Earnings Call Transcript - MKSI Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MKS Instruments Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. I would now like to introduce your host conference call Mr. Dave Ryzhik. You may begin.

Dave Ryzhik, Vice President of Investor Relations

Good morning, everyone. I am Dave 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 fourth quarter and full year 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. 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.

John Lee, President and Chief Executive Officer

Thanks, David. Good morning everyone, and thank you for joining us today. Before I discuss our quarterly results and current market trends, I'd like to take a moment to reflect on the past year. 2020 was full of challenges for all of us both personally and professionally. But for MKS, I can best characterize 2020 with the following three words: resilience, opportunity, and growth. Let me start with resilience. Our foremost priority when the COVID-19 pandemic started was the safety and wellbeing of our global workforce, and it continues to be our top priority. We responded quickly at the onset of the pandemic and implemented a number of safety precautions for our employees while also shifting to a work-from-home environment for a significant portion of our workforce. We also remain steadfast in delivering on the needs of our customers during this challenging time. Our team worked tirelessly to ensure continuity of operations by swiftly responding to disruptions in our factories and supply chain partners while adhering to stringent safety protocols. Now let me discuss what I mean by opportunity. The disruptions we faced did not interrupt our cadence of innovation, and this allowed us to take advantage of new opportunities in the markets we serve. In 2020, we were awarded 170 new patents. We also grew new product releases by 48% year-over-year and secured a number of important design wins for both our semiconductor and advanced markets. And I am pleased to announce for the second year in a row that we are a finalist for an SPIE Prism Award this time for our Ophir beamsplitter for high power lasers. But we also view opportunities through another lens: employee development, diversity, equity, and inclusion. In 2020, we developed new leadership programs and rolled out a new diversity training program for over 120 of our top leaders. We also embarked on several other initiatives to drive greater diversity in hiring and we are already seeing these results. And finally, let me discuss what I mean by growth. In 2020, we grew revenue by 23%. In particular, we grew semiconductor revenue by 49% year-over-year. Non-GAAP EPS and free cash flow grew by 64% and 137% year-over-year, respectively. Now let's discuss our fourth quarter results in more detail. We delivered revenue of $616 million and non-GAAP net earnings per diluted share of $2.34, both above the high end of our guidance range and both quarterly records. Sales for our semiconductor market further strengthened in the fourth quarter, growing 9% sequentially and 45% year-over-year. As we discussed at our Analyst Day last month, our industry-leading portfolio of critical subsystems has allowed us to gain insights into market inflections to drive new areas of innovation that accelerate our customers’ roadmaps. This has culminated into a sustainable competitive advantage, enabling us to outperform WFE organically by 200 basis points over the past decade. During the past several quarters, we've discussed the strong demand for our power solutions products and the fourth quarter was no exception, as revenue reached another record. We continue to lead in dielectric edge applications and remain focused on leveraging our unique capabilities to capture share and conductor edge, as well as new opportunities in deposition. But our power solutions business was just one component of our strong fourth quarter results, as we achieved robust sequential and year-over-year growth across the remainder of our semiconductor portfolio. In our pressure business, we benefited from strong demand across a wide range of applications and we continue to execute on design wins with multiple OEMs. The superior performance of our capacitance manometers in advanced applications requiring heated pressure measurement has been a key advantage. We are encouraged with the strength we saw in our valves business, and our plasma reactive gas portfolio delivered strong sequential growth in the fourth quarter. We continue to see healthy design win activity for our dissolved ozone and dissolved ammonia systems in wet clean applications with particular strength in leading edge foundry customers. As we look ahead at the first quarter of 2021, we expect revenue in our semiconductor market to be consistent to slightly down when compared to our outstanding fourth quarter levels. Demand trends remain strong and we expect to deliver robust year-over-year growth in the first quarter of 2021. In our advanced markets, we delivered record fourth quarter revenue growing 16% sequentially to 17% year-over-year, marking a return to year-over-year organic growth for the first time since the third quarter of 2018. Our strong results were underpinned by our sequential improvement in our research market and more notably an acceleration in demand from advanced electronics manufacturing. As we highlighted at our Analyst Day, we expect advanced electronic manufacturing to be a key growth driver for our advanced markets over the long term. The secular trends of miniaturization, complexity, and new materials are driving the need for precision laser processing in PCB, solar, display, and electronic component manufacturing, where we are uniquely positioned with our around-the-work-piece offering of lasers, optics, photonics, motion, and systems solutions. We saw strong demand for our flex PCB via drilling systems in the fourth quarter, which is typically a seasonal trough. As we've indicated on prior calls, we've benefited not just from capacity additions but also from our customers’ transitions to new flex PCB designs where our state-of-the-art CapStone tool is a key enabler. In addition, we have seen an improvement in demand for our multi-layer ceramic capacitor test systems, where we are a leading provider to the MLCC manufacturing ecosystem. We're also very encouraged with the market adoption of our high-density interconnect via drilling tool. And as we announced last month, we received our second multi-unit order for high-volume manufacturing, this one from an important HDI PCB manufacturer in Taiwan. We remain focused on executing our playbook of converting beta systems to design wins. Needless to say, I am very pleased with how our equipment and solutions division heads into 2021, which capped off a year marked by strong revenue growth and considerable progress in our strategy to capture share in the sizable HDI PCB market, and we are entering 2021 with strong momentum. In closing, we are encouraged by the continued recovery in our advanced markets and we expect revenue in the first quarter to be consistent to slightly up compared to fourth quarter levels, as improving demand trends in advanced electronics are expected to continue into the first quarter. And now, I'd like to turn the call over to Seth.

Seth Bagshaw, Senior Vice President and Chief Financial Officer

Thank you, John. I will cover our fourth quarter and full year 2020 results, then provide additional detail and guidance for the first quarter of 2021. Sales for the fourth quarter were a record $660 million, up 12% sequentially, up 32% year-over-year, and above the high end of our guidance range. Our performance reflects strong demand in our semiconductor market and continued rebound in our advanced markets. In the fourth quarter, semiconductor sales set another record at $393 million, up 9% sequentially and up 45% year-over-year, reflecting our broad exposure across memory, foundry, and logic applications. Our power solutions portfolio continues to outperform the underlying power market, and we're pleased to report another quarter of record revenue. As we highlighted at our Analyst Day last month, our advanced control algorithms, modularity, and SaaS development cycles are key differentiators of our power solutions and will continue to create new opportunities to accelerate our customer roadmaps. For the fourth quarter, sales for our advanced markets were a record $267 million, up 16% sequentially and up 17% year-over-year, led by strong growth in advanced electronics applications and continued recovery in our research market. As John said, we saw strong early cycle demand for our flex PCB via drilling systems, driven in large part by both capacity needs and essential technology transitions for 5G smartphones and other devices. We estimate the amount of flexible PCB content in high-end 5G smartphones is, on average, 30% higher compared to a high-end 4G phone. Moreover, continuous flexible PCB design changes are driving demand for our leading-edge via drilling solutions. We’re also pleased to see recurring demand for our MLCC test systems. As a reminder, we offer multiple MLCC test system solutions in the market addressing two main categories. The first is ultra-small form factor MLCCs, which are mainly used for smartphones and other consumer electronics. The second are large chip MLCCs, which are mainly used in automotive and infrastructure applications. We saw strength in both of these categories in the fourth quarter. We continue to execute on our HDI strategy and received our second multi-unit order for a Geode HDI system in the fourth quarter. We're very pleased with the increasing market acceptance of our HDI tool and believe this is a validation of our cost of ownership advantage, which includes higher throughput, smaller footprints, lighter weight, and improved serviceability. With regards to our first multi-unit order announced last September, we successfully completed installation and received customer acceptance on all units. These units are now fully deployed in high-volume manufacturing. As highlighted at our Analyst Day last month, our advanced electronics story extends beyond PCB solutions but also encompasses solar, display, and electronic component applications, and we encourage with demand trends we've seen in all these applications. For the quarter, the revenue split between our semiconductor and advanced markets was 60% and 40%, respectively. Fourth-quarter non-GAAP gross margin was 45.7%, above the midpoint of guidance and up 240 basis points year-over-year. Non-GAAP operating expenses for the fourth quarter were $138 million and reflect higher variable compensation due to our strong financial performance. Fourth-quarter non-GAAP operating margin was 24.7%, a sequential increase of 160 basis points and up to 630 basis points year-over-year, reflecting strong financial leverage in our operating model. Non-GAAP net interest expense for the fourth quarter was $6 million and our non-GAAP tax rate was approximately 18%. Non-GAAP net earnings for the fourth quarter were a record $130 million and a record $2.34 per diluted share. Moving on to full year results. Sales were a record $2.3 billion, up 23% year-over-year with semiconductor sales up 49% to $1.4 billion. 2020 was not only a record year for our power solutions business, but excluding power, the remainder of our combined semiconductor business also delivered record results. This record performance underscores the increasing importance of our surround-the-chamber strategy and our critical enabler across several key technology inflections. In 2020, we believe we outperformed our peers across multiple market segments. In advanced markets, revenue declined slightly or 3% largely due to COVID-19 related headwinds in the first half of the year. However, we recovered strong in the second half of 2020 growing 6% year-over-year. With sequential quarterly growth in the third and fourth quarters, we’re starting 2021 with improving demand trends in advanced electronics applications, which are a key driver of long-term growth in our advanced markets. The revenue split for the year between our semiconductor and advanced markets was 59% and 41%, respectively. Non-GAAP gross margin was 45.2%, up from 44.1% in 2019 and non-GAAP operating margin increased 450 basis points to 22.6%. In 2020, we recorded non-GAAP net earnings of $411 million or $7.43 per diluted share, which were both up more than 60% from 2019. Exiting the fourth quarter, we maintained a strong balance sheet and liquidity position with cash and short-term investments of $836 million and $100 million of incremental borrowing capacity under an asset-based line of credit subject to certain borrowing base requirements. With a term loan principal balance of $833 million, we are pleased to announce that we have exited the fourth quarter in a net cash position, less than 24 months post-acquisition of ESI. In terms of working capital, day sales outstanding were 54 days at the end of the fourth quarter compared to 56 days at the end of the third quarter. Inventory turns were 2.9 times in the fourth quarter compared to 2.6 times in the third quarter. We remain focused on improving our cash conversion cycle. In the fourth quarter, operating cash flow and free cash flow were $147 million and $122 million respectively. For the year, operating cash flow and free cash flow were $513 million and $428 million respectively. Both operating and free cash flow were record results and more than doubled from 2019. Consistent with prior quarters, we had a dividend payment of $11 million or $0.20 per share. I'll now turn to our first quarter outlook. Based on current business levels, we estimate first quarter 2021 revenue of $650 million, plus or minus $25 million. Based on anticipated product mix and revenue levels, we estimate first-quarter non-GAAP gross margin of 45% plus or minus 1 percentage point and non-GAAP operating expenses of $140 million plus or minus $4 million. For the first quarter, non-GAAP net interest expense expected to be approximately $6 million and a non-GAAP tax rate expected to be approximately 18%. Given these assumptions, we expect first quarter non-GAAP net earnings of $2.16 per diluted share plus or minus $0.20. I’d like to now turn the call back to the operator for Q&A.

Operator, Operator

Our first question comes from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti, Analyst

A couple of questions on the E&S business. I'm wondering if there's any way you can elaborate on the strength you saw in the business versus Q3. As it relates to how much of the demand you would attribute to the better smartphone cycle, the type of recovery that you're seeing in the MLCC portion of the business, and maybe to the extent to which Geode was a contributor in the quarter?

John Lee, President and Chief Executive Officer

I think Geode was a contributor but not a large contributor. So I think in general, we're attributing both the MLCC and the flex upside to a stronger smartphone cycle that is a little earlier than is typical. So it's really, we believe, driven mostly by the smartphone market.

Jim Ricchiuti, Analyst

John, I wanted to ask you about the recent significant M&A developments in the laser photonics market. How do you see this affecting MKS in terms of potential further consolidation in the market or its implications for the multiples related to any M&A opportunities you might be considering in this area?

John Lee, President and Chief Executive Officer

Well, certainly, we've talked about one of our strategies for growth is in M&A. We have targets both in advanced markets, as you know, as well as semi. There are just more targets in advanced markets. So I think the photonics industry does have more room for consolidation. I think that that will occur. And as you can imagine, we're certainly going to be a participant in that.

Operator, Operator

Our next question comes from Paretosh Misra with Berenberg.

Paretosh Misra, Analyst

So we've been hearing about the chip shortage, particularly at several automotive producers. So just curious, how is MKS positioned to help customers increase volumes, are you seeing any incremental demand because of that shortage?

John Lee, President and Chief Executive Officer

I can't say we can put a finger on anything specific with respect to the published shortages and automotive chips. We certainly sell a lot of service and spare parts to the older fabs that are the ones building a lot of those kinds of automotive chips. So I don't think we can really tell if a lot of that is going to the automotive manufacturers.

Paretosh Misra, Analyst

And then just as a follow-up on your laser business, some of the fiber laser producers are seeing increased demand, primarily from manufacturing. I was just curious, are you seeing some of that too? I know you don't have that much exposure to the fiber lasers mostly on the pulse side. But just curious, what are you seeing on the demand side?

John Lee, President and Chief Executive Officer

Broadly, Paretosh, I think we do see industrials as well as advanced electronics manufacturing increasing. You can see that in our numbers in Q4 and our guidance in Q1. So we see a little bit of that as well. As you say, we don't make the fiber lasers but we do make the rest of the surround the world piece diagnostics that go around it. So I would say we're seeing something similar to what some of those participants are saying they're seeing in the fiber laser market.

Operator, Operator

The next question comes from Patrick Ho with Stifel.

Patrick Ho, Analyst

John, maybe first off on the semiconductor side of things. You've talked about share gains on the power for your semi business. Can you just discuss some of the emerging opportunities on the optics side, particularly as it relates to litho and process control? Do you expect to outperform the industry growth rates as you gain more share in that segment?

John Lee, President and Chief Executive Officer

That's certainly one of our strategic objectives, as we talked about at Analyst Day. Our investments in engineering and CapEx will allow us to address more of the optics market for lithography, inspection, as well as outside semi. We see an opportunity, and as you know, we invest in that inflection. It's a multi-year plan, and we're pretty positive about the opportunity there because our share there is lower than in our vacuum chamber type of businesses.

Patrick Ho, Analyst

And maybe as my follow-up question for Seth, you've actually delivered long working capital numbers in an environment where logistics and supply chain is tight across the ecosystem. One, how are you looking at the supply chain today? Are you facing any shortages? And two, what are you able to do to maintain these pretty strong working capital numbers despite the high demand, particularly in the semi side of things?

Seth Bagshaw, Senior Vice President and Chief Financial Officer

So I would say on the supply side, we have a normal ramp environment, obviously looking at parts that we work on supply chain. I think it's a typical ramp environment. You're always chasing a few parts, which is quite typical. The operations team, you can see our numbers have been, just a really fantastic job navigating that in this environment, especially going back when COVID-19 hit in Q1 and Q2. So I put that in a kind of novel category and we're managing that pretty well. In terms of working capital, we mentioned a couple of calls, I think the Analyst Day as well, is we're really focused on cash conversion. Obviously, we've got a very strong operating model. The cash conversion opportunities we're seeing is working down receivables. We did that starting back again in early 2020 and maintain momentum going forward. We'll do the same thing on being more efficient on inventory levels and velocity of turns and so forth. So that will be a little bit of a journey for us because we have a long list of parts. One of our strengths, again, is to respond quickly to our customer base. So we always have a little bit probably higher than average inventory levels, but we're definitely looking at that as an opportunity going forward. So it's a holistic approach. Obviously, the operating model is in good shape. We'll continue to drive that improvement over the long term. And now cash conversion is a focus for us as well. We're seeing impact, obviously, this year in the record free cash flow and operating cash results. We believe we can do better going forward; that's our goal.

Operator, Operator

Our next question comes from Krish Sankar with Cowen.

Unidentified Analyst, Analyst

This is Steven calling on behalf of Krish. John, my first question for you. In terms of the semis business, I was wondering if you could provide some more color on the March quarter guidance for the semis business. Any color on the components that will be driving that would be helpful? And also, if you'd look a little further out, just one of your good customers last night talked about a front half loaded WFE year. I was wondering if the trends you're seeing are consistent with that and if you see any other factors that might lead to differentiation there?

John Lee, President and Chief Executive Officer

So we're seeing a strong Q1 for sure. The midpoint of the guide is $650 million, slightly lower than our $660 million that we achieved in Q4. Q4 was really quite a record quarter. So we see a very strong semi quarter in Q1. We don't guide out more than Q1, but I would say visibility is okay in the first half. And I think that in the second half, I don't think anyone really knows; there are a lot of things that could drive it better or worse. So I think we're strongly positive about semi in Q1. The first half is looking okay, but we wouldn't want to guide beyond the first quarter.

Unidentified Analyst, Analyst

And maybe one quick one for Seth. Seth, in terms of the gross margin guidance, can you talk a little bit about the puts and takes for the high and low end of the gross margin guidance?

Seth Bagshaw, Senior Vice President and Chief Financial Officer

Our published model indicates a 50% variable gross margin, which we successfully achieved in 2020, especially in the fourth quarter. In the first quarter, there’s a slight mix dynamic. The L&M division sold products in the fourth quarter and we expect it to continue in the first quarter, but performance is slightly below the corporate average. It's likely just below that 5% flow through if you consider the midpoint, though it's not too far from our model. We have a range for the margin as well. Additionally, we are effectively managing challenges related to COVID, including higher freight costs. We are practicing social distancing within the factory to ensure everyone adheres to health protocols, which has slightly affected efficiencies, but our team is handling it well. The main takeaway is that there's been a minor mix issue in the L&M group during the first quarter. As we have provided a range for guidance, I would consider that range a thoughtful estimate for us.

Operator, Operator

Next question comes from Sidney Ho with Deutsche Bank.

Jeff Rand, Analyst

This is Jeff Rand on for Sidney. After growing your semis business almost 50% in 2020, do you believe this business could still outgrow the overall WFE market in 2021, or do you expect some destocking to take place?

John Lee, President and Chief Executive Officer

Typically, for suppliers in this part of the food chain of critical subsystems, we tend to overperform during the ramps and we tend to underperform when the ramps turn. That's really a question of when you think the thing will turn. I know there's a lot of talk about people trying to call the peak right now, which we're not going to. I would say, though, that we're still very confident in our long-term model, as we talked about at Analyst Day, which is our historic 200 basis points above WFE CAGR over the long term. That model is still very much intact.

Jeff Rand, Analyst

And just as my follow-up, gross margins were close to the midpoint of guidance, but on the strong revenue beat. Can you discuss how you think about the opportunity for margin expansion as you grow revenue over time?

Seth Bagshaw, Senior Vice President and Chief Financial Officer

So clearly, volume is the bigger driver. Again, a 5% flow through is our model and well intact. So that's a bigger driver going forward. Obviously, I think when the COVID-19 pandemic eases up, we'll have a little bit of tailwind there on margins just because the protocols will be relaxed a little bit, is our belief. We do have some trade friction, which is in the run rate. If that were to move differently going forward, that would be slightly helpful as well. Long term, we do look at product development activities and our roadmap is to deliver products in the long term that have higher value for our customers, which should impact gross margin. The cadence we have across all three divisions on a regular basis and that's sort of the ongoing process, which will help margins going forward. We do have a team, a widespread team in place to look at profitability improvement. That's something we do regularly. There are multiple levers that we're currently pulling. We're working hard on all those right now. But in the short term, I'd tell investors, the margin impact is really that 5% flow through on revenue. That's how I look at the margin growth going forward, the biggest lever.

Operator, Operator

Our next question comes from Mark Miller with The Benchmark Company.

Mark Miller, Analyst

I was just wondering in terms of design wins, any notable design wins beside the power area?

John Lee, President and Chief Executive Officer

We have several in our portfolio of semiconductor and other products. We have pressure, flow, valves, as well as remote plasma source for reactive gases. So there are multiple design wins there. As we talked about in 2020, we released 48% more products than we did in 2019, even during a remote work protocol for many of the engineering teams. Not just in power, but the whole portfolio. We also had design wins in our world-class optics efforts as well as in lasers. We're pretty happy with our design win activities across the portfolio. We talked about ESI in terms of HDI. We've certainly also maintained share in our leading flex drilling tool as well.

Mark Miller, Analyst

And the laser design wins, were these nanosecond lasers?

John Lee, President and Chief Executive Officer

Both nanosecond and picosecond.

Mark Miller, Analyst

Final question, margins were up significantly sequentially and year-over-year. Besides higher sales, what was driving it? Was it a mix improvement?

John Lee, President and Chief Executive Officer

No, Mark, I think volume is definitely, again, a bigger driver. If you look at our cost structure, we do a pretty good job maintaining our disciplined cost structure in that ramp environment. Higher variable compensation in 2020, obviously, because of record results. That's kind of what we did in 2020 with the volume piece, maintaining good cost controls and strong execution.

Operator, Operator

Next question comes from Joe Quatrochi with Wells Fargo.

Joe Quatrochi, Analyst

On the semi side, some of your customers have been continuing to increase inventory to support the stronger demand. But they've also been talking about building some buffer inventory just given the supply chain disruptions. I was curious, do you have any kind of visibility into that across your customer base?

John Lee, President and Chief Executive Officer

I don't think we have a broad view of it. We certainly have certain product lines and at certain customers where they've asked us to do that, and we have done that because that's their plan. So it's really not a broad-based thing, but customer specific or product specific.

Joe Quatrochi, Analyst

And then on the strong E&S results this quarter, was that reflective of any of the 80 unit Capstone order that you got early in December, or is that still kind of more ahead of us in the guide?

John Lee, President and Chief Executive Officer

I would say that that 80 unit order, the majority of it was not shipped in Q4.

Operator, Operator

Our next question comes from Tom Diffely with D.A. Davidson.

Tom Diffely, Analyst

John, I was hoping to get a little bit more on the microelectronics part of the business. And I know it's come back a bit recently, but what is your outlook for the year? Do you think your growth in that industry or that sector comes from share gains, or is it going to be recovery in the space that's going to be the biggest driver?

John Lee, President and Chief Executive Officer

I think the majority is recovery in the space for sure. But as you know, our HDI momentum is good now. We are starting from a small base, so that's why my answer is that the recovery is probably from the larger flex and MLCC markets where we already have established leadership. We hope that HDI will continue to accelerate and at some point, it will be both.

Tom Diffely, Analyst

And does HDI run on a similar cycle, or is it a little bit off cycle versus the rest of the business?

John Lee, President and Chief Executive Officer

I think in general, it does run in a similar cycle. But HDI boards, as you know, are broader in terms of applications. They're not just tied to smartphones. Flex is still very tied to the iPhone and Samsung type phone form factors. It's also broadening for the use of flex, but HDI is broader. It has a broader base of different kinds of applications.

Tom Diffely, Analyst

And then, Seth, when you look at the tax rate, it looks like it's edging up a little bit here. Is there anything to read into that?

Seth Bagshaw, Senior Vice President and Chief Financial Officer

No, Tom, we maintain an 18% guidance. That’s our perspective for 2021. In the fourth quarter, it was around 17.5%, which aligns with the 17% guideline. It’s definitely in that range. The variation is primarily due to the geographic mix of income. That's the only factor affecting the tax rate. For our internal modeling, we are using 18% for 2021.

Operator, Operator

Our next question comes from Amanda Scarnati with Citi.

Amanda Scarnati, Analyst

The first question I have is on the advanced market side of the business. It looks like it's sort of accelerating off of the trough here. Is that the way to look at it, or is it more just sort of one-off ordering that you saw in the December quarter to drive that strong sequential growth?

John Lee, President and Chief Executive Officer

It's the broader order patterns from multiple subsegments, most notably advanced electronics. I don't believe it's a one-off quarter kind of event. As we guided in Q1, and as we said in the script, we expect to have even stronger Q1 in advanced markets.

Amanda Scarnati, Analyst

And then on the HDI order that you saw in the quarter. Remember last quarter, you talked about having some new inquiries that were sort of unexpected. Was this order driven off of that, or is this something in addition to sort of the inquiries that you were seeing earlier in the year?

John Lee, President and Chief Executive Officer

Our reference to inquiries coming in a little earlier than we thought was really more about flex. Then you saw our Q4 being a lot higher than normal seasonality. So it was really driven by flex those inquiries.

Operator, Operator

Our next question comes from James Ricchiuti with Needham Company.

James Ricchiuti, Analyst

I just wanted to go back to the L&M business, particularly the non-semi portion of that business. I'm wondering where would you say we are with respect to pre-pandemic levels of demand in some of the major verticals?

John Lee, President and Chief Executive Officer

I think we still have the trade friction headwinds. So that was before the pandemic and then the pandemic added even more headwinds. The pandemic headwinds are kind of gone now. The trade headwinds are still there, and things hopefully will normalize over time. That's how we're viewing this final return to growth, organic growth.

James Ricchiuti, Analyst

And John, on the E&S side of the business, clearly, a little change here in the seasonal patterns of demand. I am wondering how we should think of that flex demand, the flex drilling demand as it relates to the normal seasonality you see in the business? And then what's the outlook for this recovery in the MLCC business? What are you hearing from some of the customers there? Is that near-term outlook still pretty strong?

John Lee, President and Chief Executive Officer

Yes. MLCC, near term, it does still seem to be strong. It seems to be strong; it has been strong, and we believe it will continue to be strong for at least another quarter as far as we can see. The seasonal pull-in, if you will, I think your question is, is the flex a pull-in or is it just additive. Because of the bookings and activities we see in Q1 and Q2, that's the normal activity and we still see that. Q4 seems to be an additive quarter to what is normally a Q1, Q2 high quarters for the E&S Flex business.

Operator, Operator

Our next question is a follow-up question from Tom Diffely with D.A. Davidson.

Tom Diffely, Analyst

Just a quick clarification. John, did you say you had over 200 patents issued in the year?

John Lee, President and Chief Executive Officer

170, Tom.

Tom Diffely, Analyst

And then what segments are those concentrated in?

John Lee, President and Chief Executive Officer

It's pretty broad. We have so many products. We have a fair number of pressure products, valve products, remote plasma source products, and power products. It's really pretty broad-based. We have a good patent process in place to evaluate whether things are worth patenting or not, and that goes across all the divisions. E&S has some patents, too, but those are really fewer in number because those are mostly system integration type of ideas.

Tom Diffely, Analyst

And maybe just on that, when you look at your R&D spending for the upcoming year, are there particular focuses that you have? Or are you going to be pretty broad-based across all your markets spending R&D as well?

John Lee, President and Chief Executive Officer

No, I think we've talked about it in the past. We are very targeted in terms of where we would put our R&D dollars. We always look at areas for growth, opportunities for growth. We will invest in all products appropriately, but the areas where we are investing for future growth are power, world-class optics, to address that, lasers, and HDI.

Seth Bagshaw, Senior Vice President and Chief Financial Officer

I'm not providing guidance for the full year, but internally, we are primarily focusing on R&D spending in 2021. Most of our increases in operating expenses will be directed towards R&D initiatives. We definitely see significant opportunities in that area.

Operator, Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

Dave Ryzhik, Vice President of Investor Relations

Thank you, Kevin, and thank you all for joining us today and for your interest in MKS. Operator, you may close the call.

Operator, Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.