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Edited Transcript of MKSI earnings conference call or presentation 30-Apr-19 12:30pm GMT

Q1 2019 MKS Instruments Inc Earnings Call

ANDOVER May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of MKS Instruments Inc earnings conference call or presentation Tuesday, April 30, 2019 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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* J. Ho

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

* Shek Ming Ho

Deutsche Bank AG, Research Division - Director & Senior Analyst

* Sreekrishnan Sankarnarayanan

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

* Thomas Robert Diffely

D.A. Davidson & Co., 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 MKS Instruments First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Seth Bagshaw, Chief Financial Officer. 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, Senior Vice President and Chief Financial Officer. And I'm joined this morning by Jerry Colella, our Chief Executive Officer; and John Lee, our President and Chief Operating Officer. Thank you for joining our earnings conference call. Yesterday, after market closed, we released our financial results for first quarter of 2019. Our financial results as 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. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in the most recent end report on Form 10-K for the company. 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 contained in yesterday's earnings release. In addition, we refer to certain pro forma measures with the acquisition of Electro Scientific Industries Inc, or ESI, which closed on February 1, 2019, had occurred at the beginning of the first quarter of 2018.

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 thank you for joining us today. I'll start with the results for the first quarter 2019 followed by several business and market highlights. Then I'll turn the call over to John who'll share additional details on our strategy, customers and markets, supplemented by additional information on our financial results and second quarter 2019 guidance, before we open the call for questions.

On a reported basis, overall first quarter revenue was $464 million, which included 2 months of ESI results. On a standalone basis, MKS delivered first quarter revenue of $428 million, which was above the midpoint of our guidance range. On a reported basis, overall non-GAAP net earnings were $61.3 million or $1.12 per share, which included 2 months of ESI results.

On a standalone basis, MKS first quarter non-GAAP net earnings were $64 million or $1.17 per share. This bottom line outperformance was driven primarily by another strong quarter for Advanced Market business, and our long-standing commitment to mention the cost through the semiconductor market cycles.

For the first quarter, we continued to see strength in our Advanced Markets, and in particular, on Surround the Workpiece offerings. The laser business is the cornerstone of this strategy from which we deliver leading products and services to the laser, photonics and optic markets, and in turn, grow our share. We also had a strong quarter in China, in both the semiconductor and solar markets. Due to the dynamic macroeconomic environment in China, we remained focused on positioning ourself to take advantage of growth opportunities. Our long-term strategies around technical localization and broadening our exposure to new customers and markets has positioned us well in China, much as we did in Korea over the past 6 years with the annual revenues at more than triple.

John will provide more details around the design wins and other successes in these areas. I'm very pleased with our performance this quarter. As you know, semiconductor capital spending has moderated over the last 3 quarters. However, our business appears to have stabilized, and we are preparing for recovery by building capacity, to support us well into the future.

Our acquisition of ESI closed on February 1, 2019. This acquisition is another significant step in executing our strategy broadening and this exposure to new customers and markets and expands our addressable market by approximately $2.2 billion. Going forward, we'll refer to the acquired ESI business as our equipment and solutions division, and this we will be a reportable revenue segment.

For the last few years, we've outperformed our served markets and key elements of this success has been optimizing our sales model, including a strong emphasis on leveraging our customer relationships across both our Light and Motion and document analysis divisions. In 2018, we secured design wins that had the potential to deliver over $50 million of annualized revenue. We will apply the same front-end strategy to the Equipment & Solutions division.

In terms of market drivers, we are excited about the prospects of the new 5G technology implementation. We anticipate this enabling technology will drive long-term growth, both for Advanced Markets and semiconductor markets, including in our new Equipment & Solutions division.

Turning to our Q2 2019 and earnings guidance, we estimate that our sales in second quarter could range from $460 million to $510 million. Second quarter non-GAAP net earnings per share could range from $0.89 to $1.26 per share. Seth will provide the balance of second 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. We are very pleased with our progress on integrating ESI into our business. It has a very strong cultural fit and both companies share similar core values, which will help us facilitate a smooth, ongoing integration. As we have done with other acquisitions, we are applying the MKS business process, have begun to find areas for collaboration and leverage.

For example, we are collaborating on a recently released, flexible printed circuit board laser drilling solution, which incorporates our Spectra-Physics nanosecond pulse laser. We have already received significant quarters in Asia and Europe for this solution. We provide unmatched productivity improvements that further solidifies our market leadership in the flexible PCB market.

In the first quarter, [Career Technologies Corporation], one of the world's leading manufacturers of flexible PCBs, honored ESI with its Principal Partner Award in recognition of the outstanding operational support for [Career's] business ramp in 2018. Also the ESI high density, interconnect drilling solution was awarded the Printed Circuit Design in FAB magazine's 2018 new product award for rigid printed circuit board fabrication.

As we've discussed during our last call, the ESI acquisition further broadens our Surround the Workpiece offerings by adding advanced systems expertise and deep technical understanding of laser materials interactions. We expect ESI leadership and complex printed circuit board processing systems to provide MKS the opportunity to accelerate the road maps and performance of our laser, motion and photonics portfolios. While we manage through the cycles of the semiconductor market, we continue to emphasize the importance of design wins through uninterrupted support of our customers' development road maps.

In the first quarter, we had noteworthy wins in our power solutions business. We continue to take share in RF power from memory applications, most recently, in conductor etch with our next generation 13.56 megahertz generator. We also received a significant volume order from RF generators to support etching processes or a memory fab expansion in China. And in Korea, we won an exclusive contract for our matching networks that enables improved uniformity and yet, another etch application.

Our microwave power solutions continue to win business from multiple customers for synthetic diamond applications. And another microwave power design win, we received several orders for a plasma-assisted, Atomic layer deposition application for the semiconductor market. Our lasers business was also strong in the first quarter. We secured design wins in China for a number of Advanced market applications, including stem cutting for the life and health sciences market, and glass cutting application for the industrial market and a number of scribing and drilling applications for the photovoltaic market.

As Jerry mentioned, we have strength in our cross-selling capability, and our customers appreciate the opportunity to work with a partner that has a broad range of end-to-end solutions. We won a key design for our optical sub-assembly solution used for a semiconductor wafer inspection application. Our elimination and collection OpEx will be used to capture critical dimensions at nanostructures and DRAM, flash and logic devices. Then we had a number of precision motion design wins for various applications and wafer inspection and Advanced Packaging.

We are excited about the roll out of 5G and anticipate this will be a long-term growth driver for all of our divisions. In the short term, there will be a new wave of communications chips and a refresh cycle for mobile devices. There will also be new antenna designs and new materials required, which enable 5G performance that will require new laser-based processes. Longer term, we expect new devices and broader IoT deployments that require the same 5G components for connectivity.

This new connectivity and performance shift will enable more use cases, which we expect will provide MKS the opportunity to deliver new designs and innovative solutions across our portfolio. Our outlook remains very optimistic. We continue to garner design wins in all of our markets, and our strong position in Advanced Markets is bolstered by our ESI acquisition. This balance in growing portfolio products and solutions uniquely positions us for the long-term growth.

At this point, I'd like to 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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Thank you, John. I'll cover our Q1 2019 financial results then discuss our Q2 2019 guidance. The GAAP and non-GAAP results for the first quarter include the combined results of the recent acquisition of ESI, which closed on February 1.

Turning to Q1, pro forma sales for the quarter were $471 million, a decrease of 11% sequentially. Pro forma sales for semiconductor market were $221 million and pro forma sales for our Advanced Markets were $250 million, both decreased by 11% sequentially. The decrease in pro forma sales were primarily driven by the moderation sale for semiconductor industry as well as the flexible PCB market as ESI's customers absorbed capacity additions over the last 18 months. On a pro forma basis, approximately 47% of our sales were the semiconductor market and 53% to customers in the other Advanced Markets we serve.

Now moving to GAAP and non-GAAP results for the quarter. Reported revenue for the quarter was $464 million and non-GAAP gross margin was 43.8%. Non-GAAP operating expenses and non-GAAP operating margin were $121 million and 18%, respectively. GAAP gross margin was 42.7%, included the impact of $5 million of inventory purchase accounting charges. GAAP operating expenses were $175 million, included $16 million in amortization of intangible assets, $30 million in acquisition integration cost, $1.7 million in expenses related to fulfilling a customer obligation and $6 million in transaction fees associated with the issuance of term loan debt to finance the acquisition of ESI.

GAAP net interest expense was $7.4 million, and non-GAAP net interest expense was $6.8 million. Our GAAP tax rate was 18.8%, and our non-GAAP tax rate was 18%. GAAP net income was $12.5 million or $0.23 per share and non-GAAP net earnings was $61.3 million or $1.12 per share.

Respect to MKS standalone results, excluding the impact of the ESI acquisition, revenue was $428 million, which was above the midpoint of our guidance range and decreased 7% compared to Q4 revenue of $461 million. Standalone GAAP and non-GAAP gross margin approximated 45%. Non-GAAP operating expenses were $110 million and non-GAAP operating margin was 19% of sales, which was favorable to our expectations at this revenue volume. Standalone non-GAAP net earnings were $64 million or $1.17 per share, both of which was also at the higher end of our guidance range.

The integration of the ESI acquisition is proceeding very well. We've already begun to realize cost synergies, which in the second quarter, are expected to be approximately $1 million or $4 million on an annualized basis. We're on schedule to realize the $15 million of announced total cost synergies in the 18 to 36 months subsequent to transaction closing.

Now turning to the balance sheet. We financed the ESI acquisition with $650 million of incremental, institutional term loan B and approximately $400 million of cash and investments. At quarter end, we had approximately $1 billion of total term loan B debt outstanding, which were rated DD+ by Standard & Poor's and Ba1 by Moody's. Our goal continues to deleverage the balance sheet as we have done with the Newport acquisition, where we reduce term loan debt by over $430 million in a 24-month period post acquisition.

Furthermore, at the end of the quarter, we maintained a strong balance sheet and liquidity of over $460 million of cash and investments, $100 million of available borrowing capacity under an asset-based line of credit and a modest trailing 12-month pro forma net leverage ratio of under 1x. Free cash flow for the quarter was $15 million through the impact of acquisition, integration expenses as well as variable compensation payments during the quarter.

Cap additions for the quarter were $15 million, depreciation and amortization expenses were $25 million and stock compensation stance was $28 million. Stock compensation included $18 million of charges for acceleration of vesting in stock awards for certain ESI employees [early] to the acquisition. And these stock compensation charges have been excluded from non-GAAP results and are included in acquisition cost in the quarter.

We continue to demonstrate a balanced approach to capital deployment. In the quarter, we paid a cash dividend of $11 million or $0.20 per share. In terms of working capital, pro forma days outstanding were 66 days at the end of the first quarter compared to 60 days at the end of the fourth quarter, and pro forma inventory returns were 2.2x compared to 2.5x in the fourth quarter.

Finally, I'll discuss our Q2 2019 guidance, which includes a full quarter of the ESI results. Based on current business levels, we estimate that our sales in the second quarter could range from $460 million to $510 million, and our non-GAAP gross margin could range from 43.5% to 45.5%.

Q2 non-GAAP operating expenses could range from $128.5 million to $135.5 million. R&D expenses could range from $42.2 million to $44.8 million, and SG&A expenses could range from $86.3 million to $90.7 million. Non-GAAP net interest expense is estimated to be approximately $10.1 million and a non-GAAP tax rate to be approximately 20%. Given these assumptions, second quarter non-GAAP net earnings could range from $49.1 million to $69.1 million or $0.89 to $1.26 per share.

In the second quarter, amortization of tangible assets is expected to be approximately $17.6 million. Inventory-related purchase accounting charges are estimated to be $3.2 million. Integration-related costs are expected to be $1.8 million and GAAP net interest expense is estimated to be approximately $10.9 million. As result of these transaction-related charges, GAAP net income is expected to range from $30.7 million to $50.9 million, or $0.56 to $0.93 per share on approximately 55 million shares outstanding.

This concludes our prepared remarks. I'll 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 the line of Patrick Ho with Stifel.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [2]

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Congrats on a nice quarter and closing the ESI acquisition. Jerry, in your prepared remarks, you said you believe that the semi business is stabilizing. Maybe on a qualitative basis, can you give a little more color on, one, why you believe it's starting to stabilize and maybe two, do you believe that the March quarter represents -- the March or June quarter represents a bottom for MKS' semi business?

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

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Yes. Thanks, Patrick, for the call -- for the question. No The reason why I made a comment about stabilizing is because we don't report on orders. We report on revenue. But what I look at is -- I look on a bookings [issue] and every day, I've done it, every day, it felt like 36 years probably. And the semi orders have really stabilized nicely, and the Advanced Markets orders look very strong. So even though we don't comment about order rate in terms of specifics, but I look at those things, I see that there's real good stability in the order rate that we've seen. We've had positive -- more positive commentary of what customers about, what towards the end of the year looks like and they are preparing themselves, hopefully, for -- maybe things coming back and to reflect a strong 2020. But you have to back off into '19 for order rates, which backs it further into us.

The other thing I do want to mention though is there's always doom and gloom of the semi industry, and even if we stay flat this year in semi, it'll be the third highest revenue year in the company's history. So we've been supplying the semiconductor industry well over 40 years and this is to be the third highest year, and the run rate will be close to $900 million. People are sad about that. And on Advanced Markets, it's close to $1 billion. So I'm not feeling bad about running a business that's close to $2 billion just because it looks a little dour right now. And we've adjusted our cost structure, we are continuing to look at costs for efficiency and productivity.

But I feel very good about what our business prospect looks like even if we were flat because I've been through some pretty horrific downturns in the past, and this feels, not that I'm happy about it, but it feels more consistent. And like I said, I think the order rates have stabilized, and as you know, Patrick, those things can turn on a dime. If I was Nostradamus, I'd give you great predictions. But I feel that generally, it seems to be coming together. People talk a little more about DRAM and maybe memory inventory side to stabilize a bit. But I look internally at the order rates, and they appear to be pretty healthy at this point. Hope that answer the question.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [4]

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No, that was helpful. Maybe as my follow-up question, John, when you described the Advanced Markets and some of the opportunities and some of the design wins that you got there in the quarter, particularly in China, I think you mentioned glass cutting, scribing, markets like that. Can you detail maybe some of the other applications that are driving in order to project a year in your Advanced Markets business?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [5]

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Sure, Patrick. Yes. So a lot of the solar market applications are what was referred to in the prepared remarks, and so that's the scribing, et cetera. But if you look at ESI, that brings in a whole another level of different kinds of laser applications such as the flexible PCB, which is certainly different than solar. And that's also strong in China as well as other Asian countries.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [6]

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Great. And final question from me for Seth. In terms of the gross margin outlook, ESI, historically, has had a volatile gross margin profile driven primarily by product mix. How much of that is an influence, I guess, in the June quarter. And how do you look at that variable as we go into the second half of 2019?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [7]

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Yes. Patrick. So in Q2, again, the $485 million midpoint of guidance, you'd kind of assume that there's still -- MKS businesses is pretty consistent on the revenue side. And so you get to ESI's kind of the difference in that $5 million I think for the quarter, give or take a little bit. And at those volumes, the gross margin is in the mid-40% range, so even at a relatively modest flex spending environment, the -- in the mix we're seeing it right now, it's a pretty strong operating model.

And then going forward, what's interesting is ESI on a standalone basis and MKS on a consolidated basis, they have variable gross margins still in that 50% range and variable operating margin at a 40% to 45% range. So it was interesting as ESI with a robust model kind of is right in line with the MKS long-term operating model in terms of profitability, based on flow-through additional revenue. So that's kind of how we're looking at the model going forward. Right, mix could have an impact obviously, but based on our projections in the second quarter, yes, that's what we're seeing for the gross margins, again, a pretty healthy level. So we're pretty happy about that quite honestly.

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Operator [8]

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

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

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I think you guys just talked about the ESI as the difference and for the [given] guidance that the MKS itself is kind of consistent. Can you talk about the splits or helps between the semi side the first, Advanced Markets side outside of ESI? What's taken into your guidance?

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

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Yes. Patrick, this is John. So I was saying that for semi, it's consistent, the MKS business, if that's what your question is. For the Advanced Markets, it's a little lumpy, but it's been steady. And so still a lot of it is still driven by lasers in the Surround the Workpiece portfolio. So we're pretty happy with the growth rates there. In our Advanced Markets, we still -- probably said, and we're still very confident and growing at twice the rate of those Advanced Markets growth rates. And so that's what we're continuing to see.

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

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Okay. That's fair. That's kind of my next question is. I think Q1 to be look at on an organic basis, I think the Advanced market may be a little lighter than you guys have expected. Just wondering what is driving the mix? Is that a -- is there some lumpiness, and are you still expecting the 8% and 10% growth you're looking for this year?

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

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Yes. I know Sidney, that Advanced Markets business has always been a lumpy business. Some of it is project based and that's been the calling cards for MKS forever, frankly. So I guess that I saw the order rates in -- coming in last quarter we're strong for the Advanced Markets. So do you ever look at over the long run, over a years' time rather than quarter-to-quarter, this can move up and down a little bit.

I remember back in the days when solar was hot and LED was hot, and we'd get huge orders and that would be for a contract. And then they'd back off a bit. Then you get a -- 6 months later, another huge order. So that's kind of a way that, that business moves around. But we expect that to remain relatively strong and consistent.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [13]

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Okay. Maybe -- my last question is on the ESI. Clearly, things are a little tough there in the first half of the year. How should we think about the growth projection over the next few quarters, especially, related to PCB business, which I believe is down maybe by one customer? And also just to finish up all the other parts, you previously talked about the -- you expect the deals to be accretive during your first 12 months post-closing. Are you expecting that to happen given where revenue was at calendar Q1? And what kind of quality revenue do you expect ESI to be accretive to EPS? And what margins level would you expect that to happen?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [14]

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Yes. So this is Seth. I'll take the accretive question first. So in the Q2 guidance, it actually is accretive. I know I said that it's a $5 million revenue give or take, plus or minus, 10%. That midpoint operating profit on a non-GAAP basis is kind of high single digits. And that'd be accretive for the quarter. So again, in that -- and again, and in Q2, we only have about $1 million of cost synergies in those numbers, and we get more opportunity going forward as well. So we're pretty fit right out of the shoot, which is great.

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

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Yes. And then, Sidney, for your other question about how to look at the business. Certainly flex PCBs where we want to secure our #1 market position and that was the release of the CapStone tool, which is what I referred to in the prepared remarks. And those are ones that have been released, and we're already getting a few orders. And so we're really happy about and confident that we'll maintain our #1 position in flexible PCB via drilling.

And then as we talked about, we were getting ready to start delivering the [DO] tool, which I -- in my prepared remarks, I said got the one magazine's Best Product for 2018 Award. And so as those beta sites go out in the Q2, Q3 time frame that's kind of the next real market segment by which we don't participate today. And we hope to participate just as we do with flex PCB going forward. So that's what you should look for going forward.

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

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Yes. I mean we're really excited about the HDI opportunity. When we looked at the company, we looked at what they were doing in that business in the past. Virtually, there was really no business there at all. We looked at the prospect of market share that was pertaining. It appeared to be quite reasonable to us. And now we're looking at the solution that they provided and seeing the facts that they've been awarded an award with that design gives us great confidence that, that pickup in their business in the future on HDI is on top of already the share they have in flex PCB, along with just the organic growth of the market. So we think that's going to be very positive for the company over the next several years for sure, taking it to 5G.

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Operator [17]

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

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [18]

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Yes. Thanks for taking my question. I just have a few of them. Jerry or John, I'm just trying to figure out on the core of the legacy MKS side business. Is It fair to assume that semiconductor revenues are down Q-over-Q in June versus March?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [19]

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Yes, Krish. So I think June versus March is flat. March was just slightly down, maybe about 5% from a pretty high Q4 where we saw some pull-ins into Q4. So that's why we think it's -- that we characterized it as stable and flat.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [20]

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Got it. That's very helpful, John. And then how do you see your customers inventory, like where do you think they are in that inventory stabilization or rationalizing the inventory process today on the semiconductor side?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [21]

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Yes. I think it's a mixed bag, Krish. Unfortunately, I wish people weren't as irrational about what they thought this would be, and they bought a little more than they needed to. But it does appear as though it leaned off a good segment of that inventory. And I think we're in a pretty decent place now, compared to last 6 to 7 months that we saw. So I think it's -- no I think that's what we said that this is just flattish at this point.

And so I thought that the order rates have stabilized, which meant I didn't see another debt degradation in the orders, which is good, which would mean to me that the inventory is stabilized. Because the order rate really is a reflection about the position they have on the inventory. And when I look at that, it appears as though we were in pretty good stead at this point. And my team needs to tell me that they pretty much consumed a large bulk of it that we -- part of it with this little more -- had to eat up and for the most part, it appears to be pretty consistent and stable right now, Krish. We feel pretty good about that.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [22]

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Got it. And I think just to follow up on the point, does that mean, in theory, if your customers -- your semicap customers are an inflection in the business upwards, your shipment should follow in tandem without any kind of a quarter or 2 lag? Is that fair?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [23]

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There's no question. Yes. This is an example, one of the things I mentioned was -- in my remarks, we're actually putting capacity in. We have one business unit, I'm putting in $15 million worth of capital in anticipation of the next so that they can pick up. But our lead times are very, very short, Krish. We're on a lot of JT programs with our the customers, so we would see an immediate pickup. It's not a quarter lag. You'd probably see us -- our revenue pick up before you would see the OEMs revenue pick up. We're that fast.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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Got it. Thanks, Jerry, very helpful. And a follow-up question on ESI. My understanding was that on the flexible PCB side, ESI had almost 75% market share versus maybe under 5% or low single digits on the HDI PCB: a, is that correct; and b, if so, is there any kind of cross-selling opportunities within flexible and HDI, or are they all completely different customer base?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [25]

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Krish, this is John. Yes. So those numbers are right. But I would say the HDI number was even lower for the older tools. So we're starting at a low base. There are many of our customers -- PCB customers who do both flex and HDI, some who only do flex and some who only do HDI. So there are cross-selling opportunities because you're already in the factory with flex. And then of course, you know the relationship, and you can leverage that.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [26]

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But there are other opportunities within semi of discussions that we could have, I think, with end users about some potential to the ESI longer term, and we're already in those conversations. The minute we bought ESI, there were end-users talking to us about, "Okay, we need that road map meetings now. Can you come over?" And we've already had those. Very similar to what happened with Q4. Very similar.

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Operator [27]

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(Operator Instructions) Our next question come from the line of Tom Diffely with D.A. Davidson.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [28]

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First question on ESI. The roughly $35 million for the quarter, which is 2 of the 3 months. Is that reflective of the business trends there? Or was it just somehow skewed because Chinese New Year was essentially when you assumed control?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [29]

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Yes. Tom, it's Seth. Yes. $35 million got a couple of things. One, you're right, it's a partial quarter, so obviously, it's only 2 months. And the next, they also have some purchasing accounting revenue adjustments, which bring that revenue down. So I would say this if ESI was a standalone company, the rev would be more like the high $40 million range, trending up obviously is Q2. You have a whole comp -- that's kind of a better metric.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [30]

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Okay, good. And then, Seth, you talked about creating a new category of Equipment & Solutions. What else is in there besides ESI, going forward?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [31]

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It's just ESI. It'll just be that division at this point.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [32]

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Yes. We're going to have 3 divisions going forward. Vacuum analysis was with the standalone MKS business. Light and Motion that was Newport. And Equipment & Solutions, which was with ESI, Tom.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [33]

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Okay, great. And then Jerry obviously we've been around ESI a peer for a long time, and they've got a very deep bench of just core technology. How long do you think it'll be before you can utilize some of that technology in your other products?

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [34]

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Well, I mean, we've already had a lot of collaboration between Newport and ESI over the last year or 2 and actually had displaced an incumbent on the latest flex tool that we released. We came in with better technology, more capable. And we have a technology conference we're holding in the next few weeks. There will be a lot of opportunity for people from all the divisions to talk about a collaboration. We also have the office of the CTO. So we're already engaged in that already.

My expectation is, we'll see how that comes out. You see total design cycles for a year or 2. Although, in some cases, you can probably already displace a competitor because you don't have copy exactly in the other Advanced Markets like you do in semi. So the opportunity to take more share or utilize our technology within our own systems is a little easier on -- in the Advanced Markets than it is on the semi side. So John, do you want to add anything?

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

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Yes. Tom, I had to add that we had many, many dual tool road map meetings between the Light and Motion group and the ESI group. And I think the capability on both sides was a little surprising to each side. Some of the modeling capability and the systems capability at ESI was unknown to the Light and Motion side. Some of the laser capability and motion capability was unappreciated -- underappreciated by the ESI folks. So there's been a lot of really good ideas. And going forward, they just held a joint TRM together in Asia at the request of that customer, as Jerry had mentioned. And so when you can come to a customer and show the whole portfolio of Newport and the whole portfolio of ESI, no one else can do that. And so that was really a great event for our customer as well.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [36]

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And, Tom, I know this is going to sound like self-promotion obviously but as the CEO, I should, but I sit in -- I sat in in on these map -- the monthly business reviews for the last number of decades. And I am incredibly impressed with the amount of technical horsepower this company now has. It is absolutely incredible. What was more incredible to me is see people from multiple divisions that all understand each other's technology. And the fact that they talked about how they can be engaged in developing more capable technology and integrated systems and helping each other solve their -- the solutions and their problems. And I was just blown away by last [MER] and how much technical firepower this company now has. And I'm just glad that John has a PhD from MIT because he can help me understand what I don't understand. So -- and really incredibly impressive.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [37]

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Yes. Okay. Great. Seth, one more question on the guidance. The EPS range is little wider than it has been recently. Is that strictly because of the volatility of the ESI business or is there something else behind that?

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Seth H. Bagshaw, MKS Instruments, Inc. - Senior VP, CFO & Treasurer [38]

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No. Tom, as we -- we have our own range as for MKS. And then we have talked to the ESI team, and said, if you were standalone, what would you range your revenue? And he was like, probably $5 million on both sides at midpoint. And we just add their range to our range. It was simple math like that. That was how we got it.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [39]

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And then, finally, John. When -- you talked about the 5G rollout as being the big driver. And I assume that you're more leveraged to the handset part versus the base station. And it seems like the handsets more of a 2020, 2021 episode. So just, kind of -- if you could just kind of go through what you think the opportunity is on a near-term basis versus what it could be in a couple of years that'd be great.

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John T. C. Lee, MKS Instruments, Inc. - President & COO [40]

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Yes. Sure, Tom. So on a near-term basis, base stations that's driving a lot of the new chip technology. So that's what would affect our core MKS business. And then going forward though, the headsets, that's where new materials are being adopted for enabling those handsets. And that's when you start seeing the capabilities of ESI starting to help that kind of a market. So near-term is more of the VNA side and then longer-term is more of the ENS side.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [41]

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Okay. But is it fair to say that the longer term, the handset rollout is going to be a much bigger opportunity for you?

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John T. C. Lee, MKS Instruments, Inc. - President & COO [42]

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Yes. Because that has both the VNA side as well as the flexible PCB side.

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Operator [43]

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Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Jerry Colella, Chief Executive Officer, for any further remarks.

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Gerald G. Colella, MKS Instruments, Inc. - CEO & Director [44]

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We are pleased with our results for the first quarter of 2019. We expect that our exposure to diverse end markets, a global leadership position in the semiconductor market, and our focus on financial and operational excellence will continue to drive sustainable and profitable growth. I am more confident than ever that the strategy we put in place has positioned us for long-term outperformance within the markets that we serve.

Thanks for joining us on the call today. And if you're interested in MKS, we look forward to updating you on our progress when we report our second quarter 2019 financial results. Thank you.

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Operator [45]

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