Q2 2026 MKS Inc Earnings Call

August 6, 2026

Speaker #1: Good day, and thank you for standing by. Welcome to the MKS Q2 2026 earnings conference call. At this time, all participants are in the listen-only mode.

Operator: Good day. Thank you for standing by. Welcome to the MKS Second Quarter 2026 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 one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra.

Speaker #1: be a question-and-answer session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. press *11 again.

Speaker #1: raised. To withdraw your question, please Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today.

Speaker #1: Misra.

Speaker #2: Good morning, everyone. I'm Paritosh Misra. Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Ramayampurath, Executive Vice President and Chief Financial Officer.

Paretosh Misra: Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations. I'm joined this morning by John Lee, President and Chief Executive Officer, and Ram Mayampurath, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for Q2 2026, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q.

Speaker #2: Yesterday, Paritosh after market close, we released our financial results for the Q2 of 2026, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations plans and prospects for MKS comprise forward-looking statements.

Speaker #2: 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.

Speaker #2: 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.

Paretosh Misra: 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. The company disclaims any obligation to update these statements. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP, other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the investor relations section of our website for information regarding our non-GAAP financial results and the reconciliations to our GAAP measure. Our investor website also provides a detailed breakout of revenues by end market and division. I'll turn the call over to John.

Speaker #2: During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin.

Speaker #2: Please refer to our press release and the presentation materials posted to the investor relations section of our website for information regarding our non-GAAP financial results.

Speaker #2: And a reconciliation to our GAAP measure. Our investor website also provides a detailed breakout of revenues by end market and division. Now, I'll turn the call over to John.

Speaker #3: Thanks, Paritosh. And good morning, everyone. Momentum is continuing to build at MKS. Strong demand across all of our markets. Q2 revenue and key profitability metrics came in at the high end or above our guidance ranges.

John Lee: Thanks, Paretosh. Good morning, everyone. Momentum is continuing to build at MKS. Strong demand across all of our markets. Q2 revenue and key profitability metrics came in at the high end or above our guidance ranges. Our Q3 guidance is supported by strong order activity that we expect will drive continued robust year-over-year growth. Against the backdrop of intensifying AI-driven investment across semiconductor and advanced packaging applications, we are demonstrating the strength of our foundational position. From vacuum, plasma, and power products that enable leading-edge etch and deposition applications, to optical components and photonic subsystems for the lithography, metrology, and inspection markets, to laser systems, proprietary chemistries, and chemistry equipment for the advanced circuit boards on which leading-edge semi devices are integrated. We are a leading enabler of advanced electronics. This is MKS at its core.

Speaker #3: Our Q3 guidance is supported by strong order activity that we expect will drive continued robust year-over-year growth. Against the backdrop of intensifying AI-driven investment across semiconductor and advanced packaging applications, we are demonstrating the strength of our foundational position.

Speaker #3: From vacuum plasma power products that enable leading-edge etch and deposition applications, to optical components and photonic subsystems for the lithography, metrology, and inspection markets, to laser systems, proprietary chemistries, and chemistry equipment for the advanced circuit boards, on which leading-edge semi-devices are integrated, we are a leading enabler of advanced electronics.

Speaker #3: This is MKS at its core. Our performance reflects the benefits of investments we've made and continue to make, in broadening our capabilities and expertise.

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

Speaker #3: Deepening our relationships with ecosystem. And building out the global capacity needed to meet the unprecedented demands of this investment cycle. We're not only excelling in current environment, but also generating new design wins that position us to capitalize on long-term growth opportunities.

Speaker #3: Now, I'll review our Q2 end market performance and Q3 outlook. Starting with our semiconductor market. Revenue was above the midpoint of expectations as we and our supply chain partners continue to ramp our operations.

Speaker #3: Revenue grew 19% sequentially and 28% year-over-year. Which accelerated meaningfully from the 13% year-over-year result in Q1. Growth was broad-based across deposition and etch products, including RF power for NAND upgrades, and vacuum subsystems, plasma generators, reactive gases, for advanced logic and DRAM applications.

Speaker #3: Our photonics and optics solutions also continue to gain momentum in the lithography, metrology, and inspection market. Overall, we continue to see strong order activity and very healthy order backlog that gives us good visibility through the second half of the year.

John Lee: Our photonics and optics solutions also continue to gain momentum in the lithography, metrology, and inspection market. Overall, we continue to see strong order activity and very healthy order backlog that gives us good visibility through H2. We also continue to achieve design wins, including in advanced logic, where we are the process tool of record for dissolved gas applications, and in RF power, where we have segment share leadership in high aspect ratio dielectric etch applications. Our semi outlook for Q3 implies year-over-year growth will accelerate to over 50%, with strength across our entire portfolio of solutions. This anticipated growth is an indicator of MKS' longstanding track record of WFE outperformance during improving investment environments. Turning to Electronics and Packaging, AI-related applications are driving a meaningful increase in investment. Revenue was above the high end of our outlook, up 19% sequentially and 44% year-over-year.

Speaker #3: We also continue to achieve design wins including in advanced logic, where we are the process tool record for dissolved gas applications. And in RF power, where we have segment share leadership and high aspect ratio dielectric etch applications.

Speaker #3: Our semi outlook for Q3 implies year-over-year growth will accelerate to over 50%, with strength across our entire portfolio of solutions. This anticipated growth is an indicator of MKS's long-standing track record of WFE outperformance during improving investment environments.

Speaker #3: Turning to electronics and packaging, AI-related applications are driving a meaningful increase in investment. Revenue was above the high end of our outlook, up 19% sequentially and 44% year-over-year.

Speaker #3: Laser drilling system sales into the flex PCB markets for advanced smartphones and peripherals were strong. And chemistry sales remained robust as well. In chemistry equipment, we said last year that order activity had been elevated for multiple quarters.

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

Speaker #3: It has moved another level above that. Our chemistry equipment demand is easily the strongest it has ever been. Supported by AI server investments, including optical modules.

Speaker #3: Our visibility now extends through 2027. And to meet this growing demand, we recently announced we are doubling the capacity of our Guangzhou equipment factory.

Speaker #3: And notably, in rigid PCB drilling, we're pleased to see increased order activity as the market embraces our differentiated capabilities in a compelling cost of ownership proposition.

Speaker #3: As we have noted in the past, our proprietary chemistry carries higher gross margins than equipment. And we have high chemistry tax rates, with our equipment customers.

Speaker #3: So we believe the stage is set to continued attractive, high-margin chemistry growth through this cycle. We continue to be active plans, which serves as a good leading indicator for strong equipment orders.

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

Speaker #3: Overall, the growth we're seeing in EMP reflects our long-held view that the trends driving device scaling in semi would ultimately come to the advanced PCB market as device integration becomes a core requirement for advanced electronics.

Speaker #3: That day has arrived. And advanced PCBs are rising in importance as increasing layer count requirements and integration challenges extend to higher-end smartphones, AI servers, and other advanced electronics.

Speaker #3: In Q3, we expect electronics and packaging revenue to be up over 30% year-over-year, with AI-related investment partially offset by flex equipment-related seasonality. Our flex market is typically down sequentially in Q3, ahead of the next design cycles, and we are coming off a very strong first half.

John Lee: Our flex market is typically down sequentially in Q3 ahead of the next design cycles, and we are coming off a very strong H1. I'd like to highlight how we are scaling in our semiconductor and Electronics & Packaging business to meet anticipated demand growth today and over the next several years. Near-term, we are increasing our working capital investments to address rapidly accelerating demand in the current cycle. Longer-term, capacity planning is also key. Our new Malaysia Supercenter, which opened in Q2, can be expanded at our option, and we are building out our chemistry equipment facility in Guangzhou, as I mentioned earlier. These facilities will play an important role in supporting our future capacity needs, and their proximity to many of our customers will strengthen engagement as well as deliver performance benefits as the new facilities ramp.

Speaker #3: I'd like to highlight how we are scaling in our semiconductor and electronics and packaging business to meet anticipated demand growth today and over the next several years.

Speaker #3: Near term, we are increasing our working capital investments to address rapidly accelerating demand in the current cycle. Longer term, capacity planning is also key.

Speaker #3: Our new Malaysia supercenter, which opened in Q2, can be expanded at our option, and we are building out our chemistry equipment facility in Guangzhou, as I mentioned earlier.

Speaker #3: These facilities will play an important role in supporting our future capacity needs, and their proximity to many of our customers strengthens engagement, as well as deliver performance benefits as the new facilities ramp.

Speaker #3: Switching to our specialty industrial market, we delivered a strong quarter, up 8% sequentially and 14% year-over-year. Revenue has not been this high since 2023.

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

Speaker #3: Driven by our Data Comm and Defense markets, performance across our remaining specialty industrial markets was steady in Q2. We expect strong performance in our specialty industrial market in Q3, led by the markets I've called out.

Speaker #3: We're pleased to see how our foundational enabling technologies extend beyond semi and electronics and packaging, into adjacent opportunities that leverage our R&D spend and deliver strong incremental cash flows.

Speaker #3: Wrapping up, MKS is executing at a high level financially, operationally, and technologically. We've further broadened our capabilities and expertise to address key opportunities across the ecosystem.

Speaker #3: Resulting in deepening penetration in areas like lithography, metrology, and inspection, and advanced PCBs at critical time for the industry. We're also making strategic investments to support our customers and drive profitable growth well into the future.

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

Speaker #3: Our customer engagement and design win activity underscores our role as a foundational enabler of advanced electronics who looks ahead and solves ahead. Thank you to our MKS team, our suppliers, and customers for your hard work and partnership.

Speaker #3: We are incredibly excited about what lies ahead. Now, here's Ram to run through the quarter and our financial outlook in more detail.

Speaker #2: Thank you, John. And good morning, everyone. We delivered an excellent second quarter, and our seeing increased demand across all end markets. We remain focused on driving profitable growth with disciplined execution and continue to make the investments needed to capitalize on the growth opportunities that we see ahead.

Ram Mayampurath: Thank you, John. Good morning, everyone. We delivered an excellent Q2 and are seeing increased demand across all end markets. We remain focused on driving profitable growth with disciplined execution and continue to make the investments needed to capitalize on the growth opportunities that we see ahead. Let me begin by reviewing our Q2 results in detail. MKS reported revenue of $1.25 billion, up 16% sequentially and 28% year-over-year. Year-over-year growth trends accelerated through the H1 of the year, and we expect that to continue in Q3 as demand increases across our end markets. Q2 semiconductor revenue was $554 million, up 19% sequentially and 28% year-over-year. In addition to continued strengthening of demand in DRAM and logic, we saw increased momentum in NAND upgrade activity.

Speaker #2: Let me begin by reviewing our Q2 results in detail. MKS reported revenue of $1.25 billion, up 16% sequentially and 28% year-over-year. Year-over-year growth trends accelerated through the first half of the year, and we expect that to continue in Q3 as demand increases across our end markets.

Speaker #2: Second quarter semiconductor revenue was $554 million, up 19% sequentially and 28% year-over-year. In addition to continued strengthening of demand in DRAM and logic, we saw increased momentum in NAND upgrade activity.

Speaker #2: Collectively, this demand is driving strength across our key product categories, led by plasma and reactive gases, and vacuum products. While also supported by robust growth in our power solutions, optics, and photonics offerings.

Ram Mayampurath: Collectively, this demand is driving strength across our key product categories, led by plasma and reactive gases and vacuum products, while also supported by robust growth in our power solutions, optics, and photonics offerings. Q2 Electronics & Packaging revenue was $381 million, an increase of 19% quarter over quarter and 44% year over year. The very strong sequential improvement highlighted elevated demand across our portfolio, including chemistry solutions, chemistry equipment, and flexible PCB drilling sales. The even stronger year over year comparison was driven by demand for chemistry equipment, which continues to inflect higher. We are also seeing very healthy demand for chemistry solutions and flexible PCB drilling equipment. As the chemistry business continues to benefit from accelerating demand for AI-related applications, sales in the quarter were up 21% year over year, excluding the impact of FX and palladium pass-through.

Speaker #2: Second quarter electronics and packaging revenue was $381 million, an increase of 19% quarter over quarter and 44% year-over-year. The very strong sequential improvement highlighted elevated demand across our portfolio including chemistry solutions, chemistry equipment, and flexible PCB drilling sales.

Speaker #2: The even stronger year-over-year comparison was driven by demand for chemistry equipment, which continues to inflect higher. We are also seeing very healthy demand for chemistry solutions and flexible PCB drilling equipment.

Speaker #2: As the chemistry business continues to benefit from accelerating demand for AI-related applications, sales in the quarter were up 21% year-over-year excluding the impact of FX and Palladium pass-through.

Speaker #2: In our specialty industrial market, second quarter revenue was $313 million, an increase of 8% sequentially and 14% year-over-year. The year-over-year growth was driven by data comm and defense applications, while the sequential improvements reflected continued momentum in data comm as well as seasonal recovery following the Lunar New Year.

Ram Mayampurath: In our specialty industrial market, Q2 revenue was $313 million, an increase of 8% sequentially and 14% year over year. The year over year growth was driven by datacom and defense applications, while the sequential improvements reflected continued momentum in datacom as well as seasonal recovery following the Lunar New Year. Turning to GM, we reported Q2 GM of 47.6%. In addition to higher volume, we also saw a benefit from certain discrete items in the quarter. Excluding these discrete benefits, GM remained very healthy despite unfavorable product mix and accelerated investments necessary to address rising demand. Q2 operating income was approximately $320 million, yielding an operating margin of 25.6%, which was up 480 basis points year over year and well above our guidance midpoint. OpEx of $275 million were in line with our guidance.

Speaker #2: Turning to gross margin, we reported second quarter gross margin of $47.6%. In addition to higher volume, we also saw a benefit from certain discrete items in the quarter.

Speaker #2: Excluding these discrete benefits, gross margin remained very healthy, despite unfavorable product mix and accelerated investments necessary to address rising demand. Second quarter operating income was approximately $320 million, yielding an operating margin of 25.6%, which was up 480 basis points year-over-year and well above our guidance midpoint.

Speaker #2: Operating expenses of $275 million were in line with our guidance. We are driving very healthy operating leverage in the business as revenue scales. Second quarter adjusted EBITDA was $358 million, yielding a 28.6% margin and also above the high end of our guidance.

Ram Mayampurath: We are driving very healthy operating leverage in the business as revenue scales. Q2 adjusted EBITDA was $358 million, yielding a 28.6% margin and also above the high end of our guidance. Net interest expense was $33 million compared with $46 million in Q2 2025, reflecting the full quarter benefits of our Q1 financing actions, as well as continued proactive principal prepayments. Our Q2 effective tax rate was 19.6% and in line with our guidance. Q2 net earnings were $232 million or $3.30 per diluted share, up 86% year over year on a per share basis and above the high end of our guidance. Let me now turn to our cash flow and balance sheet. We closed the quarter with over $1.6 billion of liquidity, comprised of cash and cash equivalents of $611 million and our undrawn revolving credit facility of $1 billion.

Speaker #2: Net interest expenses was $33 million, compared with $46 million in the second quarter of 2025, reflecting the full quarter benefits of our first quarter financing actions as well as continued proactive principal prepayments.

Speaker #2: Our second quarter effective tax rate was 19.6% and in line with our guidance. Second quarter net earnings were $232 million, or $3.30 per diluted share, up 86% year-over-year on a per-share basis and above the high end of our guidance.

Speaker #2: Let me now turn to our cash flow and balance sheet. We closed the quarter with over $1.6 billion of liquidity, comprised of cash and cash equivalents of $611 million, and our undrawn revolving credit facility of $1 billion.

Speaker #2: We generated free cash flow of $188 million, about 15% of our investments in capex and working capital to increase through the remainder of the year, as we continue to prioritize our organic growth.

Ram Mayampurath: We generated free cash flow of $188 million, about 15% of our revenue. We expect investments in CapEx and working capital to increase through the remainder of the year as we continue to prioritize our organic growth. Beyond that, we will maintain our focus on proactively deleveraging to strengthen the balance sheet. We made a $100 million prepayment on our term loan earlier this week. Our leverage at the end of Q2 was three times based on a trailing 12-month adjusted EBITDA of $1.1 billion, which is down one full turn since Q2 of last year, as we continue to make strong progress towards our target leverage ratio. Finally, we paid a dividend of $0.25 per share, or $17 million, following the 14% increase in our dividend in Q1. Let me now turn to our Q3 outlook.

Speaker #2: Beyond that, we will maintain our focus on proactively deleveraging to strengthen the balance sheet. We made $100 million prepayment on our term loan earlier this week, our leverage at the end of Q2 was three times based on a trailing 12-month adjusted EBITDA of $1.1 billion.

Speaker #2: Which is down one full turn since Q2 of last year, as we continue to make strong progress towards our target leverage ratio. Finally, we paid a dividend of 25 cents per share, or $17 million, following the 14% increase in our dividend in Q1.

Speaker #2: Let me now turn to our third quarter outlook. We expect revenue of $1.35 billion, plus or minus $40 million, which represents continued strong sequential improvement and further acceleration in year-over-year growth.

Ram Mayampurath: We expect revenue of $1.35 billion ±40 million, which represents continued strong sequential improvement and further acceleration in year-over-year growth. Our Q3 outlook by end market is as follows: Revenue from our semiconductor market is expected to be $630 million ±15 million. Revenue from our Electronics & Packaging market is expected to be $385 million ±15 million, and revenue from our specialty industrial market is expected to be $335 million ±10 million. Based on anticipated revenue levels and product mix, we estimate Q3 gross margin of 47% ±100 basis points. We expect Q3 operating expenses of $280 million ±5 million. We expect operating expenses will grow at a much lower rate than revenue.

Speaker #2: Our third quarter outlook by end market is as follows. Revenue from our semiconductor market is expected to be $630 million, plus or minus $15 million.

Speaker #2: Revenue from our electronics and packaging market is expected to be $385 million, plus or minus $15 million. And revenue from our specialty industrial market is expected to be $335 million, plus or minus $10 million.

Speaker #2: Based on anticipated revenue levels and product mix, we estimate third quarter gross margin of $47%, plus or minus 100 basis points. We expect third quarter operating expenses of $280 million, plus or minus $5 million.

Speaker #2: We expect operating expenses will grow at a much lower rate than revenue. We expect third-quarter operating income of $355 million, with an operating margin of 26.3%.

Ram Mayampurath: We expect Q3 operating income of $355 million with an operating margin of 26.2%. We estimate Q3 adjusted EBITDA of $395 million ±28 million. We continue to expect CapEx for the year to be in the range of 4% to 5% of our revenue. We expect our Q3 tax rate to be approximately 20% and the full-year tax rate to be at the lower end of the 18% to 20% range we provided previously. Based on these assumptions, we expect Q3 net earnings per diluted share of $3.58 ±$0.31. As our Q2 results and Q3 guidance indicate, our business momentum continues to increase. Our focus is on meeting accelerating customer demand. We remain committed to making the investments necessary to support growth while continuing to prioritize our deleveraging efforts.

Speaker #2: We estimate third quarter adjusted EBITDA of $395 million, plus or minus $28 million. We continue to expect capex for the year to be in the range of $4 to $5% of our revenue.

Speaker #2: We expect our third quarter tax rate to be approximately 20%, and the full year tax rate to be at the lower end of the 18 to 20% range we provided previously.

Speaker #2: Based on these assumptions, we expect third quarter net earnings per diluted share of $3.58, plus or minus $31 cents. As our Q2 results and Q3 guidance indicate, our business momentum continues to increase.

Speaker #2: Our focus is on meeting accelerating customer demands. We remain committed to making the investments necessary to support growth, while continuing to prioritize our deleveraging efforts.

Speaker #2: We are in a great position entering the second half of the year. And with that, operator, please open the call for questions.

Ram Mayampurath: We are in a great position entering the H2 of the year. With that, operator, please open the call for questions.

Speaker #1: Thank you. At this time, we will conduct a question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone.

Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Steve Barger at KeyBanc Capital Markets.

Speaker #1: And wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.

Speaker #1: Our first question comes from Steve Barger at KeyBank Capital Markets.

Steve Barger: Hey, thanks. Good morning, guys.

Speaker #2: Hey, thanks. Good morning, guys.

Speaker #3: Good morning, Steve.

Ram Mayampurath: Morning, Steve.

John Lee: Morning, Steve.

Steve Barger: I'm going to start on some of the NAND tool upgrade. You've talked about that activity will contribute in coming years, but Greenfield NAND, I think, is even better business. Can you update us on what the upgrade cycle looks like and how that bridges to Greenfield projects you may see entering equipment planning?

Speaker #2: I'm going to start on some of the NAND tool upgrade you've talked about that activity will contribute in coming years. But Greenfield NAND, I think, is even better business.

Speaker #2: Can you update us on what the upgrade cycle looks like and how that bridges to Greenfield projects you may see entering equipment planning?

Speaker #3: Yes, Steve. So we did mention that we are seeing upgrade activity in Q2. We certainly expect that to continue. It can be lumpy, but we know that the industry is certainly trying to increase capacity in NAND.

Ram Mayampurath: Yes, Steve. We did mention that we are seeing upgrade activity in Q2. We certainly expect that to continue. It can be lumpy, but we know that the industry is certainly trying to increase capacity in NAND. Of course, there's been some announcements of Greenfields, and those factories, as you say, will be even better for our power as well as the rest of our portfolio. Those factories, fabs, will be coming in towards the end of 2027, beginning of 2028. That's the plan right now. Between now and then, we would expect continued upgrade activity.

John Lee: Yes, Steve. We did mention that we are seeing upgrade activity in Q2. We certainly expect that to continue. It can be lumpy, but we know that the industry is certainly trying to increase capacity in NAND. Of course, there's been some announcements of Greenfields, and those factories, as you say, will be even better for our power as well as the rest of our portfolio. Those factories, fabs, will be coming in towards the end of 2027, beginning of 2028. That's the plan right now. Between now and then, we would expect continued upgrade activity.

Speaker #3: And then, of course, there's been some announcements of Greenfield, and those factories, as you say, will be even better for our power as well as the rest of our portfolio.

Speaker #3: And those factories fabs will be coming in towards the end of '27, beginning of '28. So that's the plan right now. So between now and then, we would expect continued upgrade activity.

Speaker #2: Got it. Can you compare the magnitude of dollar spend for a new leading-edge tool versus an upgrade?

Steve Barger: Got it. Can you compare the magnitude of dollar spend for a new leading-edge tool versus an upgrade?

Speaker #3: Yeah. We haven't really disclosed that, but I would just say that the our power part of that upgrade is the largest part of the BOM in terms of cost.

John Lee: Yeah, I would just say that the RF power part of that upgrade is the largest part of the BOM in terms of cost, and therefore opportunity for MKS. That's why when there are upgrades, we benefit from that. Of course, if it's a brand-new tool, we would have the rest of the semiconductor portfolio around that tool, that would be better. The RF power content is large.

Speaker #3: And therefore, opportunity for MKS. That's why when there are upgrades, we benefit from that. Of course, if it's a brand new tool, we would have the rest of the semiconductor portfolio around that tool.

Speaker #3: So that would be better. But the our power content is large.

Speaker #2: Got it. And then one quick follow-up. Really appreciate the commentary on visibility into '27 and electronics and packaging. As we've gone through earnings, some of your biggest semiconductor customers said visibility is the best it's ever been.

Steve Barger: Got it. Then one quick follow-up. Really appreciate the commentary on visibility into 2027 in electronics and packaging. As we've gone through earnings, some of your biggest semiconductor customers said visibility is the best it's ever been for their business. Can you talk about lead times and visibility into 2027 on the semi side?

Speaker #2: For their business, can you talk about lead times and visibility into 2027 on the semi side?

Speaker #3: Yeah, sure. We were in constant communication with our customers, as you know. They have given us their plans and expectations much further out than normal.

John Lee: Yeah, sure. We're in constant communication with our customers, as you know. They have given us their plans, expectations, much further out than normal. We are building capacity and inventory and scaling our factories and getting the labor in to meet those anticipated increases from our customers. We are planning to make sure that we're not the constraint. Lead times right now for us are still kind of normal. We're executing really well, given we're already a couple of quarters into the ramp. Of course, we've got to manage many suppliers, but right now our supply chain is stepping up.

Speaker #3: And we are building capacity and inventory and scaling our factories and getting the labor in to meet those anticipated increases from our customers. So we are planning to make sure that we're not the constraint.

Speaker #3: Lead times right now for us are still kind of normal. So we're executing really well given we're already a couple of quarters into the ramp.

Speaker #3: So, of course, we've got to manage many suppliers, but right now, our supply chain is stepping up.

Speaker #2: Understood. Thanks.

Steve Barger: Understood. Thanks.

Speaker #3: Thanks, Steve.

John Lee: Thanks, Steve.

Speaker #1: Our next question comes from Bhavesh Lodhaya. BMO Capital Markets.

Operator: Our next question comes from Bhavesh Lodaya, BMO Capital Markets.

Bhavesh Lodaya: Hi, good morning. Can you give us an update around the ramp up of Malaysia and timing capacities, as you ramp up those things? Are you still comfortable with the $180 to 200 billion of WFE that you can support with those plans?

Speaker #4: Hi, good morning. Can you give us an update around the ramp-up of Malaysia and telling capacities as you ramp up those things? And are you still comfortable with the 180 to 200 billion dollars of WFE that you can support with those plans?

Speaker #3: Thanks, Bhavesh. Yeah. Malaysia has started ramping. In fact, we could say that the first revenue shipments have occurred there. It's still early days, of course.

John Lee: Thanks, Bhavesh. Yeah. Malaysia has started ramping. In fact, we could say that the first revenue shipments have occurred there. It's still early days, of course. We've said in the past that we did not need Malaysia for 2026, to meet the 2026 demand. Malaysia is ramping up to meet the 2027 demand, and then beyond that. We had talked about capacity planning last quarter, that we would need Penang, as well as perhaps other sites. Right now, we have reconfigured things so that we believe that when we fill out Penang, we will be able to support a WFE in that $200 to 250 billion range, which is an incremental improvement from what we said last quarter. Of course, in addition to that, we announced the doubling of capacity in our MSD chemistry equipment factory in Guangzhou.

Speaker #3: We've said in the past that we did not need Malaysia for 2026 to meet the 2026 demand. So, Malaysia is ramping up to meet the 2027 demand.

Speaker #3: And then beyond that, we had talked about capacity planning, last quarter, that we would need Penang as well as perhaps other sites right now.

Speaker #3: We have reconfigured things so that we believe that when we fill out Penang, we will be able to support a WFE in that 200 to 250 billion range.

Speaker #3: Which is an incremental improvement from what we said last quarter. And of course, in addition to that, we announced the doubling of capacity in our MSD chemistry equipment factory in Guangzhou.

Bhavesh Lodaya: Got it. Question on your specialty industrials platform. It's a nice step change in the earnings growth profile. Your guidance seems to indicate it's going to grow in the high teens in Q3. Can you touch on some of the end markets or sectors that are helping? I know you called out a couple of them. It looks like those have to be very strong for the overall platform to grow in the high teens. Maybe talk about the durability of those earnings. Are there any timing benefits, and how should we think about the baseline of this platform into the next year?

Speaker #4: Got it. And the question on your specialty industrials platform, it's a nice step change in the earnings growth profile. Your guidance seems to indicate it's going to grow in the high teens in Q3.

Speaker #4: Can you touch on some of the end markets or sectors that are helping? I know you called out a couple of them. But it looks like pretty those are to be very strong for the overall platform to grow in the high teens.

Speaker #4: Maybe talk about the durability of those earnings. Are there any timing benefits? And how should we think about the baseline of this platform into the next year?

Speaker #3: Yeah, thanks for that. I think we called out two of the submarkets and that was Datacom, Data Communications. Now, again, that's driven by AI.

John Lee: Yeah, thanks for that. I think we called out two of the sub-markets. That was datacom, data communications. Now again, that's driven by AI, so communications testing for AI data centers. That continues to be strong. We expect that to continue to be strong. It should follow, for instance, the AI investments for the industry. The other segment we called out was defense. That has continued to be strong and grown over the last several quarters. That's really a market where it probably depends on your view of defense. Those two markets continue to remain strong, and that's why our guidance for specialty industrials in Q3 remains strong. That's the color we can give you. The other sub-markets, one is automotive. That's kind of bouncing along. No degradation, no material improvement either.

Speaker #3: So, communications testing for AI data centers—that continues to be strong. We expect that to continue to be strong. It should follow, for instance, the AI investments for the industry.

Speaker #3: The other segment we call that was defense. And that has continued to be strong and grown over the last several quarters. And that's really a market where it probably depends on your view of defense.

Speaker #3: But those two markets continue to remain strong. That's why our guidance for specialty industrials in Q3 remains strong. So that's the color we can give you.

Speaker #3: The other submarkets, one is automotive. That's kind of bouncing along. No degradation. No material improvement either. So and then industrials, industrials, that is also we're seeing incremental improvement there, but not to that same order of magnitude as Datacom and defense.

John Lee: Industrials, that is also, we're seeing incremental improvement there, but not to that same order of magnitude as datacom and defense.

Speaker #4: Thank you.

Bhavesh Lodaya: Thank you.

Speaker #3: Thank you.

John Lee: Thank you.

Speaker #1: Our next question comes from Matthew Priscow at Cantor.

Operator: Our next question comes from Matthew Prisco at Cantor.

Speaker #5: Hey, guys. Thanks for taking the question. I guess, first, on the EMP side, how should we be thinking about the chemistry growth potential moving forward given this continued equipment strength?

Matthew Prisco: Hey, guys. Thanks for taking the question. I guess first on the E&P side, how should we be thinking about the chemistry growth potential moving forward, given this continued equipment strength? Is this something we look for a meaningful growth inflection in 2027, 2028 as those systems move to high-volume manufacturing? Any update you can provide on the AI contribution as a percentage of those revenues?

Speaker #5: Is this something kind of we look for a meaningful growth inflection in 2027, 2028 as those systems move to high volume manufacturing and any update you can provide on the AI contribution as a percentage of those revenues?

Speaker #3: Yeah, Matt. Maybe I'll start with the AI contribution. We had said in '24 was 5% AI chemistry as a percentage for our chemistry overall.

John Lee: Matt, maybe I'll start with the AI contribution. We had said in 2024 it's 5% AI chemistry as a percentage of our chemistry overall, then 10%, and this year 15%. Last quarter, I would say it's incrementally better. Think about 15% to 20% as the right number now for chemistry as a percentage of our chemistry for AI. That's one update. I would also say that the chemistry equipment business is growing very, very fast. We did talk about the fact that we have visibility through 2027, which gives us the confidence to build that Guangzhou factory, expand that capacity. I would say, too, that we have said the percentage of chemistry, or the amount of chemistry that comes out for every dollar of equipment sales is in that 20% to 40% range.

Speaker #3: Then 10 in this year, 15. Last quarter, I would say it's incrementally better. So think about 15 to 20 percent as the right number now for chemistry as a percentage of our chemistry for AI.

Speaker #3: So that's one update. I would also say that the equipment business is the chemistry equipment business is growing very, very fast. We did talk about the fact that we have visibility through 2027, which gives us the confidence to build that Guangzhou factory, expand that capacity.

Speaker #3: I would say too that we have said the percentage of chemistry or the amount of chemistry that comes out for every dollar of equipment sales is in that 20% to 40% range.

Speaker #3: That's still true, but maybe the update here for your modeling is that we're selling a lot more of the higher-end pieces of equipment. Fundamentally, because AI boards are more difficult and you need higher-end equipment.

John Lee: That's still true, but maybe the update here for your modeling is that we're selling a lot more of the higher-end pieces of equipment, fundamentally because AI boards are more difficult, and you need higher-end equipment. Those come with higher ASPs, and so mathematically, that 20% to 40% range, think of it at the lower end now, and that's just a math problem. The chemistry's still there, but the ASP of the equipment is higher now.

Speaker #3: Those come with higher ASPs. And so mathematically, that 20 to 40 percent range think of it at that lower end now. And that's just a math problem.

Speaker #3: The chemistry is still there. But the ASP of the equipment is higher now.

Speaker #5: Perfect. That's helpful. And then on the debt side, we're seeing strong sequential growth in Q2, guided strong sequential growth in Q3. Voluntary prepayment kind of staying the same.

Matthew Prisco: Perfect. That's helpful. On the debt side, we're seeing strong sequential growth in Q2, guided strong sequential growth in Q3. Voluntary prepayment kind of staying the same, and I understand you're investing supply to meet demand, but can you maybe give us updated thoughts on strategy around deleveraging and at what point do these voluntary payments begin to move more meaningfully higher? Thank you.

Speaker #5: And I understand you're investing in supply to meet demand, but can you maybe give us an updated thought on strategy around deleveraging, and at what point do these voluntary payments begin to move more meaningfully higher?

Speaker #5: Thank you.

Speaker #3: Yeah. Hi, Matt. This is Rob. I'll take that. It's a great question. As we have said before, investing in organic growth, supporting our organic growth as first priority and then strengthen the balance sheet, deep prepayment on our term loan is number two, a close number two, I would say.

Ram Mayampurath: Hi, Matt. This is Ram. I'll take that. It's a great question. As we have said before, investing in organic growth, supporting our organic growth is first priority, and then strengthening the balance sheet, prepayment on our term loan is number two, a close number two, I would say. In the H2 of the year, you will see our CapEx picking up and inventory growing as we prepare for the ramp. Having said that, we continue to make the prepayment of $100 million each quarter, and we are looking at making additional payments in Q3 and in Q4. Although it has not happened yet, it is high on our priority.

Speaker #3: In the second half of the year, you will see our capex picking up. And inventory growing as we prepare for the ramp. Having said that, we continue to make the prepayment of 100 million each quarter.

Speaker #3: And we are looking at making additional payments in Q3 and in Q4. So although it has not happened yet, it is high on our priority.

Speaker #5: Thank you.

Matthew Prisco: Thank you.

Speaker #1: Our next question comes from Michael Manny at Bank of America Securities.

Operator: Our next question comes from Michael Manning at Bank of America Securities.

Operator: Our next question comes from Michael Mani at Bank of America Securities.

Speaker #5: Hi, good morning. Thanks so much for taking my questions. To start on semi-market, nice to see that on a quarterly runway basis, you've crossed the last peak.

Michael Manning: Hi, good morning. Thanks so much for taking my questions. To start on semi market, nice to see that on a quarterly run rate basis, you've crossed the last peak that the segment saw back in 2022. If you were to compare then versus now, could you give us an update on how much of the mix is NAND versus DRAM versus logic? Especially NAND, so we get a rough sense of how far it is off from the bottom. Looking ahead, how do you expect that mix to evolve, especially as you pick up more wins on the logic side? Thank you.

Speaker #5: But the segment saw back in 2022. If you were to compare then versus now, could you give us an update on how much of the mix is NAND versus DRAM versus Logic?

Speaker #5: So especially with NAND, we get a rough sense of how far it is off from the bottom. And looking ahead, how do you expect that mix to evolve, especially as you pick up more winds on the Logic side?

Speaker #5: Thank you.

Speaker #3: Morning, Michael. Yeah, I'll start with that. I think the way we're looking at it in terms of our end markets, it's still largely Logic, DRAM, driven semi-market.

John Lee: Morning, Michael. Yeah, I'll start with that. I think the way we're looking at it in terms of our end markets, it's still largely a logic, DRAM-driven semi market. The NAND upgrade was nice to see. We kind of expect that to continue. It might be even better, but eventually in 2028, with NAND Greenfields, that will become a bigger percentage of our semi revenue. I think also you pointed out that we are getting to that point of over-performance of WFE during the ramp as we've done historically, and our guidance in Q3 of our semi revenue implies that we will be over 50% year-over-year in Q3. To just give the audience a little more color, remember, we are exposed to 85% of WFE, so every segment of WFE.

Speaker #3: The NAND upgrade was nice to see. We kind of expect that to continue. It might be even better. But eventually, in 2028, when NAND greenfields, that will become a bigger percentage of our semi revenue.

Speaker #3: I think also you pointed out that we are getting to that point of overperformance of WFE during the ramp as we've done historically. And our guidance in Q3 of our semi revenue implies that we will be over 50% year over year.

Speaker #3: In Q3. And to just give the audience a little more color, remember, we are exposed to 85% of WFE. So every segment of WFE.

Speaker #3: And as we've said in the past, in lithometrology inspection, those amplitudes are smaller in terms of the ramp than dep batch. So our average is over 50%.

John Lee: As we've said in the past, in litho metrology inspection, those amplitudes are smaller in terms of the ramp than dep/etch. Our average is over 50%, but you can do the math as well as I can, that the dep/etch part is significantly higher than that average.

Speaker #3: But you can do the math as well as I can that the debt batch part is significantly higher than that average.

Speaker #5: Great. Thank you. Very helpful. And then on EMP, could you help decompose between this past quarter you reported and what you're seeing into Q3 and potentially even into Q4?

Michael Manning: Great, thank you. Very helpful. Then on EMP, could you help decompose between this past quarter you reported and what you're seeing into Q3 and potentially even into Q4? Where is the strength coming from between chemistry versus electroplating versus flex drilling? Is it fair to say that maybe some of the demand destruction here related to mobile were more benign than feared, or is it still kind of too early to make that judgment?

Speaker #5: Where is the strength coming from between chemistry versus electroplating versus flex drilling? And is it fair to say that maybe some of the demand destruction fears related to mobile were more benign than feared, or is it still kind of too early to make that judgment?

Speaker #3: Yeah, regarding the demand destruction that the industry had feared earlier in the year, I think it is more benign than feared. That's true. We could see it in our flex drilling because the flex drilling business has was very strong in the first half.

John Lee: Yeah. Regarding the demand destruction that the industry had feared earlier in the year, I think it is more benign than feared. That's true. We could see it in our flex drilling, because the flex drilling business was very strong in the H1. There is seasonality to it. New form factors and high-end smartphones have been fairly strong for us, and that's reflected in our flex drilling system revenue. That's pretty good. Now, the chemistry for the rest of the consumer products also goes through seasonality, but it's really AI that's driving the quarter-on-quarter growth is our expectation. Then the other part is chemistry equipment. We are shipping that chemistry equipment as fast as we can. To add a little more color to the prepared remarks, we talked about the Guangzhou factory, doubling capacity there.

Speaker #3: There is seasonality to it. But new form factors, and high-end smartphones, have been fairly strong for us. And that's reflected in our flex drilling system revenue.

Speaker #3: So that's pretty good. Now, the chemistry for the rest of the consumer products also goes through seasonality. But it's really AI that's driving the quarter-on-quarter growth as our expectation.

Speaker #3: And then the other part is chemistry equipment. We are shipping that chemistry equipment as fast as we can. And to add a little more color to the prepared remarks, we've talked about the Guangzhou factory, Dublin capacity there.

Speaker #3: We've talked in the past about what happens if the current Guangzhou factory is full. And that was to use our Germany factory. And we have turned on Germany as well.

John Lee: We've talked in the past about what happens if the current Guangzhou factory is full, and that was to use our Germany factory, and we have turned on Germany as well, to fill the gap between now and when the Guangzhou second factory comes online. We are shipping equipment as fast as we can. To the earlier question, that is great for market share of chemistry in the future. The equipment does have a lower gross margin, so that mix does affect the overall company gross margin. We're okay with that because it's a great market share and much higher chemistry gross margin later.

Speaker #3: To fill the gap between now and when the Guangzhou second factory comes online. So we are shipping equipment as fast as we can. To the earlier question, that is great for market share of chemistry in the future.

Speaker #3: And the equipment does have lower gross margin. So that mix does affect the overall company gross margin. But we're okay with that because it's a great market share and much higher chemistry gross margin later.

Speaker #5: Perfect. Thank you very much.

Michael Manning: Perfect. Thank you very much.

Speaker #3: Thank you.

John Lee: Thank you.

Speaker #1: Our next question comes from Shane Brett at Morgan Stanley.

Operator: Our next question comes from Shane Brett at Morgan Stanley.

Speaker #4: Thank you for letting me ask a question. So I want to I want you guys to help us unpack the gross margin portion a little bit.

Shane Brett: Thank you for letting me ask a question. I want you guys to help us unpack the gross margin portion a little bit. If my numbers are correct, your gross margin ex palladium for the Q2 would've been kind of in the mid 48% range. Just how much of your quarter-over-quarter decline into Q3 is a result of some E&P chemistry weakness? Are you expecting palladium to be a tailwind or a headwind to gross margin in the Q3? Thank you.

Speaker #4: If my numbers are correct, your gross margin ex-palladium for the June quarter would have been kind of in the mid-48% range. Just how much of your quarter-over-quarter decline into September is a result of some EMP chemistry weakness?

Speaker #4: And are you expecting palladium to be a tailwind or a headwind to gross margin in the September quarter? Thank you.

Speaker #3: Yeah, hi, Shane. Let me the last part of your question, we expect palladium to kind of stay flat in the third quarter at about 1,300.

Ram Mayampurath: Yeah. Hi, Shane. The last part of your question, we expect palladium to kind of stay flat in Q3 at about $1,300. It'll probably stay at that. To get back to your question on gross margin, let me touch on a few points here. In Q2, 47.6% is what we had, what we reported. That includes about 100 basis points of discrete items, mostly coming from the refund of tariffs and duties. It's also important to point out that without these discrete benefits, GM would've been consistent with what we have in the past several quarters, despite the impact from some investments we are making to support growth. Now, John talked about getting Malaysia ready for 2027, and we continue to invest in the ramp. We are stepping up our investments to prepare for the demand, and these investments come with a P&L impact.

Speaker #3: It'll probably stay at that. But to get back to your question on gross margin, let me touch on a few points here. So, 47.6% is what we had, what we reported.

Speaker #3: That includes about 100 basis points of discrete items. Mostly coming from the refund of tariffs and duties. It's also important to point out that without these discrete benefits, GM would have been consistent with what we have in the past several quarters despite the impact from some investments we are making to support growth.

Speaker #3: Now, John talked about getting Malaysia ready for 2027. And we continue to invest in the RAM. We are stepping up our investments to prepare for the demand.

Speaker #3: And these investments come with P&L impact. So those are included in the numbers as well. And you'll see that for the remainder of the year.

Ram Mayampurath: Those are included in the numbers as well, and you'll see that for the remainder of the year. On the mix side, mix is unfavorable and will remain so as long as VSD and the chemistry equipment ramps. As we have said before, these are good problems to have because as higher VSD means higher operating income, and higher chemistry sales follows the equipment sales like we have explained before. Overall, our gross margin remains healthy with all these puts and takes. The investments will continue, and we have made a strategic choice to push forward on our equipment sales. Those two will be a headwind temporarily to the gross margin.

Speaker #3: And then on the mix side, mix is unfavorable and will remain so as long as VSD and the chemistry equipment RAMs. As we have said before, these are good problems to have because as higher VSD means higher operating income.

Speaker #3: And higher chemistry sales follows the equipment sales like we have explained before. So overall, our gross margin remains healthy with all these puts and takes.

Speaker #3: So the investments will continue and we have made a strategic choice to push forward on our equipment sales. So those two will have a head will be a headwind temporarily to the gross margin.

Speaker #4: Got it. And for my follow-up, I'm actually going to ask another gross margin question. This is going to be on VST specifically. Which I assume is a lot of semi so VSD gross margins were north of 46% in 2021.

Shane Brett: Got it. For my follow-up, I'm actually going to ask another gross margin question. This is going to be on VSD specifically, which I assume is a lot of semi. VSD gross margins were north of 46% in 2021, but as of the March quarter, we were at 42.9%. Just where are we in the margin recovery path there, and what do we need to have happen for margins to get above that sort of 46% to 47% mark that we saw in the prior peak? Thank you.

Speaker #4: But as of the March quarter, we were at 42.9%. Just where are we in the margin recovery path there? And what do we need to have happen for margins to get above that sort of 46 to 47% mark that we saw in the prior peak?

Speaker #4: Thank you.

Speaker #3: Yeah, so VSD, like I said, VSD margins are slightly lower. But where we benefit from VSD RAM is in the operating income side. We have continuously worked on operational excellence programs that will help us.

Ram Mayampurath: Yeah. VSD, like I said, VSD margins are slightly lower, but where we benefit from VSD ramp is in the operating income side. We have continuously worked on operational excellence programs that will help us, but it also depends on the mix within VSD as to what will drive the margins. That's what you're seeing now, what products that make up a lot of the VSD sales are not our highest end VSD products.

Speaker #3: But it also depends on the mix within VSD as to what will drive the margins. And that's what you're seeing now. What products that make up a lot of the VSD sales are not our highest end VSD products.

John Lee: Hey, Shane, maybe to add a little bit about that. In that prior cycle, when we hit that 45%, 46%, it was China direct sales for VSD, which is much, much lower now. That came with a gross margin tailwind. There was also a lot more RF power for NAND greenfields, and that is accretive to VSD gross margins. The third point is what Ram already pointed out. We are in that part of the cycle where we are investing in labor ahead as well as CapEx ahead. Those are the three things that are a bit of a difference between the quarter you quoted and where we are now. We think that over time, the investments will catch up, and that will be no longer a headwind. China is China. That is what it is. I think volume will continue to help.

Speaker #5: Hey, Shane, maybe to add a little bit about that. In the prior cycle when we hit that 45, 46 percent, it was China, direct sales, for VSD.

Speaker #5: Which is much, much lower now. And that came with a gross margin tailwind. There was also a lot more RF power for NAND, Greenfield, and that's accretive to VSD gross margins.

Speaker #5: And then the third point is what Ram already pointed out. We are in that part of the cycle where we are investing in labor ahead, as well as CapEx ahead.

Speaker #5: So those are the three things that are a bit of a difference between the quarter you quoted and where we are now. But we think that over time, the investments will catch up.

Speaker #5: And that will be no longer a headwind. China is China. That is what it is. And then I think volume will continue to help.

Speaker #4: Got it. Thank you very much.

Shane Brett: Got it. Thank you very much.

Speaker #1: Our next question comes from Melissa Weathers at DB.

Operator: Our next question comes from Melissa Weathers at DB.

Speaker #2: Hello. Thank you for letting me ask your question. I was hoping to talk a little bit about 2027. The second half seems like you guys are off to a really, really strong start in the second half.

Melissa Weathers: Hi there. Thank you for letting me ask a question. I was hoping to talk a little bit about 2027. The H2 seems like you guys are off to a really strong start in the H2. I was hoping to get your thoughts on how you are thinking about 2027 growth rates. What do you think will grow faster between the semis and the E&P business? Clearly, both are doing awesome, but which one do you think grows faster next year?

Speaker #2: But I was hoping to get your thoughts on how you're thinking about 2027 growth rates. What do you think will grow faster between the semis and the EMP business?

Speaker #2: Clearly, both are doing awesome. But which one do you think grows faster next year?

Speaker #5: Yeah, thanks for the question, Melissa. I don't think we know. I think, though, that they're both at historic growth rates as you know. I think, though, that they are coupled, right?

John Lee: Yeah. Thanks for the question, Melissa. I don't think we know. I think, though, that they're both at historic growth rates, as you know. I think, though, that they are coupled, right? When you think about all the investments in WFE and many of the semi customers talk about that. Many of our investors are aware of that. When you pivot to our packaging, the equipment orders we're seeing are on that same order of increase that we're seeing in WFE and maybe even higher. They're coupled. If you're going to make a lot of chips, you got to package them together. Both industries are coupled to support advanced electronics. It'd be pretty hard to determine now which ones are higher than the other. There are a little dynamic differences between the two markets.

Speaker #5: When you think about all the investments in WFE and many of the semi customers talk about that. Many of our investors are aware of that.

Speaker #5: But when you pivot to our packaging, the equipment orders we're seeing are on that same order of increase that we're seeing in WFE and maybe even higher.

Speaker #5: So they're coupled. If you're going to make a lot of chips, you've got to package them together. And so both industries are coupled to support events electronics.

Speaker #5: So it'd be pretty hard to tell to determine now which ones are higher than the other. But there are a little dynamic differences between the two markets.

Speaker #5: We have short lead times in semi. And therefore, that's why we always guide just a quarter out. And then we look at the industry to see where we might be in '27.

John Lee: We have short lead times in semi, and therefore, that's why we always guide just a quarter out. Then we look at the industry to see where we might be in 2027. In chemistry equipment, our lead times are much longer. We've talked about six and nine months in the past, because of that, we require down payments. Those down payments are things that give us confidence. That's why we said we have visibility through 2027, because of those long lead items. Similar to maybe some of the semi guys that have long lead equipment lead times. Those are the dynamics, but I think they're coupled, Melissa. If one grows, the other must.

Speaker #5: In chemistry equipment, our lead times are much longer. We talked about six to nine months in the past. And because of that, we require down payments.

Speaker #5: Those down payments are things that give us confidence, and that's why we said we have visibility through 2027—because of those long-lead items.

Speaker #5: Similar to maybe some of the semi guys that have long lead equipment lead times. So those are the dynamics. But I think they're coupled, Melissa.

Speaker #5: So if one grows, the other must.

Speaker #2: Oh, I'll take that. And then maybe along those lines, from a pricing perspective, can you just talk about clearly you're expanding capacity to serve the strong demand.

Melissa Weathers: Well, I'll take that. Then maybe along those lines, from a pricing perspective, can you just talk about, clearly you're expanding capacity to serve the strong demand, is there any change to how you guys are thinking about pricing? Is there any, I don't know, opportunistic or any leverage that you can get across either business on the pricing side?

Speaker #2: But is there any change to how you guys are thinking about pricing? Is there any I don't know, opportunistic or any leverage that you can get across either business on the pricing side?

Speaker #5: Yeah, I think our strategy for pricing has always been to get fairly paid, and to do it continuously. So we're always looking at every product line, and whether there's a pricing problem.

John Lee: Yeah, I think, our strategy for pricing has always been to get fairly paid, and to do it continuously. We're always looking at every product line and whether there's a pricing problem, and we're not getting fairly paid. We're certainly in a competitive environment. We also value the long-term relationships we have with our customers. I think we're pretty happy with what we are doing in pricing, we're not going to take advantage of any opportunistic, short-term dislocations in supply and demand. The long-term relationships are something that we're proud of and we want to maintain.

Speaker #5: And then we're not getting fairly paid. And so we're certainly in a competitive environment. We also value the long-term relationships we have with our customers.

Speaker #5: So I think we're pretty happy with where we are what we are doing in pricing. But we're not going to take advantage of any opportunistic short-term dislocations in supply and demand.

Speaker #5: The long-term relationships are something that we're proud of. And we want to maintain.

Speaker #2: Perfect. Thank you.

Melissa Weathers: Perfect. Thank you.

Speaker #5: Thank you.

John Lee: Thank you.

Speaker #1: Our next question comes from Chris Shanker at TD Callan.

Operator: Our next question comes from Krish Sankar at TD Cowen.

Krish Sankar: Hi. Thanks for taking my question. I told them, John, when I look at your semi revenues this quarter for the guided one, and given that it has to grow in December, given the strength, it seems like you're going to easily grow over 35% this year in semi revenues compared to some of your other peers talking about 30-plus. A, is that a fair characterization? What does that imply to how inventory is managed by your semi cap customers? I had a follow-up.

Speaker #3: Go ahead. Thanks for taking my question. I told them, John, when I look at your semi revenues this quarter, for the guided one, and given that it has to grow in December, given the strength, it seems like you're going to easily grow over 35% this year in semi revenues.

Speaker #3: Compared to some of your other peers talking about 30 plus. A, is that a fair characterization? So what does that imply to how inventory is managed by your semi-cap customers?

Speaker #3: Then I had a follow-up.

Speaker #5: Yeah, Chris, I think that's the right math. I think maybe even a little north of the number you just said. And again, as I said earlier, the debt-edge part is higher.

John Lee: Yeah, Krish, I think that's the right math. I think it maybe even a little north of the number you just said. Again, as I said earlier, the dep/etch part is higher than the litho metrology inspection part, but you're in the right zip code.

Speaker #5: Then the lithium metrology inspection part. But you're in the right zip code.

Krish Sankar: Got you. Any comments on how inventory is managed by semi caps compared to prior cycles?

Speaker #3: Gotcha. Any comments on how inventory is managed by semi-caps? Compared to prior cycles?

John Lee: Yeah, no, I don't expect any difference. I think right now, though, we are shipping to demand. Even though inventory may be rising a little bit in some of the large semi cap guys, I think it's because they have to be higher to ship the revenues they want to ship. As you know, the turns are even better, right? There's no stocking of extra inventory given what they're trying to ship. We as an industry are just ramping up the factories of our suppliers and ourselves to meet that. At some point, I'm sure everybody would like to build a little extra inventory, but we are not in that stage right now in the ramp.

Speaker #5: Yeah, no, I think I don't expect any difference. I think right now, though, we are shipping to demand. Even though inventory may be rising a little bit in some of our the large semi-cap guys, I think it's because they have to they have to be higher.

Speaker #5: To ship the revenues they want to ship. And as you know, the turns are even better, right? So there is no stocking of extra inventory given what they're trying to ship.

Speaker #5: And so we as an industry are just ramping up the factories of our suppliers and ourselves to meet that. So at some point, I'm sure everybody would like to build a little extra inventory.

Speaker #5: But we are not in that stage right now in the ramp.

Krish Sankar: Got you. Another quick follow-up on E&P side. It looks like when you look at the chemistry business, some of your chemistry customers, especially the substrate folks from Taiwan and Japan, they seem to be capacity constrained, although they're raising CapEx. In the short term, is that happening, or do you think chemistry is going to continue growing, or is that going to have any impact on your chemistry growth?

Speaker #3: Gotcha. Another quick follow-up on EMP side. It looks like when you look at the chemistry business, some of your chemistry customers, especially the substrate folks from Taiwan and Japan, they seem to be capacity consuming, although they're raising capex.

Speaker #3: In the short term, is that happening? Or do you think chemistry is going to continue growing? Or is that going to have any impact on your chemistry growth?

Speaker #5: Yeah, no, I think just like in semi, people are finding ways to utilize tools better, faster. So I think the chemistry revenue will continue to grow.

John Lee: I think, just like in semi, people are finding ways to utilize tools better, faster. I think the chemistry revenue will continue to grow. That's our expectation. At the same time, the equipment we're putting in, as well as other people's equipment going into these factories, get turned on, and that will increase the chemistry as well. I think we expect chemistry to continue to grow, even though there is a constraint in capacity, and that's why the equipment orders are so high for us. I think that portends well for the future of chemistry revenue.

Speaker #5: That's our expectation. And at the same time, the equipment we're putting in, as well as other people's equipment going into these factories, get turned on.

Speaker #5: And that will increase the chemistry as well. So I think we expect chemistry to continue to grow, even though there is a constraint in capacity.

Speaker #5: And that's why the equipment orders are so high for us. So I think that portends well for the future of chemistry revenue.

Krish Sankar: Sounds well, John.

Speaker #3: Thanks a lot, John.

Speaker #5: Thanks, Chris.

John Lee: Thanks, Krish.

Speaker #1: Our next question comes from Vijay Rakesh at Mizuho.

Operator: Our next question comes from Vijay Rakesh at Mizuho.

Speaker #3: Yeah, hi, John. And good quarter and guide here. Just looking at the June and September quarters here, obviously, very strong growth in semis. You mentioned up 50% year on year.

Vijay Rakesh: Yeah. Hi, John and Ram. Good quarter and guide here. Just looking at the Q2 and Q3 here, obviously very strong growth in semis. You mentioned up 50% year-on-year. What is driving the acceleration into September? If you can give us some color, if it's like dep/etch or inspection or, if you want to break it out differently, like foundry or memory or something. Thanks. A follow-up.

Speaker #3: What is driving the acceleration into September? If you can give us some color, if it's like depth or edge or inspection or if you want to break it out differently, like quantity or memory or something.

Speaker #3: Thanks. And a follow-up.

Speaker #5: Yeah, thanks, Vijay. Yeah, I think both. We are seeing acceleration in debt-edge as well as lithium metrology inspection. Both are growing. But they're growing at the normal expectations depending on the lead times of those sub-segments of the market.

John Lee: Yeah. Thanks, Vijay. Yeah, I think both. We are seeing acceleration in dep/etch as well as litho, metrology, inspection. Both are growing, but they're growing at the normal expectations depending on the lead times of those sub-segments of the market. Dep/etch, as I said earlier, is growing much faster year-over-year. The average is over 50% in Q3 year-over-year. Those are the dynamics. Those haven't changed. They're both growing, but they're growing at the expected ratio, if you will, of the two sub-segments.

Speaker #5: So debt-edge, as I said earlier, is growing much faster, year over year. The average is over 50% in Q3, year over year. And so those are the dynamics.

Speaker #5: Those haven't changed. So they're both growing, but they're growing at the expected ratio, if you will, of the two sub-segments.

Speaker #3: Got it. And then, as you look at 2027, obviously your semis are growing way faster than WFE. I mean, WFE is probably growing 25% to 30% year over year.

Vijay Rakesh: Got it. As you look at 2027, obviously your semis are growing way faster than WFE. WFE is probably growing 25% to 30% year-on-year. You're growing 50%. Packaging is also doing some massive increase versus WFE. How should we look at the growth there, as we look at 2027 versus WFE, if you look at semis and the E&P segment, because all these trends seem to be in place, if not accelerating into next year. Thanks.

Speaker #3: You're growing 50%. Packaging is also seeing some massive increase versus WFE. How should we look at the growth there as you look at 2027 versus WFE?

Speaker #3: If you look at semis and the EMP segment, because both all these trends seem to be in place, if not accelerating into next year.

Speaker #3: Thanks.

Speaker #5: Yeah, I think right now, we do see this acceleration. We are planning on the acceleration. Our customer conversations all say we should expand capacity and be prepared for an accelerating environment into '27.

John Lee: Yeah, I think right now we do see this acceleration. We are planning on the acceleration. Our customer conversations all say we should expand capacity and be prepared for an accelerating environment into 2027. It's hard to know what that'll mean. Certainly if that's true and our plans meet that, certainly we would expect continued outperformance of WFE. As you know, that's always the case during the H1 of the ramp. At some point, we will meet WFE just because the ramp will peak, and then of course, on the downturn, it reverses. Right now, everything is pointing up, and we are preparing to meet that.

Speaker #5: And so, it's hard to know what that will mean. But certainly, if that's true and our plans meet that, then certainly we would expect continued outperformance of WFE.

Speaker #5: And as you know, that's always the case during the first half of the ramp. At some point, we will meet WFE just because the ramp will peak.

Speaker #5: And then, of course, on the downturn, it reverses. But right now, everything is pointing up. And we are preparing to meet that.

Speaker #3: Great. Thanks.

Vijay Rakesh: Great. Thanks.

Speaker #5: Thanks, Vijay.

John Lee: Thanks, Vijay.

Speaker #1: Our next question comes from Jim Riccudi at Needham & Company.

Operator: Our next question comes from Jim Ricchiuti at Needham & Company.

Speaker #3: Hi, good morning. You may have said this. Could you provide the chemistry growth in the quarter?

Jim Ricchiuti: Hi. Good morning. You may have said this. Could you provide the chemistry growth in the quarter?

Speaker #5: Yeah, Jim. I think the question was, can we provide the chemistry growth quarter on quarter? I think year over year, I guess, is one way to look at it.

John Lee: Yeah, Jim. I think the question was, can we provide the chemistry growth quarter-on-quarter? I think year-over-year, I guess is one way to look at it. That was about 21%.

Speaker #5: That was about 21%. And so we're pretty healthy. Quarter-on-quarter, I can get you that number, but it was all an increase and very healthy.

John Lee: We're pretty healthy. Quarter-on-quarter, I can get you that number, but it was also an increase, and very healthy. We're pretty happy with the chemistry growth.

Speaker #5: So we're pretty happy with the chemistry growth.

Jim Ricchiuti: Got any way of knowing that 21% growth that you're seeing, how much of that is coming from new capacity versus just what we've all been hearing about the higher layer counts within the existing installed base?

Speaker #3: John, any way of knowing that 21% growth that you're seeing, how much of that is coming from new capacity versus just what we've all been hearing about the higher layer counts within the existing installed base?

Speaker #5: Yeah, I think it's hard to tell, Jim, but part of it is coming definitely from newer capacity of equipment that we and our peers have shipped to those customers.

John Lee: Yeah, I think it's hard to tell, Jim, but part of it is coming definitely from newer capacity of equipment that we and our peers have shipped to those customers. Most of it today is still driven by capacity that was already there. Maybe some customers are taking tools that were mothballed even and turning them on. We know that's happened earlier in the cycle. I would say the majority of the chemistry growth right now, Jim, is still with previously installed capacity.

Speaker #5: But most of it, Jim, today is still driven by capacity that was already there. And maybe some customers are taking tools that were mothballed, even, and turning them on.

Speaker #5: We know that's happened earlier in the cycle. So I would say the majority of the chemistry growth right now, Jim, is still with previously installed capacity.

Jim Ricchiuti: The timing on the new capacity in EMP, you may have given that. When do you expect to have that facility, that second factory?

Speaker #3: And the timing on the new capacity, in EMP, you may have given that. When do you expect to have that facility that second factory?

Jim Ricchiuti: The timing on the new capacity in EMP, you may have given that. When do you expect to have that facility, that second factory?

Speaker #5: Yeah, so the capacity that we're shipping now—I think that's a question—those tools are going in now. It takes, I think, between 24 to 30 months for chemistry to go into that volume, to go into a piece of equipment.

John Lee: Yeah. The capacity that we're shipping now, I think if that's a question, those tools are going in now. It takes, I think, between 24 to 30 months for chemistry to go into that, at volume, to go into a piece of equipment. Some of that equipment's already going in. I think it portends well for the several years, because of the equipment that's going in now, next year, and perhaps the year after.

Speaker #5: And so some of that equipment is already going in. So I think it portends well for the several years because of the equipment that's going in now, next year, and perhaps the year after.

Speaker #3: Yeah, I'm sorry. I apologize. Thank you for that. I was just curious about the new capacity that you're adding in Guangzhou. What is the timing on that?

Jim Ricchiuti: Yeah. I'm sorry. I apologize, and thank you for that. I was just curious about the new capacity that you're adding in Guangzhou. What is the timing on that?

Speaker #5: Yeah, Q3 2027, Jim, the Guangzhou factory will be online.

John Lee: Yeah. Q3 2027, Jim. The Guangzhou factory.

Jim Ricchiuti: Okay

John Lee: will be online.

Speaker #3: Great. Thank you.

Jim Ricchiuti: Great. Thank you.

Speaker #5: Thanks, Jim.

John Lee: Thanks, Jim.

Speaker #1: Our next question comes from Elizabeth Sun at Citi.

Operator: Our next question comes from Elizabeth Sun at Citigroup.

Speaker #6: Oh, good morning. Thanks for taking the question. I guess my question is on the EMP for the flex drill equipment part. I'm just trying to understand which part of PCB or AI PCB or AI substrates those flex drilling equipment are more exposed to.

Elizabeth Sun: Good morning. Thanks for taking my question. I guess my question is on the EMP for the flex drill equipment part. I am just trying to understand which part of PCB or AI PCB or AI substrates those flex drilling equipment are more exposed to.

Speaker #5: Yeah, the flex drilling PCB revenue is really mostly targeted to the smartphone and peripherals markets, Elizabeth. So a lot of flex used in foldables and smartphones and AirPods, if you will.

John Lee: Yeah, the flex drilling PCB revenue is really mostly targeted to the smartphone and peripherals markets, Elizabeth. A lot of flex used in foldables and smartphones and AirPods, if you will. Most of it is there. Not much of it is being used in AI. We did mention in our prepared remarks that we are starting to see more progress on our rigid PCB drilling, and that is driven by two markets, AI being one of them, but also the low Earth orbit market that we have talked about in the past. We are starting to see some momentum there as well. The flex is really targeted towards more consumer products, smartphones.

Speaker #5: So most of it is there. Not much of it is being used in AI. But we did mention in our prepared remarks that we are starting to see more progress on our rigid PCB drilling.

Speaker #5: And that is driven by two markets: AI being one of them, but also the low earth orbit market that we've talked about in the past.

Speaker #5: So we're starting to see some momentum there as well. But the flex is really targeted towards more similar products, smartphones.

Elizabeth Sun: Got it. On the chemistry side, you just talk about you are starting to see some of the revenue coming from the new capacities that got in on the chemistry side, on equipment side. Just wondering, when do you expect to see more of the Time to revenue show up that is attached to the equipment you shipped for the past two years.

Speaker #6: Got it. And then on the chemistry side, you just talked about there's starting to see some of the revenue coming from the new capacities that got in.

Speaker #6: On the chemistry side, equipment side, so I was wondering, when do you expect to see most of more of the chemistry revenue show up that is attached to the equipment you'll ship for the past two years?

Speaker #5: Yeah, I think it's going to be continuous. Over the next couple of years, as I said earlier, the lead times can be anywhere from 24 to 30 months before you see volume chemistry in equipment.

John Lee: Yeah, I think it is going to be continuous over the next couple of years. As I said earlier, the lead times can be anywhere from 24 to 30 months before you see volume chemistry in equipment we have started building. We are shipping equipment every quarter. They are being installed as fast as our customers can install them, and they are being turned on as fast as they can turn them on. I think it is going to be this continuous ramp. We talked about equipment revenue in the past being, at most, $200 million a year. This year will be significantly higher than that, as you can imagine. We expect that to continue to grow, and that is why we have committed to building the new Guangzhou factory. I think it will be more of a continuous ramp up for the next couple of years.

Speaker #5: We've started building. So I think, and we're shipping equipment every quarter. And they're installing, being installed as fast as our customers can install them.

Speaker #5: And they're being turned on as fast as they can turn them on. So I think it's going to be this continuous ramp. We talked about equipment revenue in the past being at most $200 million a year.

Speaker #5: This year will be significantly higher than that, as you can imagine. And then we expect that to continue to grow, and that's why we've committed to building the new Guangzhou factory.

Speaker #5: So I think it will be more of a continuous ramp for the next couple of years.

Speaker #6: Got it. Thanks, Jim.

Elizabeth Sun: Got it. Thanks, John.

Speaker #5: Thanks, Elizabeth.

John Lee: Thanks, Elizabeth.

Speaker #1: Our next question comes from Joe Quattrocchi at Wells Fargo.

Operator: Our next question comes from Joe Quatrochi at Wells Fargo.

Speaker #3: Yeah, thanks for taking the question. On the EMP equipment side, is the capacity ramp, are you expecting to be somewhat constrained in your own capacity to fulfill demand until that facility opens in 3Q next year, or does it ramp kind of modularly?

Joe Quatrochi: Yeah. Thanks for taking the question. On the EMP equipment side of the capacity ramp, are you expecting to be somewhat constrained in your own capacity to fulfill demand until that facility opens in Q3 next year? Does it ramp kind of modularly?

Speaker #5: Thanks for the question, Joe. Yeah, no, we are not constrained because we always had that Germany factory. In order to meet any shorter-term demand before the second factory comes online in Guangzhou in Q3 of '27.

John Lee: Thanks for the question, Joe. Yeah, no, we are not constrained because we always had that Germany factory in order to meet any shorter-term demand before the second factory comes online in Guangzhou in Q3 of 2027. As I said earlier, we have turned that Germany factory back on. It was running at a pretty low level. Now it's much busier. At the same time, in Guangzhou, with the current factory, we continue to eke out new space here and there. We continue to increase that capacity as well. We are bursting at the seams, but we've been able to take every order that our customers needed. That's really an area where we're pretty happy with our capacity plan.

Speaker #5: So as I said earlier, we have turned that Germany factory back on. It was running at a pretty low level. Now it's running it's much busier.

Speaker #5: At the same time, in Guangzhou, with the current factory, we continue to eke out new space here and there. So we continue to increase that capacity as well.

Speaker #5: So, we are bursting at the seams, but we've been able to take every order that our customers needed. And so that's really an area where we're pretty happy with our capacity plan.

Joe Quatrochi: Thanks for that. As a follow-up maybe, I think your services revenue is actually really strong this quarter, kind of one of the highest levels we've really ever seen. Just curious what drove that?

Speaker #3: Great. Thanks for that. And then, as a follow-up, maybe, I think your services revenue is actually really strong this quarter, kind of one of the highest levels we've really ever seen.

Speaker #3: Just curious what drove that.

Speaker #5: Yeah, I think utilization of our semi customers is what's driving that, Joe. You can imagine they're all running at 100% utilization if they can. When you do that, of course, equipment needs more service.

John Lee: I think utilization of our semi customers is what's driving that, Joe. You can imagine they're all running 100% utilization if they can. When you do that, of course, equipment needs more service. We are seeing this kind of a step-up in new elevated service revenue, and we kind of expect that to continue. I don't know if it's going to step up again, but I think this is just a reflection of utilization in semi. The fabs have been running really hot for a couple of years, but the parts that need servicing take a little time, after utilization goes to these high levels. I think it's really a step-up that we kind of feel this is the new level for the foreseeable future.

Speaker #5: So we are seeing this kind of a step-up in new elevated service revenue. And we kind of expect that to continue. I don't know if it's going to step up again, but I think this is just a reflection of utilization semi.

Speaker #5: The fabs have been running really hot for a couple of years. But the parts that need servicing, it takes a little time, right? After utilization goes to these high levels.

Speaker #5: So I think it's really a step-up that we kind of feel this is the new level for the foreseeable future.

Speaker #3: Thanks.

Joe Quatrochi: Thanks.

Speaker #5: Yep. Thanks, Joe.

John Lee: Thanks, Joe.

Speaker #1: Our next question comes from Jim Schneider at Goldman Sachs.

Operator: Our next question comes from Jim Schneider at Goldman Sachs.

Speaker #7: Good morning. Thanks for taking my question. Given the factory ramps both in Malaysia and Guangzhou, can you maybe talk about some of the accounting in terms of how the expenses are loaded into cost of goods and, if any, are an OpEx and as those factories get qualified and production ready, should we expect those startup costs headwinds to start to abate?

Jim Schneider: Good morning. Thanks for taking my question. Given the factory ramps both in Malaysia and Guangzhou, can you maybe talk about some of the accounting in terms of how the expenses are loaded into cost of goods and if any are in OpEx? As those factories get qualified and production-ready, should we expect those startup cost headwinds to start to abate, and would that accrue mainly to the gross margin line? Sorry if I missed that before.

Speaker #7: And would that accrue mainly to the gross margin line? Sorry if I missed that before.

Speaker #5: Yeah, hi, Jim. So you're right. The cost right now will get charged through COGS and will impact our OpEx. I'm sorry, our gross margin.

Ram Mayampurath: Yeah. Hi, Jim. You're right. The cost right now will get charged through COGS and will impact our gross margin. It's mostly about the gross margin. There's not much OpEx impact there. The magnitude of that now is in the 50 to 80 basis points each quarter. That will continue for a few quarters now, next couple at least. You're right. Once that plant gets up and running, and gets fully loaded, we will start seeing improvement flow through. Most of these investments will be self-liquidating and come back as margin improvements in the future.

Speaker #5: It's mostly about the gross margin. There's not much OpEx impact there. The magnitude of that now is in the 50 to 80 basis points a quarter, each quarter.

Speaker #5: And that will continue for a few quarters now, next couple at least. And you're right. Once that plant gets up and running, and gets fully loaded, we will start seeing improvement flow through.

Speaker #5: So most of these investments will be self-liquidating, and come back as margin improvements in the future.

Speaker #7: Thank you. And then maybe just as a follow-up on the earlier pricing input class question, understand you don't want to be opportunistic in terms of taking price today, but do you expect that over the next, say, 12 to 18 months, your level of pricing increase could more than offset the level of input cost pressure you've been seeing?

Jim Schneider: Thank you. Then maybe just as a follow-up on the earlier pricing input cost question, understand you don't want to be opportunistic in terms of taking price today, but do you expect that over the next, say, 12 to 18 months, your level of pricing increase can more than offset the level of input cost pressure you've been seeing? Thank you.

Speaker #7: Thank you.

Speaker #3: Yeah, Jim, we always strive to do that.

John Lee: Jim. We always strive to do that, and we've been pretty successful in the past in doing that. It's really two things. It's getting the best suppliers and the valuable, the ones that can scale and lower cost because they have scale. That's one strategy on the input side. On the other side, as I talked about, it's really about delivering valuable products that customers are willing to pay for. I think we've done pretty well, Jim, in the past, and we expect to continue that kind of performance.

Speaker #5: And we've been pretty successful in the past in doing that. Yeah, it's really two things. It's getting the best suppliers and the valuable the ones that can scale and lower cost because they have scale.

Speaker #5: That's one strategy. On the input side. And then on the other side, as I talked about, it's really about delivering valuable products that customers are willing to pay for.

Speaker #5: So I think we've done pretty well, Jim, in the past. And we expect to continue that kind of performance.

Speaker #7: Thanks.

Jim Schneider: Thanks.

Speaker #5: Thank you.

John Lee: Thank you.

Speaker #1: This concludes the question-and-answer session. I would now like to turn it back over to Paritosh for closing remarks.

Operator: This concludes the question and answer session. I would now like to turn it back over to Paretosh for closing remarks.

Speaker #4: Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please.

Paretosh Misra: Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please.

Operator: This does conclude the program. You may now disconnect.

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