Q1 2022 MKS Instruments Inc Earnings Call
Good day and thank you for standing by welcome to the MKS instruments first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference may be.
A recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, David <unk> Vice President of Investor Relations. Please go ahead.
Okay.
Good morning, everyone I am David Richard 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 first quarter of 2022 which are posted to our website.
M K S. 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 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 financial measures.
Unless otherwise noted all forward looking financial measures, excluding any contribution from AMETEK limited the acquisition of which is still pending.
Also unless otherwise noted all income statement related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our website for information regarding our non-GAAP financial results, a reconciliation of our GAAP and non-GAAP financial measures.
And certain pro forma financial information.
Now I'll turn the call over to John .
Thanks, David Good morning, everyone and thank you for joining us today I'm very pleased with our Q1 results, especially given the significant industry supply chain challenges.
First quarter revenue of $742 million was within 1% of the midpoint of our guidance range.
Profitability was strong with net earnings per diluted share of $2.71.
Exceeding the midpoint of our guidance range and an increase of 6% year over year.
We credit this profitability to excellent execution in our factories and an emphasis on cost control, while continuing to make targeted R&D investments across our portfolio.
We believe our performance highlights prudent management of our expenses, while still investing in the long term growth of our business.
While underlying demand trends remain very healthy industry supply chain constraints are limiting growth.
Which is particularly true in our semiconductor business.
Before I review the key trends across our end markets I want to explain a change in how we will present our revenue.
Beginning with this quarter, we have divided what we previously referred to as our advanced markets into two separate and markets.
So electronics specialty industrial.
We believe this change better represents the end markets, we serve and will enable you to better understand the key drivers of our business.
There will be no change to our semiconductor market, which includes deposition etch lithography metrology inspection, what clean and packaging applications.
In the first quarter revenue from our semiconductor market comprised 66% of overall revenue.
Advanced electronics represents revenue from advanced printed circuit board solar display and electronic component applications.
We view, our advanced electronics market as a close cousin to the semiconductor market each of which benefits for the same defining trends of miniaturization and complexity.
We believe packaging technologies will become increasingly critical to enabling better performance design and cost of electronic devices from high end smartphones. So electric vehicles to high performance microprocessors for Datacenters and artificial intelligence.
And advanced P C d's and packaged substrates are the next key drivers of these trends.
Underscoring the strategic rationale of our pending acquisition of out of checks, where we plan on leveraging ametek's electroplating solutions.
Our advanced laser drilling solutions to accelerate our customers' roadmaps.
In the first quarter revenue from our advanced electronics market comprised 11% of overall revenue.
Our specialty industrial market represents a broad array of industrial life Sciences research and defense applications.
These are businesses that leverage our domain expertise in semiconductor and advanced electronics.
Representing the collection of proprietary technologies with strong margins.
In the first quarter revenue from our specialty industrial market comprised 23% of overall revenue.
Now I'd like to provide more detail on our first quarter results and my thoughts on second quarter demand trends.
Sales for semiconductor market declined 1% sequentially in the first quarter in line with our expectations, reflecting continued its continued supply chain constraints as well as a temporary shutdown at our Shenzhen facility due to local government COVID-19 measures.
Our operations and engineering teams continue to respond to these challenges with agility flexibility and determination in partnership with our customers and suppliers.
Overall semiconductor demand trends remain robust in the first quarter with broad based strength across our vacuum and photonics portfolio.
We continue to see strong demand for our RF power solutions for dielectric etch applications as well as for our dissolved ozone solutions for advanced foundry applications, especially in new fab expansions.
I'm also pleased to announce that we commenced shipments of our new clean line solution in the first quarter.
This innovative system is a compact remote plasma source used to reduce buildup of byproducts that arise from vacuum processing, which improves fab yields and lowers preventative maintenance costs.
It is a direct result of our surround the chamber strategy as it leverages our expertise across our RF power remote plasma valve and integrated process solutions teams to deliver a unique solution, which again demonstrates the strength of MKS is innovation engine.
We are seeing very positive interest from multiple customers.
We also continue to see strong demand for our photonic solutions.
Particularly the strength in our precision motion subsystems, securing design wins across multiple backend applications, including annealing and advanced packaging lithography.
As we look to the second quarter demand trends in our semiconductor market remained very strong.
However, we expect supply chain constraints to remain a factor.
Currently we expect revenue from our semiconductor market to be consistent to slightly down as compared to first quarter levels.
Before I discuss our advanced electronics and specialty industrial markets I want to share my thoughts on 2020 one critical sub system market share data published earlier this month by the independent market research firm Techinsights, formerly VLSI.
The report validated that occur and Cas is continuing to take share in the overall critical subsystem category in 2021.
In fact their research shows MKS is now the market leader in RF power supplies.
This achievement was the culmination of many years of targeted investments innovation execution and close collaboration with our customers.
I'm extremely proud of the MKS team for achieving this milestone, which took hard work dedication and expertise.
And we see additional opportunities on the horizon for RF power fueled by continued industry investments into vertical scaling.
Techinsights also highlighted our share gains across other critical subsystem categories, such as RF matching networks remote plasma sources pressure sensing residual gas analyzers and linear motion subsystems.
As a critical sub system leader with the broadest set of capabilities in the industry, we are well positioned to capitalize on many opportunities that lie ahead in the semiconductor market.
Moving to our advanced electronics market revenue in the first quarter declined 15% sequentially and 29% year over year.
Clients were primarily a result of softer industry demand for flexible PCB via drilling equipment.
We believe our customers have taken a risk averse approach to expanding flex PCB capacity at this time.
Given the growing uncertainty, resulting from factors such as supply chain constraints geopolitical tensions inflation risk and its impact on consumer and demand.
As we look to the second quarter, we expect revenue from advanced electronics to be down sequentially led by continued softness in flexible PCB equipment spending.
Excluding flexible PCB via drilling our advanced electronics revenue is expected to be consistent with first quarter levels.
Revenue from our specialty industrial market declined 1% sequentially, but grew 2% year over year.
We saw good sequential and year over year growth in life Sciences applications, offsetting seasonal softness and research spending.
For the second quarter, we expect revenue from our specialty industrial market to remain consistent with first quarter levels.
Before I hand, the call over to Seth I want to share a few thoughts regarding our pending acquisition of that attack is.
You may have seen on April 1st we announced an extension of the date for completing the acquisition to September 30th 2022.
The strategic benefits of acquiring out attacks have become increasingly compelling as it trends towards advanced packaging continue to accelerate.
We believe the unique combination of MKS is laser drilling and analytics advance electroplating solutions will allow MKS to become a foundational enabler of electronic devices.
Spanning from the transistors on a chip to the Interconnects and advance PCB.
The defining trends of miniaturization and complexity they have driven continuous innovation in the semiconductor industry for decades are rapidly disrupting the PCB packaged substrate landscape.
Just like when we didn't say any more than two decades ago, we were positioned positioning ourselves to be at the forefront of these trends.
We believe out of Texas General metal, finishing business will fit nicely within our specialty industrials business sharing the common thread of leveraging core domain expertise to address a wide variety of specialty industrial applications.
We continue to work with China State administration for market regulation to obtain regulatory clearance, which is the remaining jurisdiction for which approval is a condition to closing.
Looking forward to closing the transaction and welcoming the talented auto tech teams MKS.
With that I'd like to turn the call over to Seth.
Thank you John .
Provide additional detail on updated end market classification.
Then cover our first quarter of 2022 results followed by guidance for the second quarter.
Well start with advanced electronics, which is a key enabler of laser based manufacturing solutions for cutting edge electronics applications.
This market includes flexible and HDI PCB via drilling.
Laser in vacuum processing for solutions for solar and display applications.
A number of other precision manufacturing applications for electronic devices.
We believe our unique surround the workpiece portfolio of lasers motion optics, and other photonics solutions combined with our application expertise from equipment solutions Division provide us with unique opportunity to be the go to enabler of advanced electronics manufacturing.
These applications offer attractive secular growth or maybe some level of cyclicality given this market is tied to capital equipment spending.
Looking ahead, our pending acquisition of AMETEK with add critical like gold plating solutions for advanced Interconnects.
With these solutions.
The laser drilling systems, we believe are well positioned to optimize the interconnect and accelerate customer Roadmaps next generation electronic devices.
We also believe that a textbook trucks business, adding large base of stable recurring revenue with a strong margin profile.
But 2021 revenues from our advanced electronics market comprised 15% of MKS is total revenue.
On a pro forma basis with AD Tech 2021 reported financial results would have comprised 32% of overall revenue.
Especially industrial market represents a broad array of leading technologies across industrial life, and health Sciences research and defense markets.
Examples of applications include vacuum solutions with synthetic diamond manufacturing lasers for ophthalmic surgery.
Grace in isolation for advanced research and infrared zoom lenses for both commercial and defense application.
This market provides more stable revenues and strong margins and cash flow.
In this market, we leverage pricing technology capabilities that we developed from our investments in the semiconductor and advanced electronics markets.
That <unk> general metal, finishing business would fall into our specialty industrial market symbols.
Similar to our existing specialty industrial applications, there's important domain expertise in chemistry is language across a wide array of applications, especially the surface, finishing in functional coatings for electric vehicles renewable energy.
He hosts of other industrial and commercial applications.
In 2021 revenues from our specialty industrial market and comprised 23% of MKS is total revenue.
On a pro forma basis, <unk> 2021 reported financial results.
We are comprised about 27% of overall revenue.
In addition to driving I did listen to dividing our advanced market into two separate markets. We also modified the names of three divisions.
Our vacuum analysis Division is now our vacuum solutions Division.
Light and motion Division is narrow photonic solutions division.
In our equipment and solutions Division is now our equipment solutions Division.
A historical snapshot of our results broken down by our divisions in new markets. The prior three years is available in the Investor Relations section of our website.
With that let's now discuss our first quarter results and outlook for the second quarter.
Sales for the first quarter was $742 million into quiet, 3% sequentially, but up 7% year over year.
While overall revenue was below the midpoint of our guidance, we're very pleased with how we execute in the quarter, giving ongoing global supply chain constraints.
As well as temporary shut down of ice engine facility due to local COVID-19 restrictions.
In the first quarter somebody like the sales were $4 $88 million down, 1% sequentially, but up 19% year over year, reflecting broad based demand for my vacuum and photonic solutions.
While supply chain constraints draw must be attention. These days a relentless focus on innovation is as strong as ever the market share gains. We delivered in 2021 are a clear reflection of our ability to accelerate our customer roadmaps.
We are innovating areas keto dance electronics advanced semiconductor manufacturing, including vertical scaling atomic layer processing advanced lithography metrology and inspection as well as wet cleaning applications.
We have significant domain expertise across each of these areas.
There are many cases, where we combine our broad expertise to introduce new solutions that create new market applications.
Such as our clean line solution that John discussed.
We have a long track record of gaining market share, we continue to leverage new opportunities.
What would your advanced electronics market right with the first quarter was $82 million, a decline of 15% sequentially and 29% year over year.
The primary driver behind the decline was softer industry demand for flexible P. C D D drilling equipment.
As a result of the factors as John highlighted we expect demand for our flexible PCB equipment to remain relatively muted in the second quarter.
This market continues to be a long term secular grower, but given our exposure to the capital equipment spending in this industry.
All the revenue remains lumpy.
For contacts between 2019 2021 flex.
Flexible PCB equipment revenue grew at a 40% compounded annual growth rate.
We tend to work closely with the H D. I P. C D via drilling beta customers to drive further qualifications well continue to generate interest from new customers.
We have dozens of tools and Hy Bon manufacturing running 24, seven which is a clear validation of our technology.
What are the attractions at this market as it is sticky once you get designed in.
We've liked to have made faster progress gaining share we are encouraged by the customer conversations and the performance of our offering.
Moreover, we are excited about the growing attention on advanced HDI Pcbs and package substrates in the role of these play an authorized in performance cost and designs of advanced electronic devices.
We expect this to become more critical to enabling high end smartphone applications.
High performance servers, Wearables electric vehicles and other electronic devices.
Importantly, these increasing market requirements aligned very well with M Katz and analytics capabilities and.
We believe our combined capabilities allow us to optimize the interconnect Andrew.
And drive better and faster solutions for our customers.
Turning now to especially industrial market revenue was $172 million in the first quarter declining 1% sequentially, but growing 2% year over year.
On a sequential basis, we saw growth in life, and health Sciences, and defense applications offset by seasonal softness in the research market.
Our first quarter gross margin was 45%.
It's at the midpoint of our guidance as expected were negatively impacted by high inflation.
Pleased how we exited on gross margin despite revenue being below the midpoint.
Well first quarter research and development expenses remained flat sequentially.
Continued investment in product development first quarter operating expenses were down $3 million sequentially.
$144 million and below our guidance range has built a strong cost controls as well as the timing of certain equity compensation expenses.
It will be reflected in our second quarter.
First quarter operating margin was 25, 6%.
What are the 100 basis points above the midpoint of our guidance near the high end of our guidance range.
Operating income was $190 million up $11 million year over year.
First quarter, adjusted EBITDA was $211 million.
Adjusted EBITDA margin was 28, 4%.
<unk> expense for the first quarter was $6 million and our tax rate was approximately 18%.
Net earnings for the first quarter were $151 million were $2.71 per diluted share.
Actually the first quarter maintain a strong balance sheet liquidity position with cash and short term investments at a record $1 billion.
Which well positions US ahead of the pending AD Tech acquisition.
Our term loan principal balance was $822 million at the end of the first quarter.
We exited the first quarter, the twin $31 million net cash balance.
In terms of working capital days sales outstanding were 59 days at the end of the first quarter compared to 53 days at the end of the fourth quarter, reflecting the timing of revenue during the quarter.
Inventory turns were two six times at the end of the first quarter compared to two eight times at the end of the fourth quarter, which was impacted by supply chain constraints.
These metrics combined with the annual bonus payment.
In the first quarter operating cash flow of $41 million and free cash flow of $22 million.
Consistent with prior quarters, we had dividend payment and $12 million or 22 cents per share.
I'll now turn I'll now turn to our second quarter outlook.
Even though our business levels remain robust, we expect second quarter revenue of $730 million, plus or minus $30 million.
Primarily due as continued supply chain constraints.
Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 43, 5% plus or minus one percentage point.
Like many other companies, we're not immune to the exceptional macroeconomic inflationary challenges impacting our markets.
However, we have a strong track record of driving continuous improvement in our operating model. We will continue to take all necessary steps to counteract these inflationary impacts over time.
We expect operating expenses of $156 million, plus or minus $4 million or.
The sequential increase is largely due to timing of annual compensation increases.
For the second quarter net interest expense is expected to be approximately $6 million.
And our tax rate expected to be approximately 18%.
Given these assumptions, we expect second quarter net earnings of $2.28 per diluted share plus or minus <unk> 24 cents.
Before I turn the call back the operator, I'd like to share a few thoughts on our pending acquisition of that attack.
I am pleased to announce we successfully re syndicated debt financing earlier this month.
The expiration of the previous indication.
Our updated financing includes a term loan b with a $3 6 billion dollar U S dollar tranche.
In a 600 million euro tranche, both of which were substantially oversubscribed.
We also diversified our lending base with a $1 billion term loan a.
Funding will coincide with the close of the pending acquisition of Amtech.
Given the current debt market environment. The price was understandably somewhat higher this time around however, we were very pleased with the final terms in the mix of debt capital we achieved.
We believe the successful pricing demonstrates lenders' belief in the strong credit profile of the combined company.
We are confident that cash flow generation of the combined company will position us to aggressively delever the balance sheet consistent with prior acquisitions.
We're also pleased ethics business performance as evidenced by their full year 2020 results released on April four.
In fact on a pro forma basis 2021, adjusted EBITDA for the combined company would have amounted to $1.3 billion.
At Teck has also performed slightly better than we expected when we performed our initial due diligence.
Furthermore, we originally announced the acquisition, we said that we expected net leverage at closing to be slightly below three five times.
Given the extension of the timing of the transaction.
Just paid cash flow generation for both MTS and add a tech we now anticipate a more favorable net leverage ratio at closing.
MKS is a strong position to drive shareholder value creation by capitalizing on a number of attractive secular trends and.
We believe additive which further enhance those efforts.
I'd like to now turn the call back to the operator for Q&A.
Thank you.
Have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish come under yourself from the queue. Please press the pound key.
We ask that you please limit yourself to one question and one follow up question.
Our first question comes from the line of Patrick Ho with Stifel. Your line is open. Please go ahead.
Thank you very much John maybe first off I know there are a lot of moving parts on the whole supply chain and COVID-19 related issues.
Can you give a little bit of color for the June quarter, what the bigger impacts or is it the ability to procure certain components or the change in lockdowns.
And the after effects are still impacting your ability to ramp up.
The facility, there and maybe as a follow up to that what's what's been the ability on your rent to flex some of that capacity to you know because you have a large footprint, what's the ability to flex some of that capacity to a I guess open capacity.
Yeah. Thanks, Patrick for the question I think I'll take the Shenzhen one so our factory was closed for about a week or so because of the COVID-19 restrictions. So we do recover after about a week.
And so that's factored into our Q2 guidance, but I would comment that the supply chain constraints are not getting better.
Electronic components remain a big part of it but also broadened to other types of materials resins specialty metals.
So we're factoring that into our Q2 guidance as well in terms of moving our capacity between factories. There are a few factories, where we can do that but mostly our factories are still running pretty well.
In terms of utilization because theres still constrained by supply.
Great that's helpful and maybe as my follow up question for Seth in terms of gross margins you guys performed really well despite the shortfall.
In revenues and need the supply chain constraints can you just give some of the the levers are that are keeping gross margins are still pretty high levels given the current environment.
Yeah. Thank you Patrick Yeah, I would say that the obviously what we.
Do survive to a culture of high value applications. So I think what you're seeing is a reflection of our margin reflects frankly that value.
To our customers and the overall you know markets we serve.
On the the tactical level to your question, we have a number of levers we've got a world class operations team. We are really working to qualify potential other sources to mitigate inflationary pressure. We do have some pricing ability we talked about in the past that we definitely leaned into and there's more opportunity there as well in the future.
And we broad based portfolio across a number of different markets I think kind of mitigate some of the things that John talked about.
And some of the markets. We serve so it's a wide range of opportunities to widen read a different levers we pull them I think fundamentally you'll see our margins go back up over time to historical level, that's our goal for sure.
Great. Thank you again.
Thanks, Patrick.
Thank you and our next question comes from the line of Jim Macchiato with Needham <unk> Company. Your line is open. Please go ahead.
Alright. Thank you so if I look at the the vacuum solutions business being down sequentially, guys that was mainly supply chain and the COVID-19 disruption and that's I assume the area of the semiconductor business that you're you're a little bit more cautious about continuing our supply chain issues in the June quarter.
Jimmy It's John that's right you know give or take it was about down 1% in our semi business.
And that is where the majority of the supply chain constraints are hitting our business.
Okay and.
If we look at our Photonics solutions portion of the business and look at the way you're now characterizing that business. What I'm wondering is if you could provide some color on the non semi photonics business, how that's performing.
For instance are you are you seeing any signs of changing demand in the European part of that business just in light of the geopolitical situation that we're experiencing there.
Yeah, Jim Thanks for the question no we've actually seen it that part of the business of the Photonics solutions division to be pretty stable.
Yeah, we don't have a lot of exposure of business to Russia, if you will and nor supply chain and so the business has been actually pretty stable in the as we talked about life and health Sciences research and defense so in it and other industrials.
Okay. Thanks, a lot.
Thanks, Jim.
Thank you and our next question comes from the line of Scott Graham with Loop capital markets. Your line is open. Please go ahead.
Yeah, Hi, good morning, Thanks for taking the question John surfing, David So I'm, just looking at near the weakness in the PCB business and you're alluding to your.
Sort of the Oes Capex a weakening there.
And that's you know does seem to be a pivot versus where we were understanding of course that this is a lumpy business. How can we read that across well you know we're gearing up for an acquisition.
And just you know we're much more than doubling down P. C. B, where you know kind of five vaccine yet right. So I'm just wondering you know.
How how well why should we be comfortable in the next couple of quarters with you know the the PCB business weakness in your you know.
Bow to significantly.
Typically increase the size of a business, where the customers capital spending is weak.
Yes, Scott it's a fair question I would always pivot to the fact that our strategies are always long term and when we look at advanced packaging and packaging substrates, we see that as a really attractive long term opportunity for MKS and that's why we were trying to acquire at attack when you look at our flex business.
It is lumpy.
And I think it's well known that are smartphones and consumer demand in some of the the uncertainties have made our customers are cautious in terms of adding capacity for flex, but we also know that we are the leader in flex PCB via drilling there's been no loss of market share.
As far as we know so we always look at the long term and flex business will come back.
That business will grow.
And and if out of Texas part of the family their business for electronics.
<unk> will also grow so we're really looking at the long term.
Play with respect to advanced packaging.
Understood. Thank you. So I appreciate that John is good I suspect. The other question I had was about you know sort of price cost in <unk>.
Some companies look at price cost as pricing versus material some lucky it as pricing versus companywide deflation. However, you look at it. It does look like the second quarter is going to be you're going to be behind that curve and so on I know you mentioned that there's some opportunity for you in pricing.
You know kind of why does the gross margin sync that much what how what why are we not increasing prices, maybe a little bit faster right to buffer that second quarter gross margin, maybe just talk about price cost in the context of your second quarter Guide.
Yeah, Scott I think our you know the inflationary costs have hit us pretty hard.
That's it everybody pretty hard we have been left leaning into price increases, but that does take some time to recover.
And so the pace of which inflationary costs that hit us.
And the pace of our levers.
Levers in terms of price increases there was a bit of a gap I guess.
Youre seeing that in our guidance in Q2, but as Ted said, we expect that to recover over the next the outer quarters as well and you know we have a lot of backlog and so the backlog as you know commitments our previous prices and so there's a bit of a constraint in terms of how fast we can change prices.
You know versus for instance, a consumable company, where he can just change prices immediately or a chip company for that matter.
And so we do have a little bit of a lag there but be rest assured that we expect to recover that gross margin in the outer quarters.
I appreciate that John Thank you and I guess it'll be like a two quarter event, but just to tuck in sort of a question to weigh here is there any reason why with demand so strong because it doesn't sound to me like semi is weaker and that's where the supply chain.
As you know kind of hit the hardest it sounds to me like the end demand is pretty strong is there any reason why we can't reprice the backlog.
It's always an option that we've looked at and and you know we are.
To balance that with our partnerships and relationships with key customers.
So we look at that as well, but we also try to make sure that we're partnering in a long term sense with our key customers. That's really important to us that we maintain those long term partnerships and I think we get rewarded for that probably our biggest customers.
Just to add what John said is and the market share gains we generated back in 2021 is kind of an extension with John mentioned, you know, obviously technology seeing the right inflection points investing ahead of that curve is is a big driver for share gains, but the fact that customers Trust us to work with US I think is pretty important as well so I would say it's a.
It's a big picture view is how we look at it.
Alright, guys, Hey, Thanks, a lot for taking my questions.
Yeah. Thanks, Scott.
Thank you and our next question comes from the line of Joe Cuatro Cai with Wells Fargo. Your line is open. Please go ahead.
Yeah. Thanks, Thanks for taking the question Oh, maybe one on the semi side I'm. Just curious you know several of your customers are talking about diversifying their supply chains are qualifying additional yep.
Critical sub components have you guys benefited from any of that type of practice in terms of being able to maybe gain some share in some critical applications that maybe previously weren't.
Joe It's John I'm actually we have a we've actually been been the beneficiary of some of that behavior from our customers and going back to Scott's earlier question, that's because our customers Trust us and we partner with them and so when they have constraints in their supply chain.
MKS is one of the first companies to always come through and say can you deliver these other new products.
More of the the ones that are designed in and so we actually have been the beneficiary of that so you know, we're working hard and our operations team to.
To continue to deliver and overcome the supply chain constraints, but in this kind of environment. The operations team is going to be responsible for share gains.
You know, usually we get share gains from technology.
New innovations et cetera, and that's normal but in this kind of constrained environment, our ability to gain market share because of our operational teams excellence and performance. It was really a great another lever for us.
That's helpful. And then just as a follow up on the flex side.
How would you characterize the industry's or your customers disappointing relative to maybe the last down cycle have you seen them, maybe pullback on the capex somewhat quicker or faster than the past cycle in terms of just you know kind of.
Hoping to see a less of a peak to trough.
Yeah.
Yeah, No I think this one is a little different than the last cycle. Joe I think this one was started off the year with kind of uncertainty what we people weren't sure customers weren't sure of their capacity needs because there was uncertainty by their customers in terms of the signals from them and then as the quarter progressed.
Think those uncertainties became realized.
And that you know the inflationary expectations and its effect on consumer demand the geopolitics of eastern Europe didn't help and so those uncertainties became realized into kind of a risk off approach and that's what we're seeing right now in a flat market.
Very helpful. Thank you.
Thanks, Joe.
Thank you and as a reminder, when asking your questions. Please limit yourself to one question and one follow up question. Our next question comes from the line of Krish <unk> with Cowen and company. Your line is open. Please go ahead.
Hi, Good morning, this is Steven calling on behalf of Krish.
Thanks for taking my questions I guess the first one.
The more of a high level if.
If you could talk a little bit about the linearity across the three businesses throughout the quarter I guess, just looking at the the higher Dsos.
I'm kind of wondering whether.
It was the semi business that saw some of the.
The orders sort of person you are closer to the end of the quarter due to the options and protection.
Impact or if there are other and interesting.
Characteristics simple a few orders and sales across the other segments during the quarter.
Yeah, Steve This is Seth I'll take that question yeah.
Paired remarks D. The diesel a little bit higher this quarter versus prior quarters because of the linearity.
Linearity of revenue in the ER during the quarter.
You usually have a little more of a hockey stick the backend, which is more of a photonics piece of the business, but I think what you're seeing what we saw in Q1 is supply chain constraints. It was sort of a linear impact there as well so I wouldn't say, it's a timing of orders per se I think it's more of how we got parts into the operations and how we shipped out products that was more.
The linear impact I think on the quarter and that drove up DSO I mean, the aging is in good shape everything else. Its really just the timing of revenue during the quarter, it's more operational driven.
Order driven.
Got it. Thank you setup and also one more for you as well on the gross margin side.
In terms of the.
The sequential decline in gross margins.
Can you for island more color on what is the incremental change.
Change, that's driving that again, I'm, probably a mix or is it more the inflationary cost becoming a higher burden in the June quarter and are there any additional color around that would be great.
Yeah, Yeah, exactly I'll take that one as well Steve So yeah, you're right. So were down about one five points sequentially and it's virtually all inflationary pressure, that's a little bit of mix too because we mentioned the.
The flex you know the P C B V drilling revenue in Q.
You know to be relatively muted a little bit of mix there, but the lion's share of the sequential decrease of inflationary pressure, we know where it's coming from as John mentioned, we have actions in place, we're very committed to Canada.
Get back to historical levels, and you know that certainly all hands on deck work on that right now, but that's what's driving at least in the short term the impact on Q2.
And given the magnitude of it is at a higher cost is it affecting the semi business more than the other two segments.
Yeah, correct, yeah, so you'll see it in the vacuum analysis Division has the biggest impact issue. It's affecting every division, but the vast majority is the semi piece of our business.
Great. Thanks, Ed.
Yes.
Thank you and our next question comes from the line of potash Mrs. Rabb with Aaron Berg. Your line is open. Please go ahead.
Thank you good morning.
The order of photonics businesses are holding up a bit.
Sequentially and it was up a lot on a year over year basis. So what are you seeing there hasn't been impacted less by the supply chain issues or it's just better demand, which is driving that.
Yeah Josh.
No we strategic made some decisions early on when we bought Newport, which was to take the photonics technologies that we had and try to leverage that into some of the semi markets, where Newport was relatively less levered and that again like RF power was a multi year strategic decision and we bear.
In making progress with design wins over the last several years as we've talked about on these calls and you're starting to see that you're starting to see that a big part of the photonic solutions Division growth is coming from the semi market.
You see the sexual industrials being relatively stable.
And you see the Vince I'm trying to ask for the Photonics Division also relatively stable, but the growth a lot of that growth is driven by strategic decisions. We made to put that technology for the semiconductor market.
Got it got it and then as a follow up in this especially industrial segment or market.
How should we think about the growth potential in that business is it similar to advanced electronics or could it be lower than our than the electronics over the long run.
Yeah, no, that's especially industrial as we kind of look at it as a GDP plus kind of business. So that is lower than what we expect with advanced electronics, and so but that stable much more stable you can see in our guidance as well.
<unk> leverage it levers the research and research that we put into semiconductors and advanced electronics, and we only play in certain niches, where we have value and where we can.
Have that steady gross margin and cash flow from it.
Got it thanks, Sean.
Thanks, Pat Josh.
Thank you and our next question comes from the line of Hans Chung with D. A Davidson. Your line is open. Please go ahead.
Yeah. Thank you for taking my question so first.
Is it possible to quantify the impact from that something I can't concentrate to our second quarter outlook.
Like how much of a mountain bikes.
Places like Dallas, Atlanta, and concentrating on what we can do in terms of top line and then and then what's the backlog.
The March quarter versus I think what I said Hello.
Yeah. This is John it's difficult to quantify exactly what our what the supply chain constraints are on the top line I think that's your question.
Suffice it to say, though that our backlog is continuing to increase.
We don't publish that backlog bookings also continued to increase so it's not a demand problem inside backlog problem. It's a supply chain constraint problem and so we're working real hard to try to increase our output every quarter.
But as I said before the supply chain constraints, they're not getting better.
And they continue to surprise, we continue to react to react better better partnerships with our customers and our suppliers.
But they continue to surprise and I think we're also contemplating or.
Including in our guidance. The fact that there are a COVID-19 shutdowns now we were affected by Shenzhen in Q1 as you know there are a potential effects of shutdowns in Shanghai, and Beijing, and we don't have factories, there, but we have offices and certainly you know maybe third tier suppliers have factories there.
And so we're taking all that into account as we guide the revenue going forward.
Got it Okay and then next question just regarding the.
Our.
The business. So you have gained market share for the past couple of years I would say.
And.
Just kind of how much room for you guys to continue to gain share.
Particularly in the contact age tied up Anthony.
Okay.
Yeah, No I'm as you know we've been talking about design wins and incremental share gains for many years and I think you know many of our long term investors have stayed with us and they've benefited from that many other investors didn't know who to believe so they might have bailed out too bad for them.
But we were consistent we were determinant and you can see that you know this is something that doesn't happen very often in the semiconductor equipment market because of copy exact for us to be a distant number two in our power six years ago to being number one in our power you know my career that has that has happened maybe two or three times in the entire industry.
Yes.
So that's a really significant change then to your question going forward, we see that continuing to grow all that share gains that we talked about in terms of making us distant number two to number one was almost all driven by dielectric etch, we haven't even tapped into conductor etch, where we have some design wins and we.
To continue to have more design wins, and so we think that our power will continue to grow and extend its lead in market share.
Got it thank you.
Thank you and this does conclude today's question and answer session and I would like to turn the conference back over to David with like for any further remarks.
Thank you Michelle and thank you all for joining us today and for your interest in MKS Operator, you may close the call. Please.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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