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MKS Instruments (MKSI) Q4 Earnings & Revenues Beat, Down Y/Y

Zacks Equity Research

MKS Instruments MKSI reported fourth-quarter 2018 adjusted earnings of $1.54 per share that beat the Zacks Consensus Estimate by a couple of cents. However, the figure declined 9.9% year over year.

Revenues of $460.5 million comfortably surpassed the Zacks Consensus Estimate of $441 million. However, the top line declined 10% year over year. Lower spending in the semiconductor market is the reason behind the decline.

MKS Instruments, Inc. Price, Consensus and EPS Surprise

MKS Instruments, Inc. Price, Consensus and EPS Surprise | MKS Instruments, Inc. Quote

Quarter Details

Products revenues (87.3% of total revenues) were $402.3 million, down 12.2% from the year-ago quarter. Services revenues (12.7%) increased 8.6% year over year to approximately $58.3 million.

Sales to semiconductor customers decreased 10% sequentially to $235 million due to slowdown in spending from its semiconductor customers. However, the company stated that it is investing in semiconductor products like logic devices, 3D NAND and DRAM to benefit from any future opportunities.

Sales to Advanced Markets were $226 million, flat sequentially. The company noted strong demand for the products in the segment.

Moreover, the company saw design wins in areas including ultraviolet and immune lasers, advanced printed circuit boards and analytical instrumentation primarily from the United States and Europe.

The company’s Vacuum and Analysis segment reported sales of $258 million, a decrease of 10% from third-quarter 2018.

Sales from the Light and Motion Division were $203 million, up 1% from third-quarter 2018. In 2018, design wins from the division contributed to more than $50 million.

Moreover, MKS Instruments’ acquisition of Electro Scientific Industries ESIO is expected to strengthen the company’s offerings in optics, photonics and laser markets. The acquisition, which is expected to close on Feb 1, 2019, is anticipated to grow its addressable market by about $2.2 billion.

Operating Details

MKS Instruments’ gross profit margin for the quarter was 45.6%, down 100 basis points (bps) year over year due to underutilization of factory capacity.

Adjusted EBITDA declined 15.3% to $122.9 million. Adjusted EBITDA margin in the reported quarter was 26.7%, which contracted 170 bps on a year-over-year basis.

Both research & development and sales, general & administrative expenses as a percentage of revenues expanded 60 bps year over year to 7% and 14.8%, respectively.

Acquisition and Integration cost expanded 80 bps due to Electro Scientific Industries acquisition. Restructuring cost contracted 20 bps on a year-over-year basis.

The company reported non-GAAP operating income of $109.3 million in the quarter, down 17.7% from the year-ago quarter. Adjusted operating margin was 23.7%, which contracted 220 bps on a year-over-year basis.

Balance Sheet & Cash Flow

MKS Instruments exited the quarter with cash and cash equivalents of $644.3 million compared with $399.8 million as of Sep 30, 2018.

Long-term debt was $343.8 million compared with $342.9 million as of Sep 30, 2018.

As of Dec 31, 2018, cash from operating activities was $135.5 million compared with $95.9 million in third-quarter 2018.

Guidance for Q1

MKS Instruments anticipates to report revenues in the range of $400-$440 million. Non-GAAP earnings are expected in the range 95 cents-$1.18 per share. Gross margin is anticipated in the range of 44.5-45.5%.

While non-GAAP operating expenses are anticipated in the range of $112-$118 million, research and development expenses are expected in the range of $33-$35 million and selling general and administration expenses are expected in the range $79-$83 million.

Amortization is expected to be $10.4 million while deferred financing cost is expected to be $0.6 million. Additionally, restructuring costs are anticipated to be $0.3 million. Management expects capital spending from its semiconductor customers to be low in the first half of 2019. However, MKS Instruments expects growth in advanced markets to aid the top line in first- quarter 2019.

Nevertheless, with adoption of 5G, MKS Instruments expects demand to pick up for its semiconductor and laser diode business in the near future.

The guidance does not take into account the acquisition of Electro Scientific Industries.

Zacks Rank & Stocks to Consider

Currently, MKS Instruments carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the broader technology sector include Twitter TWTR and Lumentum Holdings LITE. While Twitter sports a Zacks Rank #1 (Strong Buy), Lumentum carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Twitter and Lumentum is projected to be 22.05% and 17%, respectively.

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