we assume they're making some fiveg phones and some not talking ontology phones, but we certainly don't have that visibility, we do read industry, where you know foggy phones might be like 200 million units I guess this year.
So that's that's a good tailwind for us.
Thank you.
Thanks Mark.
Thank you I'm not showing any further questions at this time I'd now like to turn the call back to John Lee for any further remarks.
Thanks, everybody. So I'm very proud of the passion dedication and resilience of our employees around the world Needless to say 2020 has had its share of challenges thus far.
But I cannot be more proud and excited about the future events. Yes. So thank you for joining us today and for your interest and then yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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