Mks Inc Q3 FY2020 Earnings Call

Thank you. Good morning, everyone. I'm David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market closed, we released our financial results for the third quarter of 2020, which are posted to our website, 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 the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q for the company. These statements represent the company's expectations only as of today and should not be relied upon as represented in 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 non-GAAP financial measures. Please refer to our press release for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. Now, I'll turn the call over to John.

Thanks, David. Good morning, everyone, and thank you for joining us today. In the third quarter, we delivered record revenue of $590 million, which is above the high end of our guidance range. Non-GAAP net earnings were $107 million or $1.93 per diluted share, which is at the high end of our guidance range. Before I discuss our results and market trends in more detail, I want to take a moment to acknowledge the tireless efforts and dedication of MKS employees around the world who achieved these record results, especially in such a challenging environment. Our employees continue to display amazing resilience in dealing with the extraordinary circumstances resulting from the global COVID-19 pandemic. Yet this did not impact their focus on serving customers, maintaining productivity, executing on our innovation playbook, and most importantly, showing compassion and caring towards each other. One of our strongest guiding principles at MKS is to win as a team, and that's what we did. Now let me discuss our third quarter results in more detail. Sales to our semiconductor market grew 12% sequentially as we experienced strong demand across our portfolio of critical subsystems. Most notably in our Power Solutions business, where we achieved another record revenue quarter. We are extremely pleased with our sales and technology execution in Power, delivering over 110% year-over-year growth for the first three quarters of 2020. Demand for our market-leading plasma and reactive gas solutions continues to be strong, especially in semiconductor deposition applications. The reliability, compact footprint, and cost of ownership advantages of our remote plasma sources have led to several large orders in the quarter in atomic layer deposition and plasma-enhanced CVD applications. Our dry ozone systems continue to gain traction in advanced deposition processes, and our dissolved ozone and dissolved ammonia systems are seeing strong demand for wet clean applications at leading-edge foundry nodes. Our broad portfolio and unique capability to solve the most critical challenges around the vacuum chamber have set us apart from our peers. However, our semiconductor growth strategy goes beyond the vacuum chamber. And we continue to expand into lithography, metrology and inspection applications, where we are leveraging our broad optics, motion, and photonics expertise. In the third quarter, we secured several additional design wins through our world-class optics initiative, and we continue to engage with key OEMs to help solve their toughest problems. As we look into the fourth quarter, we expect demand in our semiconductor market to remain strong. We are pleased with our results in our advanced markets, which grew 4% sequentially, better than we anticipated. We saw a seasonal decline in PCB drilling applications as expected. However, this was offset by stronger demand in our research and life and health sciences markets. During the past few earnings calls, we've talked about the long-term opportunity we see in precision laser processing, particularly for advanced electronics manufacturing. I would like to highlight three key drivers that underpin our excitement around this opportunity. First is the expansion of devices that require precision laser processing. Five years ago, precision lasers were used mainly for smartphone electronics and solar panel manufacturing. Now we are seeing precision laser processing expand to wearables, tablets, autonomous vehicles and many other electronic devices. Second is the significant increase in the number of electronic components per device. Five years ago, we were dealing with hundreds of components in a smartphone. Today, we are dealing with many thousands. Third is the continued expansion in the types of laser-based processes being deployed for precision manufacturing. Our customers are finding new ways to use lasers. For example, in laser doping, surface functionalization and micro welding. We believe the confluence of these drivers offers an attractive growth opportunity where we are uniquely positioned with our 'Surround the Workpiece' portfolio of lasers, optics, photonics, motion and laser drilling systems. We are particularly excited to have announced our first multi-unit order for our new high-density interconnect PCB via drilling tool. Our customers are installing our tools for volume production. This is an important milestone for MKS as we enter into this $500 million market with a strongly differentiated tool. We are happy with the sequential revenue growth in our advanced markets in third quarter and we anticipate demand trends in the fourth quarter to remain consistent. Before I turn the call over to Seth, please note that MKS will be holding a virtual Investor Day on Thursday, December 10. We plan on providing more insight into our growth opportunities, strategy and long-term financial model. Stay tuned for more information in the coming weeks. And now I'd like to turn the call over to Seth.

Thank you, John. I'll cover our third quarter results and provide additional detail on our fourth quarter guidance. Sales for the third quarter were a record $590 million, up 8% sequentially and up 28% year-over-year and above the high end of our guidance range. This strong performance reflects continued strength in our semiconductor market as well as sequential growth in our advanced markets. For the third quarter, semiconductor sales were a record $359 million, up 12% sequentially and up 61% year-over-year, reflecting strong industry fundamentals. We saw strength across our product portfolio, but in particular, our Power Solutions business posted another record quarter, which marks the second consecutive quarter of triple-digit year-over-year growth in this business. Sales to Advanced Markets were $231 million, up 4% sequentially, driven by improvements in research and defense, and life and health science markets, which more than offset the expected seasonal decline of flex PCB products. In our second quarter earnings call, we noted that our research market that had been impacted by COVID-19-related university and research lab closures had stabilized relative to the first quarter. We are pleased to announce that in the third quarter, revenue from our research market grew over 30% sequentially, led by university reopenings and has now returned to pre-pandemic levels. As John mentioned earlier, we received a multi-unit order for our Geode HDI system early in the third quarter. Following the successful installation and customer acceptance, we recognized revenue in the first unit in the third quarter. For the quarter, the revenue split between our semiconductor and advanced markets was 61% and 39%, respectively. Third quarter non-GAAP gross margin was 45.1%, which is slightly below the midpoint of our guidance, primarily due to product mix and inventory charges for certain discontinued products within our Light and Motion Division. We also incurred higher variable compensation costs due to our strong financial results. We expect these items to return to more normalized levels in the fourth quarter. Non-GAAP operating expenses for the third quarter were $129 million, flat to the second quarter, reflecting our continued focus on cost control, even with higher anticipated revenue volumes in variable compensation. Third quarter non-GAAP operating margin was 23.1%, a sequential increase of 150 basis points, reflecting strong financial leverage in our operating model. We continue to generate additional cost synergies from the ESI acquisition, and we're pleased to announce that exiting this quarter, we have further increased these savings and have now realized a total of $18 million of annualized cost synergies. This amount is above our original target and remains well ahead of schedule. Non-GAAP net interest expense for the third quarter was $6.3 million and a non-GAAP tax rate reflecting a favorable geographic mix of taxable income was 17%. Non-GAAP net earnings for the third quarter were $107 million and $1.93 per diluted share. Now turning to the balance sheet. Exiting the third quarter, we maintained a strong balance sheet and liquidity with cash and short-term investments of $716 million and $100 million incremental borrowing capacity under an asset-based line of credit subject to certain borrowing-base requirements. Our net leverage ratio further decreased, highlighting our ability to generate strong EBITDA and cash flow. Since the closing of the ESI acquisition in February of 2019, our net leverage ratio has decreased from one times to 0.2 times exiting the third quarter and we anticipate continued reduction in our net leverage ratio exiting the fourth quarter. Consistent with prior quarters, we had a dividend payment of $11 million or $0.20 per diluted share. In terms of working capital, day sales outstanding were 56 days at the end of the third quarter compared to 64 days at the end of the second quarter. Inventory turns were 2.6 times compared to 2.4 times in the second quarter. We remain focused on improving our cash conversion cycle. Following a record second quarter, third quarter operating cash flow and free cash flow again set new records at $152 million and $123 million, respectively. Free cash flow was 21% of revenue for the quarter. I'll now turn to our fourth quarter outlook. Based on current business levels, we estimate that our fourth quarter revenue of $600 million, plus or minus $25 million. Based on anticipated product mix and revenue levels, we estimate fourth quarter non-GAAP gross margin of 45.5%, plus or minus one percentage point, and non-GAAP operating expenses of $133 million, plus or minus $4 million. For the fourth quarter, non-GAAP net interest expense is expected to be approximately $6 million, and a non-GAAP tax rate expected to be approximately 17%, reflecting anticipated geographic mix of taxable income. Given these assumptions, we expect fourth quarter non-GAAP net earnings of $2 per diluted share, plus or minus $0.20. I'd like to now turn the call back to the operator for Q&A.

Thank you. Our first question comes from Tom Diffely with D.A. Davidson. Please go ahead with your question.

Yes. Good morning. Thanks for taking the call. So maybe just the first question on the HDI market. Congratulations on the first production order there. But I think remind us, why is it that you're winning in the marketplace? What are the key drivers that we should be looking for this market going forward? And what type of seasonality do you typically see in that market?

Yes, Tom, it's John. We've discussed some features that set us apart. First is our higher throughput compared to others. Second is the size and weight, which have proven beneficial for some of our customers in manufacturing settings. In terms of seasonality, it aligns somewhat with consumer electronics cycles, similar to flex. That perspective hasn't changed. It's still a $500 million market, and as you know, we've just started to capture some of that share. We're really excited about the potential for growth in this area.

Okay. I guess with all that in mind, how do you think this rolls out over the next couple of years from your participation in the market?

Right. So right now, as you've said, we have very little share. We've been working on design wins with our beta customers in 2020, as we've discussed in the past. And so we are set up very well with those customers for the next cycle, which should begin in 2021. So as we do that, as we gain those kinds of customers and volume, we'll continue working with other customers or those customers that we already have with different design wins as well in terms of different processes. So, I think 2021 will be kind of the first year where we'll see some of those design win work that we achieved this year turning into revenue.

Okay. Great. And then as a follow-up, when you look at the success you've had in the Power market, are a lot of these tools going into the memory market, where if we would expect recovery over the next year or two, you'd see some further acceleration of your success in that marketplace?

That's correct, Tom. A lot of our Power is leveraged towards memory, is leveraged towards OEMs that are strong in memory. It's also leveraged towards OEMs that are based out of Korea as well as North America. So as memory picks up, we should see that benefit. We are slightly more leveraged to NAND versus DRAM. So that does change the mix a little bit in Power. But in general, memory is good for us.

Okay. Thank you.

Thanks, Tom.

Our next question comes from Sidney Ho with Deutsche Bank. You may proceed with your question.

Thank you for taking my question, Tom. I have a couple of them. On the semi side, there has been impressive growth, with a 60% increase year-to-date compared to last year. If revenue remains flat, or possibly slightly better, you might still see a growth of over 45% for the full year, which is much stronger than the Wafer Fab Equipment market. Given your position in the supply chain, do you believe you can continue to outpace the WFE market next year? Additionally, do you think your customers' inventory levels will normalize by the end of this year?

Good question, Sidney. Typically, we tend to outperform the semiconductor industry during growth periods. However, in downturns when there’s an inventory adjustment, we may lag behind. Ultimately, our goal is to grow faster than the Wafer Fab Equipment market by 200 basis points, which we have consistently achieved over the past 20 years. So, if the WFE market continues to grow, we might still exceed that growth. If it levels off, we may just keep pace. And if it declines, we will likely underperform. We always analyze WFE growth over the long term and how we stack up, aiming for that 200 basis points above the WFE compound annual growth rate.

Okay. That's helpful. Maybe switching over to the advanced markets. If you look at Q4, I understand there are many different businesses involved. What areas do you think are still below a normalized range? I know you mentioned research is returning to normal, but I'm considering the capacity we built over the past couple of years that may start facing shortages.

Yes, we have a variety of different markets within the advanced markets category. However, the industrial sector is not reliant on consumer electronics. This sector also comprises a significant part of our advanced markets, including areas like automotive and industrial manufacturing, which have been sluggish due to COVID-19. We are beginning to notice signs of recovery in these markets. Other companies linked to the automotive sector have started to see improvement, but we have not experienced that recovery yet. However, we anticipate that it will also begin to improve.

Okay. Maybe one last for me. On the gross margin side, Seth, you described the reason why the gross margin is lower than the midpoint for Q3. But for Q4, with revenue expected to be at record high again, anything you would highlight at that gross margin line, that could be a headwind as compared to your prior gross margin peak of 48% that may not go away in the next couple of quarters?

Thank you, Sidney. Looking back to 2018, the current P&L and the run rate reflect the impact of trade friction between the U.S. and China, which accounts for about 30 to 40 basis points. This is part of the comparison to several years ago. Additionally, the fourth quarter will include the ESI revenue, which returned to the pre-acquisition levels in 2018, primarily associated with Light and Motion. This may not be a direct comparison. However, we anticipate the margin to be more normalized in the fourth quarter, as the unique items influencing Q3 are not expected to persist. We believe these will normalize in Q4, all related to the Light and Motion Division, as I mentioned earlier.

Great. Thanks very much.

You're welcome.

Our next question comes from Scott Graham with Rosenblatt. You may proceed with your question.

Good morning. Thank you for taking my question. Congratulations on a nice quarter. I was following up on an earlier question about your performance in memory, given your greater focus on NAND compared to DRAM. With DRAM potentially gaining ground in the memory market over the next 12 months, as expected by the trade, I am curious if this might impact your market outperformance. John, could you share your thoughts on this? Are there any plans to increase sales into the DRAM market as it improves?

Yes, Scott, I believe there's only a slight change between NAND and DRAM. We play a crucial role in certain process steps in VNAND, which has contributed to the over 110% growth in the first three quarters and in Power. However, the rest of our portfolio is quite evenly distributed between VNAND, DRAM, and foundry. Therefore, the significant performance is primarily driven by power in VNAND, while the overall portfolio remains fairly balanced between DRAM and NAND.

Okay. Got you. Thanks. That's very helpful. Another question is more of a market inquiry for you, John. There are many developments, including those surrounding Intel, 7-nanometer, ASML, and SMIC. Could you possibly summarize those comments and headlines, as well as share insights from your customers regarding WFE for next year? Are you anticipating a quarter or two of potential challenges in WFE based on what your customers are saying about these issues? Or is it more likely to remain steady? What feedback are you receiving?

Yes, Scott, so we don't guide out more than a quarter. But in general, when you hear the public statements of our customers and their customers, it's been fairly positive for 2021 relative to 2020. We don't have any reason to dispute that. As you see in our guidance for Q4, in our commentary, we see semi continuing to be strong in our Q4. And so we will certainly monitor that very closely. But longer term, there is a lot of static, lots of things going on. But we still go back to the fundamental belief that somebody has to make the chips. And therefore, WFE is going to grow through the cycles. And then when we supply to those companies that supply the tools for WFE, we just want to grow our share of that. And so whether it moves from one company to another or one country to another, longer term, I think we're not as concerned because of the differentiated product portfolio that we have.

Thank you for that. I agree. I do have one final question that I hope to squeeze in here. And that's really kind of off of commentary that we're hearing from others, both competitors and otherwise out there is that with the COVID cases rising, and the potential for there to maybe be some rollbacks here and there. I know we're much more cautious on that these days. But U.S., Europe, and I know you're not big in Europe, but Japan has been another outbreak there. I guess my question simply is, how much do you think, John, your business is affected by sort of on-site capacity? If you follow what I mean?

Yes. No, we certainly were affected by the first phase of COVID in terms of factories having to reduce capacity, some of our supplier factories having to shut down for a couple of weeks at a time and then coming back that only reduced capacity. Everything is kind of normalized now for our factories, our suppliers' factories, but it's certainly a concern of ours looking forward that if COVID starts becoming an issue again, either in our factory locations or our suppliers'. So it's certainly something we're watching very closely, Scott. I would say, though, that we, along with I'm sure most of the industry at least now it's not a surprise. We have processes in place. We know what to do. We know how to separate shifts, we know how to test, we know how to isolate. So at least those processes are not going to be something we're trying to figure out as we're going along. But it still can have an effect as certainly some of these areas see some very large shutdowns.

Okay. Thanks a lot.

Thanks, Scott.

Our next question comes from Patrick Ho with Stifel. You may proceed with your question.

Thank you very much and congrats on a nice quarter. John, maybe first off on the semiconductor end, can you describe any other additional Power Solutions wins? I think last quarter, you talked about getting into the conductor etch side space with high aspect ratio. Can you talk about any other types of, call it, application wins that you achieved with your OEM customers?

Yes, that's a great question, Patrick. We don't often discuss it, but deposition tools also rely on RF power, which is evolving into more complex types of RF power delivery. This represents a significant opportunity for us and contributes to our Power story. We have dielectric etch for VNAND and high aspect ratio, as well as conductor etch with some of our OEMs. I believe that deposition will become increasingly important as we enable those processes with various RF power solutions. This is another area for future growth. While it takes time, it's definitely a positive development for RF power in the semiconductor sector.

Great. That's helpful. And maybe as my follow-up question in terms of the advanced markets. You've talked about in the past, consumer electronics. We're starting to see at least from the device side, some signs of stabilization and a potential recovery. I guess, what's the trickle-down effect for your 'Light and Motion solutions' that target the consumer electronics market? And when would they potentially turn if the device markets start turning positive?

That's a great question, Patrick. We observed the usual cyclical pattern during the second quarter when we reported ESI flex revenue, reaching a peak at that time. As anticipated, there was a decline in the third quarter, which is a standard cycle. However, I would like to note that currently, we are beginning to see more inquiries than we would typically expect for the fourth quarter. Our regular customers are looking into potential new capacity in case they need to increase it. This suggests that there may be better sell-through of new smartphones, tablets, and wearables, which is a positive indication. It also hints at a potentially favorable setup for 2021.

Great. Thank you very much.

Thanks, Patrick.

Our next question comes from Krish Sankar with Cowen. You may proceed with your question.

Hi. Thanks for taking my question. I have two of them. First one, John, it looks like some of your U.S. semi cap customers have gotten a letter from the government to require a license to ship to SMIC. But since you also have Japanese, Korean and Chinese semi cap customers, I'm just kind of curious, from your vantage point, are you guys kind of agnostic to what happens between U.S. and China semi cap relations? Or do you think it eventually will catch up with your folks, too? Then I have a follow-up.

Well, I would first say, Krish, that we're following all the Government regulations with respect to ECCNs and restrictions on shipping to entities that are on that list. And right now, us, as well as our competitors, are allowed to ship to OEMs globally. And I wouldn't want to comment on whether that's going to continue or not. But right now, that is something that we're allowed to do. And if it changes, we'll certainly follow those guidelines.

I have a question regarding the Equipment and Solutions side, specifically the PCB business. With the rise of 5G in smartphones, I've noticed that your Equipment and Solutions revenue continues to be inconsistent. I’m curious if you anticipate a cyclical improvement at some point, or do you believe that due to the seasonality in consumer electronics, revenue may remain uneven over the next few quarters?

Yes, Krish, thanks. And I read your 5G phone reports, your smartphone build out, some reports are very useful. I would say that today, we still view it as cyclical. But as more and more consumer electronics need these laser processing tools, certainly flex as well as HDI drilling tools, you may potentially see more of a smoothing out because it's not just one cycle. For instance, you can even see it now where certain phone companies are not just releasing one type of phone in one season, they're actually releasing it in the spring, as well as in the fall, or the Christmas season. So that would certainly drive towards a less cyclical kind of industry. But that remains to be seen. But today, we still see it as the consumer electronics cycle.

Great. Thanks, John.

Thanks, Krish.

Our next question comes from Amanda Scarnati with Citi. You may proceed with your question.

Hi. Good morning. Just want to follow-up on SMIC. We've been hearing that they've been sort of stocking up on components and spare parts in anticipation of even more restrictions from the U.S. Government. Can you talk a little bit about any direct sales that you might have to SMIC? And if you're seeing sort of anything unusual happening there?

Hi, Amanda. It's difficult for us to determine. Our revenue from China overall, not just related to SMIC, is stronger than in the second quarter and has improved this year compared to last year. It's unclear how much of this is due to stocking versus actual needs. Most of our revenue to China likely goes through our OEMs, making it challenging for us to identify if it's specifically going to SMIC or another entity. I wouldn't be surprised if there is some cautious stocking, but we can't say for sure.

Okay. And then Lam on their earnings last week commented that they had to kind of pare down their earnings a little bit because of the restrictions by the U.S. Government. And we expect to see that from other U.S. suppliers as well. Are you seeing any sort of pullback in demand at the leading U.S. OEMs? Or are things just kind of continuing on in anticipation of strong WFE next year?

Yes, I listened to the Lam call and heard that feedback. My only comment, Amanda, is that our guidance for Q4 indicates we expect continued strength in the semiconductor sector. We cannot predict whether this will persist, and we do not provide guidance on that. However, as I mentioned earlier, many of our customers are anticipating a strong 2021 compared to 2020.

Great. Thank you.

Thank you.

Our next question comes from Jim Ricchiuti with Needham & Company. You may proceed with your question.

I have a couple of follow-up questions. Regarding the flex PCB drilling business, you mentioned increased inquiries from customers. With the improved smartphone shipments in Q3 and some significant launches, do you have any insight into the capacity utilization in this market? I'm curious about how you see the impact of these launches, which usually have a higher flex PCB content. When do you expect to see an increase in orders? Would that likely happen late in Q1?

Yes, Jim, it's a good question. So these inquiries are a little unexpected relative to the normal cycle. And to your point, which is a good one, is that some of these later, more recent phone launches are high-end ones that have a lot of flex content. And that's probably the reason why we're getting those inquiries. It probably really depends on whether they really need extra capacity in the short term, near term, like perhaps even within the quarter. But I would expect it's probably earlier in the year, 2021 that maybe we would have normally seen in previous years. In previous years, as you know, our Q2 quarter is usually the peak in terms of deliveries of these tools. And maybe we'll see a little bit of pull in there, but it's hard for us to tell now because they're just today just inquiries, Jim.

Okay. And then a follow-up question is just with respect to the non-semi-related portion of that Light and Motion business, you're seeing some nice recovery. You alluded to research, defense. I'm just wondering, was some of this improvement sequentially, potentially catch-up from some of the closings as related to COVID?

Potentially, Jim. However, I believe the growth in life and health sciences was primarily driven by COVID. There has been some catch-up due to the return of medical procedures that are considered discretionary. During the COVID period, these procedures were disrupted, but they have now resumed. Additionally, research has returned to normal levels, reflecting what we observed before COVID. These factors are the main drivers for the growth in the L&M advanced market on a quarter-over-quarter basis.

And you mentioned industrial automotive, my impression was that, that former Newport business had less exposure to those markets. Has that changed?

No. I think we still have less exposure there than consumer electronics, but we do have exposure there because we don't necessarily have the kilowatt fiber laser business, but we have a portfolio of products that go around the Workpiece that are used in that market as well. Got it. Thanks.

Thanks, Jim.

Our next question comes from Mark Miller with Benchmark. You may proceed with your question.

Congratulations on the quarter, another good quarter. Just was wondering, as advanced markets starting to show some rebound, if they continue to grow, how does that impact your gross margins? Does that lower your gross margin somewhat as advanced markets becomes larger?

Yes, Mark, it's Seth. So we look at the divisional levels, so we don't have the split by the advanced markets. Because I look at the visual piece, it's pretty fair to say that Light and Motion margins are above the corporate average. And L&M has sort of a higher proportion of advanced market. So, I would say it's probably slightly higher. If you look at kind of the L&M piece of the business, now E&S volumes, they have a big impact. And as I said before, our capacity is still being absorbed in the flex market. But the new flex tools have, again, good margin going forward as well. So I guess to kind of recap, it's probably a little bit better than the corporate average on a normalized basis but not substantially so.

You mentioned some design wins in optics. Can you give a little more color or break that down a little bit more, in terms of the design wins?

Yes, Mark, we've been investing in what we call our world-class optics and capex for a couple of years now, hiring talented process engineers to develop these processes. So these optics wins are with several customers. So you can imagine, lithography, inspection, normally those kinds of customers. But there are other customers who may be developing other types of optically-based tools that might be even attached to a vacuum chamber. And so, while it's still highly focused on lithography and metrology, specific OEMs, it is broadening to other kinds of customers as well.

Thank you.

Thanks, Mark.

Our next question comes from Weston Twigg with KeyBanc Capital. You may proceed with your question.

There are some good questions on power growth and triple-digit growth year-over-year sounds really big, but I honestly don't have a good handle on how much revenue this is contributing. And I was wondering if you could help us narrow down the band in terms of how big power is as a percentage of business.

Yes, Wes, if you look at kind of third-party data of market share, that's probably where you'd find it. It's hundreds of millions. So I'll leave you to go find that. But it is triple-digit that's integrating over the first three quarters of this year versus last year. And I would say it's not just reaching triple digit. It's significantly more, certainly in the Q3 time frame. So I'll leave it at that.

Okay. That's helpful. And then similarly, on PCBs, I'm not as familiar with that market. I know there's some seasonality. But as you look into Q4, would you expect, like, another double-digit percent sequential drop in PCB revenue that looks like what we've seen over the last couple of years. Is that what you would expect this year as well?

Yes, normally we would expect that kind of seasonality. However, we are seeing more inquiries regarding those tools. Some of these inquiries may turn into actual orders, and possibly within the quarter, influenced by smartphone demand. We are guiding towards the typical expected Q4 for E&S.

Okay. That's really helpful. Thank you.

Thanks, Wes.

Our next question comes from Joe Quatrochi with Wells Fargo. You may proceed with your question.

Yes. Thanks for taking my questions. On the Power business being up 110% year-to-date, is there any way you can parse that out, the growth? Obviously, the market has rebounded quite a bit from being flat-ish. What's the growth been from just the better market versus some share gains?

Well, I think it's a little complicated because, obviously, share gains can be where you're particularly strong. And if those markets grow like NAND has. But I think we know that we've gained share also in conductor etch. We believe we're gaining now some share and deposition as well. So there's both, Joe. And so the share gain, because you're in the right space, and that space is growing. And the share gain because you're just taking share in the spaces that are growing normally. So that's the way I would characterize our Power growth.

Okay. And then as a follow-up, you guys had good cash generation this quarter back to pre-ESI acquisition cash levels. So I mean, how do we think about what's the right level of cash that you need to run the business on a day-to-day basis?

Yes. So this is Seth. So I would say you're right. We have plenty of cash in the balance sheet exiting this quarter. We said earlier on when the COVID-19 pandemic hit, we would kind of hunker down and build cash to be relatively cautious. And obviously, we performed very well in the last couple of quarters. A lot of good effort around the company to kind of reduce that cash conversion cycle. I would say it's a little hard bright line, probably somewhere $400-million-plus would be plenty of cash to run the business. The reason I had that level in mind is there's a number of things we'd like to execute on a regular basis. We note some optionality to balance sheet. But we don't need $700 million sort of to run the business right now. It's a level probably some hundred million less than that, but there's really no bright line. That's how I kind of look at it at a high level.

Great. Thank you.

Yes.

Our next question comes from Paretosh Misra with Berenberg. You may proceed with your question.

Thanks. Good morning. I just wanted to go back to the Power revenue question earlier. And more generally, if you could give some more color on your current mix in the Vacuum and Analysis business, like what are the biggest pieces of power, I guess, vacuum reactive gases? Any color on that would be great.

Yes, Paretosh, this is John. So our Vacuum and Analysis business, power and plasma are big drivers, but also our portfolio of pressure and flow of vacuum valves, pressure control. And so together, they're all large components of our over $1 billion semi components business for vacuum. So we really don't split it out. But certainly, Power has been a big driver of the growth. But if you took Power out, the rest of the portfolio is also growing quite well. As Seth said, we're 61% year-over-year in semi. And as we said, Power is that 110% of it, of Power growing. But even if you factor that out, we're well over 50% and the rest of the portfolio as well.

Got it. And then as a quick follow-up, if I could go back to the comments about world-class optics. Any sense you could give us just how big that business is right now? Is it, like, $10 million to $20 million range or annual? Or is it already bigger than that?

I would say that our business in lithography, metrology types of OEM business is comfortably over $100 million. So it's much bigger than what you had just said.

Got it. Thanks, John.

Great. Thanks, Paretosh.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to John Lee for any further remarks.

Well, thank you for joining us today and for your interest in MKS. And we look forward to having you join us at our virtual Investor Day on December 10. Again, thank you very much, operator. You may close the call, please.

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.