MKS Inc. (MKSI) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MKS Instruments’ Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today’s conference, Mr. Seth Bagshaw, Chief Financial Officer. You may begin.

Thank you. Good morning, everyone. I am Seth Bagshaw, Chief Financial Officer. I’m joined this morning by Gerry Colella, our Chief Executive Officer; and John Lee, our President and Chief Operating Officer. Thank you for joining our earnings conference call. Yesterday after market close, we released our financial results for the second quarter of 2018. Our financial results and a schedule of pro forma revenue by market, has been posted to our website, www.mksinst.com. As a reminder, various remarks that we may make 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 annual report on Form 10-K for the year ended December 31, 2017, which is on file with the SEC. 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. The company disclaims any obligation to update these statements. Today’s call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday’s earnings release. Now, I’ll turn the call over to Gerry.

Thanks, Seth. Good morning, everyone, and thank you for joining us today. I’ll start with our results for the second quarter of 2018, followed by several business and market highlights. Then I’ll turn the call over to John, who will share additional details on our strategy, customers and markets. Seth will then provide further information on our financial results and our third quarter 2018 guidance, before we open the call for your questions. Second quarter revenue was a record $573 million, above the midpoint of our guidance range, and an increase of 19% from a year ago. This record revenue was a result of a new record in our semiconductor business and continued strength in our Advanced Markets. As we discussed in our Investor and Analyst Day in mid-June, more than 40% of our revenue is in high-growth Advanced Markets. Our exposure in these markets continues to grow, with first half 2018 revenue increasing 23% year-over-year. We also achieved record non-GAAP net earnings for the second quarter of $129 million, of $2.33 per share. These results are a testament to our strategy implemented 5 years ago to transform MKS from primarily a semi-focused business model to a broader market solution provider. In the last 24 months, we have also significantly expanded our customer solutions that address additional semiconductor segments such as lithography and inspection. Equally is important, we have further broadened our Advanced Markets portfolio to address new and exciting high-growth applications within industrial technology such as materials, electronic components processing. A key pillar of the MKS business process is a robust and comprehensive set of strategic planning activities. The acquisition of Newport Corporation in 2016 was a significant output from this process, deepening our Advanced Markets portfolio to include lasers and photonics. Within Advanced Markets, industrial technology sector is a strong growth area for us. Material processing is a driver for our Light and Motion Division, especially for our ultrafast lasers, laser power measurement, laser beam profiling, motion control and beam delivery optics. We also see positive engagement in our life and health science, and research markets, due to the Newport acquisition. With our extensive technical offerings and broad market reach, we believe MKS is now, more than ever, uniquely positioned for sustainable and profitable growth. In terms of our market outlook, we expect to see moderated capital spending in the third quarter in the semiconductor market. This moderation is primarily driven by a large supplier of memory devices, as well the other device manufacturers that recently announced delays. We remain very positive on the fundamental strength of semiconductor market and continue to expand capacity to meet future growth. We are exposed to the most challenging leading-edge device and architectures, and have excellent relationships with our customers around the world that we expect to lead to continued share growth. We also anticipate strength in the Advanced Markets during the balance of 2018, led by multiple industrial applications. I’m extremely pleased with our second quarter performance and our ability to deliver another quarter of record revenue in non-GAAP earnings. I’m also very confident that the strategy we have put in place have positioned us for a long-term market outperformance. Turning to our Q3 2018 revenue and net earnings guidance, we estimate that our sales in the third quarter would range from $470 million to $510 million. Third quarter non-GAAP net earnings could range from $89 million to $103 million or $1.60 to $1.86 per share. Seth will provide the balance of our third quarter guidance in his remarks. At this point, I’d like to turn the call over to John.

Thanks, Gerry. One of our core strengths is our MKS business process, which is a disciplined approach to all aspects of our business, is built upon four pillars: accountability, customer focus, continuous improvement and strategic planning. Managing our business with this approach enables us to quickly adapt to any short-term fluctuations of the semiconductor market and positions us to address future opportunities in other markets. We continue to invest in our Light and Motion Division, furthering our success in Advanced Markets, which is now approaching a $1 billion annualized run-rate. Even with a temporary softening in the semi market, we continue to invest and strengthen our position for an expected rebound in demand. We have made significant investments in operations, technical resources, manufacturing equipment and facilities, sales and marketing capabilities. Our relationships with key customers have never been stronger or more collaborative than they are today. As a result, our power solutions business continues to outperform with record revenues, up 31% over the first half of 2017 and up 16% sequentially. We are also building upon our legacy of technical innovations. For example, we were presented with the Laser Industry Contribution Award for 2018 by the Laser Society of Japan, based on our long history of leading-edge laser technology, service capabilities and technical contributions for the industrial and scientific markets. And Laser Focus World magazine honored us with their 2018 Innovators Award Platinum level for our Ophir BeamWatch. BeamWatch is the industry’s first non-contact laser beam monitoring system that enables real-time measurement of changes in size, location, energy distribution at the beam focus. Our Light and Motion Division had another very strong quarter, achieving revenue of $205 million, a 20% increase from a year ago. Our capabilities within Light and Motion across semiconductor and advanced markets are helping to drive continued strong revenue levels. For example, we won an order for an integrated solution for an electronic thin-film OLED application as well as a significant order for ultraviolet lasers for a mobile phone materials processing application. We had a number of design wins for our laser and beam splitter products in the semiconductor market for applications, such as wafer defect inspection, wafer marking, ablation and scribing. And our laser business continues its strong performance with revenue growing 48% for the first half of 2017. Our outlook continues to be very positive. As Gerry mentioned, we are bullish on the long-term prospects of the semi market, and expect this pause in semi spend to recover in the near future. And our continued strength in Advanced Markets positions us for long-term success for the balanced and growing portfolio of products and solutions. At this point, I’d like to turn the call over to Seth.

Thanks, John. I’ll cover the second quarter financial results and our Q3 2018 guidance. Revenue for the second quarter was a record $573 million, an increase of 3% sequentially and an increase of 19% compared to the second quarter of 2017. Sales to semiconductor market were very strong and we achieved a record of $336 million in the second quarter, an increase of 19% for the second quarter of 2017. Sales to our Advanced Markets which comprised 41% of our total revenue were $237 million, and also increased 19% from a year-ago. GAAP and non-GAAP gross margin was 48% and non-GAAP operating expenses were $112.7 million for the quarter. Operating expenses were slightly below our guidance range, as we began to take actions to reduce discretionary spending and we expect third quarter Op expenses to further moderate. Non-GAAP operating margin was 28.3% reflecting strong leverage in our operating model. GAAP and non-GAAP interest expense was $3.9 million and $3.3 million respectively, and interest income was $1.5 million during the quarter. The non-GAAP tax rate was 19.5% and GAAP tax rate was lower at 17% largely due to the benefit of certain tax deductions related to stock compensation. During the quarter, we incurred restructuring charges of $800,000 primarily related to further streamlining and consolidation of certain administrative functions. GAAP net income was $123 million or $2.22 per share and non-GAAP net earnings were $129 million or $2.33 per share. Both GAAP net income and non-GAAP net earnings were record results for the company. At the end of the second quarter, we had cash and short-term investments of $631 million, which was evenly divided between the U.S. and our international operations. As of June 30, our term loan debt balance was $348 million, our net cash position increased $82 million, we ended the quarter with net cash of $277 million. Free cash flow for the quarter was $97 million, up $34 million or 54% sequentially from this first quarter of 2018. In terms of working capital, day sales outstanding were – was 54 days at the end of the second quarter, compared to 56 days at the end of the first quarter. Inventory turns were 3.1 compared to 3.2 in the first quarter. We continue to provide a balanced approach to capital deployment and during the quarter increased the quarterly dividend by 11% to $0.20 per share compared to cash dividends of $11 million. In the second quarter marked the two-year anniversary of our acquisition of Newport Corporation, which have been successful in multiple ways. In terms of sustainable and profitable growth for Light and Motion Division, non-GAAP operating income has increased since the acquisition by over 245% to almost $56 million in the second quarter of 2018. Non-GAAP operating margin for Light and Motion Division has more than doubled from approximately 11% in the second quarter of 2016 to over 27% in the second quarter of 2018. We’ve also substantially expanded our exposure new and balanced end markets, each with attractive long-term growth profiles. During the past 24 months, the portion of revenue from Advanced Markets has increased from approximately 25% of revenue to over 40%. As John mentioned, our consolidated revenue from Advanced Markets is approaching $1 billion annual run rate. Now turning to Q3 2018 guidance. As Gerry mentioned, the semiconductor cap equipment industry is experiencing a moderation in capital spending in near-term, and therefore, we expect a similar effect on our semiconductor revenue in the third quarter. We do, however expect sales to Advanced Markets as well as service revenue to all of our market segments to remain strong. We estimate that our sales in the third quarter could range from $470 million to $510 million, and gross margin could range from 46.5% to 47.5%. Non-GAAP operating expenses could range from $107 million to $113 million, R&D expenses could range from $35 million to $37 million, and SG&A expenses could range from $72 million to $76 million. Non-GAAP interest expense is estimated to be approximately $3 million and a non-GAAP tax rate could be approximately 19.5%. Given these assumptions, third quarter non-GAAP net earnings could range from $89 million to $103 million or $1.60 to $1.86 per share. In the third quarter, amortization of intangible assets is expected to be approximately $11 million. GAAP interest expense is estimated to be approximately $3.7 million and the GAAP tax rate could be approximately 21%. GAAP net income is expected to range from $78 million to $92 million or $1.40 to $1.66 per share on approximately 55.3 million shares outstanding. Those are our prepared remarks. We’ll now open the call for questions.

Thank you. [Operator Instructions] And our first question comes from Krish Sankar with Cowen. Your line is open.

Yeah, hi. Thanks for taking my question. I have a few of them. First one, Seth, if you can, help quantify the guidance for Q3 in terms of semi and non-semi business. Looks like overall sales is down 11% to 18% sequentially. First time you’re guiding down in several quarters. Any kind of quantification on the guidance would help. So can you just let us know how much semis is going to be down in Q3?

Yeah, so we don’t really guide with that level of detail obviously, Krish. So I think it’s pretty confident to say that the other markets will be pretty consistent or up in the quarter. And so the balance will be in the semi side of the business.

All right, and just as a follow-up, in the past, every time business slowed or there is a downtick in CapEx, your customers, the semi-cap OEMs would actually start using up your inventory versus buying from you folks. Is that the similar dynamic today or is the inventory kind of like match to real time demand and there is no lag effect?

I’ll take that, Krish. That’s a good question. I think the condition still exist today. We are a turns-business with our customers. We have a lot of JT [ph] programs with them. And there will be a point, where they need to probably consume some of their inventory. I think that’s reflected in our guidance, which is normal. We do the same thing here. We have JT [ph] programs we’d be looking at. We can make sure we ensure good cash flow by adjusting inventory levels and communicating to our suppliers that they might see some minor reduction in revenue. So those dynamics still exist today. And we’ve accommodated for that in our guidance.

Got it. Got it. And then, two other quick questions, Gerry, if you can give some color, at what point in Q2, was it May, was it June, did you start seeing this weakness filter in?

Probably the latter part, if I had to think about it. I watch – as you know, I watch bookings and shipments every day. That’s the first thing I do. And probably towards the latter part we started to see some level of moderation. And based on what we heard externally, what we read about, things we saw, it was not something that we were surprised by and we planned for it, so, yeah, more toward the later part.

Got it, got it. And then the final question, how much was AMAT and Lam as a percentage of revenues in Q2? Thank you.

Yeah, Q2, so AMAT – they’re both about 13%, Krish.

Got it. Thanks.

Thank you, Krish. Take care.

Thank you. And our next question comes from Sidney Ho with Deutsche Bank. Your line is open.

Thanks for taking my question. I think the weakness in the semiconductor side for Q3 is pretty much well documented. But if you look past the guidance for this quarter, I’m curious to see if you have any visibility to talk about Q4 at this time. And do you normally have visibility into Q4 at this time of the year? Or maybe I’ll ask kind of differently. Are you in a position to talk about what you think your semi business will do half over half?

Yeah, I mean, it really is difficult for us to comment on Q4. What I can tell you though is our customers are – have reflected a more bullish tone. They talked about and what we’ve read about a better position for WFE in 2019, which means perhaps it could be – start to be some pullings from Q4 to accommodate that, which is normally what we would see. But really can’t say specifically. But we are very optimistic that that business will come back and we’re prepared for that. We made some adjustment in cost, but we’re not panicking. If someone gets a cold and everybody thinks there is pneumonia in the industry and people start to get wobbly, and we’re not doing that. So my expectation is that Q3 is a low quarter. We agree with that. We can’t see the Q4. But would I be surprised if it started to come back then? I wouldn’t be surprised. But I can’t say definitely that will be the case.

Okay. That’s helpful. Just to follow up with the previous question, related to inventory, maybe as you add new customers, maybe in your supply chain, how do you feel that inventory balance exiting this quarter?

That’s really hard for us to be able to calculate. We just had a record quarter. So people needed stuff and we shipped a ton of it. But – and I think if they felt really uncomfortable about the long-term’s prospect, they would have started a long time ago to start to slow down on the pulls. So my guess is I don’t necessarily think it’s out of whack. There’ll be some adjustments. But I’ve been at this for 35 years. And my suspicion is that this will be hopefully a moderate situation. And it won’t be these wild fluctuations we saw in the past. If you think about it, if you step back for a minute and think about the macro-environment, right now we have a great GDP. There is a prospect of growth to be over 4%. Businesses are investing, people are hiring, consumer spending should follow. If you take that down to the micro-environment and add the demand for technology and all the new applications that we talk about. And I don’t need to go into it, because everybody talked about virtual reality and augmented reality and all that. The demand factors are much different than they used to be back in the day. And I was part of being back in the day. So I think that the overall setup is far more consistent and stronger than it used to be. This is probably in my mind a period where people are adjusting some of their inventory. Some demand got pushed out, didn’t get canceled, and it will all come back. And I don’t think people will overreact with inventory. But they’ll probably tamp it down somewhat. They have their cash flow they have to watch too. Hopefully, that helps.

Yeah, that’s helpful. Maybe one last question for me. If you’re kind of looking at the other Advanced Markets, I think last quarter you had expected that revenue to grow in Q2. And it ends up being down a couple of percentage points. What’s driving that downside maybe towards the second half of the quarter? And for Q3, I think you talked about that being potentially up. Are there – what are the moving parts within the guidance for Q3?

Yeah, Sidney, it’s John. So the Advanced Markets, especially the lasers has some lumpiness because of project-based programs. And there was a big project in Q1, which drove a lot of that revenue. And so, it’s just the natural lumpiness of it. So we’re really not that concerned. There is a little bit of FX as well. So we kind of look at it as flat at a very high level and we’re comfortable with that. And we expect lumpiness to occur in the future. But the average trajectory should be up and to the right.

Yeah, it’s 1.7% to be exact. And I consider that consistent. It’s in the noise.

That was good. Thank you very much.

Thank you. And our next question comes from Tom Diffely with D.A. Davidson. Your line is open.

Yeah, good morning. First, another question just here on the semiconductor side of the business. You talked about the moderation, we’re all aware of the big memory push-out. But it sounds like you inferred to some other delays as well. I was wondering if you could expand on that.

I mean, there – I think there were other end users that talked about some positives or whether it was 10 nanometer investments, things along that line, just generally. But, yeah, I think that’s all been in the news and referred to. Everybody is concerned about one major supplier. But there are few other people who have said that, now they’ve got implemented different technology, maybe a little later, another quarter or so, so just generally that, no real big secret.

Okay. And then, I guess if you look at your 2Q results, obviously, huge record results. But I’m curious, was there some push-outs of that business? Once things slowed down, halfway through the quarter, did you see some of that business get delayed into the third quarter?

No. No, we actually didn’t. It’s just a reflection of what we expect the business in Q3 to be in terms of bookings, shipments and some – what we think some inventory accommodation by customers. But the business for that quarter, it was a record. Everybody keeps forgetting. This was a record, $573 million, $336 million is semiconductor. Let’s all remember that, which means great market share, growing the business. And just some people get a cold and now we have pneumonia according to everybody. So it’s not a big deal. I think it’s just a reflection that people are going to moderate their build schedules for a quarter or however, they look – it appear to be and unfortunately reflects in our potential shipments.

You know, I was actually implying that it could have been even a bigger quarter, had it not been for the slowdown. All right, then on the laser side, if you look at the industrial laser market, coming off a record year last year, lot of capacity was added, and then the concerns about China, are you still seeing kind of all signals go on that market or have you seen any kind of waning of demand?

Yeah, Tom, it’s John. Yeah, no, we still see the same or maybe increased levels of engagements for new opportunities for design-ins in that particular market. So, no waning of interest from the customers.

Yeah, probably the biggest effect was the slowdown in OLED spending, which didn’t affect us on the laser side, because we didn’t really have an appreciable market. However, those are always opportunities to get designed in. And every time we’ve seen some type of pullback in the business, we make sure we are right there, with our newest latest technology, as we are all the time to secure new opportunities. So we weren’t materially affected by it, because we really didn’t have a lot of the OLED applications as others may have. But certainly, we are working that technology with an opportunity for future applications going forward, of which, we did win a subsystem for optics, which will be applied in that OLED business going forward. So it’s an opportunity for us, it wasn’t a detriment to the business in the past.

Okay. And, I guess, finally for Seth, when you look at the gross margins, when you have one of your segments down – like, semi is going to be down, does that materially impact the gross margin? Or have the margins from the acquisition gone up enough now where it’s fairly even?

Yeah, it’s a good question. So I mean, I think Q3 guide is a pretty good indication. So obviously, we guided down in the quarter Q3 versus Q2, and you really saw kind of a variable margin above 50%, which as our model would suggest. So you are right. On the Advanced Markets side and the Light and Motion those – in Light and Motion in particular division, the margins are just above 50% right now. And so that is not affected materially by any semi moderation. So the answer is yes, it does help the gross margin in a slowdown.

Okay. Thank you.

Yeah. Thanks, Tom.

Yeah. Thank you, Tom.

Thank you. Our next question comes from Amanda Scarnati with Citi. Your line is open.

Hi, good morning. Just a question first on the R&D side of it. It looks like you are keeping R&D relatively flat quarter-over-quarter with SG&A down about 2.5%. Can you just talk about, what you are planning on doing with R&D going forward, as we are down about 15% in the quarter? And just what the long-term trajectory there is?

Hi, Amanda, it’s John. So with respect to R&D, we have an annual planning process for various R&D projects. And we pretty much keep to that even with any kind of industry cycles. It’s really important that these projects continue during these cycles. And so that’s why you see the R&D remaining pretty much strong and consistent throughout the year.

And then in terms of the Advanced Markets, a lot of the talk lately on China has been on the semiconductor market. Are you seeing any impact there from the trade wars? I know, you mentioned that there was some impact from currency, and was that due to kind of the trade wars and the tariffs? Or are you seeing any sort of other impact there as well?

No, Amanda, we – there are some suppliers in China for parts, I’m sure many companies are affected by that. But as we probably talked about in the past, it’s been very easy to mitigate that so far. So with the current tariff levels on the products that’s really not material right now.

Got it. And then the last question I have is just on the push out. A lot of the comments around SEMICON West, where that it was a strategic move by the one customer. Are you still viewing in that way as sort of a strategic move? Or have you seen any sort of indications that it could be otherwise?

This is John. I think, we don’t know for sure, but we do view the announcement that the VNAND customer did make at SEMICON West about going to production on 92-layer VNAND kind of corroborates our view that it was a strategic play to try to move into a much higher level of technology for VNAND versus their competition.

Thank you, guys.

Thank you, Amanda.

Thank you. And our next question comes from Patrick Ho with Stifel. Your line is open.

Thank you very much. Gerry, maybe first off in terms of the laser business, obviously, it’s been outperforming over the past 12 to 18 months, and you gave a lot of details at your recent Analyst Day. But can you just refresh and kind of remind us where some of the outside opportunities in terms of target markets and applications that have been better than expected that’s driven – I think, you talked about 2017 being 71% year-over-year growth? What are some of the target markets that are really, I guess, exceeded your expectations?

Yeah, sure. I’ll turn it over to John, and let John answer that one.

Yeah, Patrick, so it’s really – as a reminder, the microprocessing using pulse lasers, which is the laser that we have a specialty on. And as we described in the Analyst Day, our concept of surrounding the work piece with all the other instruments and beam diagnostics around the work piece, including the laser that’s really where we see the largest opportunity. And that’s where we’re making our largest investments to make sure we capture those opportunities.

But outside of industrial, we continue to bring Light and Motion group into the semiconductor space. As an example, we had a win for wafer marking in semi, and we also had a win for packaging ablation in semi. So as much as we are enthralled and happy about and think the growth industrial technology is the growth driver, there’s lots of opportunity for us to bring that that solution into the semi or the thin-film market. In fact, our guest speaker at our Analyst Day, I think, talked about the additional opportunities perhaps that we would have with optics and lasers in the thin-film semi related market. So we are just as excited about that, Patrick.

Great. That’s helpful. And maybe as a follow-up question for Seth. On top of the comments just made on the laser business, that obviously is a piece of the business you acquired from Newport. And you’ve talked about increasing the margin profile of the Newport business as a whole. On the laser side specifically, what have you done, in terms, whether it’s manufacturing, supply chain, things of that nature that have helped you boost the overall, I guess, Light and Motion operating margins from I believe you’ve mentioned in your press release from like 11% to 27%? What specifically on the laser side, given that that’s been one of your fastest growing businesses?

Yeah, good question, so you’re right. It went from 11% two years ago in Q2 of 2016 to over 27% in Q2 of 2018 in prepared remarks. It’s really moving, I think, design opportunities, so we’ve worked very hard to give a low cost product to the marketplace, which is driven up the margins and developed better solutions for our customer base. That’s kind of a key driver for us. And then, we’ve looked at sourcing of raw materials in low cost countries, I think that’s been a big driver as well. And then, the volume is up quite a bit, and our variable margin on that side of the business is very strong. Again the overall margins in Light and Motion in this past quarter, gross margin just north of 50%, and so the variable margin is probably 55% in that case as well. So really those three opportunities or three areas we’ve pulled levers on have been very, very strong on the laser side as well as the whole Light and Motion Division obviously. And again, we’re very bullish going forward as well. We’ve got a lot of opportunities, we think in the pipeline to continue to grow that business. And again, to be more lean and more effective in how we operate it as well. So we are very, very optimistic about that side of the house.

Yeah, Patrick, just to kind of amplify that a bit. With the Newport acquisition, we now spend almost $1 billion in raw materials, services, indirect materials. We have hired a Chief Procurement Officer, who is filling out his organization. And the intent is to make sure that we go to, as we’ve always managed procurement pretty well, but we want to ensure that we go to the market as a $1 billion spender in these other areas. And we expect that that Light and Motion and V&A will continue to benefit from that focus on the cost materials and services going forward. Focusing a lot initially on Light and Motion, because there was a great opportunity there. They never leveraged any of their spend across the commodity, didn’t have commodity management. But there is also additional upside for V&A, as we continue to focus on that. And I get monthly updates from the Chief Procurement Officer, because that was kind of my job when I came here. But he is doing much better job than I ever did about what we are doing and pressing him for more cost reduction.

Great. Thank you very much.

Okay. Thank you, Patrick.

Thank you. Our next question comes from Weston Twigg with KeyBanc Capital Markets. Your line is open.

Hi, thanks for let me ask a question. I actually have three, if you will let me. But first, I wanted to follow-up on the tariffs, I know, you said there is no impact right now, but what about the proposed tariffs? Do you see any impact if things escalate based on the list that you have seen of potential products? Would that have a material impact on your material costs?

Yeah, this is Seth, Wes. So we have looked that, it would be a larger impact than was currently in place. But again, it would not be huge for the business. So we think, we can still mitigate that. I will say, it’s a fluid situation. We haven’t quite got clarity from – this will happen into what extent, but we have a task force in place. We are very close to kind of this potential challenge. But at this point, it seems to be quite manageable.

Okay. That’s helpful.

So we will let you ask two more, Wes.

Okay, as long as it’s okay. This one should be easy-ish. I’m wondering about foundry. You didn’t really mention foundry, but next year is supposed be a big year for 7-nanometer ramp. Are you seeing any of that, given that you have kind of a pretty tight relationship with some of your end customers?

Yeah, this is John, Wes. So certainly, TSMC announced a slight delay in their 7-nanometer plus. But they still were very positive on keeping a very aggressive schedule for the 5-nanometer in 2019. And so it looks like there’s a little delay and that’s where part of the downturn is occurring. But it looks like that’s going to coming in 2019, if not sooner. And 5-nanometer is still targeted starting a pilot in 2019 and maybe some ramp after that. So that speaks well if they do execute on that for foundry business in 2019.

Okay. That’s helpful. And then, I just finally wanted to touch on the Advanced Markets growth. I know that year-over-year, it looks great, but it was kind of flat in Q2. You are suggesting it might be flat or up a little in Q3. So I am a little concerned about the flattening of the Advanced Markets sequentially the growth. And if there is anything to be concerned about here or if you think that growth rate will start to pick up again, say, Q4 or Q1 in 2019?

Yeah, no. So for sure, I think, I mentioned before, Advanced Markets can be lumpy, if there is very large projects. Advanced Markets also has a large component of consumer electronics. And so it looks like Q3 might be a little down as we look at it. But I think, it’s really within the noise at very high level of $200 million or so, $250 million or so. So I think, in that case, we’re still pretty happy, pretty bullish about that. And that could change very rapidly if a big project comes in and we win.

Yeah, I just want to clarify, too. I mean, the question before was what we thought would happen in Q3 in Advanced Markets. And I think, they will be consistent, and I’ll just give you a sense of kind of the guidance expected by the semi moderation more than anything else. And then, just add to what John said is, we captured four major markets, submarkets in Advanced Markets. And John mentioned, one lumpiness, one segment. All the three markets were up, and then the FX has been a factor as well. So they are very strong markets. We are very, again, optimistic looking forward.

And remember, we – the first half of 2018 was 23% year-over-year, so even if they stay flat, we are more than 23% up year-over-year, but we expect to continue to grow. But – and we are doing things like sales channel optimization, where we’re putting – we have an opening now for a Senior Vice President of Global Sales, someone has got experience in the industrial side and other markets, whereas we had been probably more semi-focused that we need to be. We’re investing in sales people, both inside and outside, on these other markets. So we are making investments in anticipation to support stronger growth. So we are very confident in that, Wes.

Okay. That’s helpful. So do you think it would be reasonable to model or project something in that 8% to 10% growth rate, which is what you outlined at the analyst event for next year even off these relatively good numbers this year?

Yeah, that would be our goal.

Yes, that’s a fourth question. But we let you have that, but yes.

Thanks. Appreciate it.

That’s our objective and our expectation, yes.

Thank you, Wes. Great question by the way. Thank you.

Thank you. And our next question comes from Mark Miller with Benchmark. Your line is open.

Thank you for the question. I just was wondering, if we can drill down a little further in terms of China, both for semiconductor and also advanced products. Do you see anything specifically, especially from these new domestic semi-fabs? Is that business starting to pick up or is that also being impacted?

Yeah, Mark, it’s John Lee. So I think the announced fabs by the few domestically owned semiconductor chip fabs in China, those have not changed in terms of the expectations for their build out this year, and then their aspirations for next year. So, in terms of semi in China that really hasn’t changed as far as we could tell.

And in terms of advanced products, the laser business, is that still healthy in China?

Yeah, that’s the part, that is very much very healthy. And as you know, a lot of the sintering of industrial laser micro-machining is based out of China either end user buys it or an equipment OEM uses our lasers to build their equipment. So China is still very healthy with that – with respect to that market.

And that’s actually where, when we acquired Light and Motion, where we actually had a lot of sales and applications resources on the ground was in Asia. We felt that was underrepresented. And that’s paying up big benefit by having done that.

You announced a win for UV laser for basically a mobile-phone-type application. Your competitor is starting to penetrate that market after several years where you’ve had that all to yourself. Are you seeing any increased competition or pricing pressure for that product, which has been one of your better new products?

I assume you’re referring to IPG.

Yes.

Yeah. They’ve been at it for many, many years. We’re always paranoid. We’re always fighting to make sure that we offer the best cost per function. And so far, we’ve continued to be very happy with our position in the marketplace in China, even though I’m sure our competitors certainly will try to take some of that share. But right now, we’ve been doing – holding our own and been happy with that.

Thank you.

Thank you.

Thanks, Mark.

Thank you. [Operator Instructions] And we have a question from C.J. Muse with Evercore. Your line is open.

Yeah, good morning. Thank you for fitting me in. I guess two questions, if I could clarify and one other thing as well. Clarification on the foundry side, I think I heard you say slight delay on the 7-nanometer-plus. Are you referring to changes in kind of shipments to your customers or is that just reflection of the lower CapEx announcement a week ago?

It’s exactly that latter, C.J. It’s the same thing that you read that we read.

Okay, great. And then, I guess, in terms of how you manage your business, how are you managing your upstream suppliers? And, I guess, in particular, how are your discussions with them going in terms of the potential for your key OEM customers telling you to be ready for pull-ins? How are you managing that supply chain?

Well, that’s been a strength of MKS since I came here, since I did. So I’ll take full credit for that. But we consolidate the spend with our suppliers. We have multi-year agreements with them. They are legally required through our contracts to maintain three months of inventory on an ongoing basis on the shelf. We have our obligation to them that if the business tank, we just take it. And we’ve managed, which we’re not saying it would by the way. So we’ve managed our supply chain. That’s probably one of our strengths I would believe. We’ve had quarterly supplier meetings since 1985. And we don’t stop them regardless of the business. So we communicate closely. We contract professionally. They maintain inventory. And they’re always – and we’ve also worked with a lot of them to lean themselves out, to learn how to do things like just-in-time manufacturing, from endpoint on to us. So we’ve told them to keep the inventory, be ready. When it comes back, it snaps back. And that’s one of the reasons why – we’ve probably won as many awards for operational effectiveness and rampability as we had for technology. So we feel very confident about that. We’re not worried about it.

That’s very helpful. And then last question for me. I know your exposure to DUV litho is fairly limited. But how are you interpreting the commentary from ASML, that while they saw push-outs, they saw equal pull-ins, and that they expect their business to remain strong at least through the first-half of 2019?

Yeah, C.J., it’s John. Actually, our exposure to Deep-UV is not weak actually. And so, we’re kind of agreeing with ASML. We’re seeing that consistency. As you said, there are some pushes and pulls. But the Deep-UV part of litho seems to remain strong. And this year for us is a good year.

Okay, great. Thank you.

Thank you.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Gerry Colella for closing remarks.

Thank you. We’re very pleased with our results for the second quarter of 2018. And we achieved new records for the revenue and non-GAAP net earnings. Our strategy to augment our semi-focused business model with additional solutions that serve industrial technology and other advanced markets has been effective. We are confident that our diverse end-markets, combined with our global leadership position in semiconductor will continue to drive sustainable and profitable growth. Thank you for joining us in the call today. If you’re interested in MKS, we look forward to updating you in our progress when we report our third quarter 2018 financial results. Thank you.

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