Q3 2020 MKS Instruments Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the MKS instruments third quarter 2020 conference call. At this time all participants are in a listen only mode. After the speaker presentations will be a question and answer session.

Ask a question during the session you'll need to press star one on your telephone please be advised that today's conference maybe recorded.

Our any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today, David Ritchie <unk>.

Credit Investor Relations. Please go ahead Sir.

Thank you good morning, everyone I'm, David Ritchie <unk>, 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 third quarter of 2020, which are posted to our website 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 in the most recent annual report on form 10-K, and any subsequent quarterly reports on form 10-Q for the company.

[music].

These statements represent the companys 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 non-GAAP financial measures. Please refer to our press release for information regarding.

Our non-GAAP financial results and a reconciliation reconciliation of our GAAP and non-GAAP financial measures now.

Turning the call over to John.

Thanks, David Good morning, everyone and thank you for joining us today.

Third quarter, we delivered record revenue of $590 million, which is above the high end of our guidance range.

GAAP net earnings were $107 million or $1.93 per diluted share, which is at the high end of our guidance range.

Before I discuss our results and market trends in more detail.

To take a moment to acknowledge the tireless efforts and dedication of MTS employees around the world who achieved these record results, especially in such a challenging environment.

Please continue to display amazing resilience and dealing with the extraordinary circumstances, resulting from the global global COVID-19 pandemic.

Yet this did not impact their focus on serving customers maintaining productivity executing on our innovation playbook and most importantly shown compassion and carrying towards each other.

One of our strongest guiding principles that MKS is to win as a team and that's what we did.

Now, let me discuss our third quarter results in more detail.

Sales to our semiconductor market grew 12% sequentially as we experienced strong demand across our portfolio of critical subsystems, most notably in our power solutions business, where we achieved another record revenue quarter.

We are extremely pleased with our sales and technology execution power delivering over 110% year over year growth for the first three quarters of 2020.

Demand for our market, leading plasma and reactive gas solutions continues to be strong, especially in semiconductor deposition applications.

Reliability compact footprint and cost of ownership advantages of our remote plasma sources have led to several large orders in the quarter and atomic layer deposition and plasma enhanced CVD applications.

Our dry ozone systems continue to gain traction in advanced deposition processes.

Dissolved ozone and dissolved ammonia systems are seeing strong demand for what clean applications at leading edge foundry nodes.

Our broad portfolio and unique capability to solve the most critical challenges around the vacuum chamber has set us apart from our peers. However.

However, our semiconductor growth strategy goes beyond the vacuum chamber.

We continue to expand into the philosophy metrology and inspection applications, where we are leveraging our broad optics motion in photonics expertise.

In the third quarter, we secured several additional design wins to a world class optics initiative, and we continue to engage with key Oems to help solve their toughest problems.

As we look into the fourth quarter, we expect demand in our semiconductor market to remain strong.

We're pleased with the results in our advanced markets, which grew 4% sequentially better than we anticipated.

We saw a seasonal decline in PCB drilling applications as expected. However, this was offset by stronger demand in our research and life and health Sciences markets.

During past few earnings calls we've talked about the long term opportunity, we see in precision laser processing, particularly for advanced electronics manufacturing.

I would like to highlight three key drivers that indicates it underpins our excitement around this opportunity.

First is the expansion of devices that require precision laser processing.

Years ago precision lasers were used mainly for smartphone electronics and solar panel manufacturing now.

Now we are seeing precision laser processing, Stan to Wearables tablets autonomous vehicles and many other electronic devices.

Second is the significant increase in the number of electronic components per device.

Use ago, we were dealing with hundreds of components in a smartphone today, we're dealing with many thousands.

Third is the continued expansion the types of laser based processes being deployed for precision manufacturing.

Our customers are finding new ways to use lasers for example in laser dopey surface functionalization in micro welding.

We believe the confluence of these drivers offers an attractive growth opportunity. We are uniquely positioned rests around the world peace portfolio of lasers optics, <unk> photonics motion and laser drilling systems.

We are particularly excited to have announced our first multi unit order for our new high density interconnect PCB via drilling tool.

Our customers installing our tools for volume production.

This is an important milestone for MKS as we enter into this $500 million market strongly differentiated tool.

We were happy with the sequential revenue growth in our advanced markets in the third quarter, and we anticipate demand trends in the fourth quarter to remain consistent.

Before I turn the call over to Seth. Please note that MTS will be holding a virtual investor day on Thursday December 10th.

We plan on providing more insight into our growth opportunities strategy and long term financial model stay tuned for more information in the coming weeks and now like to turn the call over to Seth.

Thank you John I will cover our third quarter results and provide additional detail on our fourth quarter guidance.

Sales for the third quarter were a record $590 million up 8% sequentially and up 28% year over year and above the high end of our guidance range.

This strong performance reflects continued strength of semiconductor market as well as sequential growth in our defense markets.

The third quarter semiconductor sales were a record $359 million up 12% sequentially and up 61% year over year, reflecting strong industry fundamentals.

We saw strength across our product portfolio, but in particular, our power solutions business posted another record quarter, which marks the second consecutive quarter of triple digit year over year growth in this business.

Sales for advanced markets, which were $31 million up 4% sequentially driven by improvements in research in defense in life, and health science markets, which more than offset the expected seasonal decline of flex PCB products.

In our second quarter earnings call, we note that our research market.

It impacted by COVID-19 related University in research lab closures and stabilize relative to the first quarter.

We are pleased to announce in the third quarter revenue from our research market grew over 30% sequentially led by University Reopenings. It has now returned to pre pandemic levels.

As John mentioned earlier received a multi unit order for a geo hds system early in the third quarter.

Following the successful installation and customer acceptance, we recognize revenue in the first unit in the third quarter.

For the quarter the revenue split between our semiconductor in advanced markets was 61%.

39% respectively.

Third quarter non-GAAP gross margin was 45.1%, which is slightly below the midpoint of our guidance, primarily due to product mix and inventory charges for certain discontinued products within our light and motion Division.

We also incurred higher variable compensation costs due to our strong financial results.

We expect these items to return to more normalized levels in the fourth quarter.

Non-GAAP operating expenses for the third quarter were $129 million flat to the second quarter, reflecting our continued focus on cost control, even with higher anticipated revenue volumes in variable compensation.

Third quarter non-GAAP operating margin was 23.1% you sequential increase of 150 basis points, reflecting strong financial leverage in our operating model.

We continue to generate additional cost synergies from the OSI acquisition.

We are pleased to announce that exiting this quarter. We have further increase these savings have now realized totaled $18 million in annualized cost synergies.

This amount is above the original original target remains well ahead of schedule.

Non-GAAP interest expense in the third quarter was $6.3 million in a non-GAAP tax rate reflected a favorable geographic mix of taxable income was 17%.

Non-GAAP net earnings with third quarter $107 million in $1.93 cents per diluted share.

Now turning to the balance sheet actually the third quarter maintain a strong balance sheet liquidity with cash and short term investments of $716 million in.

$100 million incremental borrowing capacity on an asset based line of credit subject to certain borrowing base requirements.

Our net leverage ratio further decreased highlighting our ability to generate strong EBITDA and cash flow.

Since the closing of the OSI acquisition in February of 2019, our net leverage ratio has decreased from one times 2.2 times X in the third quarter.

We anticipate continued reduction in our net leverage ratio exiting the fourth quarter.

Consistent with prior quarters, we a dividend payment of $11 million or 20 cents per diluted per share.

In terms of working capital days sales outstanding were 56 days at the end of the third quarter.

Appeared to 64 days at the end of the second quarter.

Inventory turns were 2.6 times compared to 2.4 times in the second quarter.

We remain focused on improving our cash conversion cycle following a record second quarter.

Third quarter operating cash flow and free cash flow again set new records at $152 million and $123 million respectively.

Free cash flow was 21% of revenue for the quarter.

I'll now turn to our fourth quarter outlook based.

Based on current business levels, we estimate that fourth quarter revenue of $600 million, plus or minus $25 million.

Based on anticipated product mix in revenue levels, we estimate fourth quarter non-GAAP gross margin of 45.5% plus or minus one percentage point.

And non-GAAP operating expenses of $133 billion, plus or minus $4 million.

For the fourth quarter non-GAAP net is expense is expected to be approximately $6 million.

In our non-GAAP tax rate expected to be approximately 17%, reflecting anticipated geographic mix of taxable income.

Given these assumptions, we expect fourth quarter non-GAAP net earnings of $2 per diluted share plus or minus 20 cents.

I'd like to now turn the call back to the operator for Q and a.

Yes.

Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press. The pound key please limit yourself to one question and one follow up please stand by while we compile the June a roster.

Our first question comes from Thom definitely with D.A. Davidson you May proceed with your question.

Hi, yes, good morning, thanks for taking the call.

First question on the steel market congratulations on the first production order there, but if you could remind us why is that.

That you're winning in the marketplace. What are the key drivers that we should be looking for for this market going forward and what type of seasonality typically see that market.

Yes, Tom it's John So we've talked about before as some of the features that we have that make it a highly differentiated the first one is throughput high throughput than what's what's out there.

Second of all is also the footprint and weight and so those have been a very valuable to some of our customers with respect to manufacturing.

Putting into manufacturing locations.

In terms of seasonality, probably does follow a little bit of the consumer electronics seasonality. So similar to flex and that's how we look at it and that hasn't really changed as well.

And so.

So a $500 million market of which as you know we only have just begun to gain some of that share. So we're really excited about the potential growth there.

Okay, I guess with all that in mind, how do you think this rolls out over the next couple of years for your participation in the market.

Right. So right now as you said, we have very little share we've been working on design wins.

With our beta customers in 2020, as we've discussed in the past and so we are set up very well with those customers for the next cycle, which should begin.

In 2021, so as we do that it was we gained those kinds of customers in volume, we will continue working with other customers or those customers that we already have with different design wins as well in terms of different processes. So I think 2021 will be kind of the first year, where we'll see some of those design.

When work that we've done to achieve this year turning into revenue.

Revenue.

Okay, Great and then as a follow up.

When you look at the Big success, you've had in the power markets.

Our lot of these tools going into the memory market, where if we would expect a recovery over the next year or two further acceleration of your success in that marketplace.

That's correct, Tom a lot of our power is leveraged towards memory.

Is leveraged towards Oems that are strong in memory. It's also leverage towards Oems that are based out of Korea.

As well as North America, so as memory picks up we should see that benefit we are slightly more leverage to NAND versus DRAM. So that does change the mix a little bit in power.

But in general memory is good for us.

Okay. Thank you ill hop back in the queue.

Thanks, Tom.

Thank you. Our next question comes from Sidney Ho with Deutsche Bank. You May proceed with your question.

Hi, Thanks for taking my question a couple of them. So on the semi side, obviously very impressive growth up 60% year to date year over year. If revenue is flattish. It's two point and maybe slightly better are you still looking at maybe 45% plus for the full year, obviously much stronger than that.

The fab equipment market itself.

Sort of where you are in the supply chain do you think you can continue to outgrow the WFP market next year.

What do you think the maybe at the inventory at your customers are at normalized levels exiting this year.

Yeah. Good question Sidney I mean, typically as you know, we we out run.

Semi doing the ramp we always outgrow and then the downturn when there is inventory correction, we would underperform, but net net we always look at our target of growing faster than Wi Fi by 200 basis points.

Which is still our model in which we've demonstrated over the last 20 years. So I think it's a Wi Fi continues to grow we may still outperform if it flattens out I think than we kind of leverage and then of course, if it turns.

Turns down, we'll probably underperformed, but we really look at WSE.

Growth longer term through the cycles and how we perform there that's always about been about 200 basis points above WSE CAGR.

Okay. That's helpful. Maybe switching over to the advanced markets. If you look at Q.

Q4, I understand there is a lot different businesses in there what are the areas that you think that are still below a normalized range. I know you talked about research back to normal, but I'm thinking about that line along the lines, where we have some capacity overbuild in past couple of years that may start seeing shortage.

Yeah, you know I think we do have a lot of different markets in that advanced markets bucket, that's industrials, they're not levered to consumer electronics. Those those are also a significant part of our advanced markets.

And as for instance, automotive and things like that industrial manufacturing.

Those are the kind of markets that have been depressed because of Covance and we'll start to see signs of those coming back up you see some of the other calls from other companies Levered to automotive and some sea lice. There. So that's an area, where we haven't seen that picked up yet, but we expect that to also pick up as well.

Okay, maybe one last for me on the gross margin side, yes.

He described the reason why the gross margin is lower than the mid 0.4 for Q3.

Q4 was three with revenue expected to be had record high again anything you would highlight that that gross margin line that could be a headwind as compared to your prior gross margin peak of 48% that may or may not go away in the next couple of quarters.

Yes. Thank you Cindy so I would say if you look back absolutely 2018, there is in a current run rates obviously the duties from the trade friction between us in China.

Thats, probably about a 30 to 40 basis points versus if you go back several years ago, that's certainly a piece of it.

Obviously, the fourth quarter here would have.

Yes, I revenue in there as well.

Back to you know pre.

Acquisition 2018 has only been a light and motion is not quite apples.

Apples to apples I would say, but.

But other than that we expect the margins being the fourth would be more normalized we saw in Q3. It was really unique items that were unique to the quarter and again, we think those will normalize back in the fourth one there on the light and motion Division as I mentioned.

Yes.

Great. Thank you very much.

Okay welcome.

Thank you and as a reminder, please limit yourself to one question and one follow up our next question comes from Scott Graham Rosenblatt. You May proceed with your question.

Hey, good morning, and thanks for taking the question nice quarter.

Thank you.

Yeah. So I was just wondering on sort of a follow on to a prior question about.

How you're doing in.

In memory with you know you being more skewed towards and then.

Jim I was just sort of wondering with DRAM kind of maybe catching up in the memory market over the next 12 months at least that's traded expectations.

That that could potentially cut into your outperformance of the market I was just wondering if you can comment on that and if there are any plans maybe to push some you know some sales through us into the DRAM market.

Improves.

Yes, Scott I think its really a marginal shift between NAND and DRAM. We are critical highly critical to certain process steps in D NAND and that has driven.

At a 110%.

Over 110% growth for the first three quarters and power.

The rest of our portfolio is fairly evenly levered between.

V NAND DRAM as well as foundry so.

So the outperformance is really mostly due to power the Indian and so but the rest of the portfolio is pretty much evenly lever between DRAM and NAND.

Okay Gotcha, Thanks, Thats very helpful.

Then.

Another question is just sort of maybe a market question for you John the a lot of things going on a lot of headlines around Intel seven nanometer you know some else Mick.

Would you maybe pull together those comments.

Those those headlines as well as maybe what your customers are saying next year.

That Wi Fi is there maybe going to be a quarter or two.

Potential air pocket in WSE next year.

Are you hearing from your from your customers from these issues for you know is it may be steady as she goes what do you what are you hearing.

Yes got it was so we don't guide out more than a quarter, but in general when you hear the public statements of our customers and their customers. It's been fairly positive for 2021 relative to 2020, we don't have any reason to dispute that as just as you see in our guidance for Q4 and our commentary we we see.

Sami continuing to be strong in our Q4.

And so we will certainly monitor that very closely but longer term you know there's a lot of static lots of things going on that we still go back to the fundamental belief that somebody has to make the chips and therefore WSE is going to grow through the cycles.

And then when we supply to those companies that supply the tools for WSE, we just want to grow our share of that and so whether it moves from one company to another or one country to another longer term I think we're not as concerned because of the differentiated product portfolio that we have.

Thanks, Thank you for that.

I agree I do have one final question that I hope to squeeze in here and that's really kind of off of.

Commentary that we're hearing from others.

Both competitors and otherwise out there is that you know with a cold case is rising and the potential for there may be some rollbacks year in there I know we're much more surgical on that these days.

But us Europe, and I know, you're not big in Europe, but Japan has been you know another outbreak there I guess my question simply is how much do you think John your business is affected by the slow.

On site.

Capacity to follow if you follow what I mean.

Yes, no. We certainly were affected by the first phase is covered in terms of factories, having to reduce capacity some of our suppliers factories, having to shut down for a couple of weeks at a time and then coming back at only reduced capacity.

Everything's kind of normalize now for our factories are suppliers factories, but certainly a concern of ours looking forward.

Its cove it starts becoming an issue again.

In our factory locations for our suppliers. So it's certainly something we're watching very closely.

Scott I would say, though that we along with Im sure most of the industry lease now it's not a surprise we have processes in place we know what to do.

We know how to separate shifts we know how to test you know how to isolate.

So at least those processes are not going to be something we're trying to figure out as we're going along.

But it's still can have an effect there's certainly some of these areas see some very large shutdowns.

Okay. Thanks, a lot thanks.

Thanks Scott.

Thank you. Our next question comes from Patrick Ho with Stifel. Please proceed with your question.

Oh, Thank you very much and congrats on a nice quarter, John maybe first off on the semi conductor and can you describe any other additional power solution wins I think last quarter, you talked about you know getting into the conductor etch sided base with high aspect ratio can you talk about any other types.

Oh cool application wins.

That you achieved with your OEM customers.

Yes. Good question, Patrick So we don't talk about too much but deposition tools also require RF power and that our power has also been transitioning into more complex more difficult types of RF power delivery and so that's also now becoming a great opportunity for us and a.

The share of the power story, so we have the dot electric edge for being in high aspect ratio, we have conductor etch in certain of our Oems and I think deposition become will become increasingly more important as those processes could be enables was a different kinds of our power solutions. So that's another.

Area for future growth and these take this takes time, Patrick but it's certainly a positive for our power and semi.

Great that's helpful and maybe as my follow up question in terms of the advanced markets.

We've talked about in the past you know consumer electronics, we're starting to see at least from the device side. So.

Some signs of stabilization and a potential recovery I guess whats the trickle down effect, where youre, a quote light and motion solutions that target the consumer electronics market and when would they potentially turn if the device markets lets start turning positive.

It's good question Patrick I think we saw the normal cyclicality occur in that the Q2 timeframe. When we reported you sized flex revenue you saw the the peak there.

And then Q3 as expected went down that's a normal cycle.

I would comment though that in Q right now, we're starting to see a little more a little more inquiries than what we would expect normally in the Q4 timeframe with respect to our normal customers.

Asking for potential new capacity in case, they had to increase that capacity. So I think thats a reflection patrick of potentially.

Better sell through of new smartphones for instance.

Outlets new Wearables so.

So I think that's a good sign and it's a little bit of a sign for potentially a good set up for 2021.

Great. Thank you very much.

Thanks, Patrick.

Thank you. Our next question comes from Krish Sankar with talent you May proceed with your question.

Hi, Thanks for taking my question I have two of them first one John looks like from a few U.S. semicap customers have gotten a letter.

The government do require licenses shipped at somebody C., but then you also have Japanese Korean and Chinese semi cap customers I'm just kind of curious when your vantage point are you guys kind of agnostic to what happens between U.S. and.

And that's how the calculations or do you think you're doing too little catch up with you folks too then I had a follow up.

Well I would first say Chris that were following all the government regulations.

With respect to MCC ends and restrictions on shipping.

Two entities that are on that list and right now you know us as well as our competitors are allowed to ship to Oems or globally.

And I wouldn't want to comment on whether that's going to continue or not but so right now that is.

Somebody that were allowed to do.

And if it changes, we'll certainly follow those those guidelines.

Got it got it and then I had a question on the on the Couponing solutions like that I guess, the PCB business.

But you know with smartphones kind of like five you'd begin to call you.

You look at Couponing solutions revenue seems to be some pretty choppy. So I'm wondering is that at some point, we should see a cyclical uplift is still you still think that because of the consumer.

I'm doing electronic seasonality, it's kind of going to be a little choppy over the next several quarters.

Hi, Chris Thanks, and I read your Fiveg Fiveg phone reports your smartphone buildout someone puts are very useful I would say that today, we still view it as cyclical.

But as more and more consumer electronics need these laser processing tools, certainly flex as well as HD <unk> drilling tools, you may potentially see more of a smoothing out because it's not just one cycle there could be for instance, you can even see it now where.

Certain phone companies are not just releasing you know one type of phone in one season, they're actually releasing it in the spring as well as in the fall for the Christmas season.

So that would certainly drive towards a less cyclical.

End of industry, but you know that's a remains to be seen but today, we still see it as that consumer electronics cycle.

Thanks, John.

Thanks, Chris.

Thank you. Our next question comes from Amanda Scarnati with Citi. You May proceed with your question.

Hi, good morning.

Follow up on ethane nicely, we've been hearing that they've been stocking up on components and spare parts in anticipation of even more restrictions from the U.S. government.

Can you talk a little bit about any direct sales that you might have to ask them I see and if you're seeing sort of anything unusual happening there.

Hi, Amanda and it's hard for us to say, our China revenue in general not just us and I see is stronger.

Then even in Q2 and stronger this year than certainly last year.

How much of it is stocking versus direct needs. It's hard to tell but you know the majority of our revenue to China, probably goes through our Oems.

So and that's really hard to tell then for us in terms of what it's going to sneak there's somebody else.

So I wouldnt be surprised if there is a little bit of caution and stocking.

It's hard for us to tell.

Okay.

And then lastly on their earnings last week commented that they had to kind of pare down their earnings a little bit because of the restrictions by the U.S. government.

No we expect to see that from other U.S. tires as well are you seeing any sort of pullback in demand at the leading U.S. Oems.

Four things just kind of continuing <unk> in anticipation of a strong WSE next year.

Yes, I I as I listen to the land calls when I heard that commentary I think the only comment I can make a man as our guidance for Q4 and our commentary is that we see semi is continuing to be strong so in the fourth quarter.

Whether that continues or not going out.

We don't really don't know, we don't guide that but as I said earlier in the commentary many of our customers are looking at a pretty good 2021 expecting a good 2021 versus 2020.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Jim Ricchiuti with Needham and company. You May proceed with your question.

Yes, I had a couple of follow up questions just regarding the flex PCB drilling business you alluded to so.

Creature inquiries from customers I'm, just wondering you know with the better smartphone shipments in Q3, and obviously some some important launches are you do you have any sense of what the capacity utilization.

It looks like in this market and I'm, just wondering with these launches which typically have higher.

Yes.

Contents I'm wondering how you're seeing this play out.

When you would anticipate seeing that pick up in orders would it be late in Q1.

Yes, Jim it's a good question. So these inquiries are little unexpected relative to the normal cycle and to your point, it's which is a good one is that some of these later more recent phone launches are at high end ones that have a lot of flex content and that's probably the reason why we're getting those inquiries.

You know it ripped probably really depends on whether they really need extra capacity in the short term near term like perhaps even within the quarter.

But I would expect its probably earlier in the year 2021 that maybe we would have normally seen in past years in past years as you know our Q2 a.

Quarter is usually the peak in terms of deliveries of these tools.

And maybe we'll see a little bit pull in there, but it's hard for us to tell now because they are just today just inquiries Jim.

Okay and then the follow up question is just.

With respect to the.

Non semi related portion of the light and motion business, Yeah, you're seeing some nice recovery you alluded to research that sense I'm just wondering.

It was some of this improvement sequentially potentially catch up from some of the closings as it related to coal that.

Potentially Jim, but I think the life and health Sciences, a growth was actually because of Cove. It.

There is some catch up because some of the medical procedures that were what we call discretionary.

During the <unk> period, Theyve become you know they've come back and so there's a little bit of catch up there.

And then research as we said is not Miss a catch up it just gone back to normal what we have seen pre coated.

So those are the main drivers Jim for the L. Nm Nonsemi, if you will advance market growth quarter over quarter and.

And you mentioned industrial automotive my impression was that the warrant Newport business.

Less exposure to those markets has that changed.

No I think we still have less exposure there than consumer electronics, but we do have exposure. There because you know we don't necessarily have the you know kilowatt fiber laser business, but we have a portfolio of products that they go around.

The work piece that are used in that market as well.

Got it thanks.

Thanks, Jim.

Thank you. Our next question comes from Mark Miller with Benchmark you May proceed with your question.

Rationalizations wonder quarter, another good quarter I'm just wondering.

Has the minutes market starting to show some some rebound.

If they continue to grow how does that impact your.

Gross margins does that lower your gross margin somewhat as advanced markets becomes.

Larger.

Yeah, Mark it's so when we look at individual level. So we don't have the split but it ends markets because look at visual piece, it's pretty fair to say that light and motion margins are above the corporate average.

And Alan and has a higher proportion of dance market. So I.

I would say, it's probably slightly higher if you look at kind of the LM piece of the business now yes.

Volumes, they have a big impact in said before capacity still being absorbed in the flex market.

A new flex tools have again, you know good margin going forward as well, so I guess to kind of recap it it's probably a little bit better than corporate average or normalized basis, but not substantially so.

You mentioned some design wins in Opex can you give a little more color break that down a little bit more terms of the design wins.

Yeah Mark.

We've been investing in what we call our world class optics and Capex for a couple of years now hiring talented process engineers to develop these processes. So somebody's optics wins are with several customers. So you can imagine lithography inspection normally those kinds of customers, but there are other customers who may be developing.

You know other types of optically based tools that might be even attached a vacuum chamber and so while it's still highly focused on lithography metrology spin.

Specific Oems it is broadening to other kinds of customers as well.

Thank you.

Thanks Mark.

Thank you. Our next question comes from Weston Twigg with Keybanc capital You May proceed with your question.

There were some good questions on power growth in triple digits growth year over year sounds really big but I honestly don't have a good handle on how much revenue. This is contributing and I was wondering if you could help us narrow down the band in terms of how big power is as a percentage of it yeah.

Yes, you know if you look at kind.

Kind of third party.

Data of market share, that's that's probably where you'd find it it's it's hunt.

Hundreds of millions so I'll leave you to go find that but it is triple digit for this you know that's integrating over the first three quarters of this year versus last year.

I would say, it's a it's not just reaching triple digit significantly more.

Certainly in the Q3 timeframe.

So I'll leave it at that.

Okay. That's helpful. And then similarly on Pcbs I, you know I'm not as familiar with that market and now there is some seasonality but.

As you look into Q4 would you expect like another double digit percent sequential drop in PCB revenue down looks like what we've seen over the last couple of years is that what you would expect this year as well.

Yes normally.

So that's what we would expect and that's you know kind of a normal seasonality, but as I said in the earlier answer to the earlier questions. We're seeing more inquiries with respect to those kinds of tools and as I said.

Perhaps some of those turn into real orders and perhaps some of those turns were orders within the quarter.

Driven by some of the some of the smartphone demand, but so we really don't know that yet we're guiding towards.

The normal expected Q4 for a DNS.

Okay. That's really helpful. Thank you.

Thanks Les.

Thank you. Our next question comes from Joel Quadracci with Wells Fargo. You May proceed with your question.

Yeah. Thanks for taking the questions are on.

On the power business being up 110% are they is there anyway, you can parse that out the growth obviously the market has rebounded quite a bit from NAND flash.

What's the growth and from you know just the better market versus some share share gains.

Well I think it's a little complicated because obviously share gains can be where you were particularly strong and if those markets grow like like NAND has.

But I think we know that we've gained share also in conductor etch. We believe we're gaining some share in deposition as well.

So the <unk>, there's both Joe and sort of the share gain because you're in the REIT space and that space is growing and the share gain because you just taking share in this space is that are you know growing normally so that's the way I would characterize our our power growth.

Okay, and then as a follow up you guys had good cash generation this quarter back to.

Yes, I acquisition cash levels. So how do we think about what's the right level of cash you need to run the business on a day databases.

Yeah. So so success, so I would say you're right we want to cash the balance sheet actually this quarter.

He said earlier on when the Cobi 19 pandemic, yes, we would.

Hunkered down and build cash to be relatively cautious obviously performed very well the last couple of quarters a lot of good effort around the company to kind of reduce the cash conversion cycle I would say its little hard bright line.

Probably somewhere.

You know 400 million plus would be plenty of cash to run the business. We used to have that level in mind is there's a number of things we like to execute on a regular basis.

Functionality the balance sheet, but you know we don't need so many millions or run the business right now it's a level, probably you know somewhat less than that but there's really no bright line thats, how I kind of look at a high level.

Great. Thank you.

Thank you and as a reminder is asking question you'll need to press star one on your telephone. Our next question comes from parent plus Misra Berenberg. You May proceed with your question.

Thanks, Good morning I.

I just wanted to go back to the power revenue question earlier and a more.

More generally if you could give some more color on your current mix and the vacuum analysis business.

Like what are the biggest pieces.

Uh-huh firepower I guess vacuum reactor guess isn't any any color on docs like be it would be great.

Oh, you apparent touched as John So you know our vacuum.

And now an analysis business power and plasma are big drivers, but also our portfolio of pressure and flow of vacuum valves pressure control.

And so together they are all large components of our over 1 billion dollar semi components business for vacuum.

So you know, we really don't split it out, but certainly power has been a big driver of the growth, but if you took power out of the rest of the portfolio is also growing quite well assess said were 61% year over year in semi and as we said power as you know the 110% of it.

Power growing but yes, even if you factor that out we're well over 50% and the rest of the portfolio as well.

Got it and then a quick follow up but if I could go back to the.

Comments about world class optics, any any sense you could give us just how big that business is right now is it like a $10 million to $20 million range or annual or is it already bigger than that.

I would say that our business in the soggy metrology types of Oh OEM business is is comfortably over 100 million. So it's much bigger than what you just said.

Got it thanks Chuck.

Great. Thanks Paretosh.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to John Lee for any further remarks.

Well, thank you for joining us today and for your interest in MKS and we look forward to having you join us at our virtual Investor day on December 10th.

Again, thank you very much operator, you may close call. Please.

Thank you ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.

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