MKS Inc. (MKSI) Q3 2026 Earnings Call Transcript

Operator: Thank you for standing by. My name is May. I will be your conference operator today. And at this time, I would like to welcome everyone to MKS third quarter 2026 earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, please press 1. To withdraw your question, please press 1 again. Thank you.

Paretosh Misra: Good morning, everyone. I am Paretosh Misra. Vice president of investor relations, and I am joined this morning by John T. C. Lee, president and chief executive officer and Ramakumar Mayampurath, executive vice president and chief financial officer. Yesterday, after market closed, we released our financial results for the third quarter of 2026 which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations plans and prospects for MKS comprise forward looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-Ks, and any subsequent quarterly reports on Form 10-Q. These statements represent the company's expectations only as of today. And should not be relied upon as representing the company's estimates or views as of any date subsequent to today and the company disclaims any obligation to update these statements. During the call, we will be discussing various non GAAP financial measures. Unless otherwise noted, all income statement related financial measures will be non GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non GAAP financial results, and a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division. Now I will turn the call over to John.

John T. C. Lee: Thanks, Paretosh, and good morning, everyone. MKS' strong business momentum continued in the third quarter. Driving revenue and EPS above the high end of our guidance. We also expanded operating margins by approximately 700-basis-point year-over-year, demonstrating the leverage in our business as revenue scaled. Each of our end markets performed at or above the high end of our guidance, and we continue to see strong order flow. Providing us greater visibility into future demand. Our guidance today points to a very strong finish to the year, with continued robust year-over-year revenue growth. Driven by unprecedented demand across our key end markets. As AI related investments accelerate across semiconductor manufacturing, and electronics and packaging, we are capitalizing on our broad capabilities long term relationships with customers, and our ability to develop solutions that address the fundamental trends of scaling. Stacking, and new materials. These same trends are driving complex requirements for memory and logic devices as well as the advanced circuit boards and substrates that integrate them. We are uniquely foundational to enabling customer road maps across both markets. This position is also translating into new design wins that create opportunities to gain share and further expand our visibility into the AI super cycle. At our upcoming Investor Day in December, we look forward to sharing more about how and where we innovate and win. I will turn now to our Q3 end market performance and Q4 outlook. Starting with our semiconductor market, revenue was at the high end of our guidance range. Up 15% sequentially and 54% year-over-year. Growth was broad based across our vacuum and photonics solutions. Including power, pressure, microwave, and plasma and reactive gas solutions. We also secured a major customer win with a leading foundry, selecting our dissolved gas solutions for advanced logic. NAND upgrades continued at a healthy pace, and with greenfield capacity planned for 2028, our RF power outlook is robust. Design win activity remains solid. Including an important pulsed DC power win for a significant conductive etch application. Overall, order activity remains very strong. Providing rapid revenue growth and excellent visibility well into the new year. Our semi outlook for Q4 points to accelerating year-over-year growth with continued strength across our product portfolio. Customer conversations we are having gives us confidence in our ability to continue outgrowing WFE during this period of elevated investment. Against this backdrop, some customers have noted certain constraints elsewhere in their supply chain. We plan several years ahead so that we and our suppliers are positioned to meet customer demand. From a manufacturing perspective, we are preparing for WFE approaching $300 billion in 2028. Our Malaysia Supercenter will ramp over the coming quarters. With room for further expansion. We also plan to expand supercenter capacity in other key regions such as North America and Europe. MKS has the depth scale, and financial strength to expand capacity across our own operations and supply chain while maintaining CapEx intensity within our targeted 3% to 5% range. Turning now to Electronics and Packaging. The business continues to deliver outstanding growth. Revenue was well above our guidance range, increasing 9% sequentially on top of a strong Q2 and up 43% year-over-year. Our chemistry equipment business continued to see record order volumes as customers expand capacity largely to support AI related applications. Chemistry revenues grew 26% year-over-year excluding the impact of FX and Palladium pass through. The strongest growth in the history of the company. That performance reflects strong AI driven demand, as well as increasing consumables revenue at the equipment we have installed over the past several quarters is qualified and moves into production. As a reminder, our proprietary chemistries have an attach rate of greater than 85% to our equipment installed base. Generating years of steady revenue and gross margins well above the corporate average. AI related chemistry revenue represented 10% of our electronics and packaging chemistry revenue last year. And it is now tracking towards the high end of the 15% to 20% range we had talked about for 2026. Including all of our E&P capabilities, chemistry equipment, chemistry, and laser systems, AI exposure is expected to represent approximately 25% of total E&P revenue for the full year, an approximately 180% annual increase in dollar terms. As we have reported throughout the year, our momentum is accelerating. At the midpoint of our guidance, we expect approximately 1-third of our E&P revenue to come from AI in Q4. And we will expect this to continue to increase as we help customers meet growing demand for AI applications. Chemistry equipment sales were up more than 75% year-over-year in the third quarter. And we expect full year sales of more than $300 million, over 50% above our historic annual peak. Current capacity is sold out through 2027, and to meet accelerated chemistry equipment demand, we are expanding capacity in Guangzhou, China, and this will double our overall capacity when completed which we are targeting for Q3 2027. Across the electronics ecosystem, AI demand is increasingly challenging semiconductor innovation as well as advanced packaging substrates and PCB technologies. As package sizes grow, layer counts increase, and package architectures become more complex, we are leveraging our broad electronics and packaging portfolio to address these technological challenges. Looking ahead to Q4, order activity remains extremely strong across the board. With chemistry equipment now booking for deliveries well into 2028. We have also seen considerable new order volume for our laser systems for rigid PCB applications. Including optical modules, with deliveries expected to accelerate significantly in 2027. These wins reflect years of coordinated go to market groundwork across our PCB laser drilling systems and chemistry businesses. Which has positioned us well to meet the industry's needs for innovation at just the right time. We expect Q4 electronics and packaging revenue to increase over 40% year-over-year, driven by strength in chemistry equipment, AI related chemistry, and rigid PCB laser drilling systems. On an annual basis, our E&P business is on track to grow nearly 40% in 2026. As AI continues to drive elevated capital investment across the PCB industry. As new equipment is qualified and ramps in coming quarters, we expect our larger installed base will support steady growth in our higher margin chemistry consumables over the long term. Turning to our specialty industrial market. Revenue grew 15% sequentially and 27% year-over-year, well above our guidance range, led by strength in datacom and improvement in general industrial markets. Automotive posted modest growth despite soft vehicle production, highlighting our value add position in the market, The growth of these businesses in 2026 demonstrates our ability to extend our core capabilities into attractive markets. Looking ahead to Q4, we expect revenue to remain at this level following the significant growth we delivered. Last month, we announced that we entered into an agreement to sell Ophir Optics business to TTM Technologies. Ophir Optics develops high precision infrared thermal imaging laser optics solutions for defense, security, and industrial applications. We grew this business organically, improved its profitability and have agreed to sell it at an attractive valuation to an industry leader. For MKS, the transaction gives us balance sheet flexibility and shows how our specialty industrial activities enhance shareholder value creation. Wrapping up, MKS is poised to end 2026 on a strong note and we are excited about what lies ahead. As the only company in our space broadly exposed to powerful transcribing innovation in both semiconductors and advanced PCBs we are in a great position to significantly grow our business in the coming years. AI is not just driving investment. it is pulling forward customers' technology road map across semi and electronics packaging landscapes. Elevating the value of innovation for those who can deliver it. As a foundational enabler of that innovation, the future is bright for MKS. I want to thank our outstanding MKS team for their tireless efforts to deliver for our customers in this unprecedented demand. And our suppliers and customers, and industry partners across the electronics ecosystem for their continued support and collaboration. Now here's Ramakumar, to run through the quarter and our financial outlook in more detail.

Ramakumar Mayampurath: Thank you, John, and good morning, everyone. We delivered another very strong quarter driven by broad based demand across all our end markets. Our results demonstrate our ability to translate high revenue growth into even better earnings growth through disciplined execution. We are driving strong operating leverage while continuing to invest in the multiple growth opportunities that we see ahead. For the third quarter, MKS supported revenue of $1.41 billion, up 13% sequentially and 43% year-over-year, As our guidance indicates, we expect strong demand across all our end markets to continue in the fourth quarter. Third quarter semiconductor revenue was $638 million, up 15% sequentially and 54% year-over-year. In addition to continued strength in DRAM and logic demand, we saw increased momentum in NAND upgrade activity Collectively, this demand is driving continued strength across our key product categories led by plasma and reactive gas solutions and vacuum products as well as accelerating growth in power solutions, optics, and photonics. Third quarter electronics and packaging revenue was $415 million, up 9% quarter over quarter and 43% year-over-year, Continuing its record growth. The sequential improvement was driven by higher chemistry and chemistry equipment sales. Partially offset by typical seasonal decline in flexible PCB drilling system sales. The strong year-over-year growth was driven by demand for chemistry equipment, chemistry solutions and flexible PCB drilling equipment. Underscoring our strong market position despite smartphone market softness. As John mentioned, our chemistry business continues to benefit from accelerating demand from AI related applications. With sales up 26% year-over-year, excluding the impact of FX and palladium pass through, and a record year-over-year growth rate. In our specialty industrial market, third quarter revenue was $360 million, an increase of 15% sequentially and 27% on a year-over-year basis. The year-over-year and sequential growth was driven primarily by datacom and general industrial while our automotive business remains stable. We reported third quarter gross margin of 47.7%, supported by higher volumes and a 30-basis-point benefit from IPR tariff refunds. Which we do not expect to repeat in Q4. Our gross margin continues to expand driven by the value of our solutions as well as higher volumes despite modest headwinds from growing sales of lower margin chemistry equipment as well as cost incurred from the expansion of manufacturing capabilities. While we expect these headwinds to continue into next year, both are expected to become margin tailwinds longer term as chemistry consumables grow with our newly installed chemistry equipment and new capacity reaches full utilization. Third quarter operating income was $393 million with operating margin improving approximately 700-basis-point year-over-year to 27.8%, well above our guidance and our highest quarterly operating margin in over 8 years. Operating expenses of $281 million were in line with our guidance as we continue to drive operating leverage in the business. Third quarter adjusted EBITDA was $434 million, yielding a 30.7% margin and above the high end of our guidance. Net interest expenses were $33 million, compared to $45 million in the third quarter of 2025, reflecting the benefits of our first quarter financing actions as well as continued proactive principal prepayment. Our third quarter effective tax rate was 19.1%, slightly favorable related to our guidance. Third quarter net earnings were $292 million or $4.18 per diluted share more than doubling year over year and above the high end of our guidance. Let me now turn to our cash flow and balance sheet. We closed the quarter with over $1.6 billion of liquidity comprised of cash and cash equivalents of $676 million, and our undrawn revolving credit facility of $1 billion We generated strong free cash flow $243 million, about 17% of revenue. We expect to continue to invest in capex and working capital through the year end to support organic growth. With full year capital spending remaining within our target range of 3% to 5%. With excess cash, we made a €50 million principal prepayment on our euro term loan in Q3. In addition, we made another $100 million prepayment on the USD term loan this month. Bringing total year to date prepayments to over $450 million. Our net leverage ratio at the end of Q3 was 2.4x, based on a trailing 12 month adjusted EBITDA of $1.3 billion, and down 1.5 turns from a year ago and within our target net leverage of 2.5x. With our stronger balance sheet and healthy business outlook, our Board recently approved a $500 million share repurchase program providing flexibility to repurchase shares opportunistically. Finally, we paid a dividend of $0.25 per share or $17 million. Let me now turn to our fourth quarter outlook. We expect revenue of $1.49 billion, plus or minus $40 million which represents a 44% growth over the prior year. Our fourth quarter outlook by end market is as follows: Revenue from our semiconductor market is expected to be $700 million, plus or minus $15 million Revenue from our electronics and packaging market is expected to be $430 million, plus or minus $15 million And revenue from our specialty industrial market is expected to be $360 million, plus or minus $10 million Based on anticipated revenue levels and product mix, we estimate fourth quarter gross margin of 47.5%, plus or minus 100 basis points similar to where we ended Q3, excluding IPR tariff refunds. We expect to continue to deliver strong operating leverage with fourth quarter operating expenses at $288 million, plus or minus $5 million and increasing at a much lower rate than revenue. We expect fourth quarter operating income of $420 million, plus or minus $29 million with an operating margin of over 28%. We estimate fourth quarter adjusted EBITDA of $461 million, plus or minus $29 million We expect our fourth quarter tax rate to be approximately 19%, and our full-year tax rate to be just over 16%. Based on these assumptions, we expect fourth-quarter net earnings per diluted share of $5.00, plus or minus $0.38 Our strong Q3 performance and Q4 outlook position us for an outstanding second half of the year Order volumes are healthy, visibility is improving, and strong execution is driving higher profitability and cash generation while we invest in the business to address the strong growth cycle we see ahead in our semiconductor and electronics and packaging businesses. With that, operator, please open the call for questions.

Operator: Thank you very much. So ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your touch-tone phone. You will hear a confirmation once your line has been placed in the queue. If you wish to withdraw your question, please press star followed by 1 again. And if you are using a speakerphone, we kindly ask that you lift the handset before pressing any keys. Please hold for a moment while we gather questions. Our first question comes from the line of Matthew Prisco. Cantor.

Matthew Prisco: Hey, guys. Thanks for taking the questions. I guess, starting on the semi side. Can you give a bit more color on that visibility that the customers are giving you today? Maybe how that splits between actual orders and forecasts And maybe your latest thoughts on MKS' ability to outgrow WFE through 2027? What type of magnitude should we be thinking?

John T. C. Lee: Yeah. Good morning, Matthew. it is John. So we are in, obviously, constant contact with all of the semi customers. And they are giving us much better visibility than the past. Extends out certainly into the 2028 time frame. And those are guidance levels. The bookings and actual orders, of course, are in a shorter period of time because you actually, you know, need the details of actually what they need. But the visibility is great as you would expect. During up cycles, MKS has always demonstrated that we are outperform. WFE, and we see that happening now. I think early in 2026, it was a little slower start. I think the critical subsystems folks were trying to rev the engine, if you will, in our supply chains. And now you are starting to see that acceleration And I think with the guidance, we will probably grow, something like 40% year-over-year. And then I think WFE is kind of in that, you know, mid thirties percent range. And I think that will continue in 2027.

Matthew Prisco: Great. Thank you. And then I guess speaking on semis, can you offer some more color on the constraints that you are seeing in today's market? Are there any share opportunities that you see arising from this? Any problem areas for you guys in securing supply? Thank you.

John T. C. Lee: Yeah. I think there is been reported shortfalls in certain commodities. And some of those commodities are things that we make as well. And so those are share gain opportunities for us. I think if you look at our delivery, our operations team has been doing a great job. We talked about our factory expansions, and we are well on our way to supporting $300 billion WFE. And I would like to take a little time to also just remind everybody how much hard work this is for the entire supply chain We have thousands of suppliers They are all stepping up We have asked them to double, and then we have asked them to double again. This is not a small feat. Right? And so I think it should not be lost that we are asking the entire supply chain to do something that is never been done before. We may end this year as an industry increasing WFE by $50 billion just in 1 year. Of course, that was slower. A slower rate beginning of the year than the end of the year. So I think the accomplishments for the industry are really impressive. Thank you.

Operator: Alright. Thank you very much. Our second question comes from the line of Chris Sankar of TD Cowen.

Sreekrishnan Sankarnarayanan: Yeah. Hi. Thanks for taking my question. I John, if you look at some of the big well known concerns out there, 1 is MSC, the other 1 is the rigid PCB drilling tool. You have a position in both of those, and looks like the constraint is coming from 1 of your Japanese competitors. I am wondering, is there a chance for you to gain market share in both the MSC side and also the rigid PCB side?

John T. C. Lee: Yeah. I think, for sure, those are opportunities, since we have been delivering pretty well. I would say that our prepared remarks, we did call out a little bit of rigid PCB drilling business and how that has been very strong now. Will continue to accelerate through 2027. And that is a lot of it driven by the fact that we have already been qualified, but there are constraints there. And that is opportunity for us. So yes, these are share gain opportunities, 1 of which we are calling out already.

Sreekrishnan Sankarnarayanan: Got it. Got it. And then, the other thing I just want to find out is that, you know, clearly, I have been selling quite a bit of these tools this year on the E&P side, and my understanding is that the chemistry follows later. So is it fair to assume in 2027, the chemistry revenues could be higher than 2026? And what is its implication to gross margin?

John T. C. Lee: Yeah. So as you know, our gross margin for chemistry is, higher than corporate average. Significantly. And that remains the same. And so as that chemistry starts being put into the tools we have been delivering, we will get that tailwind and gross margin as the chemistry revenue increases. And I would say we are already seeing some of that chemistry revenue from the first tools that we have shipped several quarters ago. So that is starting and, obviously, the shipment of tools has continued, since, 3 or 4, maybe 5, 6 quarters ago. And so we expect that to accelerate in 2027 and that chemistry revenue to come with that. Thanks, John. Thanks, Krish.

Operator: Thank you very much. Our third question comes from the line of Melissa Withers. From Deutsche Bank.

Melissa Weathers: Hi. Thank you for the question. I guess following up on that gross margin point, can you help walk us through the different puts and takes as we go through next year? You have got some mix headwinds. You have got some capacity headwinds, but then you do have that chemistries piece. And volumes are clearly going higher. So can you just kind of hold our hands as we walk through next year and how you are thinking about gross margins?

Ramakumar Mayampurath: Yeah. Sure. Hi, Melissa. Melissa, this is this is Ramakumar. We are improving our gross margins as you as you as you noted, which we saw this quarter. We have improved it sequentially and year over year. We continue to execute very well. And we are translating that high revenue to higher gross margin, earnings, and cash flow. So in the past, you have said we will be 47%+, and we are there now with the 2 headwinds you noted. that is the investments we are making to improve capacity and capabilities and the mix impact from fast growing equipment mix. So those 2 are masking our true underlying performance, if you may, in the in the near term. However, you know that this will turn to tailwinds in the longer term, we do have a high, path to a higher gross margin and that will come. The volume is certainly helping. And ongoing improvement activities will help margins in 27. And in the near term, we expect the margins to stay at these levels, but we do have a path to higher gross margins. And we will talk more about that in a month in our investor day.

Melissa Weathers: Perfect. Looking forward to that investor day. And then you called out in the prepared remarks the NAND upgrade spending and maybe it seems like a rosier outlook on greenfield NAND spending in 2027. So can you give a little more color on these signals that you are seeing in that market? And kind of what is changed and how you expect that to grow through the next couple of years?

John T. C. Lee: Yeah. I think, you know, what we have seen is that the NAND upgrade is in full swing. 1 of our biggest customers has mentioned that, that is been pulled in. And so we are seeing that. We are seeing the RF power that goes with those upgrades. So we are really happy to see that. And, of course, this has no greenfields. And, you know, the publicly announced greenfields are, you know, coming online kind of in the late 2027, early 28 time frame. And so the equipment will go in, you know, hopefully a little bit before that. So I think that upgrades will continue for the most part of 2027. But then greenfields start taking off, in the later half of 2027 likely and into 2028. And you hear every day, another announcement about another NAND fab out in the future. So I think it is a multiyear tailwind in terms of NAND equipment building that has to happen to support this AI infrastructure. Thank you, Beth. Thanks, Melissa.

Operator: Thank you very much. And our fourth question comes from the line of Steve Barger from KeyBanc.

Steve Barger: You said chemistry equipment is sold out through 2027. Bookings extend into 2028. And then the Guangzhou capacity does not come on till the third quarter of next year. Can you help us frame the cadence of E&P growth next year? Like how much growth is constrained by available equipment capacity right now versus customer qualification timing? And just how should that larger consumable base allow chemistry revenue to grow faster than equipment revenue?

John T. C. Lee: Yeah. Steve, thanks for the question. I think I will give you a couple of pieces We are likely to grow equipment revenue, chemistry equipment revenue to that $300 million range in 2026. And as we said in the prepared remarks, our historic peak was never $200 million. We hit that in 2025, actually. And this year, we are at $300 million-plus. that is without new factories. So that is really just using the factories we have, working with our partners supply chain partners to help us with their space. Taking every bit of space we can while we prepare for the next set of capacity. So and even though we have been able to increase our revenue by 50%, without adding a factory, that is really why our bookings are booking out into 2028. So there is obviously a constraint. And we will try to pull in the Q3 2027 time frame. But when that comes online, that doubles. Our equipment capacity. And so, you know, we will try to, you know, deliver that as fast as possible. And, you know, I think that will allow the revenue growth to accelerate. Towards the second half of 27. And then the chemistry revenue, to your point, we have said it is between, 20 months to 30 months from the acceptance of a PO. there is a 6- to 8-month timeframe to build the thing. there is an installation period, and there is a qualification period of the customers, and then there is a ramp. As I said, some of that equipment that we shipped 6 or 7 quarters ago is now seeing that chemistry revenue and we expect that to accelerate as more of that equipment gets qualified. And that accelerates, especially if we continue putting more equipment in the second half of 2027 and beyond.

Steve Barger: Yeah. that is. That is great detail. And looking forward, do you expect stability or maybe even improvement in attach rates as layer counts and process complexity increases? And can you talk about trends in chemical consumption per machine Meaning, are more complex boards driving higher chemical consumption per machine?

John T. C. Lee: Yeah. I would. I will answer the second question. it is a little easier. So each board is made 1 layer at a time. And so the consumption is pretty much consistent. it is just that there are more layers and therefore more square inches of PCBs as layer count grows. So it is really that. Now at the same time, we are making more complex PCBs, so the chemistry is changing. We are making different kinds of chemistries that allow you to fill smaller features, allows you to bond 80 layers together instead of 20. Much better. So all these technological innovations are occurring at the same time as we are increasing the number of layers and shrinking device sizes. And to your point, if you can provide that chemistry and that technology, it is much harder to displace that. there is very little motivation to change that because it is such a difficult process now. it is kind of the same story as semi. Right? The copy exact idea in Semi, which is it is so hard to make a chip work. And there is thousands of steps. You really do not wanna change anything. And I think we are in a great position because the thesis for buying Atotech was to have the chemistry and the equipment knobs. And when you have both knobs, you are optimizing both. And therefore, you are going to come up with a solution that I think is much better and faster. And harder to displace. And so we are really happy with the position we are in with our E&P business. that is great. Thank you. Thanks, Steve.

Operator: Our fifth question comes from the line of James Ricchiuti of Needham and Company. Go ahead, please.

James Ricchiuti: Hi. Thanks. Good morning. You alluded a couple of times, I think, to this, but the growth that you are seeing in chemistry, which I think you said was 75% in equipment, if I heard you correctly, in Q3, Are you able to actually parse out how much of that is coming from legacy? Because you are beginning to see some initial revenues, I think you said, from the equipment that was installed over the last, call it, 6 quarters or so. But any color on how much of that is coming from, if you will, the legacy hardware in the field?

John T. C. Lee: Hey, Jim. So I think what we said in prepared remarks was that in Q3, chemistry revenue organically grew about 26% year-over-year. And of that, so very little of it is this chemistry from new equipment That is just starting. So the vast majority of that chemistry growth is from installed equipment that is already out there. And, you know, I think that our year-over-year growth will be strong as well in the-- as equipment chemistry does come in with our equipment, and you will see that percentage grow over time for sure. And our growth rates for chemistry, we think, will also follow that.

James Ricchiuti: Thanks for clarifying the growth in chemistry. That makes it a lot clearer. With respect to the fact that you are essentially out of capacity on the hardware side even though you are expanding. Have there been other options for customers that need capacity earlier Or is this, do you think, more of an industry wide phenomenon?

John T. C. Lee: Yeah. I think we talk to, obviously, the whole ecosystem of customers and I would just say that there are some, that are much more aggressive in their expansion. And some that are a little more measured. As you would expect with a large, fast array. But I would think I would say that all of them are starting to accelerate. Whatever their original plan was, they are all starting to accelerate. Their pace. So there are some customers, though, that are making some really big investments, and you probably follow them And those are the customers that we certainly saw start earlier. But now we see everybody kind of jumping in now.

James Ricchiuti: John, any concerns that you see and the question we get a lot is at what point do we get into an overbuild situation? And clearly, the AI demand is driving this. But as you think about what you are seeing in the market, do you have any concerns? What signs are you looking for that potentially things are, as you look out into 2027, potentially could get overheated on this side of the business since it is easier to add this kind of capacity.

John T. C. Lee: Yeah. it is-- yeah. You are right, Jim. it is a little to add capacity on the E&P side than the semi side. But I would say this. The things I look at are, when data centers are built, are they turned on? So far, the answer is absolutely yes. And then, certainly, if the people building those data centers are making money. And certainly they are. So I think those are the kind of signs we see. Now you should see the same thing. We hear the same things about pushback on data centers, etcetera. But the demand for the data centers and the ability to make money building those data centers is still very much intact. And so those are the things we watch for. Jim, because, you know, we have been in semi a long time, you and us both. And we know the cycles change, and they change fast. We have had a long history of being able to react very quickly because we have had to. Having lived in semi for 65 or 75 years. And just a final point, you know, our CapEx intensity is still very low. Jim, we are not paying. We are we are doing 3% to 5%. Is our CapEx intensity while we are building a semi fab as well as a chemistry equipment fab, factories. So, in terms of the financial strength we have, it is still relatively small risk for us. Got it. Thank you. Thanks, Jim.

Operator: Thank you very much. And for our sixth question comes from the line of Vijay Rakesh. Of Mizuho Group.

Vijay Rakesh: Congratulations on a good quarter and guide here. Just on the. if I should look at your semis and E&P. Looks like you are growing in a-- a lot-- much faster than WFE. It looks like growing almost 40% year-on-year. Given the visibility that you have out to 2027-2028. And you mentioned $300 billion WFE. Would you expect the growth to kind of kind of track in those same ranges as you go out Just wanted to get some more visibility on the. On those 2 big markets. Thanks. And a quick follow-up.

John T. C. Lee: Yeah. Thanks for the question, Vijay. I think I would comment on this. When you look at our growth rates in semi, for the first 4 quarters of 26, relative to WFE, you will see that it took a couple of quarters to rev up. And, you know, Q3 was the quarter where we started, you know, kind of starting materially exceed WFE. And that is just because it takes time to rev up the entire supply chain. So we are kind of in that phase where, you know, for MKS, the engine is humming. And we are ready to continue accelerating that build. And, for the next, you know, for the next several quarters, if not a year or 2, we see that we will continue to have to accelerate this. This is the feedback our customers are giving us. And as, we have said in the past, that is usually the time when we, overperform and exceed WFE by a large factor. So I think that is kind of our expectations. And then, you know, to your point, at some point, you know, things flatten and then things come down. So I think that is still far away. At least that is the customer conversations we are having. So I think we will start. You will start seeing us continue to accelerate our performance, overperformance relative to WFE the coming quarters.

Vijay Rakesh: Got it. And just a quick 1 for Ramakumar. When you look at the gross margin side, just wondering if you are seeing any ASP tailwinds on the equipment side or the material chemistry side given how tight things are or given how some of the chemistry cost have gone up, I guess. Do you. Are you contemplating any price increases, ASP increases into, like, 2027-2028? Thanks.

Ramakumar Mayampurath: Yeah. Hi. Thanks. Of course. Can you hear me? Yes. Yeah. Yeah. So there are pockets of inflation that we are seeing. it is not widespread so far. And we always try and balance our cost and price. Cost is always a reference point for our pricing decisions. So it could increase in the second half and into 2027, but right now, we are seeing certain pockets of inflation.

John T. C. Lee: And, Vijay, it is John. I would say too that we have always tried to get value pricing for technology we bring. And this is an environment where a lot more need for that technology. And so we are continuing to do that. And to accelerate that you know, that value based pricing. Got it. Thank you.

Operator: Thank you very much. And our next question comes from the line of Elizabeth Sun of Citigroup. Go ahead, please.

Yiling Sun: Thanks for the Good morning. Thanks for taking my question. I guess my first question is on the if we look into next year, so this year, semis and E&P are going, like, similar rates for the. Both around 40%. And next year, semis clearly outperformed the WP again. And just. If I think about, the growth in E&P, are you seeing it is, like, again, similar growth with the, or can you outperform or under. Like, grow a little bit slower? Than the semi side?

John T. C. Lee: Yeah. Good morning, Elizabeth. I would say this. You know, the difference between the semi side and the E&P side is that the E&P side has a consumables component to it. Which does not grow as fast as a CapEx component, and I think that is just normal. And whereas the semi side is all CapEx. So the expectation would be that semi side would as we start accelerating the supply chain revs up, that should grow faster than E&P. But not necessarily the equipment side of E and P. As we talked about, the equipment side of E&P is sold out through 2027,. And now we have lasers in it. As well as chemistry equipment. So, I think that is the only difference Elizabeth, I would call out is that CapEx only market in semi and a consumables plus CapEx market in the E&P side. And so the growth rate should track those kinds of those kinds of businesses.

Yiling Sun: Understood. Thanks. that is helpful. And then on the supply chain side, obviously, you are doing a much better job right now, like, giving a lot of visibility to your suppliers. But I am just curious are you seeing any supply chain constraint right now or for your own? And is this kind of the Q4 guide? And if we look into the next couple of quarters next year, are you is your growth kind of supply constrained? Obviously, it is very strong growth but, like, is there any-- if there are no supply-side constraints, can you do better?

John T. C. Lee: I would say this. Our supply chain is an incredible group of people that have really stepped up, met with. We just had a supplier day, met with all the key CEOs. They are all behind us investing and hiring people I would say this, there is always a golden screw. You know, something happens, a yield bust happens somewhere, further down the supply chain that even our suppliers cannot control. that is happening. But still really relatively in control for us at least in our supply chain. So I would say the revenue and the and the guidance we are giving is a very. there is very little constraint from our supply chain. And that may change over time, but right now we believe that our supply chain is quite strong, maybe unique, and that they have been stepping up and helping us deliver to our customers. Great. that is great to hear. Thanks, John. Yep.

Operator: Thank you very much. Our, next question comes from the line of Shane Brett of Morgan Stanley. Go ahead, please.

Shane Brett: On Krish's earlier question on rigid PCB, would you be able to quantify how much of your E&P tools business comes from rigid PCB application? At the moment as my assumption is the majority of your lasers are for flex. I am asking this question because my understanding is that the TAM for rigid is multiples of flex. If we do have the capacity to deliver tools, just how big can this get for you in 2027 and 2028? Thank you.

John T. C. Lee: Hey, Shane. Good question. I think, for Flex, Flex was pretty strong in Q3. But Flex has that seasonality to it because of consumer product cycles. So we expect it to come down in Q4. Kind of the low point Q1 and then goes up in Q2, Q3. So we are seeing that. So the guidance for the future rigid drilling is. Or the laser drilling is really rigid. And you are right. The rigid drilling market is multiples times bigger than the flex market. And so that is a huge opportunity for us. And as you know, we started this business many years ago, and have had some success. But not as much as we would wanted. And now the market is giving us this and we are working extremely hard you can imagine, to expand our capacity, expand the supply chain for that particular product line as well. So we will we will report more on it going forward. And as we said, we expect that to accelerate through 2027,.

Shane Brett: that is exciting to hear. And for my follow-up, I was going to ask about semi. If I look to prior cycles, share gains across subsystem players have been more about OEM or forms more than anything. But a lot of smaller suppliers have not been able to keep up with the OEMs here and may have difficulty next year, but you guys have executed adding a lot of inventory in advance. Just beyond your end market exposure, do you think your scale and execution has led to share gains this year and can contribute to outgrowth next year as well? Are your OEMs giving you a lot more responsibility given the performance this year? Thank you.

John T. C. Lee: Yes. I would say this. Yes. OEMs, our customers are certainly asking everybody, including us, if we can get more. If we can get more and deliver more. And I think in some of those opportunities, they are share gain opportunities. I would say the. You know, quantifying it is a little difficult, but I would say it is pretty small in 2026 because this is just kind of a recent phenomena. And we will see in 2027 if that becomes more material. Only thing we have talked about is laser drilling, for sure. But in semi, I think that could be a more interesting number in 2027. I think size does matter, now. I think even, we as well as our customers all think about our supply chains. And their ability to scale. As I said earlier in the remarks, never asked the industry to scale by $50 billion in 1 year. So in order to do that, you have to have companies that can actually make those kinds of investments in inventory, and factories. And, you know, fortunately, MKS has the financial strength to do that, and we are doing that. You saw us taking a lot of inventory very quickly. You. You have heard us, you know, building the fact. Talking about building the factories. So I think, when you are trying to grow at this kind of scale, $50 billion a year, you have to be big. And so if you are not or not willing to spend on those investments, then I think you will you will get left behind for sure. Great. Thank you. Thanks, Shane.

Operator: Thank you very much. Our next question comes from the line of Wells Fargo Joe Quatrucci.

Joseph Quatrochi: Yeah. Thanks for taking the question. Please go ahead. Maybe thanks. Maybe on the gross margin side, can you quantify just the impact within the guidance that is related to the chemistry equipment mix? And capacity investments that you are making? And then historically, you guys have been kind of incremental gross margin at around 50%. Given that chemicals continues to increase in mix, like, why should we not think about that being, you know, potentially higher?

Ramakumar Mayampurath: Yeah. Hi, Joe. Let me talk about near term versus longer term. In the near term, it is a mix between investments we need to make and the mix impact from the ramping chemistry equipment sales. And as we have said before, both these will turn to tailwinds So in the longer term, to your second question, gross margin could be higher than 50%. Incremental. On incremental sales. And we will talk more about that again on the investor day. But in the near term, we have ongoing programs to offset most of that. In 2027, there will be a meaningful impact especially from accelerating chemistry equipment. Investments step up happened in Q2, and now we will stay at these levels There will not be many incremental investments for building chip manufacturing capabilities into 2027. It will stay at these levels through most of 2027. But you will see some incremental impact from chemistry equipment accelerating sales. And we have a path to higher gross margin beyond that. And let's. We will get to the puts and takes of that again in the investor day, but to your question, in the short term, we will maintain that 50% incremental gross margin on sales. In the longer term, it can be higher than 50%. I will also say that we are making great progress on our operating margin. Operating margin is well above the 40% we have, we have talked about, driving scale. And as that top line continues to grow, drive more scale out for OpEx. Thanks. for that.

Joseph Quatrochi: And then, you know, you guys announced a $500 million share repo authorization. Historically, MPS has not really been a big participant in share repurchase. So maybe can you talk about just the focus of excess cash flow for share repo versus debt reduction?

Ramakumar Mayampurath: Sure. So we welcome that authorization, the $500 million authorization. This gives us more flexibility. And as you noted, we are moving to a new phase now The balance sheet is strong. And that has that has happened mostly because of the cash flow we are generating and the disciplined approach to managing debt. So we have stayed focused on that for several quarters now, and we are moving to a phase where our balance sheet is now strong, and the growth we see ahead will further strengthen our cash position. So making investments necessary to support organic growth and managing our debt will remain top priorities, but we are all actively looking at opportunistic buyback going forward. Thanks.

Operator: Thank you very much. And our next question comes from the line of James Schneider from Goldman Sachs. Go ahead, please.

James Schneider: Good morning. Thanks for taking my question. I was wondering if you could maybe just comment on the outlook for 2027 for WFE up 35% or so. Do you see clearly, you are not supply constrained, but I am wondering if some of your peers are to a point where you see any problems with the industry actually achieving that from a supply perspective. So the question is, you know, do you think there is a point in time where your own shipments could get impacted because of supply constraints from others that are also selling into your customers?

John T. C. Lee: Hey, James. it is John. I will take a crack at it. I think that is logical. I think what you say is logical. I think you know, for our customers to build a whole tool, they need all the parts. Right? And if someone else cannot deliver, it is a very critical part. That we do not make, let's say, that will certainly constrain us, for sure. And that is really an industry comment. Right? I think when, you know, just as anecdote for sure, you know, as well as we do, when we came into 2026, we thought a 135 billion was gonna be awesome. Right, from $115 billion WFE. And then I went to $145 and $155 and now people talking about $160. And so what that says is everybody in the industry, everybody making all the parts was able to come through. So I think you know, we will see what happens, but certainly increasing another $40 billion or $50 billion will be will be a challenge. But I think, we are certainly going to be, ahead of that and I think many of our peers will try to do the same.

James Schneider: that is helpful. Thank you, John. And then maybe on the gross margin side, I know this may be something you cover at the Investor Day in a month or so. But can you maybe kind of comment on your ability to drive any kind of like for like pricing resets as we head into the calendar year 2027? And will that actually contribute to some gross margin uplift beyond the factors you already talked Yeah.

John T. C. Lee: I think, as I said, we are continuously looking at getting value pricing for what we deliver. You know, in those discussions, I would just comment, it is an environment where it is a little more conducive. To those discussions just because everybody understands constraints. Everybody understands that inflation is happening. And everybody understands that those suppliers that can deliver, that is another leg of value. Beyond the technology. Right? So if a supplier can deliver that is very valuable to our customers. And so that gives us another leg up in terms of being able to have those pricing discussions. Thank you. Thanks, Jim.

Operator: Thank you all very much. And our last question comes from the line of Michael from Bank of America. Go ahead, please.

Michael Mani: Hi. Thanks so much for taking my question. My first question is just on the competitive landscape. Particularly in China, are you seeing any meaningful domestic competitors from China, whether in chemistry equipment or laser drilling systems? I know in some cases, these are probably customers as well, but are you seeing these customers more when you attempt to qualify at some of your local customers there? And it is also on the chemistry side too. Is there any sort of has there been any sort of change in the competitive dynamics related to, the chemistry consumable landscape? Within China as well. Thank you.

John T. C. Lee: Yeah. Like, I would say that for chemistry equipment, we provide industry leading equipment that enables HDI and MLB processing. And so there are always competitors in China and in other countries as well, but I would say when you are pushing technology, you kind of need the most advanced tools. So I think our position in chemistry equipment is very strong. With laser drilling, as we talked about, you know, our market share has been very little. Very small in the past. And now while the technology has been qualified, the volume was not there until now. And, again, this was a industry constraint challenge that we are benefiting from. We are going to try to take as much share as we can. And so that is really more, you know, commentary on the industry rather than China specific competitor or a non China specific competitor. In terms of chemistry, I would say the same thing is happening. The chemistry needs to be better. Needs to be more innovation in it. And those competitors are usually in other countries. US competitors, Japanese competitors, etcetera. Highly technological competitors. Many of our competitors in China in the past have been more on cost, competing on cost. And so as technology evolves, and that is our strategy, right, which is to be in markets where technology continuously evolves, Therefore, you know, we are always concerned about competitors. but it is about innovation competitors at this point.

Michael Mani: Great. Thank you. And I think you mentioned important pulse DC power design win for significant conductive etch application. Could you talk about some more. Is it just a share gain on an existing customer or a new customer? And how do we think about the content on a dollar per tool basis maybe relative to something like your standard RF power product?

John T. C. Lee: Yeah. Yeah. Thanks for the question. So there is an inflection going on in conductor etch using something called pulse DC. And that is an opportunity. Right? Anytime technology changes and inflections occur, And we have been using and doing pulse DC and dielectric etch which has been our strength. And so, you know, we usually do not talk about design wins till after we won. And that is why we are calling this 1 out. This is with-- you know, obviously there are not a lot of potential customers there. it is a customer of ours for other products. But this particular application is something we were not in. And is displacing the incumbent. And I am not going to get into dollar terms, but I would say this. Called it out because we believe it will be significant in the future. But, hopefully, it is just the beginning. Of the use of our technology, our pulse DC technology, in the conductor application. So that is-- that is probably all I would add to it, Michael.

Operator: Very much. There are no further questions at this time. I will now hand the call back over to John for any closing remarks. Go ahead, please.

John T. C. Lee: Yes. Thank you. Thank you all for joining the call. As you can see from our results and Q4 outlook, MKS continues to gain momentum. The strength of our business model is driving profitable growth at scale. The midpoint of our Q4 guidance suggests more than 85% growth in EPS this year. And looking out further, our order growth, future design wins point to new opportunities across our semiconductor and electronics and packaging businesses. We believe we have a unique position across both markets, and this positions us to play a foundational role enabling advanced electronics in the AI era. Our balance sheet and cash generation are strong. And we just announced a new $500 million share repurchase program. Suffice to say, we are excited about the future, and look forward to sharing much more with you at our investor day in New York City on December 14th. Thanks, everyone, for joining today.

Operator: You may now close the call. This concludes today's conference call. Thank you for your participation. You may now disconnect.