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MKS Instruments Inc  (NASDAQ:MKSI)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 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 Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference call, Chief Financial Officer, Seth Bagshaw. You may begin.

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

Thank you. Good morning, everyone. I'm Seth Bagshaw, Senior Vice President and Chief Financial Officer. I'm joined this morning by Jerry Colella, our Chief Executive Officer; and John Lee, our President and Chief Operating Officer. Thanks for joining our earnings conference call.

Yesterday, after market close, we released our financial results of fourth quarter and full year 2018. Our financial results and scheduled 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. The actual result may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our 2017 Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q. These statements represent the company's expectations only as of today and should not be relied upon as representing the company's estimates or views as of any date subsequent to today and the company disclaims any obligation to update these statements.

Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday's earnings release.

Now, I'll turn the call over to Jerry.

Gerald G. Colella -- Chief Executive Officer

Thanks, Seth. Good morning, everyone, and thank you for joining us today. I'll start with results for the full year and fourth quarter 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 first quarter 2019 guidance, before we open the call for your questions.

Revenue for fiscal 2018 was a record $2.1 billion, and increased over 8% from $1.9 billion in 2017. Non-GAAP net earnings were $7.83 per share, an increase of 31% from a year ago. Our ability to deliver these record results despite second half semiconductor market headwinds was driven primarily by a balanced exposure to a diverse range of Advanced Markets, coupled with our long-standing commitment to managing expenses.

For the fourth quarter, we achieved revenue of $461 million and non-GAAP net earnings of $1.54 per share, both of which were at the higher end of our guidance.

I'm very pleased with our strong performance in 2018. Despite the slowdown in semiconductor capital spending, we continued on our path of sustainable and profitable growth. We advanced through semiconductor market fluctuation for many years, using as a combination of strict cost control, leveraging our flexible manufacturing capabilities and increasing market share with key design wins.

We have been clear in our strategy to broaden (ph) MKS exposure to customers and markets. The pending acquisition of Electro Scientific Industries or ESI is another significant step in executing the strategy expands our addressable market by approximately $2.2 billion. We have received all necessary regulatory and shareholder approvals, and we anticipate closing on February 1, 2019. We expect the addition of ESI to strengthen our expertise in the lasers, photonics, and optic markets, enabling us to develop systems to provide unique and cost-effective solution, and meet the challenges of our customers' evolving technology needs.

Our strong and long-standing relationship with our semiconductor customers have helped us deliver over $50 million in Light and Motion design wins in 2018. This selling now is working well for us, and we'll apply the same strategy to ESI's product portfolio.

For last five years, that I've been CEO, we have focused on delivering sustainable and profitable growth executing on a combination of internal improvements and strategic acquisitions. During this period, we have tripled revenue from $670 million to over $2 billion, and delivered a 770% increase in non-GAAP net earnings per share.

In terms of broadening our customer market reach, we grew our semiconductor market business by 150% and our Advanced Markets by over 340%. These accomplishments are a testament to the MKS business process, our close relations with customers and suppliers, and the skills and dedication of our strong MKS team around the world.

In terms of our outlook, we anticipate that our semiconductor customers will remain muted in the capital equipment spending through the first half of 2019. However, we remained very positive on the (inaudible) strength of this market as well as the continued strength in our Advanced Markets.

Turning to our Q1 2019 revenue and earnings guidance, we estimate that sales in the first quarter to range from $400 million to $440 million, and first quarter non-GAAP net earnings per diluted share to range from $0.95 to $1.18 per diluted share.

Seth will provide the balance of our first quarter guidance in his remarks. At this time, I'd like to turn the call over to John.

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

Thanks, Jerry. As Jerry mentioned we remain very bullish on the long-term trends in the markets that drive our business.

For the semiconductor market, our exposure to all device types, including 3D NAND, DRAM and logic combined with our broad exposure to 85% of WFE spend, including deposition, etch, lithography, metrology and inspection, positions as well when capital spending returns to normalized levels.

We have an industry-leading portfolio and laser-based solutions for advanced industrial manufacturing, and we anticipate continued long-term growth in these markets. We're also excited about new market drivers such as the implementation of new 5G technology over the next few years, which will require upgraded wireless infrastructure and new mobile devices. This will require increased data processing and storage capabilities which is positive for our semiconductor and laser diode testing businesses, as well as our pending acquisition of ESI.

Our strategic initiatives over the last five years has been to broaden our reach into Advanced Markets as well as enhance our strong semiconductor market portfolio. In our Advanced Markets, revenue increased to a record $931 million in 2018 or 14% over 2017. This is on top of the 14% year-over-year growth achieved in 2017, on a pro forma basis reflecting the full year results of Newport Corporation which we acquired in 2016.

In the fourth quarter, we continued to see strong demand for our products across a number of diversified Advanced Market applications. Our industrial microwave generator designed in for thin-film bottle coating in the beverage industry. In another microwave application, we received a large order for a synthetic diamond manufacturing application.

In the analytical instrumentation market, we had a significant multiyear contract win for our unique multi-filter module that enables a significant improvement in the speed of simple testing. In the photovoltaic market, our new pressure control valve displaced a significant competitor. And in the industrial packaging and coding market, our multi-range, multi-gas mass flow controllers were designed into production roll coaters.

We also received a number of significant design wins for ultraviolet and green lasers, through applications to improve photovoltaic efficiency as well as to process advanced printed circuit boards.

As mentioned, we've set to close on the acquisition of ESI shortly, which will bring into the MKS portfolio, leading innovator and laser-based manufacturing solutions for the micro-machining industry. The acquisition further broadens our surround work piece offerings by adding advanced systems expertise and deep technical understanding laser materials interactions. We expect ESI's leadership in complex printed circuit board processing systems and other capabilities to provide MKS the opportunity to accelerate the roadmaps and performance of our laser, motion and photonics portfolio.

We continue to invest in and position ourselves to take advantage of market opportunities for our products in the semiconductor market, such as developing new solutions for 5-nanometer logic devices, 3D NAND stacks of 128 layers and beyond, and next-generation DRAM structures. Our strength and differentiation are based on our ability to work closely with our customers to develop solutions that address their most complex technical problems.

Jerry mentioned our financial success for the last five years. And the key component of this is our demonstrated ability to significantly outpace the semiconductor market growth rate. In fact, in the past five-year period, we have exceeded the semi growth rate by over 500 basis points.

Our outlook remains very positive as our continued design wins in the semiconductor market and strength in Advanced Markets positions us for long-term success with a balanced and growing portfolio of products and solutions.

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

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

Thank you, John. I'll cover the fourth quarter and full year financial results and discuss our Q1 2019 guidance.

Revenue for the quarter was $461 million, just slightly above the high end of our guidance range, primarily due to strong expected sales to semiconductor customers. This compared to revenue of $487 million in the third quarter 2018 and revenue of $512 million in Q4 2017.

Sales to semiconductor customers were $235 million, a decrease of 10% compared to the third quarter 2018, and sales to Advanced Markets were $226 million in the quarter, consistent with sales of third quarter driven by continued strength in Light and Motion division. Our mix of revenues partially evenly split between our semiconductor and Advanced Markets in the quarter, reflecting our balanced end market exposure. Sales in the Vacuum and Analysis division were $258 million, and sales in Light and Motion division were $203 million.

GAAP and non-GAAP gross margins was approximately 46%, slightly below our expectations at this volume, due to product mix and lower factory utilization. Non-GAAP operating expenses were $101 million, which was stable to low end of our guidance range, continued to undertake cost containment actions throughout the quarter, as well as adjustments to variable compensation plans. Acquisition costs related to ESI acquisition are excluded from non-GAAP operating expenses.

Non-GAAP operating margin is 23.7%, slightly favorable to our expectations at the revenue level through lower operating expenses. And the non-GAAP and GAAP tax rates, both approximately 21%, slightly above our projected rate of 19%, due to tariff lifts and taxable income. GAAP net income was $72 million or $1.32 per share, and non-GAAP net earnings was $84 million or $1.54 per share.

At the end of the fourth quarter, we had cash and short-term investments of $718 million, an increase of $99 million in the quarter, where 65% was in U.S. and 35% in our international operations. The balance outstanding in our term loan as of December 31 was $348 million. Free cash flow for the quarter was $109 million or 24% of revenue.

In terms of working capital, day sales outstanding was 58 days, inventory turns were 2.6 times at the end of the fourth quarter, both consistent with the third quarter.

In the quarter, we paid cash dividend of $11 million or $0.20 per share.

I'd like to now cover some highlights for the full year. For the full year 2018, we achieved record revenue of $2.1 billion, an increase of 8% compared to 2017 revenue. Our semiconductor revenue increased 4% to a record of more than $1.1 billion after $0.45 increase in 2017 on a pro forma basis. And our revenue to Advanced Markets achieved another year of double-digit growth, and increased 14% to $931 million, also a record. For the full year, revenue split between the semiconductor market and Advanced Markets were 55% and 45% respectively.

As a result of the strength of our operating model as well as the benefits from last year's Tax Reform Act, in 2018, we achieved a 31% increase in non-GAAP earnings per share and 8% increase in revenue over the prior year. Free cash flow was $351 million. It's also a record and was 17% of revenue.

In 2018, we maintained a balanced approach to capital deployment. We increased our dividend rate by 11% and paid a total of $42 million in dividend for shareholders. We repurchased $75 million of stock. We announced the acquisition of ESI is expected to close on February 1.

2018 was also another record year for Light and Motion division, as sales increased 15% to $814 million compared to 2017 revenue of $709 million. Annual sales in Light and Motion increased 35% compared to 2016 pro forma revenue, the year MKS acquired Newport Corporation.

Non-GAAP operating profit for Light and Motion was $211 million or nearly 26% of revenue compared to 10% of revenue prior to the acquisition.

Now, turning to Q1 2019 guidance, which excludes the effect of ESI acquisition, based on current business levels, we estimate that our sales in the quarter range from $400 million to $440 million. At this expected sales range, our Q1 gross margin could range from 44.5% to 45.5%.

Non-GAAP operating expenses could range from $112 million to $118 million. R&D expenses could range from $33 million to $35 million, and SG&A expenses could range from $79 million to $83 million. As a reminder operating expense were seasonally higher in the first quarter due to payroll taxes and certain fringe costs.

Non-GAAP net interest expense again excluding debt related to pending acquisition is expected to be approximately $3.1 million and non-GAAP tax rate to be approximately 19%.

Given these assumptions, first quarter non-GAAP net earnings could range from $52 million to $65 million or $0.95 per share to $1.18 per share. In the first quarter, amortization of intangible assets is expected to be approximately $10.4 million and GAAP interest expense is estimated to be approximately $3.7 million. GAAP net income is expected to range from $42 million to $56 million or $0.78 to $1.02 per share or approximately 54.6 million shares outstanding.

This conclude the prepared remarks, and I'll now open the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Sidney Ho with Deutsche Bank. You may proceed.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Good morning, everyone. Thank you for taking my questions. Maybe just to start off, what's your assumption in your guidance for -- between semis and other Advanced Markets for revenue growth of revenue?

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

Yes, this is Seth. Yes, I would assume that we again -- we don't really guide by market, but we can go to assumptions, I think we would -- expect that Q1 guidance would assume that the Advanced Markets are relatively steady in terms of fourth quarter.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, great. So I guess, well, if all the decline in revenue is coming from the semi side, my rough math would tell me it's down around 15% to 20% quarter-over-quarter. You started to see weakness about the same time as your one of the biggest customers. But your revenue outlook including guidance will be down like 40% from the peak level versus -- for them it's more like down 20%, 25%. Do you think you are at a level that should start growing in line with your customers or WFE starting say in Q2?

Gerald G. Colella -- Chief Executive Officer

Well, it's a little difficult for me to project where an upturn comes in the business. I think, I've been quoted to say, it's Jerry, that I feel like we are in canoe which we've been in before, that the length of the canoe which we've been in before that the length of the canoe, which is the termination. Despite the difference in guidance, we -- business at this -- when you hit this level, Sidney, this can be a bit lumpy.

And in Q4, as an example, we had customers that wanted to pull orders from Q1 into Q4. So, it looks like there's an imbalance between Q4 and Q1 because we had allowed them to take orders in early that they have some opportunities for revenue. And so that obviously affects what happens in Q1, Q2. But we think the business is consistent from here. The order rate is consistent. What's really great is we're seeing a lot of opportunities on design wins.

And frankly, I know this may seem odd, but we look at these downturns in our business as an opportunity to gain share. People want to do business coming out of these things with larger companies gives us an opportunity to reassess structure of our company, what our costs look like. So we are actually -- we've been through this, for me, 35 and a half years now. So I've been through all this and I can't account. But it feels consistent now. Like we said before, the business looks pretty steady and I'm not going to predict what Q2 or Q3 or Q4 looks like.

I have my team prepared. We're a lean company. Lead times are short. We have the ability to respond quickly. We have inventory a little higher, but we consider that store capacity that's why we can outpace the ramp of other people. So we feel pretty consistent with the business. And when it comes back, it will come back, and I've never been one to worry about the forecast (inaudible) operations. I told my team to forecast (inaudible) get over it, get fast. And that was 30 years ago and I feel the same way now.

But it feels consistent and what I'm really pleased with is the Advanced Markets is so strong. We're really grateful to the Newport team for the Light and Motion now what they've done to increase the stability of this business and give us another place to go, and that business will continue to grow. So I leave you with the thought that I think it's consistent for now, and I can't predict what the future looks like, but I'm very positive over time it will improve and we'll be the first ones to recover quickly.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. Thanks, Jerry. Just to be -- just to clarify that. So the upside in Q4 about $20 million seems like it's all coming from semiconductors, and that's the pull in that you talk about that potentially should have been in Q1.

Gerald G. Colella -- Chief Executive Officer

That's a mix, yes. But it's all -- it's pretty much all semi and it is the opportunity to provide customers product faster than they originally expected and than they asked for. That's correct.

Sidney Ho -- Deutsche Bank -- Analyst

And you also mentioned that your order has been consistent, I think, some time in Q4 and that hasn't really changed.

Gerald G. Colella -- Chief Executive Officer

Yes, it feels pretty consistent. It does.

Sidney Ho -- Deutsche Bank -- Analyst

Okay.

Gerald G. Colella -- Chief Executive Officer

And watch them every -- you know, I watch them every day. So, yes, that feels pretty consistent.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. And for me switching topic to the Advanced Markets side, it's great that you gave some background about how you think about that market. But if you look at the revenue from that market -- those markets, it's been slightly down, slightly for four consecutive quarters including the guide. Are you concerned that this market may be a little -- is there anything beyond just the normal business environment getting a little softer? Or do you think the growth rate is not as strong as maybe you had expected before?

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

Sidney, it is John. Let me take that one. So, we do see a little bit of more caution, mostly in Asia. And so it doesn't change our ability to win designs, but certainly spending is a little more muted there and has been maybe last year. But I think that's really part of the macroeconomic issues and perhaps some tariff issues. So, I don't think it's endemic about our ability to grow that Advanced Markets covenant in the future.

Gerald G. Colella -- Chief Executive Officer

And that's after two consecutive years of 14% growth. The average growth rate of those markets, Sidney, on an annual basis is 4%. So we consider what we've done last two years, we think there's continued opportunity there. And if you listen to the amount of design wins that John talked about, it was very wide and deep in terms of packaging, agricultural, synthetic diamonds, multiple solar opportunities and more thin film applications or industrial coding applications. So it's a wide swath of opportunities. So we feel very confident that our projected growth with those markets will be consistent.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Thank you very much.

Gerald G. Colella -- Chief Executive Officer

You are welcome.

Operator

And our next question comes from Amanda Scarnati with Citi. You may proceed.

Amanda Scarnati -- Citi Research -- Analyst

Good morning. Can you just clarify where the inventory levels are? Customers the last quarter, we talked about it could take another quarter or so for the burn out to continue? But if you saw pull-ins this quarter, is some of that inventory already collected at your key customers?

Gerald G. Colella -- Chief Executive Officer

Yes, Amanda, it's Jerry. So it's a little difficult for us to really project where the inventory level is by customer and customer. And oftentimes they will get some unique opportunities on a specific line to pull a product in more than they had expected. Typically, when we see these types of downturns in the last four quarters or so, people go through their inventory burns, I mean, I can't project where it is this time. But it does appear right now that there's a stabilization what we're seeing in terms of people, build schedules and what our inventory position is with them.

So, I think we're at a good place as far as stabilized businesses are concerned. But I really can't see into the inventories. And during these times too, you have a lot of mixed changes which affect sometimes what the inventory position looks like and the amount of revenue. But I'd say we're in a very good consistent spot at this point.

Amanda Scarnati -- Citi Research -- Analyst

And then can you just talk about the geographic split in revenue in the Advanced Markets? Is it more heavily weighted toward Asia? Just kind of continuing on the conversation from the last question, or is it more kind of heavily weighted to the US? Just kind of trying to gauge whether or not if macro conditions weaken, then we should see continued weakness.

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

Yeah. Hi, Amanda. We will get you the exact percentage, but most of the Advanced Markets opportunities are in Asia. China is the big market for us, but as well as Taiwan and Korea and Japan. So those are the major markets as well.

Amanda Scarnati -- Citi Research -- Analyst

And then you mentioned that design wins are still relatively strong in that market.

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

Yes, in certain markets. Yes, for instance, in certain markets, like solar, it's still very hot and still lots of opportunities and demand for new design wins.

Gerald G. Colella -- Chief Executive Officer

Just to give some additional color, all of the design wins that John just talked about in Advanced Markets, 90% of them came from either Europe or the United States.

Amanda Scarnati -- Citi Research -- Analyst

And then just a follow-on question I have is do you expect to update any sort of guidance next week once the ESI acquisition closes? Or is that just we'll hear more about more in next quarter?

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

Yes. This is Seth. Yeah, probably it'd be next quarter. So again, we're going to close on Friday, so evil time, you know the company kind of worked well seeing their integration has gone very well. We should make sure we get in there for a while, understand their business before we update the guidance, which is what we did in Newport as well, so our pretty standard procedure, so --

Amanda Scarnati -- Citi Research -- Analyst

Great. Thank you.

Gerald G. Colella -- Chief Executive Officer

Yes.

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

Thank you, Amanda.

Operator

And our next question comes from Tom Diffely with D.A. Davidson. You may proceed.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Yes, good morning. Couple more questions on the advanced materials side. So, I guess, first of all, when you look at your laser business and kind of the flattish environment we've been in for a while, that's much better than most of your peers that are calling for pretty big sequential decline. Is it just because you don't have as much exposure in the advanced (ph) market? Do you think it's geographic exposure or is it share gains? How do you think you guys are performing?

Gerald G. Colella -- Chief Executive Officer

Yes, Tom. So I'll talk little bit about the growth rate. So, we saw our laser revenue growth of 24% year-over-year on a full year basis, and there's multiple applications. So we're really happy with the strength. And then what that does is that pulled along with it other opportunities for optics and motion, beam profiling, and things on that line. So we're really thrilled about how we've seen the growth in that business. And John would like talk little bit about the applications and the difference.

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

Yes, Tom, I think we've mentioned it before, the difference really is the high power industrial type of laser applications versus the lower power pulse micro-processing laser business. And so we're exposed to the latter much more than the former. And I believe some of the peers that we have that have seen headwinds are really because they're exposed to that high power market.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. And then at this point, are there certain seasonal trends that you see in advanced packaging that have changed over the last couple of years as you've gotten more exposed on the laser side?

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

There is a bit of a cycle in terms of consumer products. So, there is a component of the business that we're starting to see a little bit of that where in the spring they kind of decide -- the big consumer products, people decide what their likely volumes will be for Christmas which then backs up the chip guys and the packaging guys, and all of that. But as Jerry mentioned there are many other markets so -- that aren't cyclical in that way.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. And then just finally switching over to the semiconductors side of the business, when you look at the different OEM customers, is there a difference in ordering patterns based on geographic locations, where your customers in Korea order at a different pace to rate than the ones in the US?

Gerald G. Colella -- Chief Executive Officer

It actually becomes down to their operational confidence and capability. There are customers that still stick to the old MRP process, where they want to build schedule looking MRP and they placed blanket orders. There are customers that we have lean arrangements with where as they build and pull our equipment, we restock it and then there are some hybrids between it. There are some people that buy inventory in advance of a ramp and stock the shelves until they're bulging. There are other customers that keep inventory lean and dependent on short lead times and cycle times to replenish it.

So, really, it's really all over the map. And I think we see with some customers we can sell that they appear to be, but we can't quite calculate or won't have any inventory because of their ordering patterns versus what their revenue appears to be and others that appear to be consistent. But it's really all over them.

We tried over the years because we're a lean provider, our short terms are very quick, and we have all lean factories and just-in-time delivery systems from our suppliers, so we have (inaudible) acquisition systems. And we have tried for years to convince our customers to move away from MRP and long-term contracting and schedule deliveries to rightsize supply because it just is consistent and just it takes all the forecasting concern out of it. And we've converted finally half our customers to see it that way and the other half remain with old line production problems. So it's really a mix.

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Okay. That's helpful. Appreciate it.

Operator

And our next question comes from Patrick Ho with Stifel. You may proceed.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Thank you very much. Jerry, maybe first off in terms of some of the design wins and the share gains you've talked about in your prepared remarks, are they all coming from the Advanced Markets side of things? Or are you also seeing gains and new opportunities on the semiconductor side? And if so on the semi, is it more in your core Vacuum and Analysis or on the Light and Motion side that you acquired from Newport?

Gerald G. Colella -- Chief Executive Officer

Yes. So Patrick, I'll split the question with John. The proponents of the design wins we mentioned in the script are all from the Advanced Markets. So, thin-film for beverages, synthetic diamond manufacturing. And it's across a number of different applications, whether it's power, microwave power or lasers or pressure control or mass flow control. So it's really nice to see that it's a wide swath of technology across multiple divisions and for multiple long-term applications. It's really widespread.

So, I'd say, V&A and L&M are enjoying almost equally the opportunity. We did talked about over $50 million of Light and Motion semiconductor design wins in 2018 and those were all cross-sell opportunities from the V&A group. So the old MKS, the Vacuum and Analysis group, our sales team worked with their customer base in semi to introduce the Light and Motion product portfolio, whether it'd be lasers or motion, and we saw over $50 million of cross sales in that case.

As far as the design wins in semi, I'll turn it over to John. He will give you little more color about that.

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

Yes, Patrick. So the answer is we're seeing both the Light and Motion and Vacuum and Analysis division to get semi design wins. And we didn't mention a lot about the semi design wins, but they continue to be very strong in power and plasma as well as in some of our gas analysis business groups.

Gerald G. Colella -- Chief Executive Officer

I know it sounds crazy, I mean to say, there are parts of downturns we like, because nobody likes that. But over my career with the company, we have always emerged stronger and larger of the downturn because of the design opportunities. And customers continually want to see larger, stronger global footprint of suppliers that they can depend on that are financially stable.

And our ability to increase the revenue in Advanced Markets makes us even more attractive to our semiconductor customers because they know we have the capability to invest in R&D and infrastructure and inventory because we don't suffer the same concern that somebody that saw(ph)semi dependent. So we're really looking forward to more market share gains during this design win. And I make our sales people get on the road even more so on the design wins side and maybe just get another order.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Great, that's helpful. Maybe Seth, as my follow-up question, in terms of the gross margins, I think you mentioned in your prepared remarks that it was primarily absorption. Would there -- any other variables that impacted gross margins both for the December quarter and your March quarter outlook or is it primarily just the lower revenue levels that are impacting that metric?

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

Yes, Patrick. So, yes, the bigger driver is lower volumes, you're right, and so it becomes higher when the factories aren't running at full capacity. So that's a big -- that's the biggest driver. Little bit of mix there too in Q4, just sort of forecast to continue in Q1 as well. But I would say that the acquisition and mix are the two biggest drivers for sure.

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Great. And good luck to you guys this Sunday in Atlanta.

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

Thank you.

Gerald G. Colella -- Chief Executive Officer

Thank you.

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

Thank you.

Operator

And our next question comes from Krish Sankar with Cowen. You may proceed.

Robert Mertens -- Cowen & Company -- Analyst

Hi. This is Rob Mertens on behalf of Krish. Thank you for taking my question. First question, just sort of around your semi customers' inventory, I know you've mentioned that it's very hard to gauge and there's a whole lot of moving pieces to the puzzle there. But for these customers that are sort of on the order inventory systems that tend to run higher inventory levels, do you expect bigger bounce back in demand once they run through this inventory and semi markets starts to rebound a bit? Is that the correct way to think about it?

Gerald G. Colella -- Chief Executive Officer

Yes. Actually they're counseling us to don't go away, keep your particular inventory high, keep your people in place, they want you to respond. And so look we won more awards for ramping ability than almost technology wins. So have no fear, we manage the expenses appropriately, but we'll be prepared and that's absolutely what will happen.

Sometimes people drain their inventory too low, and then they go, oh no, we drained too low. Can you respond quickly? And we're like, sure, we'll take any order and we'll turn it within a quarter if necessary. So that we expect it to happen. Some people come back consistently and other people just panic and place a bunch of orders, and we have to turn around quickly. We're used to that. We built a machine that respond to anything.

Robert Mertens -- Cowen & Company -- Analyst

Great. Thank you. And then just as a follow-up, turning to the Advanced Markets side of things, it looks like you're seeing strong steady demand, but maybe a little bit of a moderation in the second half of this year. And coming off of this high -- or this double-digit growth into maybe a softer macro demand environment, how should we sort of think about that throughout this year? I know you've mentioned a lot of design wins in a lot of different areas which is great. Is there a time frame that a typical design win goes into revenue recognition or is it all over the place instead of pretty specific application?

Gerald G. Colella -- Chief Executive Officer

Yes, it really varies in terms of the duration. Some can be almost immediate and some takes a year or two to come to fruition. The industry average for our Advanced Markets is 4%. So, the fact that we grew it 14%, two consecutive years, tells you about our design win and capturing share. And we expect and our internal goal is always twice what the industry average is. And so we will do whatever we need to do to get share, because we don't have 100% market share.

So you'd have the growth rate in the year moderate, our expectation is to get out in the street with our salespeople and our capability of the products to take share. So we still see the industry average as 4% and that's growing at least twice that over time. But you'll see these -- you may see a little bit of moderation due to tariff concerns, whatever the issues that may impact us. But over time, it's pretty significant.

And again, one of the things that I will reiterate, over 90% of the design wins, John mentioned in his portion of the script, were in Europe and the United States, which talked about a nice opportunity outside of Asia for the growth of the business.

So, John, do you want to comment anything else on Advanced Markets?

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

Yes, I think, we were always targeting that 2x the monthly growth rate as Jerry says, that's 8%, and you just overshadowed that for two years in a row. Our plan is to -- we expect to go another 8% this year. But we have a history of overshooting. And so that's what we'll strive for internally.

Robert Mertens -- Cowen & Company -- Analyst

Okay. Great. Thank you. Appreciate it.

Gerald G. Colella -- Chief Executive Officer

Thank you.

Operator

(Operator Instructions) And our next question comes from Mark Miller with Benchmark Company. You may proceed.

Mark Miller -- Benchmark Company -- Analyst

Just was wondering if the Chinese New Year along with the government shutdown especially for your research lasers for like (inaudible). Did that have any impact on your guidance for the third quarter?

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

No. Not at all.

Mark Miller -- Benchmark Company -- Analyst

Okay. Just was wondering about ESI. How exposed are they to the smartphone market?

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

Hey, Mark, this is John. Flex PCBs are used in the mobile smartphone market quite a bit, as well as other kinds of devices. So they have a fairly significant exposure to the phones which is good and bad. But the way we look at it is mobile has been very strong over many years. It was not as strong as past year for sure. And so if I have one customer, I think it's just the macro smartphone market, but we expect the content of flex to increase per phone going forward. So we still look at that exposure to mobile as a good thing from ESI perspective.

Gerald G. Colella -- Chief Executive Officer

Plus the application of things like automotive. If you think about dashboards on cars today, it's more -- anyway we have to twist and turn for some type of illumination or read-out. There will be a need for flexible PCB application. The growth of 5G over time which John mentioned about -- so we're excited about beyond mobile and personal devices with the application of the product.

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

Yes, Mark, the other -- I think you know that ESI had released a new via hole drilling tool, addressing the (inaudible) market, so not flex, and so that's the old market opportunity that is another growth driver as well, that's not as tied to phone.

Gerald G. Colella -- Chief Executive Officer

And that's all upside for them, all upside.

Mark Miller -- Benchmark Company -- Analyst

They had a strategic position of starting to develop their own lasers for some of their products. How has that turned along? Or will you be supplying some lasers for them?

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

Hey Mark, this is John again. So we had mentioned in the past, we actually won our first laser for their tool. And that was before we talked about buying them, so it was legitimate. But you're right, historically, they have had their own laser division that has supplied lasers to some of their tools, but historically they've also used other people's lasers at the same time. And so, of course, as we put ESI into the family, we will look at our laser division, and it may add to our laser portfolio at this stage, do some unique things there as well.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

Gerald G. Colella -- Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, that concludes our Q&A portion of today's conference. I would now like to turn your call back over to Jerry Colella, Chief Executive Officer, for any closing remarks.

Gerald G. Colella -- Chief Executive Officer

Thank you. We're pleased with our results for fiscal 2018. Despite the slowdown in semiconductor CapEx spending, we delivered record year for both revenue and non-GAAP net earnings. Our significant exposure to diverse end markets combined with our global leadership position in the semiconductor market will continue to drive sustainable and profitable growth. I am more confident than ever that the strategy will be put in place and position us for the long-term out performance.

Thank you for joining us on the call today and for your interest in MKS. We look forward to updating you on our progress when we report our first quarter 2019 financial results. Thank you.

Operator

Thank you. Ladies and gentlemen, that now concludes our conference call. Thank you for attending and have a great day. You may all disconnect.

Duration: 42 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

Sidney Ho -- Deutsche Bank -- Analyst

Amanda Scarnati -- Citi Research -- Analyst

Thomas Diffely -- D.A. Davidson & Co. -- Analyst

Patrick J. Ho -- Stifel Nicolaus -- Analyst

Robert Mertens -- Cowen & Company -- Analyst

Mark Miller -- Benchmark Company -- Analyst

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