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Edited Transcript of MKSI earnings conference call or presentation 24-Oct-18 12:30pm GMT

Q3 2018 MKS Instruments Inc Earnings Call

ANDOVER Oct 25, 2018 (Thomson StreetEvents) -- Edited Transcript of MKS Instruments Inc earnings conference call or presentation Wednesday, October 24, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald G. Colella

MKS Instruments, Inc. - CEO & Director

* John T. C. Lee

MKS Instruments, Inc. - President & COO

* Seth H. Bagshaw

MKS Instruments, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Amanda Marie Scarnati

Citigroup Inc, Research Division - Semiconductor Consumable Analyst

* Christopher James Muse

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst

* J. Ho

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector

* Mark S. Miller

The Benchmark Company, LLC, Research Division - Research Analyst

* Shek Ming Ho

Deutsche Bank AG, Research Division - Director & Senior Analyst

* Sreekrishnan Sankarnarayanan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Weston David Twigg

KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, CFO, Seth Bagshaw. Please go ahead, sir.

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [2]

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Thank you. Good morning, everyone. I'm Seth Bagshaw, Chief Financial Officer. I'm joined this morning by Jerry Colella, Chief Executive Officer; and John Lee, our President and Chief Operating Officer.

Yesterday after market close, we released our financial results for the third quarter of 2018. Our financial results in a scheduled pro forma revenue by market have been posted to our website, www.mksinst.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. The actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 2017.

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. Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday's earnings release.

Now I'll turn the call over to Jerry.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [3]

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Thanks, Seth. Good morning, everyone, and thanks for joining us today. I'll start with results for the third quarter of 2018, followed by several business and market highlights, and then I'll turn the call over to John, who'll share additional details on our strategy, customers and markets. Seth will then provide further information on our financial results and our fourth quarter 2018 guidance before we open the call for your questions.

Third quarter revenue was $487 million, which was within our expectations for the quarter, and in line with a year ago. Non-GAAP net earnings for the third quarter were $103 million or $1.88 per share. They were above the high end of our guidance range and a 20% increase over last year. This bottom line outperformance was driven primarily by another strong quarter for our Advanced Markets as well as our focus on expense containment.

One of MKS' key strengths is our ability to manage through the semiconductor cycles. We understand that although the end market for chips continues to grow over the long term, the semiconductor capital equipment market can experience fluctuations in the short term. To minimize the impact of these fluctuations, we implemented a strategy 5 years ago to transform MKS from primarily a semi-focused business to a broader market solution provider, exposed to a wide range of new and exciting markets.

In that short period of time, we have significantly expanded our customer solutions that address additional semiconductor segments such as lithography and inspection, and fast-growing Advanced Markets such as materials and electronic component processing. This diversification in markets, customers and product portfolio helps us outperform our semiconductor peer group throughout the cycles, and we are on target to grow more than 2x faster than the overall market for our Advanced Markets.

Revenue for our Advanced Markets for the first 3 quarters of 2018 has grown almost 20% over the same period in 2017. Given our long history and deep experience in the semiconductor market, we have learned to consistently deliver strong results during fluctuations, through strict cost control, whilst amplifying our focus on design wins to increase market share, which historically we have achieved.

Finally, I'm also very pleased with MKS being ranked #17 on the 2018 Fortune 100 fastest-growing companies list. MKS was #1 in the biggest jumps category, moving from 89 in 2017. This achievement is a testament to our overarching strategy of sustainable and profitable growth.

In terms of our outlook, we expect the semiconductor customers will continue to work through their existing inventory. However, we remain very positive on the fundamental strength of this market. We anticipate strengthening the Advanced Markets led by multiple industrial applications with over 40% of our revenue coming from the steady and high-growth opportunities. Despite the semiconductor market headwinds, I am very confident that the strategies we put in place have positioned us for long-term outperformance.

Turning to our Q4 2018 revenue and net earnings guidance. We estimate that our sales in the fourth quarter could range from $420 million to $460 million. Fourth quarter non-GAAP net earnings per share could range from $1.38 to $1.64 per share. Seth will provide the balance of our fourth quarter guidance in his remarks. At this point, I'd like to turn the call over to John.

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John T. C. Lee, MKS Instruments, Inc. - President & COO [4]

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Thanks, Jerry. You've heard us talk about our MKS business process, which is a disciplined approach to all aspects of our business. It is built on 4 pillars: Accountability, customer focus, continuous improvement and strategic planning. With respect to the second pillar, customer focus, a key differentiator is the breadth and depth of our technical capability, which is essential for developing solutions to our customers' most complex problems. Today, in both semiconductor and Advanced Markets, we are seeing more opportunities for design wins than at any other time in our history. The requests are coming from a broad cross-section of our key OEMs and other customers.

The diversity of these opportunities spans multiple markets and employs a wide range of solutions in our industry-leading portfolio of lasers, power delivery, motion control, ozone gas generation and integrated optical subsystems. Very often, these solutions involve the integration of several different components and/or subsystems, which is a clear and unique differentiation that our customers value greatly. As part of our strategy to leverage cross-selling across our markets and customers, we won several opportunities in the third quarter by combining the expertise of our integrated optical subsystem design capability, with our leading-edge laser products for the growing OLED display market.

Our motion systems group continues to win opportunities for the most challenging applications, most recently for metrology and wafer inspection applications within the semiconductor market. Our ozone gas products are being tested in the most advanced, logic and memory nodes for Atomic layer deposition processes.

Our power solutions business continues to deliver significant value to our customers, most recently winning a full system of RF generators and matching networks for plasma-enhanced CVD application in Korea. In the third quarter, our lasers group won a number of applications for solar cell and printed circuit board processing, using our industry-leading ultraviolet and green lasers.

And finally, our Mass Flow Controller products have been installed in the PK-4 Plasma Crystal Laboratory in the International Space Station. Our MFCs are part of the latest ongoing series of experiments that determine the behavior of low-temperature plasmas in space.

Our outlook remains very positive as our continued design wins in the semiconductor market and strength in Advanced Markets positions us for long-term success with a balanced and growing portfolio of products and solutions. At this point, I'll turn the call over to Seth.

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [5]

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Thanks, John. I'll cover the third quarter financial results and our Q4 2018 guidance. Revenue for the third quarter was $487 million, within our expectations for the quarter and a 15% decline sequentially from a record second quarter. Sales to semiconductor market were $259 million in the third quarter, a decrease of 23% from a record $336 million in the second quarter of 2018. Sales to our Advanced Markets, which comprise 47% of our total revenue, were $228 million and decreased 4% sequentially. Revenue in these markets can vary from quarter-to-quarter based upon specific projects.

We are currently experiencing a moderation of the semiconductor market. On a year-to-date basis, the 9 months ended September 30, total sales have increased 15% compared to 2017. Semiconductor sales have increased 12% and sales to our Advanced Markets have increased by 19%, driven by strong growth in our laser business, which has increased by more than 30%. GAAP and non-GAAP gross margin was 47.6% and non-GAAP operating expenses were $103 million for the quarter. Gross margin was favorable to our expectations at this sales volume, and operating expenses were also $4 million stable to even the low end of our guidance range as we undertook a number of actions beginning in the second quarter to proactively reduce our cost structure.

In addition, certain variable compensation accruals totaling $4 million were adjusted in the third quarter to be in line with our business levels in the second half of 2018. We do expect expenses in the fourth quarter to reflect more normalized variable compensation levels. Non-GAAP operating margin was 26.5%, reflecting the strength in our operating model as well as our balanced increasing exposure to Advanced Markets. We believe these are unique advantages to MKS as semiconductor business levels have moderated in the quarter.

GAAP and non-GAAP interest expense was $3.7 million and $3 million, respectively, and interest income was $1.5 million in the quarter. The non-GAAP tax rate was approximately 19%, and the GAAP tax rate was 18.5%.

During the quarter, we incurred certain charges of $1.4 million, primarily related to streamlining and consolidation of certain functions. GAAP net income was $93.3 million or $1.70 per share and non-GAAP net earnings were 1.3 -- $103.2 million or $1.88 per share. Our GAAP and non-GAAP results were both above the high end of our guidance range for the quarter.

At the end of the quarter, we had cash and short-term investments of $620 million, which was evenly divided between the U.S. and our international operations and a term loan debt balance of $348 million. Free cash flow for the quarter was $81 million or approximately 17% of revenue. Days sales outstanding was 59 days at the end of the third quarter compared to 54 days at the end of the second quarter. This increase was largely due to the timing of revenue within the quarter.

Inventory turns were 2.6 compared to 3.1 in the second quarter. Inventory turns tend to trend lower in the short term as business levels moderate.

We continued to provide a balanced approach to capital deployment, and during the quarter, we repurchased 818,000 shares of stock for $75 million, at an average price of $91.67 per share and paid a cash dividend of $10.9 million or $0.20 per share.

Now turning to Q4 2018 guidance. The semiconductor capital equipment industry experienced a moderation in capital spending in the near term. We've seen a similar effect on our semiconductor revenue in the third quarter, expect that to continue into the fourth quarter. We believe that our customers have worked down inventory levels of MKS products throughout the third quarter, and will continue to do so into the fourth quarter. We also expect sales to Advanced Markets as well as service revenue into all of our market segments to remain at healthy levels.

We expect that our sales in the fourth quarter could range from $420 million to $460 million and gross margin could range from 47% to 48%. Non-GAAP operating expenses could range from $103 million to $109 million. R&D expenses could range from $34 million to $36 million and SG&A expenses could range from $69 million to $73 million. Non-GAAP interest expense is expected to be approximately $3.2 million and non-GAAP tax rate to be approximately 19%. Given these assumptions, fourth quarter non-GAAP net earnings could range from $75 million to $89 million or $1.38 to $1.64 per share.

In the fourth quarter, amortization of intangible assets is expected to be approximately $10.8 million, GAAP interest expense is estimated to be approximately $3.9 million and GAAP tax rate to be approximately 20%. GAAP net income is expected to range from $65 million to $79 million or $1.19 to $1.45 per share for approximately 54.5 million shares outstanding.

This concludes our prepared remarks. We now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from Amanda Scarnati with Citi.

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Amanda Marie Scarnati, Citigroup Inc, Research Division - Semiconductor Consumable Analyst [2]

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Just starting off on the non-semiconductor side in the Advanced Markets. Can you talk a little bit more about the weakness that you saw there? And how much if any of it was related to the China tariff and the trade wars that we're seeing there?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [3]

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Yes. Thank you, Amanda. So it was in the noise level in terms of like 4%, and it really is more lumpy and project-based. Year-to-date, I think we're almost 20% growth, so it really wasn't anything -- of anything significant just timing of when our customers take large shipment orders. And as far as the China tariff is concerned, we really haven't seen anything significant, but we think that -- certainly, we're watching it. We want to be mindful of it. We want to be prepared if that were the event, but we have not seen any weakness in China. Actually, we have -- probably have more engagements and opportunities there than we probably ever have, and I've put more people on the street in China because of those opportunities. So it was just a matter of timing and lumpiness on the projects.

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Amanda Marie Scarnati, Citigroup Inc, Research Division - Semiconductor Consumable Analyst [4]

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Okay. And then on the semiconductor side, as customers continue to work down inventory. Do you think that that's a longer-term process? How much inventory is kept with your customers? Or do you think this could be something that can be completely reversed for your end in the December quarter?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [5]

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Yes, that's a very good question. I'm sure I've answered it about 100 times today. This is an old song and dance that we've answered at MKS for, probably 40 years. So really what happens is when you're in the middle of a high level of business at the OEM level, they have pretty high build schedules. And in that -- while they're doing that, they have a high level of finished goods, work in process, raw materials and timelines back to us. When they see the demand from their end customers decrease, first thing they're going to do is cut their schedules, and therefore, they now have to work off finished goods with raw material they can buy. And we expect that we've started to see that towards the end of the quarter. We expect that to continue this quarter, that's why we gave the guidance that we did. We don't have a lot of visibility into how long that lasts with customers. Usually, in the past, it's been a couple of quarters, that's why we think the guidance we're giving now is prudent. And -- but we are well positioned. And just to let you know, we are still making significant investments in capacity. We're actually increasing capacity in whatever facilities that we haven't increased in over 18 years because of the long-term projection of the growth in that business. So can't really project right now the potential of the upturn or the timing of it. But in the past, I said it was a canoe. I think this is another canoe. People ask me, is it a big one or a small one, is it Tippy Canoe, they're not really sure but I think that's kind of where we are. And in addition to that, some of our Korean business is slower. We had a tremendous run-up in our Korean business from 2012 through last year, from $62 million to almost $230 million. And we're -- the larger -- the spending there is slowing, the ecosystem has slowed. So some of that is also just a matter of people waiting for spending to pick up, and it's not an inventory issue there in some cases. So I'm sorry I couldn't give you a specific answer. It's not a matter of if but when, and we're just positioned to be able to handle it when it comes back.

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Operator [6]

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And our next question comes from Sidney Ho with Deutsche Bank.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [7]

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I guess, my first question is how should we think about semis versus other Advanced Markets in your Q4 guidance? It seems like you're suggesting inventory correction in semiconductors will continue, but you also said the semi business has been more steady and consistent. And can you also talk about, on your other Advanced Markets business, how have order trends changed in recent weeks?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [8]

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Yes, Sidney, it's John. So I'll take the Advanced Markets one. So Q4, we think, is relatively consistent to Q3 for Advanced Markets. So we think that we're end the year pretty strong in our Advanced Markets, so the guidance of lower revenue in Q4 is almost all up to the semi and the inventory turn off.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [9]

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Great. Maybe my second question is, clearly, there is a lot of anxiety about memory CapEx next year. Do you have enough visibility to say how your semi business will do in the first half of next year versus the second half of this year? I assume you have a more unique view about what's happening in Korea than your lost U.S. customers.

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John T. C. Lee, MKS Instruments, Inc. - President & COO [10]

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Yes. Again, it's John. So we certainly visit our Korean customers, stick very close to them and some of the public statements that Samsung have made would indicate that the first half will be similar to the second half of 2018, meaning at this lower level. And that's why our guidance has been this $440 million quarter -- in Q4 is kind of the consistent behavior we see in the first half of 2019. And so that's as far as we know, because it will depend on whether someone in Korea decides to pull in a fab or push out a fab.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [11]

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Okay. And maybe I can squeeze in one more. You guys have said in the past that the underlying market for other Advanced Markets will grow 4% to 5% per year, and that you will be disappointed if your business doesn't grow twice as fast, call it 8% to 10%. Does that percentage growth still apply for 2019, especially given some of the headwinds at least at the macro level that we're hearing?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [12]

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Well, we certainly don't have any reason to believe that that would be different. '17 grew 14% over '16. Year-to-date, we're 20% '18 over '17, and we believe our target is a good 8% to 10% at a minimum. And we have a lot of focus on that area. The width and depth of portfolio is astounding. The amount of applications that we can get involved with, which we are involved with, is remarkable. So we have all the confidence in the world. We're shifting sales focus as well and sort of adding people, adding different capability in those markets. So we don't see any reason to believe why 8% to 10% wouldn't be an achievable market for us on the growth.

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Operator [13]

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And our next question comes from Krish Sankar with Cowen and Company.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14]

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I have a few of them. Jerry or John, I think you kind of highlighted that most of the weakness in Q4 is semi-related and Advanced Markets looking flattish. So if you do a bit math, your midpoint -- you're probably getting like down 18% sequentially for semis in Q4. And then for the full year calendar '18, your semi business is probably up 1% to 2%. So I'm kind of curious, that seems like you're under growing WAC or probably in-line. Is there something happening from a share standpoint? Or am I just reading too much into quarterly volatility?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [15]

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Krish, it's John. So your numbers are spot on, frankly. And so the way we look at it is we looked at our overachievement in 2017, which was a 45% growth when semi had grown about 30%. And then 2018, you're right, it's only a couple of points up relative to 2017. But if you look at the aggregate, which is the kind of the way we look at it, then we've actually overachieved relative to the semi growth over that 2-year period. The reason we try to average over that time frame is because of the up and down of the cycles and the inventory burn off. So we actually looked at it very closely because we certainly want to make sure that we are still tracking to our 2 points above the industry standard growth for -- of market share gain, and that's what we're seeing right now.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [16]

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And actually, we continue to gain share. And you don't -- you can't lose share in the middle of a ramp or during the beginning of a downturn. That doesn't happen because the dine-ins occur usually during the downturn, not the dine out. And we continue to see more and more opportunity for share gain. The other thing I forgot to mention though, which is a salient point, what Amanda asked me, is we also have an OEM that quoted a number of months ago that they'd overbought for an ERP implementation. And so if you have a high build rate, and you overbuy for ERP, you're going to have a dramatic effect on your upstream supply chain when you have to start to work it off because, whoops, I bought too much for ERP, let's work it off and oh, oh, now customers aren't buying as much, it creates another problem. So that's exacerbated the numbers a bit. But no, it's not a market share issue. We expect to take more market share coming out of this downturn. We're putting more people on the street, more engagement with customers. That's how we keep outgrowing the space. So we -- when the industry grew 32%, '17 over '16, we were at 45%. There was a reason for that and we will continue to outgrow the market.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [17]

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Got it, got it. That's very helpful. And then just to follow up on the inventory situation. I understand the ERP issue is one of the OEMs. But in the past, all the component folks have highlighted how it's more just in time and things are more in match with what the demand is with your OEM customers. But now it looks like that's not the case. It seems like this behavior is back to prior downturns, with like them drawing down inventory. Has anything changed this time around?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [18]

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Well, there are a lot more stocking programs that we have with customers, but it doesn't mean that those stocking programs don't have an elevated level of inventory in them, unfortunately. And we had 1 customer that was, here in March, telling us to do this giant buildup in-stock inventory because they were going to have this geometric rise in their build rate. And we didn't do that. I was a bit cautious on that. So you're right. I mean, lead times are shorter, you think people are more rational, there are more just-in-time programs. So in general, it appears to be more rational and more reasonable, but there's still pockets of inventory and the way people stock things and the way they prepare for a ramp. One of things that our customers don't want to do is they don't want to be without inventory to turn their orders around. So even if we can deliver something in a day or a week, they're still going to want to have a heavy amount of safety stock to -- in case they get a last delivery order to turn it. So there's still a little bit of that in the system, I'm disappointed with it, but it just is what it is.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Got it, got it. And then just a final question. If that behavior doesn't change a whole lot with the inventory situation as in past cycles, is it fair to assume even if the first half of '19 is going to be similar to second half of '18 levels? At some point in the first half, you should see a snap back as you start building up inventory?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [20]

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That would be -- it looks like the orders have been consistent now, which is good. But I'm from the Show-Me state so I watch it every -- the first thing I do every morning is I click on my computer and every business you look at bookings and shipments because we keep our foot on the brake and the gas, and that's why we reacted so quickly, that's why we have such a great financial result because we react faster than most people. But my expectation would be that you would expect to see it start to come back if the inventory is depleted. And even if the levels of orders are consistent, you expect to see the people need more inventory and if the business is picking up, hopefully, the second half as some people may project, it's certainly would be something we would see sometime later in the first half, I would expect.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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Got it. Just a last question from my end for Seth. Is it $75 million you have left in your buyback at this point?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [22]

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Yes, that's correct. Krish, it's about $73 million and change. That's correct.

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Operator [23]

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Your next question comes from Patrick Ho with Stifel.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [24]

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Maybe Jerry, just to kind of follow up and maybe just to clarify. When you said that orders on the semi side are now steady, do you believe from an order flow standpoint, you've reached the bottom? And like you said, as soon as the customers work off their inventory, that will be the "catalyst for a rebound in your" semi orders?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [25]

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Well, Patrick, I wish I could tell you definitively if I believe that we've hit the bottom, and we're turning up. But I've been at this for 35.5 years, and we have to be prepared for an event one way or the other. It appears to me from what I'm hearing from my sales team and from customers we've talked to that things appear to be stabilized and consistent. And we are acting that way as I indicated on the answer to Amanda, we're making significant investments and capacity increases in a building we haven't done in over 18 years because our belief of it coming back. So if I had to guess if they appear we're at a good stabilized point and would expect to see it start to come back at some point. But I'm sure we've surprised people when we went from $570 million to $490 million and $490 million to $440 million. And we're a conservative company that likes to look at the business in a reasonable way to give guidance. So it appears stabilized, and I'm not -- I don't doubt that it's stabilized and I hope it continues that way. But we have to be prepared one way or the other, but I'm confident in the long term for sure. I know that was a squishy answer, but I just don't want to go out and be definitive on something until I see more than a quarter's worth of consistency. But it feels pretty good from what our salespeople are telling us.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [26]

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Fair enough. Maybe then as a follow-up question on your Advanced Markets and in particular, the laser business. Obviously, there's a lot of noise out there on the entire laser industry, particularly in the industrial segment. Can you again just kind of clarify and maybe just highlight where your market strengths are? Because I think you're a lot less on the industrial side of things relative to traditional fiber laser company. If you could give a little bit of clarity on some of your market opportunities. And I know you I think briefly mentioned it in your prepared remarks about opportunities in solar and PCB. What are some of the other emerging market opportunities that you see for your laser business specifically?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [27]

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Well, our tech team is John on this one. So as far as our lasers are concerned, the slowdown really in what fiber and CO2, it's more in the heavy industrial and the OLED, large OLED opportunity. And for us, we're more of a finer precision manufacturing, things like microprocessing with pulse lasers. And so we haven't really seen the same impact. In fact, we've seen more opportunity in a lot of those other markets that maybe we haven't -- even had a shot at in the past. We've had several 7-figure wins on mobile and virtual reality markets as well as we're bringing light motion group into semi, into things like metrology and inspection. And we see in -- the Chinese market, the micromachining, more like laser centering. So from our standpoint, we've see pretty consistency in the application of the lasers in the markets we find ourselves in. I have seen what's happening to others based on their announcements or pre-announcements, but it's a different space that we play in. So I'll turn it over to John so he can give you some insights as well from his view.

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John T. C. Lee, MKS Instruments, Inc. - President & COO [28]

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Yes, Patrick. So in addition to the solar cell application and then the PCBA, there are other applications that continue to be used and highlighted, so glass cutting, capacitor or passive component manufacturing, additive manufacturing, so all those other industrial type applications. So we just highlighted -- happened to highlight 2 of them.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [29]

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Great. That's helpful. And maybe a final question for Seth in terms of the capital allocation strategy you're trying to fix near term. It was good to see you buying back stock again at these prices. Is that this, I guess, the transitional shift in the near term of increasing the buyback, while the stocks at these prices or, I guess, are there other tactics that you can take?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [30]

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Yes. I think our view for -- you remember the last or so, once we left the balance sheet for Newport, we achieved, I think, pretty aggressively and Newport has been performing extremely well, Light and Motion Division, really our goal is do acquisitions, that's kind of our #1 priority. And then, we said in the past, as we go to the market and buy back shares, we're really opportunistic, and so I can't give any clarity or bright line on what we'll do going forward. But I think, looking at a number of factors and how we generate cash in the quarter, in a couple of quarters and how we deploy it. All those factors have not changed. So we're still being consistent in that approach.

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Operator [31]

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And our next question comes from Mark Miller with Benchmark.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Research Analyst [32]

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You mentioned that you're not exposed in terms of the metal cutting markets in China. But one of your most successful products has been UV fiber lasers. And one of your competitors is indicating they're seeing some momentum there. I'm just wondering how that space is panning out for you?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [33]

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Yes, Mark, it's John Lee. So we have 1 process, a combination of fiber and UV. That's actually the product line that's done very well actually in the last quarter in the application is solar cells. Those powers are obviously not the high power that -- with industrial lasers like IPG's lasers or nLight's. So we are seeing, obviously, good growth there in that particular type of product.

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Mark S. Miller, The Benchmark Company, LLC, Research Division - Research Analyst [34]

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Okay. One of your larger customers was upbeat about next year siting China domestic fabs. And there's been a struggle there in terms of ramping their NAND processes and that has pushed out what some people believe is a corporate ramp for production. I'm just wondering what are you seeing in terms of the ramp of these domestic fabs for NAND production?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [35]

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Yes, again, for the domestic Chinese semiconductor companies, I think it was really only one with SMIC. And now YMTC is doing NAND if that's you're referring to. And so they are making some progress, but we still see the vast majority of that build and equipment installations driven by foreign-owned chip companies in China.

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Operator [36]

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And our next question comes from Weston Twigg with KeyBanc.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [37]

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First, just wondered if you could help us understand or maybe clarify your China exposure in the non-semiconductor side of the business? Can you give us an idea of how much of your non-semi revenues is from China?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [38]

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Yes. Wes, it's John. So most of that is obviously driven by the Light and Motion side, so a lot of the laser business is going into Chinese laser OEM companies, those applications we talked about like solar cell and PCB drilling. No, I don't want to give you an exact number, but certainly, it's an area where we think it will be probably bigger than our semi side and will be an area that continues to grow faster.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [39]

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And the original MKS business, we've been in China for probably almost 20 years now. And it was really more geared towards industrial manufacturing applications, so things like architectural glass and coated -- tool coatings for wear, and that business is in the $35 million to $40 million range, that's steady business. As John said, the largest segment of it is in the Light and Motion side.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [40]

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Okay, that's helpful. And then just go back to the semiconductor side, on the slowdown in Korea. Can you give us a little bit more color in terms of where you see more risk, whether it's on the NAND side or DRAM side? And then any thoughts on -- since you're tied into that Korean market pretty tightly, just, I don't know, duration of each of those segments in terms of how long the slowdown could last?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [41]

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Wes, it's John. Certainly, we don't know beyond what's publicly stated. I think Samsung has said that they would be starting up probably a DRAM, the next phase of DRAM and the next phase of VNAND in the beginning of the second half, and that's kind of public statements. So we're hoping that's true. And -- but we don't have any more insight as to which ones comes first or which one gets pushed out.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [42]

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But the relationships in Korea are very strong, Wes. We are getting a lot of opportunity now for the light and motion group as well, beyond semiconductor Samsung opportunity. So we're tied into the relationships. We have the amount of engagement they want us involved with and they give us as much as they can that's pretty public other than say well, let's keep investing.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [43]

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Okay. But in the near term, is it -- are you seeing more weakness in the NAND side or the DRAM side, could you say?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [44]

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I think the public consensus is that the NAND side is the one that's the weakest right now.

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Operator [45]

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(Operator Instructions) And our next question comes from C.J. Muse with Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [46]

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I guess, a question on the semi side. Service including upgrades, spares, et cetera, has been a source of strength as tools have come off warranty. And so I was hoping that you could talk about your overall semi business and perhaps help us better understand the tool component and what you've seen there in terms of kind of peak to trough, and if you're seeing, I guess, stabilization and what kind of recovery you're expecting and timing there? And then on the service aspect, are you well-levered to that part of the business? How is that kind of buttressing your business? And then lastly, for your core semi business, direct sales, how should we think about that business vis-à-vis the more volatile OEM business?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [47]

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Yes, C.J, it's John. I'll take the services question first. That's the easiest one I think. So we're certainly starting to -- we're seeing the fact that our installed base growth is driving our service business, and we've seen historically the 9% to 10% a year growth. We expect that to continue and maybe have a little more because of the recent shipments of all our equipment. So I think service is solid, and it continues to be very consistent, and so we're happy with that part of it. I think your other question is about end user, direct end-user sales, is that the other part of your question?

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [48]

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That's right.

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John T. C. Lee, MKS Instruments, Inc. - President & COO [49]

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Yes. So we sell some equipment directly to end users. Examples would be, for instance, dissolved gas for wet-clean and so end users tend to make that decision. They might buy the wet-clean tool from someone else. But then they would decide whose dissolved gas to buy from. And so we have that application and strong market share, direct sales to the end users. And that comes with ups and downs of semi, but the big strength in dissolved gas has been recently in flat panels. And so they also use dissolved gas for flat panel cleaning. And then we have other types of instruments like residual gas analyzers that are bought by end users. And then for sure, we have service with end users. So a lot of end users have -- send back their components back to our repair depots in the region for repair. So that has been consistent, and that's part of the service question as well.

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Operator [50]

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And that does conclude today's question-and-answer session. I would now like to turn the call back to Jerry Colella for further remarks.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [51]

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Yes, thank you. First of all, I want to thank our employees for their help with our quick reaction to market fluctuations. I'm really proud of our ability to manage financing costs effectively, which is our proud and long-lasting legacy. So I want to make sure that people see the financial ability of this company to maintain sustainable profitability even in a downturn. I don't want anyone to lose sight of that because that's something we do better than almost anybody.

With that, we're pleased with our results for the third quarter 2018, achieving strong financial results despite the semiconductor slowdown. I'm hoping this strategy to augment our business with additional solutions that serve industrial technology and other Advanced Markets has clearly proven to be highly effective. We are confident that our diverse end markets demand will grow our leadership position and the semiconductor market continue to drive sustainable and profitable growth. Thank you for joining us on the call today and for your interest in MKS. We look forward to updating you on our progress when we report our fourth quarter 2018 financial results.

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Operator [52]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may now disconnect. And everyone, have a great day.