What MKS (MKSI) Said on Its Q3 Earnings Call

Key Points

• MKS beat its Q3 2026 guidance: Revenue rose 43% year over year to $1.41 billion, and adjusted EPS more than doubled to $4.18. It forecast Q4 revenue of $1.49 billion and adjusted EPS of $5.00 at the midpoints.
• Semiconductor and AI-related demand fueled growth. Semiconductor revenue climbed 54% to $638 million, while electronics and packaging revenue rose 43% to $415 million; AI applications are expected to make up about one-third of that segment’s Q4 revenue.
• Capacity and profitability are key priorities. MKS is expanding manufacturing to meet strong demand, including chemistry equipment orders booked into 2028, while Q3 adjusted operating margin reached an eight-year-plus high of 27.8%. It generated $243 million in free cash flow and authorized a $500 million share repurchase program.

MKS NASDAQ: MKSI reported third-quarter 2026 revenue and adjusted earnings above its guidance as demand for semiconductor equipment and AI-related electronics manufacturing drove growth across its businesses.

Revenue rose 43% from a year earlier to $1.41 billion, while adjusted earnings more than doubled to $4.18 per diluted share. The company projected fourth-quarter revenue of $1.49 billion, plus or minus $40 million, and adjusted earnings of $5 per share, plus or minus 38 cents.

President and CEO John Lee said customer orders remained strong and visibility had improved. He attributed the growth to investments in semiconductor manufacturing and electronics packaging, including demand tied to artificial intelligence.

Semiconductor Demand and Capacity Plans

Semiconductor revenue increased 54% year over year to $638 million, supported by demand for DRAM and logic applications and increased NAND upgrade activity, Executive Vice President and CFO Ram Mayampurath said. Revenue also rose 15% from the prior quarter.

Lee said a leading foundry selected MKS’s dissolved gas solutions for advanced logic. The company also won a pulsed DC power application in conductor etch, displacing an incumbent supplier at an existing customer. Lee declined to quantify the win but said he believed it would be significant in the future.

For the fourth quarter, MKS expects semiconductor revenue of $700 million, plus or minus $15 million. Lee said he expects the company to continue growing faster than the wafer fabrication equipment market in 2027, though he did not provide a specific growth forecast for that year.

MKS is preparing its manufacturing operations for a wafer fabrication equipment market approaching $300 billion in 2028, Lee said. Its Malaysia super center is expected to ramp over the coming quarters, and the company also plans capacity expansion in North America and Europe.

Lee said there was little supply-chain constraint reflected in the company’s current revenue guidance, although that could change. He also acknowledged that shortages of critical parts made by other suppliers could eventually limit customers’ ability to build complete tools and affect MKS shipments.

AI Drives Electronics and Packaging Growth

Electronics and packaging revenue rose 43% year over year to $415 million. Chemistry revenue grew 26% after excluding foreign-exchange effects and palladium pass-through, which MKS said was the strongest growth rate in the business’s history.

Lee said chemistry equipment sales increased more than 75% in the third quarter from a year earlier. MKS expects full-year sales of more than $300 million, compared with a historical annual peak of less than $200 million.

Current chemistry equipment capacity is sold out through 2027, with orders booked for delivery well into 2028. MKS is expanding capacity in Guangzhou, China, and expects the project to double its overall capacity when completed, targeted for the third quarter of 2027. Lee said the company would try to accelerate that timeline.

AI-related applications are expected to account for about 25% of total electronics and packaging revenue in 2026, up approximately 180% in dollar terms from the prior year. At the midpoint of fourth-quarter guidance, MKS expects roughly one-third of the segment’s revenue to come from AI-related applications.

Lee said the company is beginning to see consumables revenue from equipment shipped several quarters ago. Its proprietary chemistries have an attach rate above 85% to its installed equipment base, he said, and carry gross margins well above the corporate average. Most of the third-quarter chemistry growth, however, came from equipment already in the field rather than recently installed machines.

MKS also reported new orders for rigid printed circuit board laser systems, including for optical modules, with deliveries expected to accelerate in 2027. Lee said industry constraints had created an opportunity for the company to gain share in rigid PCB drilling.

Margins, Cash Flow and Outlook

Third-quarter gross margin was 47.7%, including a 30-basis-point benefit from IEEPA tariff refunds that MKS does not expect to recur in the fourth quarter. Adjusted operating margin rose about 700 basis points year over year to 27.8%, the company’s highest quarterly level in more than eight years.

Mayampurath said lower-margin chemistry equipment sales and manufacturing expansion costs were weighing on gross margin, even as higher volumes helped. He expects those headwinds to continue into 2027 but said they could become longer-term tailwinds as consumables revenue grows and new capacity reaches fuller utilization.

The company generated $243 million in free cash flow during the quarter and ended it with $676 million in cash and cash equivalents. Its net leverage ratio fell to 2.4 times trailing 12-month adjusted EBITDA, within its target of 2.5 times.

MKS made a €50 million term loan prepayment during the quarter and another $100 million payment on its dollar term loan after quarter-end, bringing year-to-date prepayments above $450 million. Its board also authorized a $500 million share repurchase program. Mayampurath said organic investment and debt management would remain priorities, while the company would consider buybacks opportunistically.

Specialty industrial revenue rose 27% year over year to $360 million, led by datacom and general industrial demand. MKS expects fourth-quarter revenue in that market to remain at approximately the same level. Lee also noted the company’s previously announced agreement to sell its Ophir Optics business to TTM Technologies.

MKS expects to provide more detail on its strategy and margin outlook at its investor day in New York City on Dec. 14.

About MKS (NASDAQ:MKSI)

MKS Instruments, Inc NASDAQ: MKSI develops technologies that enable precision control and measurement in manufacturing and research environments. The company provides instruments, components, systems and process-control solutions used to measure and control pressure, flow, vacuum, gas delivery, temperature and other critical production conditions.

Its product portfolio includes vacuum solutions, pressure and flow-control instruments, gas and vapor delivery systems, plasma and reactive-gas technologies, power delivery systems, process-monitoring equipment, analytical instruments and materials-characterization tools.

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