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MKS Instruments Inc  (NASDAQ:MKSI)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Earnings Conference Call. (Operator Instructions)

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

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you. Good morning, everyone. I'm Seth Bagshaw, Chief Financial Officer. I'm joined this morning by Jerry Colella, Chief Executive Officer; and John Lee, our President and Chief Operating Officer.Yesterday after market closed, we released our financial results for the third quarter of 2018. Our financial results and a schedule of pro forma revenue by market have been posted to our website, www.mksinst.com.

As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our report on Form 10-K for the year ended December 31, 2017. These statements represent the Company's expectations only as of today and should not be relied upon as representing the Company's estimates or views as of any date subsequent to today. And the Company disclaims any obligation to update these statements. Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday's earnings release.

Now, I will turn the call over to Jerry.

Gerald G. Colella -- Chief Executive Officer

Thanks, Seth. Good morning, everyone and thank you for joining us today. I'll start with the results for the third quarter of 2018, followed by several business and market highlights and then I'll turn the call over to John, who will share additional details on our strategy, customers and markets. Seth will then provide further information on our financial results and our fourth quarter 2018 guidance before we open the call for your questions.

Third quarter revenue was $487 million, which was within our expectations for the quarter and in line with the year ago. Non-GAAP net earnings for the third quarter were $103 million or $1.88 per share and were above the high end of our guidance range, and a 20% increase over last year. This bottom line outperformance was driven primarily by another strong quarter for our advanced markets as well as our focus on expense containment.

One of MKS's key strengths is our ability to manage through the semiconductor cycles. We understand that although the end market for chips continues to grow over the long term, the semiconductor capital equipment market can experience fluctuations in the short term. To minimize the impact of these fluctuations, we implemented a strategy five years ago to transform MKS from primarily a semi-focused business to a broader market solution provider, exposed to wide range of new and exciting markets.

In that short period of time, we have significantly expanded our customer solutions that address additional semiconductor segments, such as lithography and inspection in fast growing advanced markets such as materials and electronic component processing. This diversification in markets, customers and product portfolio helps us outperform our semiconductor peer group throughout the cycles, and we are on target to grow more than 2 times faster than the overall market for our advanced markets.

Revenue from advanced markets for the first three quarters of 2018 has grown almost 20% over the same period in 2017. Given our long history and deep experience in the semiconductor market, we have learned to consistently deliver strong results during fluctuations through strict cost control, while amplifying our focus of design wins to increase market share, which historically we have achieved.

Finally, I'm also very pleased with MKS being ranked number 17 on the 2018 Fortune 100 Fastest-Growing Companies List. MKS was number 1 in the Biggest Jumps category, moving from 89 (ph) in 2017. This achievement is a testament to our overarching strategy of sustainable and profitable growth.

In terms of our outlook, we expect the semiconductor customers will continue to work through their existing inventory. However, we remain very positive on the fundamental strengths of this market. We anticipate strength in the advanced markets by multiple industrial applications with over 40% of our revenue coming from the steady and high growth opportunities. Despite the semiconductor market headwinds, I am very confident that the strategies we put in place have positioned us for long-term outperformance.

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

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

John T.C. Lee -- President and Chief Operating Officer

Thanks, Jerry. You heard us talk about our MKS business process, which is a disciplined approach to all aspects of our business. It is built on four pillars, accountability, customer focus, continuous improvement and strategic planning. With respect to the second pillar, customer focus, a key differentiator is the breadth and depth of our technical capability which is essential to developing solutions to our customer's most complex problems.

Today, in both semiconductor and advanced markets, we are seeing more opportunities for design-ins than in any other time in our history. The requests are coming from a broad cross section of our key OEMs and other customers. The diversity of these opportunities spans multiple markets and employs a wide range of solutions from our industry-leading portfolio of lasers, power delivery, motion control, ozone gas generation and integrated optical substances. Very often, these solutions involve the integration of several different components and or subsystems, which is a clear and unique differentiation that our customers value greatly.

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

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

Our power solutions business continues to deliver significant value to our customers. Most recently, winning a full system of RF generators and matching networks for Plasma Enhanced CVD application in Korea. In the third quarter, our lasers group won a number of applications for solar cell, and printed circuit board processing using our industry-leading ultraviolet and green lasers. Finally, our mass flow controller products have been installed in the PK-4 Plasma Crystal Laboratory in the International Space Station. Our MFCs are part of the latest ongoing series of experiments to determine the behavior of low-temperature plasmas in space.

Our outlook remains very positive as our continued design wins in the semiconductor markets, and strength in advanced markets positions us for long-term success for the balance and growing portfolio of products and solutions.

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

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, John. I'll cover the third quarter financial results and our Q4 2018 guidance.

Revenue for the third quarter was $487 million within our expectations for the quarter, and a 15% decline sequentially from a record second quarter. Sales to the semiconductor market were $259 million in the third quarter, a decrease of 23% from a record $336 million (ph) in the second quarter of 2018. Sales to our advanced markets which comprised 47% of our total revenue were $228 million and decreased 12% (ph) sequentially. Revenue in these markets can vary from quarter-to-quarter based upon specific projects.

We are currently experiencing a moderation of semiconductor market. From a year-to-date basis to the nine months ended September 30th, total sales have increased 15% compared to 2017. Semiconductor sales had increased 12% and sales to our advanced markets have increased by 19%, driven by strong growth in our laser business which has increased by more than 30%.

GAAP and non-GAAP gross margin was 47.6% and non-GAAP operating expenses were $103 million for the quarter. Gross margin was favorable to our expectations at the sales volume and operating expenses were also $4 million favorable to even the low end of our guidance range as we undertook a number of actions beginning in the second quarter to proactively reduce our cost structure.

In addition, certain variable compensation accruals totaling $4 million were adjusted in the third quarter to be in line with our business levels in the second half of 2018. We do expect expense in the fourth quarter to reflect more normalized variable compensation levels. Non-GAAP operating margin was 26.5% reflecting the strength in our operating model as well as our balanced increasing exposure to advanced markets. We believe these are unique advantages to MKS and semiconductor business level should moderate in the quarter. GAAP and non-GAAP interest expense was $3.7 million and $3 million respectively and interest income was $1.5 million in the quarter. Non-GAAP tax rate was approximately 19% and the GAAP tax rate was 18.5%. During the quarter, we incurred restructuring charges of $1.4 million primarily related to for the streamlining and consolidation of certain functions. GAAP net income was $93.3 million or $1.70 per share and non-GAAP net earnings were $103.2 million or $1.88 per share. Our GAAP and non-GAAP results were both above the high end of our guidance range for the quarter. At the end of the quarter, we had cash and short-term investments of $620 million, which was evenly divided between the US and our international operations and our term loan debt balance of $348 million.

Free cash flow for the quarter was $81 million or approximately 17% of revenue. Day sales outstanding was 59 days at the end of the third quarter compared to 54 days at the end of the second quarter. This increase was largely due to the timing of revenue within the quarter, inventory turns were 2.6 times (ph) compared to 3.1 times (ph) in the second quarter. Inventory turns tend to trend lower in the short term as business levels moderate. We continue to provide a balanced approach to capital deployment and during the quarter, we repurchased 818,000 shares of stock for $75 million in the average price of $91.67 per share and paid a cash dividend of $10.9 million or $0.20 per share.

Now turning to Q4 2018 guidance. The semiconductor capital equipment industry experienced a moderation in capital spending in near-term. We've had -- we've seen a similar effect on our semiconductor revenue in the third quarter, expect that to continue into the fourth quarter. We believe that our customers have worked out (ph) inventory levels of MKS products throughout the third quarter and continue to do so into the fourth quarter. We also expect sales to advanced markets as well as service revenue to all of our market segments to remain at healthy levels. We estimate that our sales in the fourth quarter could range from $420 million to $460 million and gross margin could range from 47% to 48%. Non-GAAP operating expenses could range with $103 million to $109 million, R&D expenses could range from $34 million to $36 million and SG&A expenses could range from $69 million to $73 million.

Non-GAAP interest expense expect to be approximately $3.2 million and our non-GAAP tax rate to be approximately 19%. Given these assumptions, fourth quarter, non-GAAP net earnings could range from $75 million to $89 million or $1.38 to $1.64 per share. In the fourth quarter, amortization of changeable assets, we expect to be approximately $10.8 million, GAAP interest expense is estimated to be approximately $3.9 million and GAAP tax rate to be approximately 20%. GAAP net income expect to range from $65 million to $79 million or $1.19 to $1.45 per share on approximately 54.5 million shares outstanding. Those are our prepared remarks. We now open the call for questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Amanda Scarnati, Citi. Your line is now open.

Amanda Scarnati -- Citi -- Analyst

Good morning, thanks for taking the question. Just starting off on the non-semiconductor side in the advanced market, can you talk a little bit more about the weakness that you saw there and how much, if any, of it, was related to the China tariff and the trade wars that we're seeing there. Thanks

Gerald G. Colella -- Chief Executive Officer

Thank you, Amanda. So, it was in the noise level in terms of like 4% and it really is more lumpy, in project-based, year-to-date we think we're almost 20% growth, so really wasn't anything of any anything significant just timing of when customers take large shipment orders. And as far as the China tariff is concerned, we really haven't seen anything significant that would impact us. Certainly we're watching it. We want to be mindful of it. We want to be prepared if that would event. But we have not seen any weakness in China, actually we have probably -- have more engagements and opportunities there than we probably ever have and I put more people on the street in China because of those opportunities. So it was just a matter of timing and lumpiness on the projects.

Amanda Scarnati -- Citi -- Analyst

Okay and then on the semiconductor side, as customers continue to work down inventory, do you think that that's the longer-term process. How much inventory is capped at your customers or do you think this could be something that can be completely reversed for your end in the December quarter.

Gerald G. Colella -- Chief Executive Officer

That's a very good question, I'm sure and I'll answer it about 100 times today. This is an old song and dance that we've answered at MKS for probably 40 years. So really what happens is when you're in the middle of a high level of business at the -- at the OEM level, they have pretty high build schedules, and in that, while they're doing that they have high level of finished goods work in process, raw materials income bonds (ph) back to us. When they see the demand from their end customers decrease, first thing, they're going to do is cut their schedules and therefore they now have to work off finished goods with raw material income bond and we expect that -- we saw that -- we started to see that toward the end of the quarter, we expect that to continue this quarter, that's why we gave the guidance that we did. We don't have a lot of visibility into how long that that last with customers. Usually in the past, its been a couple of quarters, that's why we think the jobs (ph) we're giving now is prudent and -- but we are well positioned and just to let you know, we are still making significant investments in capacity.

We actually increasing capacity in one of our facilities that we haven't increased in over 18 years because of the long-term projection of the growth in that business, so can't really predict right now the potential of the upturn, or the timing of it, but in the past, I said it was a canoe (ph). I think this is another canoe. People ask me, is it a big one, or a small one, is it typi (ph) canoe? I'm not really sure but I think that's kind of where we are and in addition to that some of our Korea business is slower. We had a tremendous run-up in our Korean business from 2012 through last year going from $62 million to almost $230 million and where the largest spend there is slowing, ecosystem has slowed, so some of that is just a matter of people waiting for spending to pick up in a sudden inventory issue there in some cases.

So I couldn't give a specific answer. It's not a matter of if, but when and we're just positioned to be able to handle it when it comes back.

Amanda Scarnati -- Citi -- Analyst

Great, thank you.

Gerald G. Colella -- Chief Executive Officer

You're welcome.

Operator

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

Sidney Ho -- Deutsche Bank -- Analyst

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

John T.C. Lee -- President and Chief Operating Officer

Yes, Sidney. It's John. So I'll take the advanced market one. So Q4, we think is relatively consistent to Q3 for advanced markets. So we think that we will end the year pretty strong in our advanced markets. So the guidance of lower revenue in Q4 is almost all (inaudible) and the inventory burn off.

Sidney Ho -- Deutsche Bank -- Analyst

Great, maybe my second question is, clearly there is a lot of anxiety about memory CapEx next year. Do you have enough visibility to say, how your semi business will do in the first half of next year versus the second half of this year. I assume, you have a more unique view about what's happening in Korea than your large (ph) US customers.

John T.C. Lee -- President and Chief Operating Officer

Again, It's John. So we certainly visit our Korean customers -- stick very close to them. In some of the public statements that Samsung have made would indicate that the first half will be similar to the second half of 2018, meaning at this lower level and that's why our guidances has been this 440 (ph) quarter in Q4 is going to be the consistent behavior we see in the first half of 2019. And so that's as far as we know because it will depend on whether somewhat in Korea, sites pull in a fab or push out a fab.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. And maybe I can squeeze in one more, you guys have said in the past that the underlying market for other advanced markets will grow 4% to 5% per year and then you will be disappointed if your business doesn't grow twice as fast, call it 8% to 10%. Does that percentage growth still apply for 2019, especially given some of the headwinds at least on the macro level that we are hearing?

Gerald G. Colella -- Chief Executive Officer

Well, we certainly don't have any reason to believe that that would be different. '17 grew 14% over '16, year-to-date we're 20%, '18 over '17 and we believe our target is good 8% to 10% at a minimum and we have a lot of focus on that area. The width and depth of portfolio is astounding, and the amount of applications that we can get involved with which we are involved with is remarkable. So we have all the confidence in the world. We're shifting sales focus as well, in terms of adding people, adding different capability in those markets. So we don't see any reason to believe why 8% to 10% wouldn't be an achievable market for us.

Sidney Ho -- Deutsche Bank -- Analyst

Great, thank you very much.

Gerald G. Colella -- Chief Executive Officer

Okay, Sidney, you're welcome.

Operator

And our next question comes from Krish Sankar with Cowen and Company. Your line is now open.

Krish Sankar -- Cowen and Company -- Analyst

Yes, hi, thanks for taking my question. I had a few of them. Jerry or John, I think you kind of highlighted that most of the weakness in Q4 is semi-related and advanced markets looking flattish. So if you do that math to your midpoint, you're probably getting like down 80% sequentially for semis in Q4 and then for the full year calendar '18, your semi business is probably up 1% to 2%. So I'm kind of curious that seems like you are under growing WFE or probably in line, is there something happening from a share standpoint or am I just reading too much into quarterly volatility?

John T.C. Lee -- President and Chief Operating Officer

Hi Krish, it's John. So your numbers are spot on frankly. And so, the way we look at it is, we looked at our over achievement in 2017, which was a 45% growth, on semi it's grown about 30%. And then in 2018, you're right, it's only a couple of points up relative to 2017. But if you look at the aggregate, which is the kind of the way we look at it, then we've actually overachieved relative to the semi-growth over that two-year period. And even if we try to average over that time frame is because of the up and down of the cycles and the inventory burn off. So we actually looked at it very closely because we certainly want to make sure that we are still tracking to our two points above the industry standard growth for our market share gain, and that's what we are seeing right now.

Gerald G. Colella -- Chief Executive Officer

And actually, we continue to gain share and you don't -- you can't lose share in the middle of a ramp, or there in the beginning of a downturn. That doesn't happen because of design-ins occur usually during the downturn, not design-out. And we continue to see more and more opportunity for share gain. The other thing I forgot to mention though, which is a salient point when Amanda asked me is we also have an OEM that quoted a number of months ago, that they had overbought for an ERP implementation. And so if you have a high build rate and you overbuy ERP, you're going to have a dramatic effect on your upstream supply chain when you have to start to work it off because, oops, I bought too much for ERP, let's work it off. And oh oh, now customers aren't buying as much, it creates another problem. So that's exacerbated the numbers a bit, but no, it's not a market share issue. We expect to take market share coming out of this downturn. We're putting more people on the street, more engaged with customers. That's how we keep outgrowing the space. So when the industry grew 32% in '17 over '16, we grew 45%. There was a reason for that and we will continue to outgrow the market.

Krish Sankar -- Cowen and Company -- Analyst

Got it, got it. That's very helpful. And then just to follow up on the inventory situation, I understand that ERP issued one of the OEMs, but in the past, all the components folks were highlighted how it's more just in time and things are more in match with what the demand is with your OEM customers. But now it looks like that's not the case, it feels like this behavior is back to prior downturns with like them drawing down inventory. Has anything changed this time around?

Gerald G. Colella -- Chief Executive Officer

Well, there's a lot more stocking programs that we have with customers, but it doesn't mean that those stocking programs don't have an elevated level of inventory in them unfortunately. And we had one customer that was here in March telling us to do this giant buildup in our stock inventory because they were going to have this geometric rise in the build rate. And we didn't do that. I was a bit cautious on that. So you're right, I mean -- lead times are shorter, you think people are more rational. There are more just in time programs. So in general, it appears to be more rational and more reasonable, but there is still pockets of inventory and the way people stock things and the way they prepare for ramp. And one of the things that our customers don't want to do is, they don't want to be without inventory to turn their orders around. So, even if we can deliver something in a day or week, just to go and have a heavy amount of safety stock to in case they get a last minute order to turn it. So it's still a little bit of that in the system. I'm disappointed with it, but it just is what it is.

Krish Sankar -- Cowen and Company -- Analyst

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

Gerald G. Colella -- Chief Executive Officer

That would be -- it looks like the orders have been consistent now which is good, but I'm from the Show-Me state, so I watch it every -- the first thing I do every morning is, I click on my computer on every business unit, look at bookings and shipments. Because we keep our foot on the -- the break and the gas and that's why we reacted so quickly. That's why it's such a great financial result because we react faster than most people. But my expectation would be that you would expect to see it start to come back if the inventory is depleted, and even if those levels of orders are consistent, you'd expect to see the people need more inventory. And if the business is picking up, hopefully the second half as some people may project, it certainly would be something we would see sometime in the -- later in the first half, I would expect.

Krish Sankar -- Cowen and Company -- Analyst

Got it. Just a last question from my end for Seth. Is it $75 million (ph) you have left in your buyback at this point?

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yes, that's correct. It's was about $73 million in change, that's correct.

Krish Sankar -- Cowen and Company -- Analyst

Thank you, folks.

Gerald G. Colella -- Chief Executive Officer

Thanks Krish. Thank you.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Yes, thanks, Krish.

Operator

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

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Thank you very much. Maybe Jerry, just to kind of follow-up, and maybe just to clarify. When you said that orders on the semi side are now steady, do you believe from an order flow standpoint you reached the bottom and like you said as soon as the customers work off their inventory, will that'll be the call, catalyst for a rebound in your, call, semi orders?

Gerald G. Colella -- Chief Executive Officer

Well, Patrick, I wish I could tell you definitively, I believe that that we've hit the bottom and we're turning up. But I've been at this for 35.5 years and we have to be prepared for an event one way or the other. It appears to me from what I'm hearing from my sales team and from the customers we've talked to, that things appear to be stabilize and consistent. And we are acting that way as I indicated on the answer to Amanda, we're making significant investments in capacity increases in a building, we haven't done in over 18 years because our belief of it coming back. So if I had a -- guess, it's appears we are on a good stabilized point and we'd expect to see it starting to come back at some point. But I'm sure we surprised people we went from 570 to 490 and 490 to 440 (ph). And we are very conservative Company that likes to look at the business in a reasonable way to give good guidance. So it appears stabilized and I'm not, I don't doubt that it's stabilized and I hope it continues that way, but we have to be prepared one or the other, but I am confident in the long term for sure. I know that was a squishy answer, but I just don't want to go out and be definitive about something till I see, more than a quarter's worth of consistency. But it feels pretty good from what our sales people are telling us.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Fair enough. Maybe then as a follow-up question on your advanced markets and in particularly the laser business. Obviously, there's a lot of noise out there on the entire laser industry, particularly in the Industrial segment. Can you again just kind of clarify, and maybe just highlight where your market strengths are, because I think you're a lot less on the industrial side of things relative to traditional fiber laser company. If you could give a little bit of clarity on some of your market opportunity and I know you -- I think briefly mentioned it in your prepared remarks about opportunities in solar and PCB. What are some of the other emerging market opportunities that you see for your laser business specifically.

Gerald G. Colella -- Chief Executive Officer

Our tech team would love joining this one. So as far as our lasers are concerned, the slowdown really Inmod fiber and CO2 is more on the heavy industrial and the OLED -- large OLED opportunity. And for us, we are more of a finer precision manufacturing, things like microprocessing with pulse lasers and so we haven't really seen the same impact that that we see more opportunity in a lot of those other markets that maybe we haven't even had a shot at in the past. We've had several seven figured wins on mobile and virtual reality markets as well as we are bringing Light and Motion group into semi to things like metrology and inspection. And we see in the Chinese market the micromachining more like a laser sintering, so from our standpoint, we see pretty consistency in the application of the lasers in the markets we find ourselves in. I have seen what's happening to others based in there -- their analysis of pre-announcements, but it's a different space that we play in.

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

John T.C. Lee -- President and Chief Operating Officer

Patrick. So in addition to the solar cell application and then the PCBA drilling, there are other applications that continue. We just didn't highlight and so class cutting, capacitor or passive component manufacturing, additive manufacturing. So all those other industrial type applications. So there we just highlighted -- happen to highlight two of them.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Great, that's helpful and maybe a final question for Seth. In terms of the capital allocation strategy or tactics near term, it was good to see you buying back stock again at these prices. Is that the -- I guess the transition will shift in the near term of increasing the buyback, while the stocks at these prices or I guess are there other tactics that you can take.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

I think our view for (inaudible) last year. So once we will have the balance sheet for Newport, we achieved, I think pretty aggressively and Newport has been performing extremely well like Motion Division. Our -- really goal of these new acquisitions that's kind of our number one priority. And then we said in the past is we go to the market buyback shares, really opportunistic. And so, you know, I can't give any clarity or a bright line of what we will do going forward. But I think looking at a number of factors and how we generate cash in the quarter and a couple of quarters and how we deploy it, all those factors have not changed. So we're still being consistent in that approach.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Great, thanks a lot, guys.

Gerald G. Colella -- Chief Executive Officer

Thank you, Patrick

Operator

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

Mark Miller -- Benchmark Company -- Analyst

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

Gerald G. Colella -- Chief Executive Officer

Yes, Mark, certainly, so we have one product that's a combination of fiber and it's that UV. That's actually product line -- it's done very well actually in the last quarter and the application is solar cells. So those powers are obviously not the high power that their industrial lasers like IPGs, lasers or in lights, so we are seeing -- also seeing good growth there in that particular type of product.

Mark Miller -- Benchmark Company -- Analyst

Okay. One of your larger customers was upbeat about the next year, citing China domestic fabs and there's been a struggle there in terms of ramping their NAND processes and that has pushed out with some people believe is a corporate ramp for production. I'm just wondering what -- what are you seeing in terms of the ramp of these domestic fabs for NAND production?

Gerald G. Colella -- Chief Executive Officer

Again -- those are domestic Chinese setup of your companies, I think, it was the only one, it was SMIC. And now YMCC (ph) doing NAND, is what you are referring to. So they're making some progress, but we still see the vast majority of that builds and equipment installations driven by foreign-owned chip companies in China.

Mark Miller -- Benchmark Company -- Analyst

Okay, thank you.

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Mark.

Operator

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

Weston Twigg -- KeyBanc -- Analyst

Hi, thanks for taking my question. First, just wondering if you could help us understand or maybe clarify your China exposure in the non-semiconductor side of the business, can you give us an idea of how much of your non-semi revenues is from China?

John T.C. Lee -- President and Chief Operating Officer

Wes, this is John. And so most of that is obviously driven by the Light Motion side. So a lot of the laser business is going into Chinese laser OEM companies for the applications we talked about like solar cell and PCBA drilling. I don't want to give you an exact number, but certainly, it's an area where we think it will be probably bigger than our semi side and will be an area that continues to grow faster.

Gerald G. Colella -- Chief Executive Officer

And the original MKS business, we've been in China for probably almost 20 years now, and it was really, really more geared toward industrial and manufacturing applications of things like architectural glass and tool coatings for wear and that business is in the $35 million to $40 million range, so it's steady business. As John says the largest segment of it is on the Light & Motion side.

Weston Twigg -- KeyBanc -- Analyst

And then just going back to the semiconductor side on the slowdown in Korea, can you give us a little bit more color in terms of where you see more risk whether it's on the NAND side or DRAM side and then any thoughts on since you're tied into that Korean market pretty tightly, just the, I don't know

 of each of those segments in terms of how, how long the slowdown can last.

John T.C. Lee -- President and Chief Operating Officer

Wes, it's John. I mean certainly, we don't know beyond what's publicly stated, I think Samsung has said that -- they will be starting up probably a DRAM. The next phase of DRAM and the next phase of V-NAND, in the beginning of the second half and that's kind of public statements, so we're hoping that's true. And -- but we don't have any more insight as to which one comes first, or which one gets pushed out.

Gerald G. Colella -- Chief Executive Officer

But the relationships been creating are very strong, Wes. We're getting a lot of opportunity now for the Light and Motion group, as well beyond semiconductor Samsung opportunities. So we're tied in in terms of relationships. We have the amount of engagement they want us involved with and they give us as much as they can that's pretty public other than, stay with us, keep in touch, thing.

Weston Twigg -- KeyBanc -- Analyst

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

Gerald G. Colella -- Chief Executive Officer

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

Weston Twigg -- KeyBanc -- Analyst

Okay, thank you, very helpful.

Gerald G. Colella -- Chief Executive Officer

Thanks, Wes. Take care.

Operator

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

C.J. Muse -- Evercore -- Analyst

Good morning. Thank you for taking my question. Really appreciate it. I guess a question on the semi side, service including upgrades, spares et cetera has been a source of strength, as tools have come off of warranty. And so I was hoping you could talk about your overall semi business and perhaps help us better understand the tool component and what you've seen there in terms of kind of peak to trough and how you're seeing, I guess stabilization and what kind of recovery, you're expecting and timing there. And then on the service aspect, are you well-levered to that part of the business, how is that kind of addressing (ph) your business and then lastly, for your core semi business, direct sales, how should we think about that business vis-a-vis the more volatile OEM business? Thanks.

John T.C. Lee -- President and Chief Operating Officer

C.J, it's John. I'll take the service question first. That's the easiest one, I think. So we're certainly starting to -- we are seeing the fact that our installed base growth is driving our service business and we've seen historically the 9% to 10% a year growth. We expect that to continue and maybe have little more because of the recent shipments of all our equipment. So I think service is solid and it continues to be very consistent, and so we're happy with that part of it. I think, your other question is about end-user -- direct end-user sales, is that the other part of your question?

C.J. Muse -- Evercore -- Analyst

That's right.

John T.C. Lee -- President and Chief Operating Officer

So, we sell some equipment directly to end users examples would be for instance dissolved gas for wet clean and so, end users tend to make that decision. They might buy the wet clean tool from someone else but then they would decide who's dissolve gas to buy from. So we have that application and strong market share direct sales to their end users and that comes with the ups and downs of settings. But the big strength in dissolved gas has been recently in flat panels. And so there also use dissolved gas for flat panel cleaning. And then you have other types of instruments like residual gas analyzers that are bought by end-users. And then, for sure, we have service with end-users, so lot of end users have sent back their components back to our repair depots in region for repair. So that is -- that's been consistent and that's part of the service question as well.

C.J. Muse -- Evercore -- Analyst

Great, thank you.

Operator

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

Gerald G. Colella -- Chief Executive Officer

Thank you. First, I want to thank our employees for their help with our swift reaction to market fluctuations and I'm really proud of our ability to manage financing costs effectively, which is our proud and long-lasting legacy. So I want to make sure that people see the financial ability of this Company to maintain sustainable profitability even in a downturn. I don't want anyone to lose sight of that because that's something we do better than almost anybody. With that, we are pleased with our results for the third quarter, 2018, achieving strong financial results despite the semiconductor slowdown. A multi-year strategy to augment our business with additional solutions that serve industrial technology (inaudible) markets has clearly proven to be highly effective.

We are confident that our diverse end markets combined with global leadership position in the semiconductor market continue to drive sustainable and profitable growth. Thank you for joining us in the call today and for your interest in MKS. We look forward to updating you on our progress when we report our fourth quarter 2018 financial results.

Operator

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

Duration: 42:09 minutes

Call participants:

Seth H. Bagshaw -- Senior Vice President, Chief Financial Officer and Treasurer

Gerald G. Colella -- Chief Executive Officer

John T.C. Lee -- President and Chief Operating Officer

Amanda Scarnati -- Citi -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Mark Miller -- Benchmark Company -- Analyst

Weston Twigg -- KeyBanc -- Analyst

C.J. Muse -- Evercore -- Analyst

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