MKS (MKSI) Q2 2026 earnings call transcript

Good morning, everyone. I'm Paritosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Ram Mampurut, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the second quarter of 2026, which are posted to our investor website at investor. nks. com. As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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 the reconciliations to our GAAP measure. Our investor website also provides a detailed breakout of revenues by NMarket and division. Now, I will turn the call over to John.

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

This is MKS at its core. Our performance reflects the benefits of investments we've made and continue to make in broadening our capabilities and expertise, deepening our relationships with customers across the electronics ecosystem, and building out the global capacity needed to meet the unprecedented demands of this investment cycle. We're not only excelling in the current environment, but also generating new design wins that position us to capitalize on long-term growth opportunities. Now, I will review our Q2 end market performance and Q3 outlook. Starting with our semiconductor market, revenue was above the midpoint of expectations as we and our supply chain partners continued to ramp our operations. Revenue grew 19% sequentially and 28% year-over-year, which accelerated meaningfully from the 13% year-over-year result in Q1.

Growth was broad-based across deposition and etched We have a lot of great products, including RF power for NAND upgrades and vacuum subsystems, plasma generators, reactive gases, advanced logic and DRAM applications. Our photonics and optics solutions also continue to gain momentum in the lithography, metrology, and inspection market. Overall, we continue to see strong order activity and very healthy order backlog that gives us good visibility through the second half of the year. We also continue to achieve design wins, including in Advanced Logic, where we are the process tool record for dissolved gas applications, and in RF Power, where we have segment-share leadership in high-aspect ratio dielectric etch applications.

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

Turning to electronics and packaging, AI-related applications are driving a meaningful increase in investment. Revenue was above the high end of our outlook, up 19% sequentially and 44% year-over-year. Laser drilling system sales into the flex PCB markets for advanced smartphones and peripherals were strong, and chemistry sales remained robust as well. In chemistry equipment, we said last year that order activity had been elevated for multiple quarters. It has moved another level above that. Our chemistry equipment demand is easily the strongest it has ever been, supported by AI server investments, including optical modules. Our visibility now extends through 2027. To meet this growing demand, we recently announced we are doubling the capacity of our Guangzhou equipment factory. And notably, in rigid PCB drilling, we're pleased to see increased water activity as the market embraces our differentiated capabilities and compelling cost ownership proposition.

As we have noted in the past, our proprietary chemistry carries higher gross margins than equipment, and we have high chemistry tax rates with our equipment customers. So we believe the stage is set to continued, attractive, high-margin chemistry growth through this cycle. We continue to be actively engaged with customers on their future plans, which serves as a good and leading indicator for strong equipment orders. Overall, the growth we're seeing in EMP reflects our long-held view that the trends driving device scaling in SEMI would ultimately come to the advanced PCB market as device integration becomes a core requirement for advanced electronics. That day has arrived, and advanced PCBs are rising in importance as increasing layer count requirements and integration challenges extend to higher-end smartphones, AI servers, and other advanced electronics.

In Q3, we expect electronics and packaging revenue to be up over 30% year-over-year, with AI-related investment partially offset by flex equipment-related seasonality. Our flex market is typically down sequentially in Q3 ahead of the next design cycles, and we are coming off a very strong first task. I'd like to highlight how we are scaling in our semiconductor and electronics and packaging business to meet anticipated demand growth today and over the next several years. Near term, we are increasing our working capital investments to address rapidly accelerating demand in the current cycle. Longer term, capacity planning is also key. Our new Malaysia Supercenter, which opened in Q2, can be expanded at our option, and we are building out our chemistry equipment facility in Guangzhou, as I mentioned earlier.

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

Switching to our specialty industrial market, we delivered a strong quarter, up 8% sequentially and 14% year-over-year. Revenue has not been this high since 2023, driven by our datacom and defense markets. Performance across our remaining specialty industrial markets was steady in Q2. We expect strong performance in our specialty industrial market in Q3, led by the markets I've called out.

We're pleased to see how our foundational enabling technologies extend beyond semi and electronics and packaging into adjacent opportunities that leverage our R&D spend and deliver strong incremental cash flows. Wrapping up, MKS is executing at a high level financially, operationally, and technologically. We have further broadened our capabilities and expertise to address key opportunities across the ecosystem, resulting in deepening penetration in areas like lithography, technology and inspection, and advanced PCBs at a critical time for the industry.

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

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

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

Second quarter electronics and packaging revenue was $381 million, an increase of 19% quarter over quarter and 44% year over year. The very strong sequential improvement highlighted elevated demand across our portfolio, including chemistry solutions, chemistry equipment, and flexible PCB drilling sales. The even stronger year-over-year comparison was driven by demand for chemistry equipment, which continues to inflect higher. We are also seeing very healthy demand for chemistry solutions and flexible PCB drilling equipment. As the chemistry business continues to benefit from accelerating demand for AI-related applications, sales in the quarter were up 21% year-over-year, excluding the impact of FX and palladium pass-through.

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

Turning to gross margin, we reported second quarter gross margin of 47.6%. In addition to higher volume, we also saw a benefit from certain discrete items in the Excluding these discrete benefits, gross margin remain very healthy despite unfavorable product mix and accelerated investments necessary to address rising demand. Second quarter operating income was approximately $320 million, yielding an operating margin of 25.6 percent, which was up 480 basis points year over year and well above our guidance midpoints. Operating expenses of $275 million were in line with our guidance. We are driving very healthy operating leverage in the business as revenue scales. Second quarter adjusted EBITDA was $358 million, yielding a 28.6% margin and also above the high end of our guidance.

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

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

Let me now turn to our cash flow and balance sheet We closed the quarter with over billion of liquidity comprised of cash and cash equivalents of million We have a great opportunity to see the results of million and our undrawn revolving credit facility of billion We generated free cash flow of million about 15 of our revenue We expect investments in capex and working capital to increase through the remainder of the year as we continue to prioritize our organic growth. Beyond that, we will maintain our focus on proactively deleveraging to strengthen the balance sheet. We made $100 million prepayment on our term loan earlier this week. Our leverage at the end of Q2 was three times based on a trailing 12-month adjusted EBITDA of $1.1 billion, which is down one full turn since Q2 of last year, as we continue to make strong progress towards our target leverage ratio.

Finally, we paid a dividend of 25 cents per share, or $17 million, following the 14% increase in our dividend in Q1. Let me now turn to our third quarter outlook. We expect revenue of $1.35 billion, plus or minus $40 million, which represents continued strong sequential improvement and further acceleration in year-over-year growth. Our third quarter outlook in market is as follows. Revenue from our semiconductor market is expected to be 630 million plus or minus 15 million. Revenue from our electronics and packaging market is expected to be 385 million plus or minus 15 million. And revenue from our specialty industrial market is expected to be 335 million plus or minus 10 million. Based on anticipated revenue levels and product mix, we estimate third quarter gross margin of 47 percent, plus or minus 100 basis points.

We expect third quarter operating expenses of 280 million, plus or minus 5 million. We expect operating expenses will grow at a much lower rate than revenue. We expect third quarter operating income of $355 million with an operating margin of 26.3%. We estimate third quarter adjusted EBITDA of $395 million plus or minus $28 million. We continue to expect capex for the year to be in the range of 4 to 5% of our revenue. We expect our third quarter tax rate to be approximately 20% and the full year tax rate to be at the lower end of the 18 to 20% of our revenue. The 18 to 20% range we provided previously. Based on these assumptions, we expect third quarter net earnings per diluted share of $3.58 plus or minus 31 cents.

As our Q2 results and Q3 guidance indicate, our business momentum continues to increase. Our focus is on meeting accelerating customer demand. We remain committed to making the investments necessary to support growth while continuing to prioritize our deleveraging efforts. We are in a great position entering the second half of the year. And with that, operator, please open the call for questions.

Morning, Steve. I'm going to start on some of the NAND tool upgrade. You know, you talked about that activity will contribute in coming years, but Greenfield NAND, I think, is even better business. Can you update us on what the upgrade cycle looks like and how that bridges to Greenfield projects you may see entering equipment planning? Yes, Steve. So we did mention that we are seeing upgrade activity in Q2. We certainly expect that to continue. It can be lumpy, but we know that the industry is certainly trying to increase capacity in NAND. And then, of course, there's been some announcements of greenfields, and those factories, as you say, will be even better for our power as well as the rest of our portfolio.

And those factories, fabs, will be coming in towards the end of 27, beginning of 28. So that's the plan right now. So between now and then, we would expect continued upgrade activity. Got it. Can you compare the magnitude of dollar spend for a new leading edge tool versus an upgrade?

Yeah, we haven't really disclosed that, but I would just say that the RF power part of that upgrade is the largest part of the bomb in terms of cost, and therefore opportunity for MKS. That's why when there are upgrades, we benefit from that. Of course, if it's a brand new tool, we would have the rest of the semiconductor portfolio around that tool. So that would be better, but our power content is large.

Got it. And then one quick follow-up. I really appreciate the commentary on visibility into 27 and electronics and packaging. As we've gone through earnings, some of your biggest semiconductor customers said visibility is the best it's ever been for their business. Can you talk about lead times and visibility into 2027 on the semi side? Yeah, sure. We're in constant communication with our customers, as you know. They have given us their plans, expectations much further out than normal. And we are building capacity and inventory and scaling our factories and getting the labor in to meet those anticipated increases from our customers. So we are planning to make sure that we're not the constraint. Lead times right now for us are still kind of normal.

So we're executing really well, given we're already a couple of quarters into the ramp. So, of course, you know, we've got to manage many suppliers, but right now our supply chain is stepping up.

Understood. Thanks. Thanks, Steve.

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

And of course, in addition to that, we announced the doubling of capacity in our MSD, chemistry equipment factory in Guangzhou. Got it. And question on your specialty industrial platform. It's a nice step change in the earnings growth profile. Your guidance seems to indicate it's going to grow in the high Qs in pre-Q. Can you touch on some of the end markets or sectors that are helping? I know you called out a couple of them, but it looks like those have to be very strong for the overall platform to grow in the high teens. Maybe talk about the durability of those earnings. Are there any timing benefits, and how should we think about the baseline of this platform into the next year?

Yeah, thanks for that. I think we called out two of the sub-markets, and that was data comm, data communications. Now, again, that's driven by AI, so communications testing for AI data centers. That continues to be strong. We expect that to continue to be strong. It should follow, for instance, the AI investments for the industry. The other segment we call that was defense, and that has continued to be strong and grown over the last several quarters.

And that's really a market where it probably depends on your view of defense. But those two markets continue to remain strong. That's why our guidance for specialty industrials in Q3 remains strong. So that's the color we can give you. The other sub-markets, one is automotive. That's kind of bouncing along. No degradation, no material improvement either. So, and then industrials, industrials, that is also, we're seeing incremental improvement there, but not to that same order of magnitude as Datacom and Defense. Thank you. Thank you.

Yeah, Matt. Maybe I'll start with the AI contribution. We had said, you know, 24 is 5% AI chemistry as a percentage for our chemistry overall, then 10, and this year 15. Last quarter, I would say it's incrementally better. So think about 15 to 20% as the right number now for chemistry as a percentage of our chemistry for AI. So that's one update. I would also say that the equipment business, the chemistry equipment business is growing very, very fast. We did talk about the fact that we have visibility through 2027, which gives us the confidence to build that Guangzhou factory, expand that capacity. I would say, too, that we have said the percentage of chemistry or the amount of chemistry that comes out for every dollar of equipment sales is in that 20% to 40% range.

That's still true, but maybe the update here for your modeling is that we're selling a lot more of the higher-end pieces of equipment, fundamentally because AI boards are more difficult and you need higher-end equipment. Those come with higher ASPs, and so mathematically, that 20% to 40% range, think of it at the lower end now, and that's just a math problem. The chemistry is still there, but the ASP of the equipment is higher now. Perfect. That's helpful. And then on the debt side, we're seeing strong sequential growth in 2Q, guided strong sequential growth in 3Q, voluntary prepayment kind of staying the same. And I understand your investments apply to meet demand, but can you maybe give us updated thoughts on strategy around deleveraging and at what point do these voluntary payments get to move more meaningfully higher?

Thank you.

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

So especially with NAND we get a rough sense of how far it is off from the bottom And looking ahead how do you expect that mix to evolve especially as you pick up more wins on the logic side Thank you Morning, Michael. I'll start with that. I think the way we're looking at it in terms of our end markets, it's still largely a logic DRAM-driven semi-market. The NAND upgrade was nice to see. We kind of expect that to continue. It might be even better, but eventually in 28, with NAND Greenfields, that will become a bigger percentage of our semi-revenue. I think also you pointed out that we are getting to that point of overperformance of WFE building the ramp as we've done historically.

And our guidance in Q3 of our semi-revenue implies that we will be over 50% year over year in Q3. And to just give the audience a little more color, remember, we are exposed to 85% of WFE, so every segment of WFE. And as we've said in the past, in lithometrology inspection, those amplitudes are smaller in terms of the ramp than depth etch. So our average is over 50%, but you can do the math as well as I can that the depth etch part is significantly higher than that average.

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

Regarding the demand destruction that the industry had feared earlier in the year, I think it is more benign than feared. That's true. We can see it in our flex drilling because the flex drilling business was very strong in the first half. There is seasonality to it, but new form factors and high-end smartphones have been fairly strong for us, and that's reflected in our flex drilling system revenue. So that's pretty good. Now, the chemistry for the rest of the consumer products also goes through seasonality, but it's really AI that's driving the quarter-on-quarter growth is our expectation.

And then the other part is chemistry equipment. We are shipping that chemistry equipment as fast as we can. And to add a little more color to the prepared remarks, we've talked about the Guangzhou factory, doubling capacity there. We've talked in the past about what happens if the current Guangzhou factory is full, and that was to use our Germany factory, and we have turned on Germany as well to fill the gap between now and when the Guangzhou second factory comes online. So we are shipping equipment as fast as we can. To the earlier question, that is great for market share of chemistry in the future. And the equipment does have a lower gross margin, so that mix does affect the overall company gross margin, but we're okay with that because it's a great market share and much higher chemistry gross margin later.

Perfect. Thank you very much. Thank you.

Yeah, hi, Shane. The last part of your question, we expect palladium to kind of stay flat in the third quarter, about $1,300. They'll probably stay at that. But to get back to your question on gross margin, let me touch on a few points here. So in Q2, 47.6% is what we had, what we reported. That includes about 100 basis points of discrete items, mostly coming from the refund of tariffs and duties. It's also important to point out that without these discrete benefits, GM would have been consistent with what we have in the past several quarters, despite the impact from some investments we are making to support growth. Now, John talked about getting Malaysia ready for 2027, and we continue to invest in the RAM.

We are stepping up our investments to prepare for the demand, and these investments come with P&L impact. So those are included in the numbers as well, and you'll see that for the remainder of the year. And then on the mix side, mix is unfavorable and will remain so as long as VSD and the chemistry equipment ramps. As we have said before, these are good problems to have because higher VSD means higher operating income, and higher chemistry sales follows the equipment sales like we've explained before. So overall, our gross margin remains healthy with all these puts and takes. So the investments will continue, and we have made a strategic choice to push forward on our equipment sales.

So those two will be a headwind temporarily to the gross margin. Got it. And for my follow-up, I'm actually going to ask another gross margin question. This is going to be on VST specifically, which I assume is a lot of semi. So VST gross margins were north of 46% in 2021, but as of the March quarter, we were at 42.9%. Just where are we in the margin recovery path there, and what do we need to have happen for margins to get above that sort of 46% to 47% mark that we saw in the prior peak? Thank you. Yeah, so VSD, like I said, VSD margins are slightly lower, but where we benefit from VSD ramp is in the operating income side.

We have continuously worked on operational excellence programs that will help us, but it also depends on the mix within VSD as to what will drive the margins. And that's what you're seeing now. What products that make up a lot of the VSD sales are not our highest end VSD products.

Shane, maybe to add a little bit about that. In that prior cycle, when we hit that 45, 46 percent, it was China direct sales for VSD, which is much, much lower now. And that came with a gross margin tailwind. There was also a lot more RF power for NAND, Greenfields, and that's accretive to BST gross margins. And then the third point is what Rahm already pointed out. We are in that part of the cycle where we are investing in labor ahead as well as CapEx ahead. So those are the three things that are a bit of a difference between the quarter you quoted and where we are now. But we think that over time, the investments will catch up, and that will be no longer a headwind.

China is China. That is what it is. And then I think volume will continue to help. Got it. Thank you very much.

Thanks for the question, Melissa. I don't think we know. I think, though, that they're both at historic growth rates, as you know. I think, though, that they are coupled. When you think about all the investments in WFE, and many of the semi-customers talk about that, many of our investors are aware of that. But when you pivot to our packaging, the equipment orders we're seeing are on the same order of increase that we're seeing in WFE and maybe even higher. So they're coupled. If you're going to make a lot of chips, you've got to package them together. And so both industries are coupled to support advanced electronics. So it would be pretty hard to determine now which ones are higher than the other.

But there are a little dynamic differences between the two markets. We have short lead times in semi, and therefore, you know, that's why we always guide just a quarter out, and then we look at the industry to see where we might be in 27. In chemistry equipment, our lead times are much longer. We've talked about six and nine months in the past, and because of that, we require down payments.

Those down payments are things that give us confidence, and that's why we said we have visibility through 2027. Because of those long lead items, similar to maybe some of the semi guys that have long lead equipment. So those are the dynamics, but I think they're coupled, Melissa. So if one grows, the other must. Well, I'll take that. And then maybe along those lines, from a pricing perspective, can you just talk about clearly your expanding capacity to serve the strong demand, but is there any change to how you guys are thinking about pricing? Is there any, I don't know, opportunistic or any leverage that you can get across either business on the pricing side? Yeah, I think our strategy for pricing has always been to get fairly paid and to do it continuously.

So we're always looking at every product line and whether there's a pricing problem and we're not getting fairly paid. And so we're certainly in a competitive environment. We also value the long-term relationships we have with our customers. So I think we're pretty happy with what we are doing in pricing, but we're not going to take advantage of any opportunistic short-term dislocations in supply and demand. The long-term relationships are something that we're proud of and we want to maintain.

Perfect. Thank you. Thank you.

Yeah, Krish, I think that's the right math. I think maybe even a little north of the number you just said. And again, as I said earlier, the depth edge part is higher than the lithometry inspection part, but you're in the rights of code.

Gotcha. Any comments on how inventory is managed by semi-caps compared to price items? Yeah, no, I think I don't expect any difference. I think right now, though, we are shipping to demand, even though inventory may be rising a little bit in some of the large semi-cap guys. I think it's because they have to be higher to ship the revenues they want to ship. And as you know, the turns are even better, right? So there is no stocking of extra inventory given what they're trying to ship. And so we as an industry are just ramping up the factories of our suppliers and ourselves to meet that. So at some point, I'm sure everyone would like to build a little extra inventory, but we are not in that stage right now on the ramp.

Gotcha. And then a quick follow-up on E&P side. It looks like when you look at the chemistry business, some of your chemistry customers, especially the substrate folks from Taiwan and Japan, they seem to be capacity-consuming, though they're raising CAPEX in the short term. Is that happening, or do you think chemistry is going to continue growing, or is it going to have any impact on your chemistry growth? Yeah no I think just like in Semi you know people finding ways to utilize tools better faster So I think the chemistry revenue will continue to grow That our expectation And at the same time the equipment we putting in as well as other people equipment going into these factories get turned on And that will increase the chemistry as well So I think we expect chemistry to continue to grow, even though there is a constraint in capacity, and that's why the equipment orders are so high for us.

So I think that portends well for the future of chemistry revenue. Thanks, Krish.

Yeah, thanks, DJ. Yeah, I think both. We are seeing acceleration in depth edge as well as lithometriology inspection. Both are growing, but they're growing at the normal expectations depending on the lead times of those subsegments of the market. So depth edge, as I said earlier, is growing much faster year over year. The average is over 50% in Q3 year over year. And so those are the dynamics. Those haven't changed. So they're both growing, but they're growing at the expected ratio, if you will, of the two subsegments.

Got it. And then as you look at 2027, obviously your semis are growing way faster than WFE. I mean, WFE is probably going 25%, 30% year on year. You're growing 50%. Packaging is also doing some massive increase versus WFE. How should we look at the growth there as you look at 2027 versus WFE if you look at semis and the ENP segment? Because all these trends seem to be in place, if not accelerating, into next year. Thanks.

Yeah, I think right now we do see this acceleration. We are planning on the acceleration. Our customer conversations all say we should expand capacity and be prepared for an accelerating environment into 27. And so it's hard to know what that will mean, but certainly if that's true and our plans meet that, then certainly we would expect continued outperformance of WFE. And as you know, that's always the case during the first half of the ramp. At some point, we will meet WFE just because, you know, the ramp will peak. And then, of course, on the downturn, it reverses. But right now, everything is pointing up, and we are preparing to meet that.

Great. Thanks. Thanks, BJ.

Yeah, Jim. I think the question was, can we provide the chemistry growth quarter on quarter? I think year over year, I guess, is one way to look at it. That was about 21 percent, and so we're pretty healthy. Quarter on quarter, I can get to that number, but it was also an increase. And very healthy. So we're pretty happy with the chemistry growth.

Scott, any way of knowing that 21% growth that you're seeing, how much of that is coming from new capacity versus just what we've all been hearing about the higher layer counts within the existing install base? Yeah, I think it's hard to tell, Jim, but part of it is coming definitely from newer capacity of equipment that we and our peers have shipped to those customers. But most of it today is still driven by capacity that was already there. And, you know, maybe some customers are taking tools that were mothballs, even, and turning them on. We know that's happened earlier in the cycle. So I would say the majority of the chemistry growth right now, Jim, is still with previously installed capacity.

And the timing on the new capacity in ENP, you may have given that. When do you expect to have that facility, that second factory? Yeah, so the capacity that we're shipping now, I think that's a question. Those tools are going in now. It takes, I think, between 24 to 30 months for chemistry to go into that volume, to go into a piece of equipment. And so some of that equipment is already going in. So I think it pertains well for the several years because of the equipment that's going in now, next year, and perhaps the year after.

I'm sorry. I apologize. Thank you for that. I was just curious about the new capacity that you're adding in Guangzhou. What is the timing on that? Yeah, Q3 2027, Jim. The Guangzhou factory will be online. Great. Thank you. Thank you.

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

And then on the chemistry side, you just talked about there is starting to see some of the revenue coming from the new capacities that got in on the chemistry side, equipment side. So I was wondering when do you expect to see like most of, like more of the chemistry revenue show up that is attached to the equipment you shipped for the past two years? Yeah, I think it's going to be continuous over the next couple of years. As I said earlier, the lead times can be anywhere from 24 to 30 months before you see volume chemistry in equipment we've started building.

And we're shipping equipment every quarter, and they're being installed as fast as our customers can install them, and they're being turned on as fast as they can turn them on. So I think it's going to be this continuous ramp. We talked about equipment revenue in the past being at most $200 million a year. This year will be significantly higher than that, as you can imagine. And then we expect that to continue to grow, and that's why we committed to building the new Guangzhou factory. So I think it will be more of a continuous ramp for the next couple of years.

Got it. Thanks, John. Thanks, Elizabeth.

Thanks for the question, Joe. Yeah, no, we are not constrained because we always had that Germany factory in order to meet any shorter term demand before the second factory comes online in Guangzhou in Q3 of 27. So as I said earlier, we have turned that Germany factory back on. It was running at a pretty low level. Now it's running, it's much busier. At the same time, in Guangzhou, with the current factory, we continue to eke out new space here and there.

So we continue to increase that capacity as well. So we are bursting at the seams, but we've been able to take every order that our customers needed.

And so that's really an area where we're pretty happy with our capacity plan. Thanks for that. And then as a follow up, maybe, you know, I think your services revenue is actually really strong this quarter, kind of one of the highest levels we've really ever seen. Just curious what drove that.

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

Thanks. Yep, thanks, Joe.

Yeah, hi, Jim. So you're right. The cost right now will get charged through COGS and will impact our OPEX. I'm sorry, our gross margin. It's mostly above the gross margin. There's not much OPEX impact there.

The magnitude of that now is in the 50 to 80 basis points a quarter, each quarter. And that will continue for a few quarters now, next couple at least. And you're right, once that plant gets up and running and gets fully loaded, we will start seeing improvement flow through. So, most of these investments will be self-liquidating and come back as margin improvements in the future. Thank you. And then maybe just as a follow-up on the earlier pricing input cost question, I understand you don't want to be opportunistic in terms of taking price today, but do you expect that, you know, over the next, say, 12 to 18 months, your level of pricing increase can more than offset the level of input cost pressure you've been seeing?

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

Thanks. Thank you.

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