MKSI - NASDAQ

Good day, and thank you for standing by. Welcome to the MKS Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra. Please go ahead.

Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Ram Mayampurath, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the third quarter of 2025, 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, 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 a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division. Now I'll turn the call over to John.

Thanks, Paretosh, and good morning, everyone. MKS delivered a solid third quarter with revenue and EPS in the upper half of our guided ranges and healthy results across each of our 3 end markets. Third quarter revenue of $988 million was up 10% year-over-year, driven by strong demand in our semiconductor and electronics and packaging end markets. We continue to demonstrate strong execution in delivering value to our customers' most critical needs. Net earnings per diluted share totaled $1.93. We also continue to take advantage of our improved cash flow to reduce our leverage with another voluntary prepayment of $100 million on our term loan completed in October. MKS is uniquely positioned at the forefront of accelerating innovation and enabling the advanced technologies that power the AI era. Increasing device complexity is creating significant challenges and opportunities in both the semiconductor and advanced packaging markets. We are differentiated in our ability to serve many critical applications with our comprehensive portfolio of semiconductor capital equipment subsystems, advanced packaging chemistries and advanced packaging equipment systems. Our Q3 performance in our end market demonstrates how we are benefiting in this dynamic environment. Starting with our semiconductor market, we reported solid revenue growth year-over-year, driven by continued strength in our products supporting deposition and etching applications, which are increasingly critical for advanced memory and logic manufacturing. Our dissolved gas systems for advanced logic applications were also a solid contributor to our performance, and our services business continues to contribute steady year-over-year growth. Lower NAND upgrade activity, which was expected after a very strong second quarter, drove the sequential decline in semiconductor sales; however, our leadership in power delivery remains as strong as ever in this space. We expect fourth quarter semiconductor revenue to remain flat on a sequential basis, which would translate into a healthy double-digit year-over-year growth for 2025. This underscores how well positioned we are with the broadest portfolio of products and technologies to drive our industry's increasingly challenging technology road maps. In Electronics and Packaging, revenue exceeded the midpoint of our expectations, growing 25% year-over-year. This strong performance reflects continued momentum across our portfolio, driven by robust demand for our chemistry solutions and in particular, our chemistry equipment. The investments we have made over the past several years to position MKS to optimize the interconnect in advanced electronics are now paying off as we gain momentum in AI-related applications. Today, our chemistry revenue growth reflects our position as a leader of the most advanced packaging technologies used in high-performance computing applications. Longer term, our chemistry equipment business highlights how critical we are to our customers as they rapidly build their next-generation infrastructure. The high attach rates from our equipment sales are a leading indicator of sustainable longer-term revenue from our proprietary chemistries. It's important to keep in mind that once we build and install the equipment, it can take 6 to 12 months for customers to qualify it and then put it into production. Once in production, our chemistry provides a long tail of steady consumable revenue generally for the life of that equipment. With high single-digit growth in chemistry revenues and strong equipment sales through Q3, we have confidence our proprietary chemistry will be a key revenue generator for us in the years ahead. In Q4, we expect revenue from our electronics and packaging market to be up on a sequential basis and up double digits on a year-over-year basis. Our strong performance reflects our ability to capture emerging AI-driven demand even as broader industry demand trends remain stable in markets such as smartphones and PCs. We anticipate continued strength in our chemistry equipment business, supported by AI, offset by modest sequential declines in chemistry due to seasonal factors consistent with prior years. Assuming the midpoint of our Q4 guidance, our Electronics and Packaging business is on track to deliver robust full year growth of approximately 20%. Our specialty industrial market revenue was consistent with the stable trends we've seen over the past several quarters. Within this market, the industrial category showed sequential improvement in life and health sciences and research and defense end markets remained steady. We had a healthy quarter of design wins, particularly in research and defense. This success highlights how MKS leverages its semi and electronics R&D investments to unlock new opportunities in specialty industrial markets that generate attractive incremental margins and cash flow. Looking ahead to Q4, we expect Specialty Industrial revenue to remain relatively flat sequentially. Overall, MKS is continuing to perform at a high level in 2025, with year-over-year growth powered by our semiconductor and electronics and packaging markets. Our broad portfolio of differentiated products and technologies in areas such as vacuum, power, photonics, laser drilling and advanced chemistries positions us favorably to win new opportunities in applications critical to enabling the AI transformation. Against this exciting backdrop, we are executing with financial discipline, aligning our business to win in our key markets and reducing our leverage. I'll close by extending my thanks to our MKS team for their tireless work driving the great results we are reporting today and also to our customers and our suppliers across the globe for their collaboration and support. With that, let me turn it over to Ram to run through the financial results and fourth quarter guidance in more detail. Ram?

Thank you, John, and good morning, everyone. We delivered strong results in the third quarter, driven by healthy demand in our semiconductor and electronics and packaging end markets and continued stability in our specialty industrial end market. As in prior quarters, our execution remains strong with healthy margins, robust free cash flow and continued progress on our deleveraging goals. Third quarter revenue was $988 million, up 2% sequentially and up 10% year-over-year. The result was at the high end of our guidance and reflected better-than-expected trends in key end markets. Third quarter semiconductor revenue was $415 million, down 4% sequentially, but up 10% year-over-year. This result was at the high end of our expectations. The sequential decline was driven by lower RF power sales due to the timing of NAND upgrade activity as expected. The year-over-year growth was driven by strength in many product categories, including our vacuum products and plasma and reactive gas businesses. The fundamentals of our semiconductor business remains strong. Third quarter Electronics and Packaging revenue was $289 million, up 9% sequentially, driven by growth in our chemistry and equipment businesses. On a year-over-year basis, sales were up 25%, driven by growth in chemistry, chemistry equipment and flexible PCB drilling equipment sales. These strong results underscore the strength of our Electronics and Packaging business as we deliver enabling technologies for high-growth emerging AI applications and today's advanced consumer electronics. Chemistry revenue was up 10% year-over-year, excluding the impact of FX and palladium pass-through, continuing the strong growth trend over the last year. In our specialty industrial market, third quarter revenue was $284 million, an increase of 3% sequentially, mainly due to the improvement in the industrial market. Revenue was down 1% on a year-over-year basis. Overall, our Specialty Industrial business has remained steady for well over a year. Third quarter gross margin was 46.6%, just above the midpoint of our guidance. Gross margin were stable relative to the prior quarter, with tariff impacts of about 80 basis points, 35 basis points better than last quarter, offset by a higher mix of chemistry equipment sales. As we have stated before, the strong equipment sales we have seen throughout 2025 are a good indicator of future high-margin chemistry revenues. Third quarter operating expenses were $256 million at the high end of our guidance and higher sequentially, primarily as a result of an increase in variable costs, mostly related to employee incentive compensation tied to stronger business performance. Third quarter operating income was $205 million with an operating margin of 20.8%. Third quarter adjusted EBITDA was $240 million and above the midpoint of our expectations with adjusted EBITDA margin of 24.3%. Net interest expenses was $45 million, in line with our guidance. Third quarter effective tax rate was 17.9%, just below the midpoint of our guidance. Third quarter net earnings were $130 million or $1.93 per diluted share and above the midpoint of our guidance. Free cash flow generation was very strong at $147 million, representing over 100% of our net earnings and 15% of our revenue. Through the first 3 quarters of 2025, we generated cumulative free cash flow of $405 million, nearly as much as we did in all of 2024. We invested $50 million in capital expenditure in the quarter. We expect CapEx to sequentially increase in Q4 but fall within the low end of our annual CapEx guidance of 4% to 5% of revenue. We closed the quarter with approximately $1.4 billion of liquidity comprised of cash and cash equivalents of $697 million and our undrawn revolving credit facility of $675 million. As John highlighted, we made a voluntary principal prepayment of $100 million in October. In total, we have made $400 million in voluntary payments thus far in 2025. We remain focused on executing our long-term capital allocation priorities of investing in organic growth opportunities while reducing our leverage through principal prepayments and working with our banking partners to reduce our interest expenses as market opportunities arise. We exited the quarter with a gross debt of $4.4 billion and a net leverage ratio of 3.9x based on our trailing 12-month adjusted EBITDA of $953 million. We continue to bring down our net leverage ratio as we generate strong free cash flow, make proactive principal prepayments and deliver high year-over-year adjusted EBITDA. Finally, during the quarter, we paid a dividend of $0.22 per share or $15 million. Let me now turn to our fourth quarter outlook. The guidance we are providing represents our best estimate based on the dynamic trade environment in which we are operating. We expect revenue of $990 million, plus or minus $40 million. By end market, we expect semiconductor revenue to be $415 million, plus or minus $15 million, reflecting the continued strong fundamentals of our business. Revenue from electronics and packaging market is expected to be $295 million, plus or minus $10 million, which would be up 16% year-over-year at midpoint. As we look to model 2026, we would remind you that chemistry equipment revenue is poised to have a record year in 2025 and has historically varied significantly from year-to-year. Chemistry revenue, which is the majority of our E&P revenue, is much steadier and more predictable. Revenue from our specialty industrial market is expected to remain relatively steady at $280 million, plus or minus $15 million. We are guiding gross margin of 46%, plus or minus 100 basis points. The sequential decline is due to higher chemistry equipment sales in the mix and lower chemistry sales due to seasonality, partially offset by lower tariff-related impacts. We anticipate our mitigation actions will nearly offset tariff costs dollar for dollar beginning in Q4; however, these costs are passed through at 0 margins, and we anticipate tariff will continue to dilute our gross margin in Q4 and moving forward by approximately 50 basis points. With our mitigation initiatives in place, we remain confident in our plan to deliver our long-term gross margin objective of 47% plus. We expect fourth quarter operating expense of $255 million, plus or minus $5 million. As a reminder, OpEx is typically higher in Q1 as a result of higher stock-based compensation and fringe benefits consistent with prior years. We expect fourth quarter adjusted EBITDA of $235 million, plus or minus $24 million. We expect tax rate of approximately 2% in the fourth quarter, benefiting from certain favorable discrete tax items in the quarter and bringing our full year tax rate to just over 14%. We expect fourth quarter net earnings per diluted share of $2.27, plus or minus $0.34. Wrapping up, MKS has executed at a high level through the third quarter, and we are expecting this momentum to continue in Q4. We are winning exciting opportunities across our semiconductor and electronics and packaging end markets, and we are focused on managing our business with discipline to drive profitability and free cash flow. We remain focused on reducing our leverage. With our broad portfolio of products, strong secular tailwinds and an improving balance sheet, MKS is in a great position as we look to 2026. With that, operator, please open the call for Q&A.

[Operator Instructions] Your first question comes from the line of Melissa Weathers with Deutsche Bank.

I think first, I want to touch on the E&P side. You said a couple of times in your commentary that equipment orders generally precede chemistry orders, and that can take about 6 to 12 months. You also mentioned that chemistries were at, I think, a record year in 2025. But I wasn't quite clear on how you were guiding 2026, whether or not that should maybe come down or be stable. So any color on how we should be thinking about the chemistries flow-through into 2026 after all the strong equipment sales?

Melissa it's John. Thanks for the question. So we're not really guiding 2026, obviously, for chemistry or for the company. But I would say this, the equipment that we are building and installing now puts us in a very good position for additional chemistry revenue starting in '26 and forward. I would say this, we really look at the whole market and its growth, and we've kind of said in our E&P market, we would grow 300 basis points above GDP. And that was made up of -- that was what we said at the Analyst Day, and that was made up of higher growth substrate business, single -- mid-single-digit HDI business and GDP-type MLB business. And those numbers are what we're staying with for now. But obviously, when we gave those numbers, AI wasn't in the mix, right? And so I think generally, things are better. And I would say our ability to hit the 300 basis points above GDP, our longer-term target is -- we're very confident in that fundamentally because we are shipping a lot of that equipment and a lot of the chemistry that goes with it will help us get to those longer-term targets.

Great. And then maybe on the semiconductor side, it seems we've seen some really positive pricing data points in memory in the last couple of weeks or months. And I think a lot of people are expecting a shortage situation in memory in 2026. So can you talk about like the order patterns that you guys saw in the quarter? Have you seen an acceleration in orders ahead of maybe potential capacity additions in the memory space?

Yes. We read those same reports as you do, Melissa. So I think in general, we're happy that memory is recovering, pricing is recovering and that the industry is moving towards a more constrained supply-constrained environment. And I think our customers are probably better to answer whether they're going to be ordering more equipment from us. But certainly, in general, I think everything is positive in the trend towards memory equipment.

Your next question comes from the line of Jim Ricchiuti with Needham & Company.

Wondering if you could give us a little bit of a better sense within the E&P business and you could comment on Q3 or 9 months, how much of that growth is actually coming from equipment, which admittedly has been strong, and we know can be a little bit lumpy.

Yes. Thanks for the question, Jim. I think we've said historically, when we looked at the MSD business, equipment can be anywhere from 5% of total revenue to 15%. And I would say because of the last 4 quarters of really strong revenues, orders and therefore, revenues, we're towards the higher end of that range and maybe a little higher than that. So it's really going to be probably the historic 4 quarters or a year for the equipment business.

And John, the -- also curious, there's another element of equipment in the PCB area. Are you seeing any signs of a cyclical pickup in the flex PCB drilling equipment business, just given somewhat improving smartphone shipments and I guess, the potential that there may be some form factor changes coming in the market next year?

Yes, we are actually seeing a pickup in Flex. The business there, as you know, we're a market share leader in flex laser drilling. And so we have seen that pick up. And this is actually the second year where we've seen a healthy business there. It's not at the historic rates that were kind of in the 2000 time frame, 2021 time frame, but it has recovered to a very healthy level.

Your next question comes from the line of Shane Brett with Morgan Stanley.

I want to follow up on that E&P question earlier. But considering that your chemistry sales for this year are up high single digits, some back of the envelope math indicates that your tooling business could be almost doubling this year. One, is that kind of the right way to think about it is that in the right ballpark? And just how much visibility do you have on equipment sales on a go-forward basis?

Shane, I think your math is roughly right with respect to the equipment business for chemistry equipment. And then I think what we can say is that we've had 4 strong quarters of bookings for that chemistry equipment. And we can look out certainly the lead times of our equipment are 4 to 12 months. And so we have added some capacity even to some of our equipment factories, not new buildings, but just expanding within the space that we have. And so we look forward to a couple more quarters at least of large equipment builds. We know that we have the backlog for that.

Got it. And for my follow-up, so your semi customers have spoken about a pickup in equipment shipments from the second half of next year. And I think your peers have been kind of cautiously optimistic towards a pickup from Q2. Just where are you guys in terms of your expectations towards semi revenue cadence through 2026? And if there's sort of any idiosyncratic tailwinds for MKS that should drive your shipments above WFE in 2026, that would be very helpful.

Yes. Certainly, we read the same things, and a lot of folks are saying kind of second half '26 is where WFE really picks up. I think we're just focused on this quarter, next quarter and the next 6 months. I would say this, our semi revenue has improved double digits year-over-year on a quarterly basis as well as year-over-year. And this is really not with a lot of NAND upgrade yet, right? We had a good NAND upgrade in Q2, not so much in Q3. And so that's still yet to come. Certainly, our customers think that's going to happen. I think we know and we're very confident in our position in our power for the high aspect ratio dielectric etch. We're very confident that when those upgrades occur, that will be us. And then certainly, even without the NAND upgrade, you can see the broad portfolio of semiconductor critical subsystems we have continued to outgrow WFE even this year. And so we look forward to 2026, where WFE follows the trends that people are expecting, another maybe high single-digit increase, we're going to enjoy some of that as well.

The next question comes from the line of Krish Sankar with TD Cowen.

I had 2 of them too. John, just to follow up on the previous question. If you do assume that in second half of next year, let's just take a time frame and say, in Q3 of next year's inflection, in theory, should you not start seeing it one quarter earlier? Or do you think there's something else different this cycle?

No, in general, I think that's still true, Krish. We -- if our customers are shipping in Q3, for instance, to your assumption, then we would certainly see that at least a quarter ahead of time. Our lead times have come back to historically low lead times anywhere from 4 to 8 weeks, sometimes 12 weeks depending on how complex the system is. But in a 4-week time frame and 8-week time frame, we do see a lot of in-quarter turns as we've talked about in the last couple of quarters. So yes, I don't see any changes to that assumption, Krish.

Got it, John. And then I just had a 2-part question. One is, how much of your E&P sales was advanced packaging chemistry? And how much within that was AI? And then on the PCB drilling side, are drill bits a constraint? And is that impacting your business? Or you're not seeing any of that?

Yes. Maybe I'll talk about chemistry and how AI has played a part in that. In the past, we have talked about AI servers driving the top 1/3 of the PCB industry. The PCB industry calls that the substrate, right? And that top 1/3 was -- the AI part of that top 1/3 was going from 5% to 10% to 15% of that top 1/3 of the PCB industry. Since then, though, as we now know, AI is also driving the equipment for HDI and MLB. This is the next 1/3 and the last 1/3 of the PCB industry. And of course, the chemistry that goes with those. So in general, our AI revenue has gone from -- if you -- for the chemistry, kind of like 5% of the total PC business, not just the top 1/3 to double that over the last year. So it's kind of 10%. If you add equipment to that, of course, we're pushing the mid-teen percentage of the MSD business due to AI. I think your second question about -- maybe clarify your second question about...

I was just wondering on the PCB drilling side, is drill -- drill bits a constraint? And is it impacting your PCB drilling business?

Yes, I don't know if I can comment on that drill bits. We don't do that. That's mechanical drilling, I think, what you're referring to. We're really doing laser drilling, but I have not heard that, that mechanical drilling is constraining the industry.

Your next question comes from the line of Michael Mani with BofA Securities.

On E&P, could you help us parse through when you look at your growth drivers, what is exactly secular versus more idiosyncratic to MKS? So I mean, it seems like a lot of the HDI and MLB momentum reflects some of this secular uptick in AI. But obviously, with Atotech, you're able to go into many of these opportunity selling both equipment and chemistry. So is there a share gain overlay aspect to it that you're seeing? Can you attribute these wins to that deal? Or is it mainly just broad-based secular growth?

Yes. I think it's both, Mike. So the regular growth is -- we're an industry leader in it. And so more square meters of PCB boards and the chemistry that just enjoy that. But I would say the thing that is different this time and that's beneficial for MKS is that AI is driving these incredibly thick boards, many, many layers of HDI boards, substrate boards as well as MLB boards. And as we talked about, a lot of the equipment orders that we have gotten tied to AI for HDI and MLB are because our equipment is uniquely qualified to process much thicker boards. We had to make modifications to the equipment. We did, and then we got those orders. Now as we said, we have very high attach rates of chemistry to our equipment. So if we are unique in being able to supply that equipment versus our competitors, we're also going to get that chemistry as we talked about in the call. So I think that's unique this time around.

Great. And maybe a question on gross margins. Given this flow-through from potentially higher chemistry revenues over the next couple of quarters, how should we be thinking about as a good baseline for gross margins through next year? It seems like volumes are trained the right way, you're getting -- you're having seen a little more of this margin accretive business. But just any way to think about how to model margins through '26?

Michael, this is Ram. I'll take that. So if you look at the progress we have made in gross margin in 2024, all the way to Q1 of 2025, we were well over 47% in gross margin. Since then, a couple of things have happened. One is the impact of the mix that you talked about of very high fast-growing equipment sales and the impact of tariffs. As we said in our prepared remarks, we have offset the impact of tariffs dollar for dollar, but we'll see an ongoing 50 basis points impact on our gross margin because we are not marking up the tariffs that we pass through, right? So in time, we'll offset that with efficiency and ongoing operational excellence programs. And in the long term, with a normalized mix, we are very confident we can get back to that 47-plus percent that we were having before.

Your next call comes from the line of Matthew Prisco with Cantor.

I guess to start, how do you see the NAND lumpiness playing out over the next handful of quarters? Kind of what are the primary moving parts you are focused on here as determinants for the linearity of that upgrade cycle?

Yes, Matt, I wish I knew. But I would say this, we have plenty of capacity, manufacturing capacity to meet any kind of uptick in either upgrades or greenfield. And I think one of our key customers has said there is a large opportunity still of upgrades just in the '26 and maybe beyond time frame. But they have said it's lumpy. But then I think overlay on top of that, the industry discussion of NAND pricing that I think Melissa asked earlier, that's just a tailwind. The discussion by many of the chip makers that NAND is now constrained. And then what's exciting is potentially a new application for NAND, driven by AI again, of course, which is in the solid state -- replacing solid state -- sorry, solid-state drives using more NAND for AI. And that would drive another layer of growth. So I think we're ready. It's lumpy, can be lumpy. We will certainly try to guide you guys as best we can in terms of when we see that coming. And -- but things can change and things probably will change rapidly.

And then maybe you could talk about progress you've made in the litho inspection and metrology part of your business. Maybe remind us of kind of year-to-date highlights and what success would look like to the team from a share gain perspective through next year?

Yes, Man, we have talked about world-class optics. This is our effort to gain more presence, obviously, in litho metrology inspection. And we've talked about in the past, revenue from that sector kind of going from $150 million to $300 million because we invested in it. And as you know, litho metrology inspection is a little flatter this past year. And so we're not immune to the cycles, but the cycles are more muted than in dep etch. But we're really happy with some of the really difficult things that we have been asked to do and delivered on that are now integral to some of the most advanced lithography machines in the world. So we will continue to invest there and continue to try to grow that share. I don't think anybody would say litho metrology inspection won't be important to semi, right? It will always be important to semi, always be a key component of semi. And I think maybe stepping back a little bit, the strategy for MKS is to be a foundational technology supplier to the entire industry. So in one decade, dep etch is more important because it's multi-patterning. In the next decade, EUV takes over and litho metrology inspection become a little more important. And from an MKS standpoint, we kind of hope that all the markets grow. But if something shifts, then we can -- we don't have to worry about it shifting away from what we're doing.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

John, you alluded to some of this already, I think, but we've been reading that CoWoS or other packaging formats are evolving from organic interposer to RDL. From your perspective, is that just switching from one format you enable to another? Or is that evolution good for you due to more layers or smaller features?

Yes. I think the industry is certainly working hard on various configurations for this redistribution layer, the RDL layer using CoWoS, CoWoS-R, CoWoS-L and then even CoOP, right? So I would say this, that RDL layer is more complex as we move to organic layers. That's good for us. That's our traditional strength, organic layers versus silicon. And when you go to organic layers, the RDL layers increase a little bit, maybe from one layer to 2 or 3. So that's good for us. But I think the bigger picture are the 40 layers beneath that, that are all the substrates and PCBs. And that's really the largest growth factor for us. And that used to be 20 layers, now it's 40. As we visit customers, as we work with our customers, they're already looking at 80 layers. So think about that. It's gone from 20 to 40 just in the last couple of years, and we're working on 80. And the one after that is 3 digits, let's put it that way in terms of number of layers. Each of these layers made one at a time. You can imagine the challenges of yield, making sure that when you put 100 layers on top of each other that it still yield the same as if you had 4. So those are great challenges for the industry and opportunities for us. So that's the bigger picture. At the same time, to your point, there's a lot of CoWoS-L or S, coOp, and all that going on. We're involved in all of that. If it goes more towards organic, that's a tailwind for us. But the bigger picture is 40 layers going to 80 going to 100.

Right. That's good detail. And just listening to some of that, this is being driven by compute right now, which is high growth, but smaller unit volume maybe. But at some point, this likely transitions to like PC or mobile, higher volume applications. Is that your understanding? And any view on like time line of when that could happen?

Yes. I think our view is consistent with the industry is that as inferencing goes out to PCs and phones and whatnot, the chips will be bigger and more complicated. There'll be more chips that need to be integrated together. And therefore, there will be more layers of PCBs or substrates underneath. So that still has not really happened much yet, Steve. And so that's a huge potential growth driver for us. And I think everybody is working hard to make sure that things -- that AI drives this inferencing need. So I think TBD, but we're optimistic that, that will happen or some form of that will happen.

Your next question comes from the line of David Liu with Mizuho.

For Vijay. Maybe the first one on revenue by geo. Can you just highlight what types of trends you're looking at split by geo? I know your customers mentioned some write-offs, but there's also maybe some tailwinds in the U.S.

Just to make sure I understand your question, you wanted some color on revenue by geography?

Yes. Just what you're seeing in terms of the demand trends by geo, yes.

Yes. Well, certainly, a lot of Asia is driving a lot of the growth for sure. But as you know, some of that's coming back to the United States as well as to Japan and Europe as people start onshoring chip fabs and packaging fabs for that matter. But I think the other larger geographic trend is China Plus One trend as things move to Southeast Asia. As you know, we are building some factories in Southeast Asia to meet that demand because our customers are moving there. So I think there is a lot of geographic movement in the industry today, especially the packaging industry, but also the chip industry as you see fabs coming up in United States, Europe, Japan and potentially India as well.

Okay. And then I don't know, any comment on the recent rumors of potentially selling the specialty coating divestiture?

Well, we're aware of those articles, but we really don't comment on market speculation, Dave.

Your next question comes from the line of Joe Quatrochi with Wells Fargo.

Maybe one on the semi side. Given the entity list affiliate rule, it looks like it's delayed. Have you seen any change in order patterns or discussions with your customers?

Yes. Thanks for the question, Joe. Not really because I think when that rule came out, we didn't have -- I don't think the industry had time to react. But some of our customers have said the impact is X, Y,

Got it. And then just your, I guess, conservative comments in terms of looking at like chemical growth into 2026. Is there a particular end market that you're maybe a little bit more conservative in the outlook for? Is it smartphones or PCs, something like that?

Yes. I would say the PC and smartphone markets have been stable, if you will, Joe. But there are some things that could drive it higher in the future. We're just not sure if they will, one of which is new form factors for phones, foldables, for instance, more foldables. And the other one is what we talked about earlier, I think what Steve asked the question about if inferencing cut out to phones and PCs, that certainly would be -- would change the outlook in terms of more of a growth outlook for PCs rather than kind of more stable, which is kind of our assumption.

Your next question comes from the line of Mark Miller with the Benchmark Company.

You noted strength in dep and etch. Are you just getting share in those areas?

Yes. I think we've had a traditional strength there in deposition and etch. That's kind of a legacy MKS business. I would say this, we've gained share in multiple areas. We talked a little bit about even dissolved gas. And as the industry moves towards more advanced nodes like 2-nanometer, the ability to clean wafers, the ability to do soft etching and soft cleaning. These are all things that are driving some of our subsystems in the reactive gas part of our business. So we've got a lot of good opportunities there that we've been capitalizing on. And of course, power for NAND is something that we are very confident, we will hold that share and as that grows into higher aspect ratio etching for things like DRAM. And then we're working hard on conductor etch. And we have some great solutions there that our customers have told us are industry-leading.

I was wondering if you could give us some color on lasers and your outlook for next year from the laser business.

Yes, Lasers has been a little muted because, as you know, lasers are used in industrial applications and industrial applications have been more muted in the last couple of years. [ PMI ] is still kind of hovering around 50% or a little below. So I think we really have to see a change in that, Mark, before we would kind of see the lasers part of our business grow.

[Operator Instructions] Your next question comes from the line of Jim Schneider with Goldman Sachs.

I was wondering if you could maybe kind of comment on, given all the things were covered earlier with respect to tariffs, how you expect your direct China business to trend directionally heading into next year? What do you expect it to be sort of up, down or flattish?

Yes. Well, in China, we have 2 markets that go to China. The semiconductor equipment direct to China, that's out of our numbers. We still sell a little bit there, what's allowed, but that's not -- that's been out of our numbers for a while. So we do have the indirect exposure to China based through our OEM customers, and that's well known. But then we also sell obviously, advanced electronics packaging to customers in China. And that still remains a good portion of our business, but many of those customers are also building new capacity in Southeast Asia, as we talked about earlier. So we see that trend probably China will be a big part of our business from the packaging standpoint, not so much from the semi direct standpoint. And then things start moving, I think, outside of China from the packaging standpoint.

And then maybe relative to your leverage target, you've talked consistently about 2x in 2027. Maybe talk about sort of the level of urgency to get there. Could you achieve it perhaps a little bit earlier than that? And maybe talk about some of the levers you might pull to sort of achieve it?

Jim, this is Ram. I'll take that. So we have made great progress in keeping our focus on deleveraging. We paid down $400 million in prepayment this year. That's following $426 million of prepayment we did last year. And that remains our focus. Our capital allocation strategy has not changed, investing in our business and then paying our debt down. That's been our focus. In terms of accelerating that, the best way to do that will be with our current cost structures when we see the top line come back to more normal levels, we will be able to generate more cash and accelerate our debt payment. 2.5, you're right, is the net leverage target we want to get to, and that's our goal. I don't want to speculate on a time when we'll get there, but 2.5 is our net leverage target.

I'm showing no further questions at this time. I would now like to turn it back to Paretosh Misra for closing remarks.