Qnity Electronics, Inc. Q1 FY2026 Earnings Call

Good morning, and welcome to the Qnity First Quarter 2026 Conference and Webcast Call. I will now turn the call over to Miller, Vice President of Global Communications. You may begin.

Thank you, and welcome to our first quarter 2026 earnings call. I'm joined by Jon Kemp, Qnity's Chief Executive Officer; and Mike Goss, Qnity's Interim Chief Financial Officer. Earlier today, we issued our earnings release along with the supplemental slide presentation, which can be found on our Investor Relations website. Before we begin, I'd like to remind you that today's discussion will include some forward-looking statements. These statements represent our best view of predictions and expectations for the future, but numerous risks and uncertainties may cause actual results to differ. Please refer to our earnings release and SEC filings for a discussion of these risks. We'll also be discussing certain non-GAAP financial measures, and I encourage you to read our earnings materials for information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure. And now it's my pleasure to turn it over to Jon.

Thank you for joining us this morning. Our strong performance this quarter demonstrates how Qnity creates value. First, through a powerful integrated portfolio. Second, a differentiated ability to innovate alongside our customers' road maps. And third, leadership in advanced materials that are foundational to the exponential growth in AI and emerging technologies. For decades, Moore's Law has been the driving force behind technological advancement in the semiconductor industry. Innovation meant shrink: smarter transistors and higher density to improve performance and power. Now those gains are increasingly constrained by physical limits. Shrink built the last era. Stack will define the next. That means even while shrink remains important, we're moving from 2D design to 3D architectures, stacking chips to unlock the next frontier of computing. That shift from flat to vertical elevates the importance of materials, integration and reliability and, ultimately, redefines where value and leadership are created. This inflection plays directly to Qnity's strengths and how our business segments work together to power a stack. In semiconductor technologies, customers rely on our materials to smooth, shape and precisely engineer surfaces at the wafer and device level. This is the foundation of performance, yield and reliability. As AI investments accelerate, stacking creates increasingly complex advanced packages and systems, with a multiplier in both process steps and material intensity for every additional layer. And the challenge shifts from individual steps at the chip level to managing integration at scale. That's where our Interconnect Solutions business segment, built on semiconductor work, addresses system-level constraints like power efficiency, heat management, signal integrity and long-term reliability, all while capturing more of our content as stacks grow taller. Together, Qnity brings these strengths into one differentiated platform, helping customers build scale and operate next-generation computing platforms. With these unique capabilities, supported by our local-for-local model that keeps us closely connected to customers around the world, Qnity is well-positioned as the partner of choice for many of the industry's leading fabricators and OEMs pioneering next-generation technology. This advantaged position reinforces our confidence in delivering sustainable long-term value for our shareholders. That long-term confidence is reflected in our near-term execution. Let's turn to our first quarter results, where we delivered our eighth consecutive quarter of strong profitable organic growth. Organic sales increased by 17% versus 2025 with double-digit growth across both segments. Adjusted operating EBITDA increased by 22%, and adjusted earnings per share grew by 33%. These results clearly reflect the ongoing momentum from AI-exposed end markets and next-generation technologies, along with our ability to drive strong operating leverage. In Semiconductor Technologies, we grew organic sales 12% year-over-year, driven mostly by advanced nodes, led by advanced logic and high-bandwidth memory. We also benefited from ongoing improvements in mature nodes and NAND. Across the board, fab utilization rates continue to improve in line with our expectations. As wafer mix continues to shift toward the leading edge with more advanced nodes, we're well-positioned for continued growth, driven primarily by increasing content per wafer. Higher node complexity brings more CMP process steps. Incremental demand for our most advanced cleaning requires increasingly intricate lithography patterning. Volumes at 3-nanometer continue to scale, and we're starting to see meaningful activity at 2-nanometer. Beyond this, we're increasingly excited about angstrom-era nodes like 16, 14 and 10, which is the primary focus of our R&D engagement with customers and keeps us tightly aligned to their road maps. In Interconnect Solutions, we had an exceptional quarter with organic sales growing 22% year-over-year, driven by content and share gains in Advanced Packaging and Interconnect and thermal management. Advanced Packaging is expected to be a core growth driver for years to come, as the move from shrink to stack accelerates. As I mentioned earlier, more sophisticated architectures mean larger package sizes, higher layer counts and more of our content in every device. In Advanced Interconnects, we're winning new business with AI PCB fabs for the leading hyperscalers and premium smartphone OEMs, where signal integrity and reliability requirements continue to rise. As data center demand accelerates, managing heat is a critical objective. Our industry-leading thermal management portfolio is designed to remove heat across the entire system, supporting increasing content and higher device performance. Our growth momentum is a testament to the depth of our customer relationships and the strength of our innovation engine. We're in a strong process-of-record position across both segments, due to the investments we're making in R&D and innovation, giving us visibility into our growth potential over the next few years. Built on decades of partnership, we've earned our customers' trust and with it comes a clear mandate to innovate and to move fast because, in this industry, that's what it takes to win. During the quarter, we underscored that trust through several key announcements, including a new collaboration with NVIDIA, focused on advancing materials research and development for next-gen AI, high-performance computing and Advanced Packaging. By combining our materials expertise with NVIDIA's modeling and simulation capabilities, we're working to accelerate development and improve manufacturing capabilities. That same commitment to collaboration and execution is reflected in our inclusion in Apple's American manufacturing program, recognizing our role as a long-term trusted partner. To support customer road maps and supply ramps for the most advanced chips, we continue to execute our capital allocation strategy to further bolster manufacturing capacity and strengthen our local-for-local operating model. In the U.S. we expanded our footprint with the March opening of a 385,000 square foot facility in Delaware. And in Taiwan, we announced a new state-of-the-art site with advanced production, clean rooms, warehousing and R&D labs scheduled to be fully operational in early 2027. These investments significantly expand our manufacturing capacity for critical CMP materials, strengthen our operational agility, ensure global and regional capacity, and advance collaborative innovation with customers. Before I hand things over to Mike, I want to touch on end market demand and the broader macro environment. Customers remain highly focused on supply chain resilience at a time when wafer capacity remains tight. As customers allocate capacity to the highest value applications, our portfolio mix is increasingly moving beyond consumer electronics to attractive high-value applications like data centers, autonomous driving and aerospace and defense. And while there's been considerable attention on the impact of memory pricing on demand for devices like smartphones and PCs, our results this quarter demonstrate we aren't seeing a material impact for two important reasons. First, our exposure is primarily to premium devices, which tend to be more resilient. And second, AI-led infrastructure growth is more than offsetting any softness in consumer electronics. Whether chips are going to data centers, satellites, or smartphones, we're well-positioned to pick up that demand given the depth and breadth of our portfolio. With that, I'll turn it over to our interim CFO, Mike Goss, to discuss our financial results and provide an update on our full-year guidance.

Thanks, Jon, and good morning, everyone. We had an excellent start to the year with first quarter net sales of $1.3 billion, up 18% year-over-year, and 11% sequentially. On an organic basis, sales improved 17% versus the same period last year. Adjusted operating EBITDA was $411 million, up 22% year-over-year. Adjusted operating EBITDA margin expanded more than 125 basis points versus the same period last year to 31.3%. Adjusted EPS for the quarter increased 33% to $1.08. This was a record quarter for Qnity, driven by continued momentum in our AI-linked businesses and strong execution by our team. We're very pleased with the performance, which reflects a combination of strong volumes, operating leverage and favorable mix. Let me provide a bit more detail on how each business segment performed during the quarter. Semiconductor Technologies performed in line with our expectations with net sales of $722 million, with year-over-year organic sales growth of 12%, led by demand for advanced logic and HBM chips. We saw broad-based strength across several product lines and particularly strong gains in CMP consumables. First quarter was strengthened by $20 million of inventory restocking, particularly in mature nodes following customers' careful inventory management in the fourth quarter. This pattern was similar to what we observed in the first quarter of 2025. Our adjusted operating EBITDA margin in the segment was 36.4%, up 130 basis points sequentially from the fourth quarter, driven by improved manufacturing efficiencies and favorable product mix. In Interconnect Solutions, impressive execution delivered net sales of $593 million with organic growth of 22%, led again by Advanced Packaging and Interconnects and Thermal Management. Sales in these core areas grew more than 50% year-over-year as we capitalized on demand tailwinds from data centers and benefited ramps on shorter-cycle EOR wins from last year. Adjusted operating EBITDA margin for Interconnect Solutions was 28.5%, an improvement of 280 basis points sequentially. This was driven by strong operating leverage on higher volumes and favorable mix. In line with our expectations for the quarter, we generated adjusted free cash flow of $28 million. This reflects strong operating cash flow, partially offset by annual variable compensation. CapEx was reflective of our capacity expansion efforts, which included about one-third of our $61.5 million investment in the new Taiwan facility. Our overall balance sheet remains strong, and we're committed to maintaining a returns-focused capital allocation framework. As a reminder, our first priority is to reinvest organically in the business to sustain market-leading growth. We continue to anticipate elevated CapEx investment for the full year at approximately 9% of sales, driven by investments to strengthen our manufacturing footprint in key geographies and support our transformation initiatives. Over the longer term, we expect CapEx to be in the 6% of net sales range. We also remain committed to returning capital to our shareholders through our quarterly dividend, and during the quarter, we repurchased $25 million worth of shares to offset normal equity dilution. We're well positioned from a liquidity perspective with approximately $850 million in cash and short-term investments at the end of the first quarter. Total debt outstanding is $4 billion with a net debt leverage of 2.2x. We maintain balance sheet flexibility to focus on the areas that add value in the long term. Our transformation plan announced last quarter is underway and tracking to plan. We have work streams dedicated to three focus areas: driving productivity and quality improvements; strengthening commercial and innovation excellence; and advancing our local-for-local operating model. We continue to expect these actions to deliver approximately $100 million of EBITDA run-rate benefit by the end of 2028. Separately, our transformation is further supported by continued progress on IT separation. This parallel effort is well underway as we continue to make steady progress on TSA exit across our digital infrastructure. Turning to guidance. Building on our strong first quarter results, we expect a normal seasonal increase in the second quarter with sequential net sales growth in the mid-single digits, supported by strong demand trends, including continued momentum for AI-driven applications, high-performance computing and advanced connectivity. More specifically, in Semiconductor Technologies, we expect sequential net sales to be roughly flat with a margin profile in the mid-30s. For Interconnect Solutions, we expect sequential net sales growth in the high single-digit range with margins in the mid- to high-20s. From a mix perspective, across both segments, we continue to see end market strength similar to the first quarter combined with the normal seasonal increase in consumer electronics. In addition, we're also making incremental investments to support strong customer ramps we're seeing. Additionally, considering the ongoing conflict in the Middle East, we're taking a prudent approach to planning while continuing to strengthen our portfolio position to meet customers' needs. We're seeing modest upward pressure in certain raw materials, energy and logistics costs. To mitigate these impacts, we're leveraging our local-for-local operating model, working closely with a diversified supplier base across regions, and adjusting inventory levels for critical materials. Based on what we see today, we don't expect any near-term operational disruption. Where we are seeing incremental increases in input or logistics costs, we're taking targeted pricing actions to pass those through in a disciplined manner. The external environment remains dynamic, and we are continuing to monitor how things evolve. Today, overall demand signals remain strong, and customer conversations are constructive. With this in mind, we're raising our full-year guidance to reflect the strength we realized in the first quarter and our forecast for the remainder of 2026. Our guide incorporates our expectations of MSI wafer start growth to be mid-single digits to high-single digits, increasing from our previous expectation of mid-single digits. This underscores our confidence in the underlying demand signals we're seeing. Net sales is now expected to be $5.225 billion to $5.375 billion, a 5% increase at the midpoint. We assumed geopolitical inflation headwinds for some raw materials and logistics costs of approximately $20 million for the remainder of 2026 based on current conditions, but expect to largely offset these through pricing actions with some timing variability. Adjusted operating EBITDA is now expected to be $1.535 billion to $1.625 billion, a 4% increase at the midpoint. Adjusted earnings per share is now expected to be $3.80 to $4.14, a 6% increase at the midpoint. Finally, adjusted free cash flow is now expected to be $500 million to $600 million, a 10% increase at the midpoint. Overall, we expect double-digit net sales and EBITDA growth year-over-year. As we move through the year, we're maintaining a disciplined and measured approach in the second half, balancing execution with visibility, customer alignment and flexibility to support long-term value creation. Jon, back to you.

Thanks, Mike. Before we open the call for Q&A, I want to underscore a few things as we mark six months as an independent company. First, we're pleased with our progress executing our growth strategy, delivering meaningful innovation to solve our customers' toughest challenges, scaling our platforms in step with their growth and allocating capital to the highest return opportunities. We're excited by the traction we're seeing as our strategy translates into differentiated offerings, increasing demand and solid performance. Strategy points the way forward, but culture is what drives results. Qnity's team is aligned on the goal, focused on getting things done and committed to the outcomes. We're looking forward to executing against this path with discipline and focus, driving durable growth and long-term value for our investors. That wraps up my remarks. Operator, let's open the call for Q&A.

Please be advised that today's call is being recorded. We'll take our first question from Chris Parkinson with Wolfe Research.

When we think about the trajectory for the balance of the year, obviously, there have been a lot of moving parts even within the last few weeks. Could you speak to your assumptions in terms of what appears to be an accelerating mainstream recovery and how that should affect your second half numbers as well as outlook in '27? And then also, Jon, I think most of us are aware where you've been investing in a lot of new products and those seem to be ramping on a preliminary basis. If we can just get the framework for those as well?

Thanks, Chris. I appreciate the questions. Maybe starting with the first question on mainstream demand. We're excited by the progress that we're seeing from some of our mainstream customers. Obviously, it's been a slow recovery in that part of the market, but we're seeing very constructive signs and signals. I think the commentary in the most recent earnings season is positive. We see utilization rates continue to increase on the mainstream logic side, from the mid-70s last year into the high 70s, maybe into the low 80s in the first quarter, and we expect to see continued sequential improvement as we move through the remainder of the year. Obviously, there is a bit of an impact from the memory market on demand in some of these areas. But what we're really excited about is the increasing positive demand that we're seeing from AI applications starting to extend in the mainstream realm. We've heard lots of customers talking about edge computing and physical AI over the last few weeks and the growth that they're anticipating from that. We think that will power the next wave of AI-led infrastructure demand, and we're excited to see that progress on the recovery on the mainstream side. Maybe moving to your second question around new product introductions. We're really excited by the continued progress that our innovation and R&D and commercial teams are having on securing new process-of-record, or POR, wins. 2025 was a record year for us, and we saw POR wins in every line of business. That momentum has continued into the early part of this year, where we continue to see wins across the most advanced technologies in both segments. To give you a couple that I'm really excited about: we launched some new CMP materials across both pads and advanced cleans, targeting the most advanced semiconductor nodes—2-nanometer and even starting to get into some of the angstrom-era nodes like 16 and 14 and forward. We've seen some nice wins in our lithography space in both patterning as well as some EUV sublayers to help facilitate the continued growth of the most advanced lithography. And then on the Interconnect side, we continue to see new wins in AI PCB boards with fine lines and interconnect, copper interconnect and interposer products, as well as continued progress advancing our thermal management portfolio across thermal pads, liquid gap fillers and phase change materials. So a lot more to come on innovation, but it's really powering the strong momentum that we're seeing in both segments.

Great. And just as a quick follow-up, just switching over to the ICS side of it. It seems like the data centers, hyperscalers and GPUs seem to be pretty much heading in the right direction. Can you just speak to the kind of the content, in terms of your tangible addressable market, it seems to be further evolving even since what you put out at the CMD last year. Can you just speak to further the broader opportunity, how you see the run-rate growth over the next few years and whether that actually differs and is higher than it was even six to nine months ago?

Yes, thanks. Obviously, the ICS business continues to outperform significantly and is really driven by the strong alignment that it has to AI-led demand, and that's fueled by the exposure that we have to the three highest growth areas in the Interconnect segment: Advanced Packaging, Thermal Management and AI PCB. In the first quarter, we saw those three areas collectively grow by more than 50% year-over-year, benefiting from the fact that those tend to be shorter-cycle wins. As we win new business, they tend to scale up a little bit faster. So what you're seeing is the results of some of the wins that we had last year starting to scale and really contribute to growth. We expect Advanced Packaging and Thermal to remain the fastest-growing parts of our portfolio. We're investing in line with our customers to meet their capacity as they put more capacity in the ground, especially for things like Advanced Packaging, and they continue to build out more advanced printed circuit board architectures to be able to meet the rising demand. We're investing in line with that to be able to meet that demand. I don't think we're at the point where I want to update guidance on the ICS segment, but we're excited by the continued momentum that we're seeing, and we think it will be a strong contributor to our growth going forward.

We will move next with Melissa Weathers with Deutsche Bank.

Congrats on the really nice start to the year. I really like this narrative of shrink versus stack; I think that's an interesting way to frame it. I guess to that point and kind of following up on the last question, the AI PCB design wins that you talked about, it seems like those PCBs need to be upgraded significantly as we look at the architectures of some of these new processes coming out. Is there any other color you can give on what the direction of travel is in that market? What kind of visibility do you have? How deep are your customer engagements on that PCB side? And then I noticed you—it kind of seems like maybe it's the third fastest grower behind Advanced Packaging and thermals. Is that the right way to think about it? Any other color on the AI PCB would be helpful.

Sure, Melissa, thank you. I think the progress that we're seeing on the AI PCBs is maybe an underappreciated part of the growth story. What we're seeing is as OEMs look to drive performance and reliability in their system-level design, they need the capability to get all of that computing power effectively distributed throughout the data center. That requires an increase in the number of layers so you can get those signals rapidly transmitted into the system. The increase in layer count, as well as very similar trends to what we've seen on the semiconductor side in terms of increasing density, is driving the need for more advanced PCBs. The way to increase density on the circuit board is a combination of both shrink and stack. So you're putting smaller lines—finer lines and spaces—on the circuit board, while you're also adding more layers to the architecture. In both dimensions, both of those trends require more advanced technology to allow the overall board to meet the performance requirements of the application. And in both situations, both finer lines as well as higher layer counts, that plays into the strength of the Qnity portfolio and really where our metallization business has been positioning itself for several years. We put a concerted effort on this part of the market going all the way back to the downturn in 2023, where we shifted our R&D portfolio significantly to focus on this part of the market, and it's paying dividends today. We continue to be excited by the road maps that we have with our leading PCB customers as we help them to scale the next-generation format for printed circuit boards as well as the next-generation formats for Advanced Packaging.

Perfect. And then as we look at your growth over this year and maybe next year, you talked about some of your capacity plans in your prepared remarks. But at a high level, how do we think about your ability to supply at this point? Are there any areas where you may be constrained, or accelerating capacity build-outs? And I guess, is there any revenue framework that we should be thinking about for how much you can supply and where your limits are?

Yes. Thanks, Melissa. So when we think about our supply and demand planning, we do that in lockstep with our conversations with customers on what their demand ramps are expected to be over the next few years. Typically, we can invest in line with our customers' investments, so that gives us good visibility and usually after we've already won POR positions. These tend to be very high-return projects that we have confidence in because we've already won a lot of the business that will then be used in these facilities. Our local-for-local operating model has been a strategic advantage for us where we continue to invest to build out capacity and capabilities in all of the key geographies that are important to our customers. If you look at the last few years, we've added capacity in every single one of our semiconductor product lines to make sure that we had capacity not only to meet demand as it returns to the record 2022 levels but even beyond. That's underscored by the announcements we made in the first quarter with the new capacity in the U.S. and Taiwan. Both of those bring state-of-the-art production capabilities, especially for the fastest-growing part of our semiconductor segment, which is CMP consumables. It gives us access to clean room space, production capacity and R&D labs. In Delaware, we've got our first line already operational and in customer trials. In Taiwan, we'll complete the equipment installation and fit out this year and expect that site to be fully operational in early 2027. On the Interconnect side of the house, the capacity investments are typically relatively small and quick to scale up. So we can do those in fairly modular incremental investments that are well inside the capital allocation framework that Mike talked about in the prepared remarks.

We will move next with Bhavesh Lodaya with BMO Capital Markets.

A question on your agreement signed with NVIDIA and Apple recently. If you could talk a bit more about the scope and longevity of these agreements. And I'm curious how this plays in your relationship with TSMC. Does it make it easier to win qualification for the next 10 nodes? Is there a path to potentially getting more market share over time? Happy to hear your thoughts on that.

Yes. Thanks, Bhavesh. Good question. When I think about the agreements, to me what it underscores is really the attention that materials providers are starting to see from across the technology and semiconductor ecosystem. In the past, a lot of the conversations would be just directly with our manufacturing partners and the folks who are buying in a transactional way. What you're seeing now is that when you get to things like signal reliability, power efficiency and thermal management, the technology and process complexity are so great that materials innovation is emerging as an important driver of system-level performance. OEMs are getting involved in material selection and design, and they're looking for capable materials innovation partners to help them advance what they're great at, which is application engineering. Qnity brings materials innovation expertise that can complement the application engineering capabilities of many OEM partners. That partnership allows us to speed up the pace of innovation and to make sure that we're keeping pace with the technology road maps in the industry. It reinforces the partnership we have with customers and extends those partnerships because we're now involving the rest of the value chain in holistic system-level design decisions, which creates great opportunities for us because our portfolio is fairly uniquely positioned to solve problems at a system level.

Got it. And maybe as a follow-up, a separate question. There are reports of multiple Chinese players trying to scale up their memory production to take advantage of the ongoing shortage in the industry. Given your presence there, could you talk about if you are seeing that impact and whether you are exposed to this dynamic in the second half?

Yes. Good question, Bhavesh. On the memory market, lots of folks are trying to allocate capacity to the highest-return opportunities. We're certainly seeing that in utilization trends for both DRAM and NAND. To give you a couple of data points: on DRAM, we finished 2025 in the mid-80s and have been trending up into the high 80s; we continue to expect to be in the high 80s, maybe even above 90% as we get into the second half of the year. NAND has progressed as well from the mid- to high 70s last year into the high 70s and progressing quickly, maybe into the low 80s as we get into the second half and see continued recovery. As it relates to the memory market in China, most of our China semiconductor exposure is really on the mature logic side because memory usually converts more quickly to the most advanced technologies. In China, we're not selling into the most advanced technologies, so we don't have a lot of in-depth exposure to the memory part of the market in China.

We will move next with John Roberts with Mizuho.

A nice sequential uplift in EBITDA margins. As we think about Q2, I know there are moving parts on raw material inflation. How are you thinking about margins in Q2? And then I have a follow-up as well.

Sure, thanks for the question. We had a little bit of feedback on your line, but I think I heard you ask about EBITDA margin heading into the second quarter. At a headline number, we're really excited about the first quarter performance — margins were above 31%, driven by continued momentum across both segments. We see that trend continuing into Q2. Specifically, a couple of pieces to highlight: we expect volume benefits to continue with a slight headwind from product mix, especially on the ICS piece as that transitions into the consumer electronics time of year — that's a normal seasonal shift we see. Additionally, coming out of the spin, we had planned hiring that took a little longer than we originally expected, but it ramped up nicely in the back part of the first quarter and will carry into Q2. With all the growth that we are seeing, we're continuing to make additional hiring investments to support that growth. Overall, I expect Semiconductor to continue to be in the mid-30s from a margin perspective, and ICS to perform nicely in the mid- to high-20s on an EBITDA margin basis. All of this continues to support the growth we're seeing.

And, can you provide an update on hiring of the Head of Semiconductor and Head of Interconnect Solutions?

Sure. We're making great progress for both of those roles. We've got a strong pipeline of qualified candidates that we're actively engaging and evaluating. We're working with as much speed and urgency as we can, and we're fortunate to have a couple of really qualified executives who are doing a terrific job helping to run the business as we work through this process. I look forward to sharing more about those appointments as we announce them in the future.

We will move next with Edward Yang with Oppenheimer.

Jon, Mike, congrats on a nice quarter. First question is on Interconnect Solutions. EBITDA margin there was a record by a wide margin. It sounds like that's sustainable, but just wondering where that ceiling can go? And on the flip side, why was Semiconductor EBITDA margin down year-over-year?

Maybe I'll start and ask Mike to chime in. On the Interconnect margins, what we're seeing is the continued benefit of strong volumes and operating leverage, fixed cost absorption, combined with a favorable product mix. The fastest-growing parts of that segment — Advanced Packaging, AI PCBs and Thermal Management — also happen to be the highest-value parts of the business. As that growth scales and comprises a larger percentage of the total, you're seeing natural mix benefits flow through. We've talked before about ICS having the most opportunity for ongoing margin increase; you're seeing it in Q1 as we move from prior mid-20s into the mid- to high-20s, and we expect that trend to continue. Mike, maybe I'll turn it over to you for the semi margin color.

Yes, thanks, Jon. On the Semiconductor margins: the segment performed nicely and in line with our expectations in the quarter. We saw a little bit of maturity in the first quarter and product mix can always impact margins in the semiconductor space. From a geographic perspective, we continue to see strong performance across Asia, with Taiwan up 25% year-over-year on a top-line basis and Korea up 17% year-over-year. America has performed nicely as well. Looking ahead to next quarter, I continue to expect nice performance out of Semiconductor from a growth perspective, and margins should continue to be in the mid-30s.

Okay. That's helpful color. Follow-up: there is labor unrest in Korea. Are you hearing anything from your Korean memory and foundry customers? Do you have contingency plans if there are walk-outs or disruptions?

Good question. We're watching developments in Asia closely. Our conversations with customers, particularly in Asia, are frequent — often daily — where we're working with them on what they see and what their needs are. As part of our normal process, we do rigorous scenario planning so we can be agile and resilient. The last few years have taught us to be prepared for unexpected shocks. Our teams have done a nice job of adapting and responding to market and external disruptions, and we'll continue to use that discipline around scenario planning, rapid response and agility going forward.

We will move next with Frank Mitch with Fermium Research.

A nice start to the year. You guys had your conference call on February 26. Obviously, the world changed on February 28, but I'm not sure that would be a huge impact for your business. You offered a kind of a soft guide on Q1 and obviously came in materially better than that. What may have surprised you in March if that is indeed true? And if so, does that continue in April and beyond?

I think on the first quarter and the guide for Q2, at a high level Semiconductor largely performed in line with our expectations. The one part of Semi that did a bit better than we expected was mature logic, where we saw restocking and more constructive commentary than we expected. Most of the outperformance in the first quarter was driven by Interconnect Solutions and the continued strength in Advanced Packaging, Thermal Management and AI PCBs. The magnitude of the strength there compared to historic seasonal patterns was remarkable, and we see that momentum continuing in Q2. Mike gave a little color on what we expect in each of the segments going into Q2: roughly flat revenue for Semiconductor and another high single-digit sequential increase from Interconnect, with the start of some builds in consumer electronics applications in our portfolio.

Yes. What I would add is that we see continued strong order books, which is great, positive demand signals from our customers and continuation of node transitions that Jon mentioned, along with continued POR wins. Regarding the second half, in our prepared remarks we said our guidance takes a very prudent view on inflation. As we monitor conditions and proceed through the second half, if conditions improve, we have a chance to do even better.

Understood. Appreciate the increase in the free cash flow guide for the year. Obviously, your EBITDA guide also went up. How do you think about working capital use throughout the year? Obviously, a bit of inventory restocking. How do you think about that playing through the year?

Free cash flow in the quarter was right in line with our expectations. We always prioritize high-return capital investments to make sure we have leading capacity to match strong demand. You saw that in our recent announcements in Taiwan and Delaware. First quarter had about one-third of that Taiwan expansion reflected in CapEx based on timing. From a working capital perspective, we focus on that every day. Inventory remains healthy. DIO (days inventory outstanding) sits a little over 100 days and DSO and DPO are nicely in line with expectations. Inventory turns are sitting right around 6x, which is where we like it. As sales grow through the year, I would expect AR to grow a bit with that, but it's something we're watching and we are in good shape on working capital.

We will move next with Arun Viswanathan with RBC Capital Markets.

Congrats on the very strong results here to start the year. In the past, you've indicated that MSI would be a good metric to track to gauge your performance and that you'll perform above market growth. Clearly, you're well above that, especially in ICS. Do you still figure that to be the best metric to use? And along those lines, are you still thinking about stronger-than-mid-single-digit growth in MSI this year? If that is the case, how does that change your mix — would AI, HPC and data center maybe be more like 20% of your business mix, up from 15% a year ago? How should we think about that?

Thanks, Arun. MSI continues to be a good metric for Qnity, particularly for the semiconductor segment. We have increased our expectations for MSI for the year, as Mike mentioned, to mid-single digits to high-single digits from prior mid-single digits. There's room to do even better in the second half as things evolve. Order books remain strong and customer conversations are constructive. For Interconnect, which has been growing much faster over the last several quarters, we've sought external benchmarks. Historically the PCB area metric correlates well — last year it was low double digits, this year it's in the mid- to high-single digits, similar to MSI. Outperformance in ICS continues to be led by Advanced Packaging, AI PCBs and Thermal Management and that will shift our end-market mix in a favorable direction. We're seeing strong growth in data centers; I think we're approaching roughly 20% of the portfolio from that end market, up from about 15% a year ago. We typically will give precise year-end mix as we report, but we're certainly seeing that shift. We're also seeing diversification into automotive, communications infrastructure, aerospace and defense as AI demand penetrates other end markets. The offset is a bit slower growth in broader consumer electronics, although our exposure to premium devices remains resilient.

You mentioned growth and the move towards 2- and 3-nanometer as well as 16-, 14- and 10-angstrom technologies. Can you give some brief details? Are you well positioned? Would you have to make more investments on that side, and what is the timing on those developments starting to contribute to profitability at Qnity?

Thanks, Arun. We're really excited by the semiconductor road map. We're seeing a lot of benefit from 3-nanometer volumes that continue to scale, and we expect progress with 2-nanometer in the second half of the year. On memory, HBM4 is progressing positively and we're seeing encouraging commentary in the first quarter and subsequent months. The investments we've made over the last couple of years and the investments we're making this year give us confidence that we'll have sufficient capacity to scale up next-generation technologies with our customers. In particular, both CMP and lithography are areas where we are well positioned from a capacity point of view. We continue to see POR wins for those angstrom-era nodes, and as those commercialize over the next few years, we'll have the capacity to meet the growth of our customers.

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