Seth Bagshaw - SVP and CFO Jerry Colella - CEO and President John Lee - SVP and COO.

Sidney Ho - Deutsche Bank Patrick Ho - Stifel Nicolaus Tom Diffely - D.A. Davidson Weston Twigg - KeyBanc Capital Markets.

Good day ladies and gentlemen, and welcome to the MKS Instruments' Fourth Quarter and Full-Year 2017 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 conference is being recorded. I would now like to introduce your host for today's conference, Seth Bagshaw, Senior VP, Chief Financial Officer. You may begin..

Thank you. Good morning. I am Seth Bagshaw, Senior Vice President and Chief Financial Officer. And I'm joined this morning by Jerry Colella, Chief Executive Officer and President, and John Lee, our Senior Vice President and Chief Operating Officer. Thank you for joining our earnings conference call.

Yesterday after market closed, we released our financial results for the fourth quarter and full-year 2017, as well as our January, 2018 operating model. We reclassified certain historical revenue data by end market for the Light & Motion division. These reclassifications [indiscernible] conform to MKS historical revenue by end market.

Our financial results is schedule to outline historical and reclassified revenue by end market in the January 2018 operating model, and then posted to our Web site, website www.mksinst.com. As a reminder, various remarks that we make about future expectations, plans and prospects for MKS comprise forward-looking statements.

Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in yesterday's press release, in our annual report on Form 10-K for the year ended December 31, 2016, which is on file with 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, and 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. In addition, we'll refer to certain pro forma measures as if the acquisition of Newport Corporation, which closed on April 29, 2016, had occurred beginning of the first quarter of 2016. Now, I'll turn the call over to Jerry..

Thanks, Seth. Good morning everyone, and thank you for joining us on the call today. I'll begin with our results for the full-year and fourth quarter of 2017. I'll then review several highlight in the business in our markets, following that I'll turn the call over to John Lee to provide additional information on specific customer applications.

Seth will then follow with further details in our financial results and the first quarter, 2018 guidance. Then we'll open up the call for your questions. Revenue for fiscal 2017 was a record $1.92 billion, an increase of 30% from $1.47 billion in 2016 on a pro forma basis.

For the fourth quarter we also achieved record revenue of $512 million, an increase of 26% from $405 million in the fourth quarter, 2016. We are extremely proud of these accomplishments. Four years ago, we identified sustainable and profitable growth as a cornerstone of our business strategy.

We have executed on this vision by providing customers with innovative technology solutions, continuing to streamline all aspects of our operations, improving our financial performance, and investing in high-growth solutions and markets.

We also invested in customer-facing areas by putting our application support and technical resources in close proximity to our customer. These long-term strategic investments have made a significant impact on achieving the vision of not only growing revenue in a sustainable way, but also improving profitability by nearly 600%, since 2013.

In terms of end market performance in 2017, revenue from our core semiconductor customers grew 45% on a pro forma basis from 2016 to 2017, to a record $1.1 billion.

This growth rate is 50% higher than consensus estimates for 2017 WFE growth, which highlights our focus on high-growth segments within the semiconductor market, and demonstrates our continued market share gains.

Growth drivers such as mobile devices, 3D NAND memory, and the accelerating adoption of the Internet of Things, and cloud applications have significantly increased the need for innovative solutions within the semiconductor manufacturing processes.

A key tenant of our strategy driving profitable sustainable growth was to augment our strong semiconductor market portfolio while broadening our addressable markets.

The Newport acquisition not only increased our addressable market in semiconductor, but it also allowed us to expand into growing adjacent technology-intensive markets, such as industrial technologies, life and health sciences, and research and defense.

In 2017, our revenue into these advanced markets increased to a record $820 million or 14% over 2016 on a pro forma basis. The industrial technology market, driven by the transition to laser-based manufacturing applications, is becoming a key focus for us.

We define the industrial technologies markets as high-precision complex manufacturing processes centered on electronic thin films, electronic components, and industrial manufacturing.

Our revenue for 2017 in these markets grew to a healthy 34% over 2016 on a pro forma basis, which contributed to the record performance of our Light & Motion division, further underscoring the strategic value of the Newport acquisition.

We have also focused on our operational improvements across all facets of our company, including applying the MKS business processes to the Light & Motion division for product development, R&D application, centralized manufacturing operations, and global sales alignment.

Prior to the acquisition revenue for the Light & Motion division had been stagnant for several years. In contrast sales in 2017 reached a record $709 million, an increase of 18% from the $602 million in 2016 on a pro forma basis.

I am extremely pleased with MKS' 2017 performance, and I would like to thank all of our employees for their hard work and dedication, for our customers for their loyalty and trust, and our supply chain partners for their continued support. I am very confident our organization is well-positioned as we enter 2018. Now, I'll turn the call over to John..

Thanks, Jerry. As Jerry mentioned, 2017 was an outstanding year for MKS. We strengthened our relationships with strategic customers around the world, expanding our offerings in key product segments, and successfully integrated our Newport acquisition.

The semiconductor market remains core to MKS, and we continue to invest in differentiated technologies and products and make next-generation semiconductor manufacturing processes possible.

Our long-term investments in our power delivery, plasma generation, and vacuum measurement and control businesses have led to significant design wins over the past few years. As a result, our power solutions revenue increased 65% in 2017 compared to 2016. And this is more than double consensus estimates for 2017 WFE equivalent.

This outstanding performance has largely been driven by bioelectric deposition and bioelectric etched applications. However, we are also now receiving multiple design wins for advanced conductor etched applications, positioning us for continued growth in power.

These strategic investments have made a significant impact on our semiconductor OEM and end-user businesses. As we have discussed in the past, revenue in Korea has increased 250% since 2012. In 2017 alone, our Korea end-user business grew 114%, while our Korea OEM business grew 96%.

In the fourth quarter we won significant business from a Korean end-user for a high flow of ozone systems used in atomic layer deposition to fabricate DRAM memory devices. We also received continued orders from a Korean OEM for our remote plasma sources for dry strip applications.

And we are honored to have just received a significant suppler award from another major Korean OEM. As already mentioned, the increasing adoption of laser-based manufacturing processes was a key contributor in our Light & Motion division's successful 2017, with revenue to the industrial technology end market increasing 34% on a pro forma basis.

The demand for faster, more precise manufacturing processes requires unprecedented innovation and laser capabilities. Precision cutting, scribing, and marking applications are enabled by ultra-fast pulsing as well as the ability to program the pulsing sequence and energy profile.

Our broad portfolio of lasers, laser-powered measurements, laser beam profiling, motion control, beam delivery solutions puts us in a unique position to address these technical challenges. In the fourth quarter, we won business in China for our thin-film scribing application for the photovoltaic market using our new infrared [indiscernible].

We also won an order in North America for an additive manufacturing application using our precision machined products. And in Japan, our laser power measurement system was selected for a laser whelming application for the automotive market.

At this point, I would like to turn the call over to Seth who will provide further details on our financial results..

Thank you, John. I will cover the fourth quarter full year financial results and newly updated January 2018 operating model and discuss our Q1 2018 guidance. Revenue for the quarter was $512 million. Increase of 5% compared to already very strong Q3 revenue of $486 million, an increase of 26% compared to revenue of $405 million in Q4 of 2016.

Sales for semiconductor market remained strong. And we achieved a new record of $284 million in the fourth quarter. Sales to our advance markets, which comprised 44% of our total revenue, increased 11% sequentially and also achieved a new record of $228 million driven by strong growth in the light & motion division.

GAAP and non-GAAP gross margin was 46.6%. Non-GAAP operating expenses were $106 million and non-GAAP operating margin 26%, all within our expectations at this revenue level. During the fourth quarter, we completed another $50 million voluntary principal prepayment, and as a result, achieved a defined leverage ratio.

Our interest spread was further reduced by 25 basis points. At the end of the quarter, our non-GAAP interest rate was approximately 3.6%. Through a combination of voluntary debt payments and three re-pricings, we reduced our annualized non-GAAP interest cost by 65% in the last 18 months.

The non-GAAP tax rate was 26.5%, slightly favorable to our projected rate of 27%. The GAAP tax rate was 30% and includes the effects of a 2017 Tax cuts and Jobs Act as well as projected foreign withholding taxes in certain countries.

We recorded approximately $43 million of repatriation and withholding taxes associated with our international earnings and also recorded a benefit of approximately $35 million associated with the reduction in U.S. deferred tax liabilities. More importantly, due to the favorable provisions of the U.S.

federal tax reform legislation, we are now projecting our 2018 non-GAAP tax rate will decrease 800 basis points from 27% to 19%. This substantial benefit alone results in an 11% increase in our non-GAAP earnings per share in our January 2018 operating model.

GAAP net income was $77.6 million or $1.41 per share, and non-GAAP net earnings was $94.6 million or $1.71 per share. At the end of the fourth quarter, we had in cash in short-term investments of $543 million. Of which, 45% was in the U.S. and 55% in international operations. Our term loan balance was $398 million.

And our net cash position increased $55 million. We ended the quarter with a net cash position of over $150 million. Free cash flow for the quarter was $67 million to reflect the seasonal timing of U.S. in international income tax payments.

In terms of working capital, day sales outstanding were 53 days at the end of the fourth quarter compared to 52 days at the end of the third quarter. And inventory turns were consistent with Q3 at 3.2 times. We continue to provide a balanced approach to capital deployment.

And during the quarter, we paid a cash dividend of $9.8 million or $0.18 per share. I would like to now cover some of the highlights for the full year. In 2017, we achieved record revenue of more than $1.9 billion with an increase of 30% compared to 2016 revenue on a pro forma basis. Our semiconductor revenue increased 45% to a record $1.1 billion.

And our revenue to advance markets increased 14% to $820 million, also a record on a pro forma basis. For the full year, the revenue split between semiconductor market and advanced markets were 57% and 43% respectively.

As a reflection of the strength of our operating model with the acquisition of Newport Corporation and strong organic growth, we achieved a 97% increase in non-GAAP earnings per share, and to an 18% increase in GAAP earnings per share. Free cash flow was $324 million, which is more than double the free cash flow in 2016.

And also in 2017, we increased our dividend rate by 3%, and paid a total of $38 million in cash dividend to shareholders. Turning to Newport acquisition, 2017 was also a record year for our Light & Motion division as sales increased 18% to $709 million compared to pro forma 2016 revenue.

Non-GAAP operating profit was over $150 million, which compares to an annual run rate of approximately $60 million prior to the acquisition. We have now fully realized our targeted $40 million of cost synergies exiting the fourth quarter or approximately a year-and-a-half from the closing date.

Turning to Q1 2018 guidance, continue to see strong growth in our end markets entering 2018. We estimate that our sales in the first quarter could range from $510 million to $550 million. At this expected sales range, our Q1 gross margin could range from 47% to 48% reflecting expected product mix.

Non-GAAP operating expenses could range from $110 million to $116 million. R&D expenses could range from $35 million to $37 million, and SG&A expenses could range from $75 million to $79 million. Q1 expenses reflect additional investments in R&D and sales functions.

As a reminder, our operating expenses are typically seasonally higher in the first quarter due to payroll taxes and certain fringe costs, non-GAAP net interest expenses is estimated to be approximately $3.6 million, and our non-GAAP tax rate to be approximately 19%.

Given these assumptions, first quarter non-GAAP net earnings could range from $102.9 million to $117.7 million or $1.86 to $2.12 per share. In the first quarter amortization of intangible assets expected to be approximately $11 million. GAAP interest expense is estimated to be approximately $4.6 million.

GAAP net income expected to range from $93.2 million to $108.1 million or $1.68 to $1.95 per share from approximately 55.4 million shares outstanding.

Lastly, yesterday we published a January 2018 operating model which incorporates the Newport synergies and other gross margin improvements, reduced interest expense, the favorable impact of 2017 tax reform legislation, as well as investments in product development and sales channel optimization to further capitalize the market opportunities that Jerry and John discussed earlier.

At an illustrated revenue level of $2.2 billion, we estimated that our non-GAAP gross margin could be 48%, non-GAAP operating margin to be 27%, with a projected non-GAAP tax rate of 19%, our illustrated model shows potential non-GAAP earnings per share of $8.55.

This represents an additional 33% accretion from our previous model published last quarter, an improvement of over 80% from the published model a year ago. This concludes our prepared remarks. We'll now open the call for questions..

[Operator Instructions] And our first question is from Sidney Ho from Deutsche Bank. Your line is now open..

Thanks for taking my questions, and congratulations.

So, for the Q1 guidance of the 4% sequential growth at the mid-point, how should we think about the growth between semis and the advanced market especially given how strong the advanced markets were in Q4? And the reason I ask is that because one of your largest customers suggested very strong shipments growth in this quarter.

I would think your revenues will lead [ph] that shipments, but your Q4 semi revenue was only up 1%..

Yes, this is Jerry. So one of the things that you can't always make the correlation is between our customers' projected shipments and sometimes our revenue, because often times they may pre-build or pre-buy from us. So as an example, we had a very strong Q3, as an example, with one of the customers that had projected a larger Q1.

So we expect the semiconductor business to be consistent and still strong. And it's very difficult to make this correlation quarter-to-quarter because of the timing of inventory buys. We have a very strong business in Korea, sometimes they pre-buy, and they for a quarter or two, then they start to buy again.

So I think in general the business will be consistent and strong. And I think we projected the midpoint up to about 530 in the midpoint, which would imply another strong quarter..

Okay. Then my follow-up is, your semi business has outperformed at the WFE quite a bit for the last few years. Do you expect that outperformance to continue? And maybe just to give some context, last year your WFE growth was really driven by 3D NAND which you had a great position on the RF Power side.

If, let's say, the WFE is up 10% is driven mainly by DRAM, does that change your growth profile relative to WFE very much?.

No. I think one of the advantages we have is our position in Korea, as an example. And in 2012, I think our revenue was around $62 million, last year it was over $112 million. And with DRAM our position with a lot of the Korea OEMs is very strong.

And there'll still be lots of opportunity in bit growth with cloud, and enterprise, and graphics, and networking, and client in mobile. We still hear from people like Hynix who will continue to invest in DRAM, Intel in 10-nanometer logic and 3D NAND. So we expect to continue to outpace the growth of WFE based on our position with the customers.

And with 3D NAND and DRAM we expect to see continued growth very strong there..

Okay. And maybe one last question for me. With the lower tax rate, my back of the envelop math suggest that you can probably get to free cash flow over $500 million this year. Plus the overseas cash I think you can now bring back to the U.S.

How should we think about your priority for your cash usage? More specifically, how do you think about capital returns going forward?.

Yes, okay, [indiscernible]. So the operating model, the January 2018 operating model, the free cash in that, to give you a data point here assuming work capital is consistent, is about $475 million. So I think that's a good model based on a consistent working capital. And our long-term historical plan and current plan going forward is still consistent.

So we definitely support the dividend, and raised a number of times and issued the dividends, social [ph] returns are pretty important for us. And again, delever the balance sheet pretty aggressively. We're at a point now where the debt in the balance sheet I think is quite comfortable for us. It's a pretty good level.

And we think there's more opportunity to do acquisitions in the future. So I think the strategy is exactly the same it was before, so for the dividend growth over time, delever the balance sheet we're pretty much where we want to be at this point, give or take a little bit, and then really look at acquisitions going forward..

Yes, I think we're, besides financially prepared for another acquisition, the organization is prepared. One of the things that we've been successful at is integrating over 20 companies. And one of the reasons why we're successful is because we make sure that we know exactly what our strategy is going into that acquisition.

And also the amount of time and effort it's going to take to deliver what we were -- we thought at the very beginning of it. And my team is now ready for the next acquisition, whether it's a tuck-in or something significant. But the timing is right for us. Now it's a matter of seeing what's available and what makes sense..

Great. Thank you very much..

You're welcome..

Thank you..

Thank you. Our next question is from Patrick Ho from Stifel Nicolaus. Your line is now open..

Thank you very much, and congrats guys. Jerry, maybe first off for you. In terms of your Light & Motion business or the majority of it that you acquired from Newport, you did mention in your prepared remarks about how you've been able to grow those new Newport businesses at a faster growth rate than when Newport was independent.

Can you give a little more color or maybe a little more detail on some of the tactics that have helped drive some of this market expansion and better-than-expected growth in those businesses?.

Sure. So I'll tag team with John Lee too, because John's obviously, as COO, driving a lot of it. I think first of all, it's just being -- setting very aggressive goals for the organization. And people watch what the boss watches. And so in looking at the markets and recognizing that they were growing at 1% while their markets were growing 4% to 5%.

So for us, we always saw we have to grow at a minimum of double our market rate. So that's the first thing, setting very aggressive goals. Two, realigning the organizations by centralizing operations, centralizing sales, and having the sale team which has done a phenomenal job for us selling around the laser.

So rather than I just sell lasers or I just sell photonics or motion, I'm selling the entire suite of products when I enter an account. Thirdly, we have focused our opportunities on some of our end user customers by doing team selling.

There's been some wins we've had in Korea, last year in particular, with a very large Korean company that had they -- Newport approached on their own they wouldn't have seen that Newport had the resources in order to accomplish that for them, and thus -- and that comes along and we've got size. And size matters.

And then I think it's just really being very prescriptive about where we want to grow. And we like the laser business in particular; they've come up with some great products in the last several years, particularly last year. And we think that there's some significant high-growth areas that we've really focused the team on.

And then lastly, the general growth from kiosk is when we implemented our strategic planning process about five years ago.

And we entered the strategic planning process with Newport when we first bought them, and allocating R&D dollars specifically to high-growth opportunities within Newport, whereas in the past all the dollars were distributed in a more democratic way.

So we actually would take dollars away from a particular area of interest in Newport and put it into an area of high focus which has created some great opportunity for us. So it's a whole bunch of different things, Patrick, but basically running the business different and being much more focused. I don't know if John wants to add anything to that..

Yes, the only thing I would add, Patrick, is that the two areas where the strategic planning process drove us to put emphasis on was in the semi side of Newport as well as the laser micro-processing, so investments in capital, people, applications. And those are the two areas that drove a lot of the growth..

Yes, and if you look at -- just one last thing. If you look at pretty much every acquisition that MKS has made from when we went public, we have improved those companies dramatically. The power business that we bought from MS Electric years ago was underperforming operationally, and financially, and technically.

Now it's leading the charge for the company. The RPS business that we bought, the company ASTeX, which was a public company years ago, was underperforming financially and operationally as well as customer-centric. And now it's leading our growth in the RPS business.

So I think it's been a tried and true program that MKS has had in terms of how to acquire company, how to get the best out of it, and apply it consistently..

Great, that's really helpful. And Seth, a follow-up question for you. In terms of the long-term operating model that you just updated this morning, on the gross margin line you continue to show expansion there from your previous models.

Is that simply because the revenue target continues to rise or are there other product mix issues, looking down the road, that'll also help gross margins increase especially given post the Newport acquisition..

Yes, good question, Patrick. So, yes, the model we posted last night is sort of like -- if you look at model that today's profitability is making that model. And the revenue is assumed at $2.2 billion. So, we've said historically that 50% variable gross margin, which is still the case in this model.

But when you get to the $2.2 billion range what's in the model is not just variable margin, there's probably in there 50-plus basis point improvement based on product mix and develop the new products that we put out in the marketplace the last year.

So that model has uptick in gross margin for volume, but also an uptick, again the 50 basis is a real mix in product development. So that's an impact on the gross margin in that model..

Yes, and Pat, just to amplify that. One of the things that we've talked about in the past where we've improved the MKS profitability as a standalone company is through our profit and cash recovery teams, which have been in place for five years.

And they still occur every month, focused on what can we do to improve the profitability and cash flow of this company. Every single month they occur. And when we move past the synergy part and integration of Newport we move them into their own profit and cash recovery team.

So every month they're exactly the same thing, looking at every aspect of the business that we can look at to improve sustainably the profitability of the company. And that will continue to go on.

So these -- the number of improvements in the model that Seth's published over the years is a direct result of that focus as well, and that's not going to change..

Great. And final question maybe for you guys as a whole, can you give me a score for this weekend's game. I assume I know who you're going to pick..

27-20, Pat..

Thanks a lot guys..

Okay, you're welcome..

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

Yes, good morning. So just I guess to follow-up on the gross margin question. When you talk about mix, is it that the replacement products in the next generation design has better margin because it's better designed or is it your mix is moving more towards a different market that gives you better margins..

Hi, Tom, it's John. Yes, you're right. A lot of the improvement comes from releasing newer products that are better designed for, not just performance, but cost. And some of the legacy products in some of our product groups, as those roll off, we get this improvement in the gross margin. So that's a big part of it..

Okay. And then when you look at the Newport business growing as fast as it has, are you a little surprised that it's grown this fast just in its second year. I mean, I assume it takes a while for you guys to figure out where you want to focus your attention, develop a new product, and then get your design wins to ramp up.

It seems like that's a multiyear process that would mean that the real growth is still ahead of us..

I'm not surprised at all why we wouldn't have bought the company. I mean I think we saw the potential in the products; they have great customer base, excellent technology, outstanding employees, a great reputation.

And we saw that there was some tremendous opportunity within the company itself with some management changes, some changes to sales in operations, breaking some of the bottlenecks which were holding them back. We're pleasantly surprised, but not surprised about the growth at all. I think that's exactly what we saw in the company.

And we're really proud of the people there that have responded to the changes. MKS has a very specific way of running a company, although we make sure that a company doesn't lose its foundation. You don't want to screw a business up. But there have been a lot of changes people have to get adapted to.

And the Newport team has done a tremendous job responding to that. And John's done a great job leading the sales and operations, changes that needed to be made in the financial side. So no, I'm not really surprised. I'm pleasantly -- happy about it, but not surprised.

But there is more that we think we can do to improve the growth and profitability of the company. We like the markets, we like the industrial market, particularly in the electronic thin-film manufacturing, industrial manufacturing, some telecom business has come back. So there's lots of interesting things that Light & Motion can bring to MKS..

Okay. And maybe ask another way too.

When you focus on a new market or new segment, how long does it take from initial planning stages to get that product to rollout, to get the customers to ramp that product? How long is that process?.

Tom, this is John. So when the model is designing into an OEM it always takes a little bit of time. But I think in the industrial manufacturing markets that Newport plays, that timing is much faster than you would expect we've experienced in semi.

Semi you design in, then an OEM has to get an end-user to quality if, and then the end user has to build a fab with the next generation technologies. So that obviously can take two to five years depending. But industrial manufacturing, it seems to be much faster at adoption.

And you don't have some things like Copy Exact and those kinds of constraints as well..

Okay, great. And then when you look at the semi business, obviously growing 50% above the market.

Is there some way you can parse out how much of that above-average-growth comes from the fact that you're just leveraged to the higher growth markets, and how much is the actual share gains?.

Yes, Tom, this is John. I think that would be difficult, but I would say that we have benefited from being well positioned in multiple patterning. I would say though that as EUV comes in we're also going to benefit from that. So we're always worried about EUV taking -- reducing the multiple patterning markets.

But I think, going forward, we're just well positioned. So we're well positioned in all the markets that are high growth in semi..

Okay, great. And then Seth, when you look at the tax, I guess a little surprised.

Your tax goes all the way down to 19%, while we've seen from most companies that are in that 25% to 32% range, their taxes go down into the low-20s, but because of things like R&D tax credits they don't go down below that, I'm curious if there is clearer, easy explanation as to why your tax rates going down lower than those?.

Yes, I think there is one. So, we are still fairly U.S. centric on a taxable income. So we have lot of IP in the U.S. Obviously our big OEM customers we shift to are all located in United States as well. So, there has been fair amount of taxable income in the U.S. So roughly speaking 2017, about 6% of our consolidated tax is in the United States.

When you figure it, the rates drops by 15% on that, 15% times point six is about 8%. That's the high-level what's driving it….

Okay, great. Okay, thanks for your time..

Yes, thanks, Tom..

Thank you. [Operator Instructions] And our next question is from Weston Twigg from KeyBanc. Your line is now open..

Hi. Thanks for taking my question.

The first I have is actually related to the operating model, with your Q1 guidance to be annualized the high-end of that revenue range were at the operating model, but EPS is a hair under, and I'm just wondering if you could help us understand what you need to close the gap in terms of hitting the margins and profitability to the target model?.

It's what I said in prepared remarks where Q1 expense structure is a little bit high in the sense that we have fringe cost in the United States, and you know, FICO gets reset.

So, we have a seasonality in the fringe cost that's mostly front-loaded in the first quarter in United States, and then that sort of normalizes, and it goes down later on the year. So, if you have the full-year with that factor in there, you get through with the models..

Got it, okay..

Yes..

I was also wondering about service revenue that was down in Q4, it's usually down a little in Q4, but what you are expecting Q1 or maybe through the year on service revenue?.

Well, we've grown service revenue on a pro-forma basis, 8% for the year, and that grew 8% full-year in 2017. Those internal goals are still pretty aggressive. So, our goal would be to grow that a higher rate in 2018.

I don't really have the detail on the Q1, don't have it available, but I think for the year, for 2018, we want to grow that again at those levels, if not higher..

Okay.

And then I guess a similar question, non-semi revenue growth has been pretty good, do you have a target growth rate that you could share with us for 2018 for the non-semi biz?.

Well, last year it grew about 14%, and we always take the markets we are in, say, at least 2X. So, the average of some of the industrial markets is in the 5% range. So, if we weren't 2X those we would be surprised. So it will be the double-digit..

Okay. Got it, thank you..

You are welcome..

Thank you. At this time, I'm showing no further questions. I will like to turn the call back over to Jerry Colella, Chief Executive Officer and President for closing remarks..

Thank you. We are very pleased with our strong performance in 2017, setting multiple all-time records from revenue and profitability. I'm also excited about how well we are positioned as we enter 2018, and we continue on our path to sustain profitable growth. Thank you for joining us on the call today and for your interest in MKS.

We look forward to updating you on our progress when we report our first quarter 2018 financial results. Thank you..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect..