Seth Bagshaw - Senior VC, CFO & Treasurer Gerald Colella - CEO John Lee - President & COO.

Amanda Scarnati - Citi Research Sidney Ho - Deutsche Bank Krish Sankar - Cowen & Co Patrick Ho - Stifel Nicolaus Mark Miller - Benchmark Weston Twigg - KeyBanc C.J. Muse - Evercore.

Good day, ladies and gentlemen, and welcome to the Third 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 may be recorded.

I would now like to introduce your host for today’s conference, CFO, Seth Bagshaw. Please go ahead, sir..

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. Yesterday after market close, we released our financial results for the third 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 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.

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. Now, I’ll turn the call over to Gerry..

Thanks, Seth. Good morning, everyone, and thanks for joining us today. I’ll start with our results for the third quarter of 2018, followed by several business and market highlights, and 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 fourth quarter 2018 guidance, before we open the call for your questions. Third quarter revenue was $487 million, which was within our expectations for the quarter and in line with the year ago.

Non-GAAP net earnings for the third quarter were $103 million, or $1.88 per share and were above the high end of our guidance range, and a 20% increase over the last year. This bottom line outperformance was driven primarily by another strong quarter for our Advanced Markets, as well as our focus on expense containment.

One of MKS’ key strengths is our ability to manage through the semiconductor cycles. We understand that although the end-market continues to grow over the long-term, the semiconductor capital equipment market can experience fluctuations in the short-term.

To minimize the impact of these fluctuations we implemented a strategy five years ago to transform MKS from primarily a semi-focused business to a broader market solution provider exposed to a wide range of new and exciting markets.

In that short period of time we have significantly expanded our customer solutions that address additional semiconductor segments such as lithography and inspection and fast growing advanced markets such as materials and electronic component processing.

This diversification in markets, customers and product portfolio helps us outperform our semiconductor peer group throughout the cycles and we are on target to grow more than two times faster than the overall market for Advanced Markets.

Revenue from Advanced Markets for the first three quarters of 2018 has grown almost 20% over the same period in 2017.

Given our long history and deep experience in the semiconductor market we have learnt to consistently deliver strong results during fluctuation through strict cost control whilst amplifying our focus on design wins to increase market share, which historically we have achieved.

Finally, I'm also very pleased with MKS being ranked Number 17 on the 2018 Fortune 100 fastest growing companies list. MKS was number one in the Biggest Jumps category moving from 89 in 2017. This achievement is a testament to our overarching strategy of sustainable and profitable growth.

In terms of our outlook, we expect that semiconductor customers will continue to work through their existing inventory. However, we remain very positive on the fundamental strengths of this market.

We anticipate strength in the Advanced Markets led by multiple industrial applications with over 40% of our revenue coming from these steady and high growth opportunities. Despite the semiconductor market headwinds, I'm very confident that the strategies we have put in place have positioned us for long-term outperformance.

Turning to our Q4 2018 revenue and net earnings guidance, we estimate that our sales in the fourth quarter could range from $420 million to $460 million. Fourth quarter non-GAAP net earnings per share could range from $1.38 to $1.64 per share. Seth will provide the balance of our fourth quarter guidance in his remarks.

At this point, I’d like to turn the call over to John..

accountability, customer focus, continuous improvement and strategic planning. With respect to the second pillar, customer focus, the key differentiator is the breadth and depth of our technical capability, which is essential to developing solutions to our customers’ most complex problems.

Today in both semiconductor and Advanced Markets we are seeing more opportunities for design wins than in any other time in our history. The requests are coming from a broad cross-section of our key OEMs and other customers.

The diversity of these opportunities span multiple markets and employs a wide range of solutions from our industry-leading portfolio of lasers, power delivery, motion control, ozone gas generation and integrated optical subsystems.

Very often these solutions involve the integration of several different components and/or substances, which is a clear and unique differentiation that our customers value greatly.

As part of our strategy to leverage cross-selling across our markets and customers we won several opportunities in the third quarter by combining the expertise of our integrated optical subsystem design capability with our leading-edge laser products for the growing OLED display market.

Our motion systems group continues to win opportunities in the most challenging applications, most recently from metrology and wafer inspection applications within the semiconductor market. Our ozone gas products have been tested in the most advanced logic and memory nodes for atomic layer deposition processes.

Our power solutions business continues to deliver significant value to our customers, most recently winning a full system of RF generators and matching networks for a plasma enhanced CVD application in Korea.

In the third quarter, our lasers [won] a number of applications for solar cell and printed circuit board processing using our industry-leading ultraviolet and green lasers. Finally, our mass flow controller products have been installed in the PK-4 Plasma Crystal Laboratory in the International Space Station.

Our MFCs are part of the latest ongoing series of experiments to determine the behavior of low temperature plasmas in space. Our outlook remains very positive as our continued design wins in the semiconductor markets and strength in advanced markets positions us for long-term success for the balance and growing portfolio of products and solutions.

At this point, I will turn the call over to Seth..

Thanks, John. I’ll cover the third quarter financial results and our Q4 2018 guidance. Revenue for the third quarter was $487 million, within our expectations for the quarter and a 15% decline sequentially from a record second quarter.

Sales to the semiconductor market were $259 million in the third quarter, a decrease of 23% from a record $336 million in the second quarter of 2018. Sales to our Advanced Markets, which comprised 47% of our total revenue, were $228 million, and decreased 4% sequentially.

Revenue in these markets can vary from quarter to quarter based upon specific projects. We are probably experiencing a moderation of the semiconductor market.

On a year-to-date basis, for the nine months ended September 30, total sales have increased 15% compared to 2017, while the semiconductor sales have increased 12% and sales to our Advanced Markets have increased by 19% driven by strong growth in our laser business, which has increased by more than 30%.

GAAP and non-GAAP gross margin was 47.6% and non-GAAP operating expenses were $103 million for the quarter.

Gross margin was favorable to our expectations at this sales volume and operating expenses were also $4 million favorable to even the low-end of our guidance range as we undertook a number of actions beginning in the second quarter to proactively reduce our cost structure.

In addition, certain variable compensation accruals totaling $4 million were adjusted in the third quarter to be in line with our business levels in the second half of 2018. We do expect expense in the fourth quarter to reflect more normalized variable compensation levels.

Non-GAAP operating margin was 26.5% reflecting the strength in our operating model as well as our balanced increase in exposure to Advanced Markets. We believe these are unique strategic advantages to MKS as semiconductor business levels have moderated in the quarter.

GAAP and non-GAAP interest expense was $3.7 million and $3 million respectively, and interest income was $1.5 million in the quarter. The non-GAAP tax rate was approximately 19% and the GAAP tax rate was 18.5%.

During the quarter, we incurred restructuring charges of $1.4 million primarily related to further streamlining and consolidation of certain functions. GAAP net income was $93.3 million or $1.70 per share and non-GAAP net earnings were $103.2 million or $1.88 per share.

Our GAAP and non-GAAP results were both above the high end of our guidance range for the quarter. At the end of the quarter, we had cash and short-term investments of $620 million, which was evenly divided between the US and our international operations and our term loan debt balance was $348 million.

Free cash flow for the quarter was $81 million, or approximately 17% of revenue. Day sales outstanding was 59 days at the end of the third quarter, compared to 54 days at the end of the second quarter. This increase was largely due to the timing of revenue within the quarter. Inventory turns were 2.6 compared to 3.1 in the second quarter.

Inventory turns tend to trend lower in the short-term as business levels moderate. We continue to provide a balanced approach to capital deployment and during the quarter we repurchased 818,000 shares of stock for $75 million at an average price of $91.67 per share and paid a cash dividend of $10.9 million or $0.20 per share.

Now turning to Q4 2018 guidance, the semiconductor capital equipment industry experienced a moderation in capital spending in the near-term, and we have seen a similar effect on our semiconductor revenue in the third quarter. We expect that to continue into the fourth quarter.

We believe that our customers have worked down inventory levels of MKS products throughout the third quarter and continue to do so into the fourth quarter. We also expect sales to Advanced Markets as well as service revenue into all of our market segments to remain at healthy levels.

We estimate that our sales in the fourth quarter could range from $420 million to $460 million, and gross margin could range from 47% to 48%. Non-GAAP operating expenses could range from $103 million to $109 million, R&D expenses could range from $34 million to $36 million, and SG&A expenses could range from $69 million to $73 million.

Non-GAAP interest expense is expected to be approximately $3.2 million and a non-GAAP tax rate could be approximately 19%. Given these assumptions, fourth quarter non-GAAP net earnings could range from $75 million to $89 million or $1.38 to $1.64 per share.

In the fourth quarter, amortization of intangible assets is expected to be approximately $10.8 million. GAAP interest expense is estimated to be approximately $3.9 million and GAAP tax rate could be approximately 20%.

GAAP net income is expected to range from $65 million to $79 million or $1.19 to $1.45 per share on approximately 54.5 million shares outstanding. Those are our prepared remarks. We’ll now open the call for questions..

[Operator Instructions] And our first question comes from Amanda Scarnati with Citi. Your line is now open..

Good morning. Thanks for taking the question. Just starting off on the non-semiconductor side and the Advanced Markets, can you talk a little bit more about the weakness that you saw there, and how much if any other was related to the China tariff and the trade war that we are seeing there? Thanks..

Thank you, Amanda. So, it was in the [level] in terms of like 4% and it really is more a lumpy and project based. Year-to-date I think we are almost 20% growth.

So, it really wasn't anything of anything significance of when customers take large shipment orders, and as far as the China tariff is concerned we really haven't seen anything significant that would impact us. Certainly we are watching it and we want to be mindful of it.

We want to be prepared if that were the event, but we have not seen any weakness in China. Actually we probably have more engagements and opportunities there than we probably ever have and have put more people on the street in China because of those opportunities. So, it was just a matter of timing and lumpiness on the projects..

And then on the semiconductor side, as customers continue to work down inventory, do you think that is a longer-term process, how much inventory is kept at your customers, or do you think this could be something that can be completely reversed for your end in the December quarter?.

That is a very good question. I'm sure I would have answered it about 100 times today. This is an old song and dance that we have answered at MKS for probably 40 years.

So, really what happens is when you are in the middle of a high-level of business at the OEM level they have pretty high build schedules, and in that – while they are doing that they have a high level of finished goods work in process, raw materials and timelines back to us.

When they see the demand from their end-customers decrease, the first thing they are going to do is cut their schedules. And therefore they now have to work off finished goods with raw material and [indiscernible], and we expect that – we have started to see that towards the end of the quarter. We expect that to continue this quarter.

That is why we gave the guidance that we did. We don't have a lot of visibility into how long that will last with customers. Usually in the past it has been a couple of quarters. That is why where we think the guidance we are giving now is prudent.

But we are well positioned and just to let you know we are still making significant investments in capacity. We are actually increasing capacity and one of our facilities that we have increased in over 18 years because of the long-term projection of the growth in that business.

So can't really project right now the potential of the upturn or the timing of it, but in the past I have said it was a canoe. I think this is another canoe. People have asked me is it a big one or a small one, is it a tippy canoe.

I'm not really sure, but I think that is kind of where we are and in addition to that some of our Korea business is slower. We had a tremendous run-up in our Korean business from 2012 to last year, going from $62 million to almost $213 million and we are the largest spend of the year is slowing, the ecosystem is slow.

So, some of that is also just a matter of people waiting for spending to pick up, and some inventory issue there in some cases. So, I'm sorry I couldn't give you a specific answer. It is not a matter of if but when and we are just positioned to – we will handle it when it comes back..

Great. Thank you..

You are welcome..

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

Good morning. Thanks for taking my question.

I guess my first question is how should we think about semis versus other Advanced Markets in your Q4 guidance? It seems like you are suggesting inventory correction in semiconductors will continue, but you also said the semi business has been more steady and consistent, and can you also talk about – on your other Advanced Markets business, how have order trends changed in recent weeks?.

Hi Sidney, it is John. So, I will take the Advanced Markets one. So, Q4 we think is relatively consistent to Q3 for Advanced Markets. So, we think that when the year is pretty strong in our Advanced Markets. So, the guidance of lower revenue in Q4 is almost all due to semi and the inventory burn off..

Great. Maybe my second question is clearly there is a lot of anxiety about memory CapEx next year, do you have enough visibility to say how your semi business will do in the first half of next year versus the second half of this year? I assume you have a more unique view about what's happen in Korea than your last U.S.

customers?.

Again it's John.

So, we certainly visit our Korean customers, stick very close to them in some of the public statements at Samsung that's made, we really say that the first half will be similar to the second half of 2018 meaning at this lower level and that's why our guidance has been this 440 quarter and Q4 is kind of even consistent behavior we see in the first half of 2019.

And so that's as far as we know because that will depend on whether somewhat in Korea besides pulling the fab or push out of that..

Okay and maybe I can squeeze in one more. You guys have said in the past that the underlying market for other advanced markets will grow 4% to 5% per year and then you will be disappointed if your business doesn't grow twice as fast, call it 8% to 10%.

Does that percentage growth still apply for 2019 especially given some of the headwinds and at least on the macro level that we are hearing?.

Well, we certainly don't have any reason to believe that that would be different. '17 grew 14% of a '16, year-to-date we're 20% '18 over '17 and we believe our target is getting 8% to 10% at a minimum and we have a lot of focus on that area.

The width and depth of portfolio is astounding and the amount of applications that we can get involved with which we are involved with is remarkable. So, we have all the confidence in the world, we are shifting sales focused as well in terms of adding people, adding different capability in those markets.

So, we don't see any reason to believe 8% to 10% wouldn't be an achievable market for us..

Great. Thank you very much. .

Okay Sid, you're welcome..

And our next question comes from Krish Sankar with Cowen & Co. your line is now open..

Yes. Hi, thanks for taking my question. I had a few of them Gerry or John I think you kind of highlighted that most of the weakness in Q4 is semi-related in advanced markets looking flattish.

So, if you do that math your midpoint you're probably getting like down 18% sequentially for semi's in Q4 and then for the full year calendar '18 your semi business is probably up 1% to 2%.

So, I'm kind of curious that seems like a under growing WAC or probably in line, is there something happening from a share standpoint or am I just reading too much into quarterly volatility?.

Hey Krish, it's John. So, your numbers are spot-on frankly, and so the way we look at it is we looked at our over achievement in 2017 which was a 45% growth, and semi it went about 30% and then in 2018 you're right it's only a couple of points up relative to 2017.

But if you look at the aggregate which is the kind of the way we look at it, then we have actually over achieved relative to semi growth over that two year period. And we try that average over that time frame is because of the up and down of the cycles and the inventory burn-off.

So, we actually looked that very closely because we certainly want to make sure that we are still tracking to our two points above the industry standard the growth for market share gain and that's what we are seeing right now..

And actually we continue to gain share and you can't lose share in the middle of a ramp or there in the beginning of a down trend. That doesn't happen because of design wins occur usually during the down trend not design out. And we continue to see more and more opportunity for share gain.

The other thing I forgot to mention which was a selling point what Amanda asked me, is we also have an OEM that quoted a number of months ago the date over bought for ERP implementation.

And so if you have a high build rate and you over buy the ERP, you are going to have a dramatic effect on your upstream supply chain when you have to start to work it off because both is about too much for ERP let's work it off and now cuts was on buying as much; it creates another problem.

So, that's exacerbated the numbers of bid but it's on our market share issue, we expect to take more market share coming out of this down turn. We are putting more people on the street more engaged with customers. That's how we keep outgrowing the space.

So, when you're out, when the industry grew 32% '17 over '16, we grew 45%; there was a reason for that. And we will continue to outgrow the market. .

Got it. That's very helpful. And then just to follow-up on the inventory situation. I understand the ERP shoot one of the OEMs but in the past on the components also highlighted how it's more just in time and things are more in match to what the demand is with your OEM customers. But now, it looks like that's not the case.

It feels like this behavior is back to prior down turns with like them drawing down inventory.

Has anything changed this time around?.

Well, there and a lot more stocking programs that we have with customers but it doesn't mean that those stocking programs don't have an elevated level of inventory in them, unfortunately.

And we had one customer that was here in March telling us to this giant build up in stock inventory because they were at this geometric rise in your bill rate and we didn't do that; I was a bit cautious on that. So, you are right I mean lead times are shorter. You think people are more rational; they are more just in time programs.

So, in general it appears to be more rational and more reasonable but they are still pockets of inventory the way people stock things and the way they prepare for ramp. And one of the things that our customers don't want to do is they don't want to be without inventory to turn the orders around.

So, even if we can deliver something at a day or a week, this is going to want have a heavy amount of safety stock to in case they get a last-minute order to turn it. So, it's still a little bit of that in the system. I'm disappointed with it but it just did what it is..

Got it.

And then just a final question, if that behavior doesn't change the whole lot with the inventory situation as in past cycles is it fair to assume even if first half of '19 is going to be similar to the second half of '18 levels, at some point in the first half you should see a snapback as you start building up inventory?.

hopefully the second half as some people may project it certainly would be something we would see sometime later in the first half I would expect..

Got it. Just a last question from my end for Seth.

Is it 75 million you have left in your buy back at this point?.

Yes, that's correct. This is about 73 million in change, that's correct..

Thank you, folks..

Yes, thanks Krish. Take care..

And our next question comes from Patrick Ho with Stifel Nicolaus. Your line is now open..

Thank you, very much. Maybe Gerry just to kind of follow up with maybe just as to clarify.

When you said that orders on the semi side are now steady, do you believe from an order flow standpoint you reached the bottom and like you said as soon as the customers work off their inventory and that'll be the catalyst for a rebound in your core semi orders?.

we are making significant investments in capacity increases in a building we haven't done in over 18 years which is our belief of it coming back.

So, if I had to guess it's appears we're at good stabilized point and we'd expect to see it start to come back at some point but I'm sure we've surprised people went were from 570 to 490 and 490 to 440 and we're a conservative company that likes to look at the business in a reasonable way. They give good guidance.

So, it appears stabilized and I don't doubt that it stabilized and I hope it continues that way but we have to be prepared one way or the other but I'm confident in the long term for sure.

I know that was a squishy answer but I just don't want to go out and be definitive about something till I see more than a quarters worth of consistency but it feels pretty good from what our sales people are telling us..

Fair enough. Maybe then as a follow-up question on your advanced markets and then particularly the laser business. Obviously, there's a lot of noise out there on the entire laser industry particularly in the industrial segment.

Can you again just kind of clarify and maybe just highlight where your market strengths are because I think you're a lot less on the industrial side of things relative to traditional fiber laser company.

If you could give a little bit of clarity on some of your market opportunity and I know you I think briefly mentioned it in your prepared remarks about opportunities in solar and PCB.

What are some of the other emerging market opportunities that you see for your laser business specifically?.

Alright, I'll tag team with John in this one. So, as far as our lasers are concerned, the slowdown really in with fiber and CO2 is more in heavy industrial and the OLED large OLED opportunity. And for us, we're more of a finer precision manufacturing, things like micro processing with pulse lasers.

And so, we haven't really seen the same impact that we see more opportunity and a lot of those other markets that maybe even had a shot at in the past. We've had several seven figured wins on mobile and virtual reality markets as well as we're bringing light motion group into semi to things like petrology and inspection.

And we see in Chinese market the micromachining more like laser sintering. So, from our standpoint we see pretty consistency in the application of the lasers in the markets. We find ourselves in -- I have seen what's happening to others based in their announcements or pre-announcements but it's a different space we play in.

So, I'll turn it over to John to give you some insight as well from his view..

Yes, Patrick. So, in addition to the solar cell application and then the PCB and drilling, there are other applications that continue we just didn’t highlight and so glass cutting capacitor or passive component manufacturing, additive manufacturing. So, all those other industrial type applications so are there.

We just highlighted, happened to highlight a few of them..

Great, that's helpful. And maybe a final question for Seth in terms of the capital allocation strategy or tactics near-term. It was good to see you buying back stock again at these prices.

Is that I guess the transition will shift in the near term of increasing the buyback while the stocks at these prices or I guess are there other tactics that you can take?.

Yes. I think our view for a number of last years, so once we look at the balance sheet for new ports, we achieved I think pretty aggressively and new ports been performing extremely well Light and Motion division.

Our really goal with these new acquisitions, that's kind of a number-one priority and then we said in the past is we go to the market and buy back shares really opportunistic and so we can't give any clarity or bright line of what we'll do going forward.

But I think looking at a number of factors and how we generate cash in a quarter and a couple of quarters and how we deploy it, all those factors have not changed. So, it will still be inconsistent that approach..

Right. Thanks a lot, guys..

Okay, thank you, Patrick..

Thank you, Patrick..

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

Thank you for taking my questions. You mentioned that you're not exposed in terms of the metal-cutting markets in China but I'm wondering most successful products has been UV fiber lasers and one of your competitors is indicating they're seeing some momentum there.

I'm just wondering them how that space is panning out for you?.

Hey Mark, John Lee. So, we have one product that's a combination of fiber and it's that UV. That's actually a product line that's done very well actually in the last quarter and the application is solar cells. Those powers are obviously not the high power that with their industrial lasers like IPG's lasers or any lights.

So, we are also seeing good growth there in that particular type of product..

Okay. One of your larger customers was upbeat about the next year citing China domestic fabs and there's been a struggle there in terms of ramping their NAND processes and that is pushed out what some people believe is an equipment ramp for production.

I'm just wondering what are you seeing in terms of any on the ramp of these domestic fabs for NAND production..

Yes. Again as a domestic Chinese sort of other companies, I think it was really only one who would smack and now YMTC doing NAND, if that's what you're referring to and so they're making some progress but we still see the vast majority of that builds and equipment installations driven by foreign ownership companies in China..

Okay, thank you..

Thanks. Thank you, Mark..

And our next question come from Weston Twigg with KeyBanc. Your line is now open..

Hi. Thanks for taking my question. First, just wondering if you can help us understand or maybe clarify your China exposure in the non-semiconductor side of the business.

Can you give us an idea of how much of your non-semi revenues is from China?.

Yes, Weston, this is John. And so, most of that is obviously turned by the Light and Motion side. So, a lot of the laser is going into Chinese laser OEM companies or that occasions we talk about like solar cell and PCB and drilling.

Now, I don’t want to give an exact number but it's certainly a scenario where we think it'll be probably bigger than our semi type and will be an area that continues to grow faster..

And the original Lam MKS business, we've been in China for probably almost 20 years now. And it was really we're geared towards industrial and needs apps and applications and things like that, architectural glass and two coating for wear. And that pitches us in the $35 million to $40 million range, so it's a steady business.

So, John said the largest segment if it is in the Light and Motion side..

Okay, that's helpful. And then just go back to the semiconductor side and the slowdown in Korea.

Can you give us a little bit more color in terms of where you see more risk whether it's on the NAND side or the DRAM side and any thoughts on since you're tied into that Cree market pretty tightly, just the I don’t know the reason of each of those segments in terms of how long this slowdown can last..

Yes, Weston, it's John. I mean, so we don’t know beyond what's publicly stated. I think Samsung has said that they will be starting up probably a DRAM, the next phase of DRAM and the next phase of VNAND in the beginning of the second half. And that's kind of public statements. So, we hope that's true.

And but we don’t have any more insight at to which one comes first or which one gets pushed out..

But the relationships in Cree are very strong West. We are getting a lot of opportunity now for the Light and Motion group as well beyond semiconductor, Samsung opportunity.

So, we pride in to the relations we have, the amount engaged with if you want to say involve with and they give us as much as they can, that’s pretty public other than same with us keep investing..

Okay.

But in the near term is it, I see more weakness in the NAND side or the DRAM side, could you say?.

I think the public consensus is that the NAND side is the one that’s the weakest right now..

Okay, thank you, very helpful..

Thanks, West. Take care..

[Operator Instructions] And our next question comes from C.J. Muse with Evercore. Your line is now open..

Good morning. Thank you for taking my question, really appreciate it. I guess, question on the semi side, service including upgrades, spares et cetera has been a source of strength as tools have come off warranty.

And so was hoping you could talk about your overall semi business and perhaps help us better understand the tool component and what you've seen there in terms of kind of big picture of it and you're saying I guess stabilization and what kind of recovery you're expecting in time.

And then on the service aspect, are you well levered to that part of the business. How is that part seeing in your business? And then lastly for your core semi business direct sales, how should we think about that business in a vis-à-vis the more volatile OEM business. Thanks..

Yes. C.J. its John. I'd take the service question first, that's the easiest one I think. So, we're certainly starting, we were seeing the fact that our install base growth is driving our service business and we see historically a 9% and 10% a year growth.

We expect that to continue and maybe have a little more because of the recent shipments of all our equipment. So, I think services is solid and then it continues to be very consistent. And so we're happy with that part of it.

I think the other questions about end user, direct end user sales, was that the other part of your question?.

That's right..

Yes. So, we sold some equipment directly to end users. Examples would be for instance dissolved gas for wet clean and users tend to make that decision, they might buy the wet clean tool from someone else but then it was decide whose dissolved gas to send to buy from.

And so, we have that application and it's from market share direct sales to the end users. And that comes with ups and downs with semi but big strength in dissolved gas has been recently in flat panels. And so, they'll also use dissolved gas for flat panel clean.

And then we have other types of instruments like residual gas analyzers that are bought by end users. And then for sure we have service with end users. Our lot of end users have sent back their our components back to our repair e-post in reaching for repair. So, that is that been consistent and that's part of the service question as well..

Great, thank you..

And that does conclude today's question and answer session. I would now like to hand the call back to Gerry Colella for further remarks..

Yes, thank you. First of all, I want to thank our employees for their help with our slip reaction to market fluctuations. I'm really proud of our ability to manage financing cost effectively which is our proud and long lasting legacies.

So, I want to make sure that people see the financial ability of this company to maintain sustainable profitability even in the down train. I don’t want anyone to lose side if that is, that's something we do better than almost anybody.

With that, we're pleased with our results for the third quarter period 2018, achieving strong financial results despite the semiconductor slow down. A multihead strategy to augment our business with additional solutions that serve industrial technology and others in its market has clearly proven to be highly effective.

We are confident and our diverse end markets demand the global leadership position and the semiconductor market continue to drive sustainable and profitable growth. Thank you for joining us on the call today and for your interest in MKS will follow-up any on our progress and report our fourth quarter 2018 financial results..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. And everyone have a great day..