MKS Instruments, inc (MKSI) Q3 2021 Earnings Call Transcript

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MKS Instruments, inc (MKSI -2.36%)
Q3 2021 Earnings Call
Oct 28, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the MKS Instruments Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your host, David Ryzhik.

David Ryzhik -- Vice President of Investor Relations

Good morning, everyone. I am David Ryzhik, and Im joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the third quarter of 2021, which are posted to our website, mksinst.com. As a reminder, various remarks today are about future expectations, plans and prospects for MKS comprise forward-looking statements, and actual results may differ materially as a result of various important factors, including those discussed in yesterdays press release, and in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. These statements represent the companys expectations only as of today and should not be relied upon as representing the companys estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various financial measures. All forward-looking financial measures exclude any contribution from Atotech Limited, the acquisition of which we expect to close by the end of the year. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures.

Now Ill turn the call over to John.

John T. C. Lee -- President, Chief Executive Officer & Director

Thanks, David. Good morning, everyone, and thank you for joining us today. We delivered strong third quarter results with revenue of $742 million and net earnings per diluted share of $2.79. Im very pleased with the strong execution of the entire MKS team as we work tirelessly to address supply chain constraints while remaining focused on technology innovation and design win opportunities with our customers. Sales to our semiconductor market grew 36% year-over-year and 13% sequentially to another record and was led by broad-based strength across our differentiated vacuum and photonics portfolios. We delivered another record quarter in our RF Power Solutions business which benefited from robust demand from leading-edge 3D NAND applications. As memory manufacturers scale 3D NAND to higher layer counts and greater density, we anticipate a continuing need for higher power and more precise RF generators for high aspect ratio etching. We are the market leader for these solutions and remain well positioned to continue solving these challenges for our customers.

In fact, following an outstanding 2020 where we delivered triple-digit growth and significant market share gains, revenue from our RF Power Solutions has grown more than 50% year-to-date, translating to another year of meaningful market share gains. We also saw continued momentum in our plasma and reactive gas solutions with strength in our dissolved ozone products for wet clean applications. Given the increased need for water efficiency and semiconductor fabrication, we have designed a solution that recycles unused ozonated water. And Im pleased to say, in the third quarter, we installed our first system in a leading-edge semiconductor fab, and are seeing growing interest from other customers. Sales of our photonic solutions to the semiconductor market grew notably in the third quarter, partly due to our acquisition of Photon Control early in the quarter, as well as continued growth in our optical solutions for lithography, metrology and inspection applications. Our high-performance optical assemblies enable our customers to increase throughput while moving to shorter wavelengths and finer features.

As we look out into the fourth quarter, demand in our semiconductor market remains strong. And we anticipate revenue to remain consistent to slightly up relative to third quarter levels. And this does factor in the continued industrywide supply chain constraints that we are all facing. We continue to make good progress in our Advanced Markets, which grew 10% year-over-year but declined 20% sequentially, primarily due to the seasonality in our flex PCB drilling business, which we mentioned in our second quarter call. Design and win activity remains strong. We secured picosecond laser design wins for solar and PCB cutting applications, and won a meaningful world-class optics design for a defense application. We added another beta customer for our HDI Via Drilling solution. Im also very proud to announce that we received the Laser Focus World Magazines Innovators Award for Excellent Innovation for our CapStone flexible PCB via drilling solution. For the fourth quarter, we expect revenue from our Advanced Markets to be consistent to slightly up driven by steady demand across our end markets. I also wanted to provide an update on our pending acquisition of Atotech.

We are progressing as planned and continue to expect the transaction to close by the end of this year. Atotech transaction is all about accelerating the next frontier in miniaturization and complexity for advanced electronics manufacturing. And we are looking forward to combining our highly complementary expertise and capabilities to optimize the interconnect. High-performance interconnects are the highways that carry the massive quantities of data between semiconductors, sensors and other components in advanced electronic devices. We believe that optimizing the interconnect requires a cross-collaboration of laser-based processing and advanced chemistry applications to meet rapidly evolving customer requirements. Here is an example of how a high-density interconnect PCB in a mobile device has evolved in a short period of time. Since 2007, the number of vias on an HDI PCB panel have increased more than four times from 250,000 to more than one million. This has resulted in a more than 60% decrease in the size of the lines and spaces as well as the diameters of the vias. These smaller geometries and greater density have been vital to enabling more functionality in our phones such as more cameras, microphones, facial recognition, LiDAR front cameras, 5G antennas and more.

These changes have also made it possible for smartphone makers to build in larger batteries while delivering thinner form factors. Enabling this rapid scaling of PCBs is what we and Atotech do. We believe these trends will only continue over time, and we are excited to harness our combined capabilities to accelerate new designs and road maps for our customers. We are also excited about Atotechs General Metal Finishing business or GMF. This is well -- which is well positioned for a number of attractive secular trends such as automobile premiumization, electrification and lightweighting as well as the industry transition to Chrom VI alternatives. This business also provides plating of new plastics for 5G antennas and chemistry for renewable energy applications such as solar and wind turbines. Needless to say, we are eager to close the transaction given our excitement about the opportunities that lie ahead for the combined company. With that, Id like to turn the call over to Seth.

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

Thank you, John. Ill cover our third quarter results and provide additional detail on guidance for the fourth quarter. Sales for the third quarter was $742 million, up 26% year-over-year and down 1% sequentially. While sales are negatively impacted by industrywide supply chain constraints in the third quarter, our team continued to execute well, respond to our customer needs to allow us to exceed the midpoint of our guidance. Even supply chain constraints, sales to the semiconductor market set another record at $488 million, up 36% year-over-year and up 13% sequentially, reflecting broad-based demand from our semiconductor capital equipment customers. In particular, we delivered record revenue from our RF Power, pressure and plasma and reactive gas solutions. We also delivered strong growth in photonics revenue from semiconductor customers. This included continued momentum in our OCTO Solutions business as well as a $15 million contribution from the acquisition of Photon Control, the market leader in temperature measurement for the semiconductor market. This acquisition represents another seamless extension of our Surround the Chamber portfolio and the integration is already well ahead of schedule.

MKS broad vacuum and photonics portfolio allows us to address the widest array of critical semiconductor manufacturing steps, spanning deposition, etch, wet clean, lithography, metrology and inspection, which we believe is unique to the industry. Sales to our Advanced Markets grew 10% year-over-year to $254 million in the third quarter and declined 20% sequentially, primarily due to seasonality demand for a flexible PCB via drilling solutions, which we discussed in our second quarter earnings call. In addition, sales of industrial applications soften the third quarter due to supply chain constraints impacting our vacuum portfolio. However, demand trends in these applications also remain healthy. For example, in synthetic diamond manufacturing, weve seen growing demand for our microwave pressure inflow products that are critical to the chemical vapor deposition process used in the manufacturing of synthetic diamonds. For the third quarter, the revenue split between our Semiconductor and Advanced Markets was 66% and 34%, respectively. Third quarter gross margin was 47%, a decrease of 40 basis points sequentially due to marginally higher input costs, but up 190 basis points year-over-year.

Third quarter operating expenses were $148 million, up less than $1 million sequentially. It was in our expectations for the quarter. Third quarter operating margin was over 27%, a decrease of 60 basis points sequentially, but up 400 basis points year-over-year, which reflects the strong operating leverage in our financial model. Adjusted EBITDA in the third quarter was $222 million, resulting in adjusted EBITDA margin of 30%. Net interest expense in the third quarter was $6 million and a non-GAAP tax rate was approximately 20%, reflecting the geographic mix of our taxable income. Net earnings for the third quarter were $155 million or $2.79 per diluted share. In terms of working capital, days sales outstanding were 54 days at the end of the third quarter compared to 52 days at the end of the second quarter. Inventory turns were 2.9 times in the third quarter compared to three times in the second quarter. We remain focused on improving our cash conversion cycle, and third quarter operating cash flow was $153 million and free cash flow was $133 million. We had increased our dividend in the second quarter by 10%, and made a dividend payment in the third quarter of $12 million or $0.22 per share. Exiting the third quarter, maintained a strong balance sheet and liquidity position with cash and short-term investments of $880 million.

Our term loan principal balance was $827 million at the end of the third quarter, and we exited the quarter with a $53 million net cash balance, which included a net payment for the Photon Control acquisition of $268 million. As John mentioned, our pending acquisition of Atotech is receding as planned. Integration planning activities are progressing very well. Were also pleased to announce have successfully syndicated our debt financing on October 22. Our term loan financing was two times oversubscribed, comprised of two tranches, a USD4.7 billion loan and 225 basis points over LIBOR with a 50 basis point floor. And a euro tranche of EUR500 million and 275 basis points above Euribor with a zero basis point floor. Both tranches were priced at 99.75. The financing will coincide with the close of acquisition of Atotech and subject to customary ticking fees. We believe this overwhelmingly strong interest from the lender community is a testament to static rationale of the acquisition as well as a strong combined financial model and a track record of successful acquisition integrations and deleveraging. We look forward to closing the acquisition and excited to welcome the talented Atotech team to MKS.

Ill now turn to our fourth quarter outlook, which excludes any contribution from Atotech. We estimate fourth quarter revenue of $760 million, plus or minus $30 million. This forecast includes the headwinds of industrywide supply chain constraints which we expect to persist through the fourth quarter. However, overall business levels are expected to remain strong. Based on anticipated product mix, revenue levels and elevated input costs, we estimate fourth quarter gross margin of 46%, plus or minus one percentage point. And operating expenses of $151 million, plus or minus $4 million. For the fourth quarter, net interest expense is expected to be approximately $6 million, and our tax rate is expected to be 18%. Given these assumptions, we expect fourth quarter net earnings of $2.85 per diluted share, plus or minus $0.26.

Id like to now turn the call back to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti of Needham. Your line is open.

Jim Ricchiuti -- Needham -- Analyst

Hi. Good morning. A couple of questions on the Advanced Markets business. Im wondering if you can give us any sense as to how you see the equipment portion of that business in the current quarter. Is there any kind of disruption as it relates to some of the supply chain issues that were seeing throughout the consumer electronics market?

John T. C. Lee -- President, Chief Executive Officer & Director

Jim, thanks for the question. Its John. Yes. I think when we look at the Advanced Markets and the contributions from the various divisions, the expectations for Light and Motion and Equipment and Solutions were consistent with what we expected. And the constraint -- the supply chain constraints manifested mostly in the D&A side of the business. As you know, we have supply chain constraints on the D&A side, and weve talked about the semi equipment side of it. But obviously, those constraints also affect the portion of the Advanced Market business for D&A as well.

Jim Ricchiuti -- Needham -- Analyst

And John, are you satisfied with the progress youre seeing in HDI? Or is it -- you added another customer there. But Im just wondering the existing customers that youre working with, are you seeing the kind of scale up that you anticipated? Or is this just because its a new product, its taking longer to scale it?

John T. C. Lee -- President, Chief Executive Officer & Director

Yes. No, were really happy with the customers that weve previously announced that have placed volume orders. So those tools have been running in production 24/7 for the past six to eight months. And those tools have been performing well. And we also have these other design wins with other large volume PCBA manufacturers. And when they ramp, we certainly expect that the orders will pick up. The interest on testing our tools remains very high. So we continue to do demos for various customers. And our goal is to make sure that we continue to get these beta sites, get the design wins. And then when they ramp, then we should see the volumes pick up.

Jim Ricchiuti -- Needham -- Analyst

Ill jump back in the queue. Thank you.

Operator

Thank you. Our next question comes from Patrick Ho of Stifel. Your line is open.

Patrick Ho -- Stifel -- Analyst

Thank you very much and congrats on a really nice quarter given the circumstances. John, maybe following up, the supply constraint issues, as you mentioned, continue to persist. But you guys did a really good job in both the September and the December quarter outlook on the semiconductor side of things. Can you just qualitatively provide a little more detail? Are they the same components, the same issues that you experienced in the September quarter? Or are things changing kind of on a dynamic basis where one thing may be resolved and something else pops up? Can you just give a little bit of color of the issues youre dealing with?

John T. C. Lee -- President, Chief Executive Officer & Director

Thanks for the question, Patrick. Its the latter. So when a particular part becomes constrained, we solve that issue and then another one would pop up. And so this has been true for the last couple of quarters. So these supply chain constraints, they are still largely about electronic components, but not the same electronic components. So as we solve each one, then any one pops up. Id say the difference in this particular cycle with supply chain constraints is that were partnering with our customers much more closely. And Id like to -- that partnership has been great to see. So working with them to resolve supply chain constraints, working with them to design substitute components. Thats actually been a silver-lining in the supply chain constraint issues, this stronger relationship with our partners and customers.

Patrick Ho -- Stifel -- Analyst

Great. As my follow-up question, it looks like you continue to gain share on the RF Power side of things. You talked about the 3D NAND applications. High aspect ratio is something thats also becoming a bigger application in DRAM. Do you see, I guess, progress in gains continuing on the RF Power front, particularly at DRAM as more and more of these high aspect ratio applications as well?

John T. C. Lee -- President, Chief Executive Officer & Director

Yes, Patrick. Were really excited about the industry trend toward vertical structures in general. That was started by even earlier than 3D NAND with FinFETs. 3D NAND certainly accelerated that. And we think that, as you pointed out, DRAM has become very vertical as well. And then, of course, when 3D DRAM becomes a reality, thats going to continue that trend toward verticality in the semiconductor industry. And the experience that weve had over the last six or seven years in developing our power solutions for that, that really puts us in a pole position to offer those solutions and develop new solutions as these new challenges come up.

Patrick Ho -- Stifel -- Analyst

Great. Thank you.

John T. C. Lee -- President, Chief Executive Officer & Director

Thanks Patrick.

Operator

Thank you. Our next question comes from Krish Sankar of with Cowen & Company. Please go ahead.

Krish Sankar -- Cowen & Company -- Analyst

Hi. Thanks for taking my questions. I had two of them, too. John, I remember you said last quarter, September revenues would have been $750 million without supply constraints, and Im assuming some of that got pushed into December. So if I look at it, without supply concern, it looks like September to December quarter, the revenues are flat. Am I thinking about it right? Or is there something else going on? And then I have a follow-up.

John T. C. Lee -- President, Chief Executive Officer & Director

No. I mean, in our semi business, its certainly going up quarter-to-quarter. Supply constraints, we certainly wanted to highlight that. But if you think about our Q2 to Q3, a decrease in revenue, remember that E&S was, due to its natural cyclicality, was going to go down about $50 million. So we actually did better than that with the rest of the business. So when you take that out, were actually up quarter-over-quarter. And then Q4 is also the cyclical downturn -- a down quarter for E&S. And so our guidance for Q4 is actually also up quarter-over-quarter relative to Q3.

Krish Sankar -- Cowen & Company -- Analyst

Got it. Got it. Thats super helpful. And then I just had a follow-up. I think Seth kind of mentioned about higher input costs impacting gross margins. It looks like everyone in the supply chain is increasing prices. And I understand its hard for you to increase price for your semi customers, maybe they pay for shipping, but not for product price increases. But are you doing any price increase on the Advanced Market side where you have a longer tail of customers?

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

Yes, Krish, its Seth. Ill take that question. Yes. So we have higher input costs in Q3 and obviously through Q4, and we dont have a view on that will kind of abate. But you might recall, we have a pretty unique process in MKS called the Profit & Cash Recovery Team. So weve had that in place for probably 6, seven years. So what I would kind of say is we meet on a monthly basis at the executive level and the next couple of levels down in the organization, its really global initiatives. And thats all designed to exactly do exactly what you mentioned, kind of drive profitability improvements. And theres many levers there. Its obviously -- we try to drive down product development costs, higher margins, the low-cost country migration. Theres always a level of pricing ability in that mix as well. So thats an ongoing cadence. We need again on a monthly basis. We do offset inflation every year, simple inflationary pressure. And then also create opportunities to invest in other areas in the business. So I would say, not to give the details about pricing dynamics, but that is part of the overall equation. And its, again, an embedded process weve had for a number of years, has been very successful, and thats very much robust today.

Krish Sankar -- Cowen & Company -- Analyst

Got it. Thanks Seth.

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

Yeah, Youre welcome.

Operator

Thank you. Our next question comes from Paretosh Misra of Berenberg. Your line is open.

Paretosh Misra -- Berenberg -- Analyst

Thanks guys. Good morning. So regarding Atotech, can you talk about the cyclicality in the PCB business? Does that industry need more capacity similar to what we are seeing in the semis business or supply versus demand?

John T. C. Lee -- President, Chief Executive Officer & Director

Theres different aspects to the PCB industry. So in terms of high-density interconnect, its less cyclical because that covers many, many more types of end devices. In terms of flexible PCB, thats a little more cyclical because the adoption today is strongly influenced by smartphones and those advanced devices. And thats also spreading across different types of advanced devices as well. So if thats a proxy for the Electronics division of Atotech, theres certainly less cyclicality than the semi equipment type of business. But its also growing very fast because the growth of semiconductors as well.

Paretosh Misra -- Berenberg -- Analyst

Got it. And then looking further ahead, what sort of opportunities do you think exists for Atotech to increase their content per device? Because I would think that as devices get smaller, theyre probably likely to use more of these chemistries and materials per device.

John T. C. Lee -- President, Chief Executive Officer & Director

Yes. No, we are excited about once we close the kinds of opportunities for us to work together with Atotech, with our laser drilling group to provide solutions to our customers faster. And I think theres a great amount of opportunity there to increase share for both the Atotech side and the MKS side. Weve talked about that in the past. And to your point, as features get smaller, it requires the ability to deliver advanced processes, and that requires investments in R&D. And as you know, Atotech invest more in R&D than any of their competitors. And its also part of the MKS DNA. We like industries that continually evolve, continually require more difficult challenges and require investments in R&D. And I think thats really a formula for success for MKS and also a formula for success for Atotech.

Paretosh Misra -- Berenberg -- Analyst

Thanks, John.

John T. C. Lee -- President, Chief Executive Officer & Director

Thanks, Paretosh.

Operator

Thank you. Our next question comes from Tom Diffely of D.A. Davidson. Your question please.

Tom Diffely -- D.A. Davidson -- Analyst

Yeah. Good morning. Thank you. John, I was wondering, another Atotech question. Have you been able to collaborate with them over the last couple of quarters, any kind of joint development work going on ahead of the potential close?

John T. C. Lee -- President, Chief Executive Officer & Director

Well, weve been working with them before any announcement on the acquisition as well. So that kind of work continues, Tom. And thats kind of normal business as we are still independent companies. But certainly, we are in the middle of integration planning. And while were keeping to the fact that were both independent companies, we can start planning on what we might do together afterwards. But the regular collaboration type of work that the two independent companies work on, that has continued.

Tom Diffely -- D.A. Davidson -- Analyst

Great. Okay. And then, Seth, another supply question. Obviously, it looks like issues continue into the fourth quarter. When youre talking to the suppliers, do you get any sense as to when either excess capacity comes on board or when they think the supply constraints might alleviate?

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

Yes, its a good question, Tom. And I think John can answer this question a little bit as well because its kind of a fluid situation. As John mentioned, well solve kind of one component shortage and will pop up kind of next day. So its kind of our approach the last couple of quarters. And thats not too atypical in a big ramp environment. Obviously, were much higher in record volumes. Its much more magnified. But its really no. Its continued working through each of the suppliers, working closely with them. As one issue comes out, we solve. Another one comes out noon, we solve that one. So its kind of that type of process at this point in time. So its hard to say when it will be alleviated. But everybody is working, and a lot of smart people are kind of driving the right behavior. And our team, I said before, has done, I think, a great job because we did beat the midpoint of our guidance for the quarter. And were working very hard to keep our customers, obviously, product in their hands as well.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. And that 40% -- or 40 basis point input cost hit in the quarter, do you expect that to stay roughly at the same level for the next couple of quarters?

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

Yes. Its probably -- so youre right, in Q3, probably about 40 basis points is our estimate. In the fourth quarter, the guidance is probably a little bit marginally higher. And its kind of hard to say when that will kind of abate going forward. I did mention earlier, kind of answer to a question, we do have a profit and cash recovery process, which again is how we kind of mitigate any major increases on input cost, inflationary pressure. So were going to lean into that probably a little bit more, obviously, going forward. But its probably a little bit north of 50 basis points in Q4 at this point is our estimate.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. Thanks for your time.

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

Thanks, Tom.

Operator

Thank you. Our next question comes from Joe Quatrochi of Wells Fargo. Please go ahead.

Joe Quatrochi -- Wells Fargo -- Analyst

Yeah. Thanks for taking my questions. John, I was curious of your thoughts on the semi cycle. Typically, MKS outperforms WFE when things are -- and then when things slow, you see it a little bit more just from an inventory correction standpoint. But clearly, the supply chain dynamics are having inventory levels be much leaner. So I know its hard to predict what happens. But I guess how do you think about that in terms of maybe a softer landing for MKS or maybe even to some extent, a bit of an inventory restocking?

John T. C. Lee -- President, Chief Executive Officer & Director

Yes, Joe, those are probable outcomes of the fact that we are in a supply chain constrained environment. So things are pushing to the right for our customers, for us. And so logically, that extends any kind of cycle for sure. And then to your point, if a downturn comes, then people are going to need to replenish their inventory. Theres not a lot of inventory just sitting out there, obviously. And then when you think about MKS performance relative to WFE, our model is 200 basis points above long-term WFE. And we dont like to cherry pick. We like to look at the long term. Because if you take the last two years, 2020 and projected 2021, we will have outperformed WFE by 1,000 basis points. But if you take it back five years, six years, thats the 200 basis points that we have modeled. And we still subscribe that thats the model that we should -- you should expect from us.

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

I just want to add one point to that, too, is weve got about $1 billion run rate in our Advanced Markets business. So just emphasize the fact that we have worked really hard to be broad-based revenue stream. And Atotech will add to that dynamic going forward as well. So even though a majority of our sales now are obviously in the semi market, we do have other areas that kind of balance that out throughout any cycle. And the service business also has grown substantially as well. Its a pretty sticky business. So we worked pretty hard over the years to make that operating model pretty robust and pretty rock solid in any type of cycles we see.

Joe Quatrochi -- Wells Fargo -- Analyst

Got it. And then just on the Advanced Market side, you talked about the industrial application softness just from supply chain dynamics. Does your guide assume a similar level of impact in the fourth quarter? Or does things get maybe a little bit worse before they get better? Got it. And then just on the Advanced Market side, you talked about the industrial application softness just from supply chain dynamics. Does your guide assume a similar level of impact in the fourth quarter? Or does things get maybe a little bit worse before they get better?

John T. C. Lee -- President, Chief Executive Officer & Director

Our guide is flat to slightly up in both markets, as we said. So were thinking that we could do a little better even with the supply constraints coming up. So I dont think were saying the supply constraints are getting better. In fact, they may be as bad or worse even. But I think our ability to deal with it is better. And our ability to partner with customers is certainly a lot better, as I mentioned earlier. So thats why were comfortable with our guide of flat to slightly up in both markets, Joe.

Joe Quatrochi -- Wells Fargo -- Analyst

Got it. Thanks.

John T. C. Lee -- President, Chief Executive Officer & Director

Thank you Joe.

Operator

Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Your line is open.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks for taking my questions. Maybe just a follow-up to the supply constraint question. Looking back to third quarter, was the total revenue being constrained roughly what you expected? And if you kind of look at Q4, see if you can quantify the impact of the supply constraints, both on both the revenue and gross margin line. And specifically related to gross margin, I understand you talked about higher input costs. But being down quarter-over-quarter, excluding that impact, what would be the reason behind that?

John T. C. Lee -- President, Chief Executive Officer & Director

So I think that impact is part of it, and then theres probably a little product mix. Theres also a little bit of inefficiency in our factories as the supply comes in, its lumpy. But I think thats kind of in the noise, Sidney, I wouldnt read too much. Were not trying to say that gross margins are changing except for these kinds of inefficiencies brought on by the supply constraints and inefficiencies that they cause in our factories. So theres nothing more to the gross margin guidance than that. And then to your other question about how much of the supply constraints we expect in Q3 materialize, yes it was probably in that order that we talked about of the $30 million we talked about earlier, plus or minus. That was our range, and we did better. We did better in Q3 than we guided. In Q4, we maintain the range, plus or minus $30 million. Just as we talked about earlier, we dont see the supply chain constraints changing much. The challenge is still going to be there. Our ability to deal with it as an industry and as MKS seems to be a little better. And well see how we end up at the end of the quarter.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. Maybe my follow-up question. On the operating expenses side, youve done a pretty good job in the past few quarters staying between $140 million and $150 million range. And keeping incremental operating margin above your target of 40% for a number of quarters now. How should we think about OpEx trajectory beyond Q4, excluding the Atotech, obviously? Do you think there will be some catch-up in spending, maybe some expenses coming back, maybe you need to hire more people, etc?

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

Yes, Ill take that, Sidney. So what I kind of think about it, if you take the Q4 guidance on OpEx and annualize that as starting point, and then probably add in roughly the inflationary piece of -- on top of that, 3%, 4%, thats probably a pretty good estimate for next year. Were still doing a budgeting process right now in the planning process. But I think it gives you kind of a pretty good sense of what were thinking next year on OpEx. We are going to lean into a number of areas. We do a number of investments in R&D. But again, I mentioned we were able to offset that from other cost initiatives as well. So even though the up sort of inflationary amount, I believe, next year, were going to lean into other product development areas that we think are very compelling in the long term.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. Thank you.

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

Yeah. Youre welcome.

Operator

Thank you. Our next question comes from Mark Miller from the Benchmark. Your line is open.

Mark Miller -- Benchmark -- Analyst

Thank you for the questions and congrats on the quarter. Just wondering any comments about what youre seeing in the bookings trend.

John T. C. Lee -- President, Chief Executive Officer & Director

Yes, Mark, we usually dont discuss the bookings, but I would comment that they remain very strong. Obviously stronger than we can ship as we talked about all quarter. So one of the things we look at, Mark, in terms of the semi side is, if things -- delivery requests starts sliding to the right, that might be an indication of a downturn. Were seeing nothing of that. Its all the other way. Were also seeing booking windows open up, extend from our customers as they try to get in line further and further out into the future. So it remains very strong, very robust, and we really have no concerns about that. Were really all focused on getting the supply so we can deliver the products at this point.

Mark Miller -- Benchmark -- Analyst

And as a follow-up, the several new fabs have been discussed coming up starting next year. When do you expect youll start to be impacted and your bookings will start to be impacted by the ramp in the new fabs? Second half of next year?

John T. C. Lee -- President, Chief Executive Officer & Director

If you think about some of the fabs that have been announced, theyre just literally digging the holes right now, kind of in Arizona. Austin, Texas hasnt even started digging the holes, theyve got the land though, right? So these sites will take at least 1.5 years, two years to be ready to have equipment put in. And then, of course, those companies have to decide that the business justifies that. So I dont think its a second half 2022 for those fabs. But there are a lot of empty shelves or fabs with capacity to add. And so I think those new fabs, its probably a two year lead time. And of course, I think you can ask the chip companies that they may say similar things or longer or shorter, but its at least in that time frame.

Mark Miller -- Benchmark -- Analyst

Thank you.

John T. C. Lee -- President, Chief Executive Officer & Director

Thanks, Mark.

Operator

Thank you. [Operator Instructions] We have a follow-up question from Jim Ricchiuti of Needham. Your line is open.

Jim Ricchiuti -- Needham -- Analyst

Yes. Just a question on -- again, going back to the Advanced Markets, the way youre characterizing the business in Q4. What Im wondering is if we pull out and look at the Light and Motion business and perhaps pull out some of the semi-related portion of that business. Im curious what kind of trends youre seeing in that business. Just because it is -- some of it is a proxy for the broader economy. And there have been some pockets where theres been some slowing. Are you seeing any change in order patterns in that Light and Motion business, excluding the semi area?

John T. C. Lee -- President, Chief Executive Officer & Director

Yes. Thats a great question, Jim. We actually look at that very carefully. We break out the semi part of Light and Motion and then we look at the rest, the Advanced Markets. Certainly, the semi side is growing faster. You would expect that given the build-outs in WFE. But the Advanced Markets are also growing kind of double digits. So thats really a great sign. And as you know, its different markets, solar, its display, its advanced manufacturing and defense even. So -- but were happy with the Advanced Markets growth of the Light and Motion division. Thats actually been double digits right now.

Jim Ricchiuti -- Needham -- Analyst

Okay. And youre seeing that across geographies?

John T. C. Lee -- President, Chief Executive Officer & Director

Its a good question. I think its still strongly Asia focused, but thats because a lot of our business is Asia focused. More of the GDP type businesses like research, et cetera, thats probably not geographic. Its everywhere.

Jim Ricchiuti -- Needham -- Analyst

Got it. Thanks a lot.

John T. C. Lee -- President, Chief Executive Officer & Director

Thanks, James.

Operator

At this time, Id like to turn the call back over to David Ryzhik for closing remarks.

David Ryzhik -- Vice President of Investor Relations

Thank you, everyone, for joining us today and for your interest in MKS. Operator, you may close the call, please.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

David Ryzhik -- Vice President of Investor Relations

John T. C. Lee -- President, Chief Executive Officer & Director

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

Jim Ricchiuti -- Needham -- Analyst

Patrick Ho -- Stifel -- Analyst

Krish Sankar -- Cowen & Company -- Analyst

Paretosh Misra -- Berenberg -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

Joe Quatrochi -- Wells Fargo -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Mark Miller -- Benchmark -- Analyst

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