MKS Instruments (NASDAQ:MKSI) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
MKS Instruments reported Q2 2026 revenue of $1.25 billion, up 16% sequentially and 28% year over year, with gross margin at 47.6% including certain discrete benefits.
The company highlighted strong demand across semiconductor, electronics, and specialty industrial markets, driven by AI investments and significant order activity, leading to a positive outlook for Q3 with expected revenue of $1.35 billion.
Strategic initiatives include scaling operations with new facilities in Malaysia and Guangzhou to meet growing demand, especially in the chemistry equipment sector, and maintaining a focus on deleveraging and disciplined financial management.
Full Transcript
Paretosh Misra, Vice President of Investor Relations
Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer, and Ram Mehpark, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the second quarter of 2026, which are posted to our investor website at investor.nks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS Instruments 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 most recent annual report on Form 10-K and any 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.
During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non-GAAP financial results and reconciliations to our GAAP measure. Our investor website also provides a detailed breakout of revenues by end market and division.
Now I'll turn the call over to John.
John T.C. Lee, President & Chief Executive Officer
Thanks, Paretosh, and good morning, everyone. Momentum is continuing to build at MKS Instruments. Strong demand across all of our markets. Second quarter revenue and key profitability metrics came in at the high end or above our guidance ranges. Our Q3 guidance is supported by strong order activity that we expect will drive continued robust year-over-year growth. Against the backdrop of intensifying AI-driven investment across semiconductor and advanced packaging applications, we are demonstrating the strength of our foundational position.
From vacuum plasma power products that enable leading-edge etch and deposition applications, to optical components and photonic subsystems for the lithography, metrology and inspection markets, to laser systems, proprietary chemistries, and chemistry equipment for the advanced circuit boards on which leading-edge semi devices are integrated, we are a leading enabler of advanced electronics. This is MKS Instruments at its core. Our performance reflects the benefits of investments we've made and continue to make in broadening our capabilities and expertise, deepening our relationships with customers across the electronics ecosystem, and building out the global capacity needed to meet the unprecedented demands of this investment cycle. We're not only excelling in the current environment, but also generating new design wins that position us to capitalize on long-term growth opportunities. Now I'll review our Q2 end markets performance and Q3 outlook. Starting with our semiconductor market, revenue was above the midpoint of expectations as we and our supply chain partners continue to ramp our operations.
Revenue grew 19% sequentially and 28% year over year, which accelerated meaningfully from the 13% year-over-year result in Q1. Growth was broad-based across deposition and etch products including RF power for NAND upgrades and vacuum subsystems, plasma generators, reactive gases, advanced logic and DRAM applications. Our photonics and optics solutions also continue to gain momentum in the lithography, metrology, inspection market. Overall, we continue to see strong order activity and very healthy order backlog that gives us good visibility through the second half of the year.
We also continue to achieve design wins, including in advanced logic where we are the process tool of record for dissolved gas applications, and in RF power where we have segment share leadership in high aspect ratio dielectric etch applications. Our semi outlook for Q3 implies year-over-year growth will accelerate to overall over 50% with strength across our entire portfolio of solutions. This anticipated growth is an indicator of MKS Instruments' long-standing track record of WFE outperformance during improving investment environments.
Turning to electronics and packaging, AI-related applications are driving a meaningful increase in investment. Revenue was above the high end of our outlook, up 19% sequentially and 44% year over year. Laser drilling system sales into the flex PCB markets for advanced smartphones and peripherals were strong, and chemistry sales remained robust as well. In chemistry equipment, we said last year that order activity had been elevated for multiple quarters.
It has moved another level above that. Our chemistry equipment demand is easily the strongest it has ever been, supported by AI server investments including optical modules. Our visibility now extends through 2027, and to meet this growing demand we recently announced we are doubling the capacity of our Guangzhou equipment factory, and notably in rigid PCB drilling. We're pleased to see increased order activity as the market embraces our differentiated capabilities and a compelling cost of ownership proposition.
As we have noted in the past, our proprietary chemistry carries higher gross margins than equipment, and we have high chemistry attach rates with our equipment customers. So we believe the stage is set for continued attractive high-margin chemistry growth through this cycle. We continue to be actively engaged with customers on their future plans, which serves as a good leading indicator for strong equipment orders. Overall, the growth we're seeing in EMP reflects our long-held view that the trends driving device scaling in semi would ultimately come to the advanced PCB market as device integration becomes a core requirement for advanced electronics.
That day has arrived, and advanced PCBs are rising in importance as increasing layer count requirements and integration challenges extend to higher-end smartphones, AI servers and other advanced electronics. In Q3 we expect electronics and packaging revenue to be up over 30% year over year with AI-related investment partially offset by flex equipment-related seasonality. Our flex market is typically down sequentially in Q3 ahead of the next design cycles, and we are coming off a very strong first half.
I'd like to highlight how we are scaling in our semiconductor and electronics and packaging business to meet anticipated demand growth today and over the next several years. Near term, we are increasing our working capital investments to address rapidly accelerating demand in the current cycle. Longer-term capacity planning is also key. Our new Malaysia Supercenter, which opened in Q2, can be expanded at our option, and we are building out our chemistry equipment facility in Guangzhou.
As I mentioned earlier, these facilities will play an important role in supporting our future capacity needs, and their proximity to many of our customers strengthens engagement as well as delivers performance benefits as the new facilities ramp. Pushing to our specialty industrial market, we delivered a strong quarter, up 8% sequentially and 14% year over year. Revenue has not been this high since 2023, driven by our datacom and defense markets.
Performance across our remaining specialty industrial markets was steady in Q2. We expect strong performance in our specialty industrial market in Q3. Led by the markets I've called out, we're pleased to see how our foundational enabling technologies extend beyond semi in electronics and packaging into adjacent opportunities that leverage our R&D spend and deliver strong incremental cash flows. Wrapping up, MKS Instruments is executing at a high level financially, operationally and technologically.
We've further broadened our capabilities and expertise to address key opportunities across the ecosystem, resulting in deepening penetration in areas like lithography, metrology and inspection, and advanced PCBs at a critical time for the industry. We're also making strategic investments to support our customers and drive profitable growth well into the future. Our customer engagement and design win activity underscores our role as a foundational enabler of advanced electronics who looks ahead and solves ahead.
Thank you to our MKS team, our suppliers and customers for your hard work and partnership. We are incredibly excited about what lies ahead. Now here's Ram to run through the quarter and our financial outlook in more detail.
OPERATOR
Thank you. At this time we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star-11 on your telephone and wait for your name to be announced. To withdraw your question, please press star-11 again. Please stand by while we compile the Q&A roster. Our first question comes from Steve Barger at KeyBanc Capital Markets.
Steve Barger, Analyst at KeyBanc Capital Markets
Hey, thanks. Good morning, guys. I'm going to start on the NAND tool upgrade. You know, you've talked about that activity will contribute in coming years, but greenfield NAND I think is even better business. Can you update us on what the upgrade cycle looks like and how that bridges to greenfield projects you may see entering equipment planning?
John T.C. Lee, President & Chief Executive Officer
Morning, Steve. Yes, Steve, so we did mention that we are seeing upgrade activity in Q2. We certainly expect that to continue. It can be lumpy, but we know that the industry is certainly trying to increase capacity in NAND. And then of course there's been some announcements of greenfields and those factories, as you say, will be even better for our power as well as the rest of our portfolio. And those factories, fabs, will be coming in towards the end of '27, beginning of '28.
So that's the plan right now. So between now and then we would expect continued upgrade activity.
Steve Barger, Analyst at KeyBanc Capital Markets
Got it. Can you compare the magnitude of dollar spend for a new leading-edge tool versus an upgrade?
John T.C. Lee, President & Chief Executive Officer
Yeah, we haven't really disclosed that, but I would just say that the RF power part of that upgrade is the largest part of the BOM in terms of cost and therefore opportunity for MKS. That's why when there are upgrades we benefit from that. Of course if it's a brand new tool, we would have the rest of the semiconductor portfolio around that tool, so that would be better. But the RF power content is large.
Steve Barger, Analyst at KeyBanc Capital Markets
Got it. And then one quick follow-up. Really appreciate the commentary on visibility into '27 in electronics and packaging. As we've gone through earnings, some of your biggest semiconductor customers said visibility is the best it's ever been for their business. Can you talk about lead times and visibility into 2027 on the semi side?
John T.C. Lee, President & Chief Executive Officer
Yeah, sure. We're in constant communication with our customers. As you know, they have given us their plans, expect much further out than normal, and we are building capacity and inventory and scaling our factories and getting the labor in to meet those anticipated increases from our customers. So we are planning to make sure that we're not the constraint. Lead times right now for us are still kind of normal. So we're executing really well given we're already a couple of quarters into the ramp.
So of course we've got to manage many suppliers. But right now our supply chain is stepping up.
Steve Barger, Analyst at KeyBanc Capital Markets
Understood. Thanks.
John T.C. Lee, President & Chief Executive Officer
Thanks, Steve.
OPERATOR
Our next question comes from Bhavish Lodhya, BMO Capital Markets.
Bhavish Lodhya, Analyst at BMO Capital Markets
Hi, good morning. Can you give us an update around the ramp of Penang, Malaysia and Tainan capacities as you ramp up those sites? And are you still comfortable with the $180 to $200 billion of WFE that you can support with those plans?
John T.C. Lee, President & Chief Executive Officer
Thanks, Bhavesh. Yeah. Malaysia has started ramping. In fact, we could say that the first revenue shipments have occurred there. It's still early days. Of course we've said in the past that we did not need Malaysia for 2026 to meet the 2026 demand. So Malaysia is ramping up to meet the 2027 demand. And then beyond that, we had talked about capacity planning last quarter that we would need Penang as well as perhaps other sites. Right now we have reconfigured things so that we believe that when we fill out Penang we will be able to support a WFE in that $200 to $250 billion range, which is an incremental improvement from what we said last quarter.
And of course in addition to that, we announced the doubling of capacity in our MSD chemistry equipment factory in Guangzhou.
Bhavish Lodhya, Analyst at BMO Capital Markets
Got it. And question on your specialty industrials platform, it's a nice step change in the earnings growth profile. Your guidance seems to indicate it's going to grow in the high teens in 3Q. Can you touch on some of the end markets or sectors that are helping? I know you called out a couple of them, but it looks like those have to be very strong for the overall platform to grow in the high teens. Maybe talk about the durability of those earnings.
Are there any timing benefits, and how should we think about the baseline of this platform into the next year?
John T.C. Lee, President & Chief Executive Officer
Yeah, thanks for that. I think we called out two of the sub-markets, and that was Datacom, data communications. Now again that's driven by AI. So communications testing for AI data centers, that continues to be strong. We expect that to continue to be strong. You know, it should follow, for instance, the AI investments for the industry. The other segment we called out was Defense. And that has continued to be strong and grown over the last several quarters.
And that's really a market where, you know, it probably depends on your view of defense. But those two markets continue to remain strong. That's why our guidance for specialty industrials in Q3 remains strong. So that's the color we can give you. The other sub-markets, one is automotive. That's kind of bouncing along, no degradation, no material improvement either. And then industrials, that is also we're seeing incremental improvement there, but not to that same order of magnitude as Datacom and Defense.
Bhavish Lodhya, Analyst at BMO Capital Markets
Thank you.
John T.C. Lee, President & Chief Executive Officer
Thank you.
OPERATOR
Our next question comes from Matthew Prisco at Cantor.
Matthew Prisco, Analyst at Cantor
Hey guys, thanks for taking the question. I guess first on the E&P side, how should we be thinking about the chemistry growth potential moving forward given this continued equipment strength? Is this something we look for meaningful growth inflection in 2027, 2028 as those systems move to high-volume manufacturing? And any update you can provide on the AI contribution as a percentage of those revenues?
John T.C. Lee, President & Chief Executive Officer
Yeah, Matt, maybe I'll start with the AI contribution. We had said '24 is 5% AI chemistry as a percentage of our chemistry overall, then 10, and this year 15 last quarter. I would say it's incrementally better. So think about 15% to 20% as the right number now, chemistry as a percentage of our chemistry for AI. So that's one update. I would also say that the equipment business, the chemistry equipment business, is growing very, very fast. We did talk about the fact that we have visibility through 2027, which gives us the confidence to build that Guangzhou factory, expand that capacity.
I would say too that we have said the percentage of chemistry or the amount of chemistry that comes out for every dollar of equipment sales is in that 20% to 40% range. That's still true. But maybe the update here for your modeling is that we're selling a lot more of the higher-end pieces of equipment, fundamentally because AI boards are more difficult and you need higher-end equipment. Those come with higher ASPs. And so mathematically that 20% to 40% range, think of it at the lower end now.
And that's just a math problem. The chemistry is still there, but the ASP of the equipment is higher now.
Matthew Prisco, Analyst at Cantor
Perfect, that's helpful. And then on the debt side, we're seeing strong sequential growth in 2Q guided, strong sequential growth in 3Q, voluntary prepayment kind of staying the same. And I understand you're investing in supply to meet demand, but can you maybe give us updated thoughts on strategy around deleveraging? And at what point do these voluntary payments begin to move more meaningfully higher? Thank you.
Ram
Yeah, hi Matt, this is Ram. I'll take that. It's a great question. As we have said before, investing in organic growth, supporting our organic growth, is first priority, and then strengthening the balance sheet, prepayment on our term loan, is number two, a close number two. I would say in the second half of the year you will see our capex picking up, inventory growing, as we prepare for the ramp. Having said that, we continue to make the prepayment of 100 million each quarter and we are looking at making additional payments in Q3 and in Q4.
So although it has not happened yet, it is high on our priority.
Matthew Prisco, Analyst at Cantor
Thank you.
OPERATOR
Our next question comes from Michael Manny at Bank of America Securities.
Michael Manny, Analyst at Bank of America Securities
Hi, good morning. Thanks so much for taking my questions. To start on semi market, nice to see that on a quarterly run-rate basis you crossed the last peak that the segment saw back in 2022. If you were to compare then versus now, could you give us an update on how much of the mix is NAND versus DRAM versus logic? So especially in NAND so we get a rough sense of how far it is off from the bottom. And looking ahead, how do you expect that mix to evolve, especially as you pick up more wins on the logic side?
Thank you.
John T.C. Lee, President & Chief Executive Officer
Morning Michael. I'll start with that. I think the way we're looking at it in terms of our end markets, it's still largely a logic/DRAM-driven semi market. The NAND upgrade was nice to see. We kind of expect that to continue; it might be even better. But eventually in '28 with NAND greenfields that will become a bigger percentage of our semi revenue. I think also you pointed out that we are getting to that point of overperformance of WFE during the ramp as we've done historically.
And our guidance in Q3 of our semi revenue implies that we will be over 50% year over year in Q3. And to just give the audience a little more color, remember we are exposed to 85% of WFE, so every segment of WFE, and as we've said in the past in litho, metrology, inspection, those amplitudes are smaller in terms of the ramp than depth etch. So our average is over 50%. But you can do the math as well as I can that the depth etch part is significantly higher than that average.
Michael Manny, Analyst at Bank of America Securities
Great, thank you. Very helpful. And then on E&P, could you help decompose between this past quarter you reported and what you're seeing into Q3 and potentially into Q4? Like where is the strength coming from between chemistry versus electroplating versus flex drilling? And is it fair to say that maybe some of the demand destruction fears related to mobile were more benign than feared? Or is it still kind of too early to make that judgment?
John T.C. Lee, President & Chief Executive Officer
Regarding the demand destruction that the industry had feared earlier in the year, I think it is more benign than feared. That's true. We could see it in our flex drilling because the flex drilling business was very strong in the first half. There is seasonality to it, but new form factors and high-end smartphones have been fairly strong for us, and that's reflected in our flex drilling system revenue. So that's pretty good. Now the chemistry for the rest of the consumer products also goes through seasonality, but it's really AI that's driving the quarter-on-quarter growth is our expectation.
And then the other part is chemistry equipment. We are shipping that chemistry equipment as fast as we can. And to add a little more color to the prepared remarks, we talked about the Guangzhou factory, doubling capacity there. We've talked in the past about what happens if the current Guangzhou factory is full, and that was to use our Germany factory. And we have turned on Germany as well to fill the gap between now and when the Guangzhou second factory comes online.
So we are shipping equipment as fast as we can to the earlier question. That is great for market share of chemistry in the future. And the equipment does have lower gross margin, so that mix does affect the overall company gross margin. But we're okay with that because it's great market share and much higher chemistry gross margin later.
Michael Manny, Analyst at Bank of America Securities
Perfect. Thank you very much. Thank you.
OPERATOR
Our next question comes from Shane Brett at Morgan Stanley.
Shane Brett, Analyst at Morgan Stanley
Thank you for letting me ask a question. So I want you guys to help us unpack the gross margin portion a little bit. If my numbers are correct, your gross margin ex-palladium for the June quarter would have been kind of in the mid-48% range. Just how much of your quarter-over-quarter decline into September is a result of some E&P chemistry weakness? And are you expecting palladium to be a tailwind or a headwind to gross margin in the September quarter?
Thank you.
Ram
Yes. Hi Shane. The last part of your question, we expect palladium to kind of stay flat in the third quarter, about $1,300. It will probably stay at that. But to get back to your question on gross margin, let me touch on a few points here. So in Q2, 47.6% is what we had, what we reported. That includes about 100 basis points of discrete items, mostly coming from the refund of tariffs and duties. It's also important to point out that without these discrete benefits, GM would have been consistent with what we have in the past several quarters, despite the impact from some investments we are making to support growth.
John talked about getting Malaysia ready for 2027 and we continue to invest in the ramp. We are stepping up our investments to prepare for the demand and these investments come with P&L impact. So those are included in the numbers as well. And you'll see that for the remainder of the year. And then on the mix side, mix is unfavorable and will remain so as long as VSD in the chemistry equipment ramps. As we have said before, these are good problems to have because higher VSD means higher operating income, and higher chemistry sales follow the equipment sales like we have explained before.
So overall our gross margin remains healthy with all these puts and takes. So the investments will continue and we have made a strategic choice to push forward on our equipment sales. So those two will be a headwind temporarily to the gross margin.
Shane Brett, Analyst at Morgan Stanley
Got it. And for my follow-up I'm actually going to ask another gross margin question. This is going to be on VSD specifically, which I assume is a lot of semi. So VSD gross margins were north of 46% in 2021, but as of the March quarter were at 42.9%. Just where are we in the margin recovery path there and what do we need to have happen for margins to get above that sort of 46% to 47% mark that we saw in the prior peak.
Ram
Thank you. Yeah, so VSD, like I said, VSD margins are slightly lower, but where we benefit from VSD ramp is in the operating income side. We have continuously worked on operational excellence programs that will help us. But it also depends on the mix within VSD as to what will drive the margins. And that's what you're seeing now. What products that make up a lot of the VSD sales are not our highest-end VSD products.
John T.C. Lee, President & Chief Executive Officer
Shane, maybe to add a little bit about that, in that prior cycle when we hit that 45%, 46% there was China direct sales for VSD, which is much, much lower. Now, that came with a gross margin tailwind. There was also a lot more RF power for NAND greenfields, and that's accretive to VSD gross margins. And then the third point is what Ram already pointed out. We are in that part of the cycle where we are investing in labor ahead as well as capex ahead.
So those are the three things that are a bit of a difference between the quarter you quoted and where we are now. But we think that over time the investments will catch up and that will be no longer a headwind. China is China. That is what it is. And then I think volume will continue to help.
Shane Brett, Analyst at Morgan Stanley
Got it. Thank you very much.
OPERATOR
Our next question comes from Melissa Weathers at DB.
Melissa Weathers, Analyst at Deutsche Bank
Hi there. Thank you for letting me ask your question. I was hoping to talk a little bit about 2027, the second half. Seems like you guys are off to a really, really strong start in the second half. But I was hoping to get your thoughts on how you're thinking about 2027 growth rates. Like, what do you think faster between the semis and the E&P business? Clearly both are doing awesome, but which one do you think grows faster next year?
John T.C. Lee, President & Chief Executive Officer
Yeah, thanks for the question, Melissa. I don't think we know. I think, though, that they're both at historic growth rates, as you know. I think, though, that they are coupled. Right. When you think about all the investments in WFE, and many of the semi customers talk about that, many of our investors are aware of that. But when you pivot to our packaging, the equipment orders we're seeing are on that same order of increase that we're seeing in WFE and maybe even higher.
So they're coupled. If you're going to make a lot of chips, you got to package them together. And so both industries are coupled to support advanced electronics. So it'd be pretty hard to determine now which one's higher than the other. But there are a little dynamic differences between the two markets. We have short lead times in semi, and therefore, you know, that's why we always guide just a quarter out. And then we look at the industry to see where we might be in '27.
In chemistry equipment, our lead times are much longer. We've talked about six and nine months in the past, and because of that we require down payments. Those down payments are things that give us confidence. And that's why we said we have visibility through 2027 because of those long lead items, similar to maybe some of the semi guys that have long lead equipment lead times. So those are the dynamics, but I think they're coupled, Melissa. So if one grows, the other must.
Melissa Weathers, Analyst at Deutsche Bank
Well, I'll take that. And then maybe along those lines, from a pricing perspective, can you just talk about clearly expanding capacity to serve the strong demand? But is there any change to how you guys are thinking about pricing? Is there any, like, I don't know, opportunistic, or any leverage that you can get across either business on the pricing side?
John T.C. Lee, President & Chief Executive Officer
Yeah, I think, you know, our strategy for pricing has always been to get fairly paid and to do it continuously. So we're always looking at every product line and whether there's a pricing problem and then we're not getting fairly paid. And so we're certainly in a competitive environment. We also value the long term relationships we have with our customers. So I think we're pretty happy with what we are doing in pricing but we're not going to take advantage of any opportunistic short term dislocations in supply and demand. The long term relationships are something that we're proud of and we want to maintain.
Thank you.
OPERATOR
Our next question comes from Krish Sankar at TD Cowen.
Krish Sankar, Analyst at TD Cowen
Hi, thanks for taking my question, John. When I look at your semi revenues this quarter for the guided one and given that it has to grow in December, given the strength, it seems like you're going to easily grow over 35% this year in semi revenues compared to some of your other peers. Talking about 30 plus A. Is that a fair characterization? So what does that imply to how inventory is managed by your semi cap customers then I had a follow up.
John T.C. Lee, President & Chief Executive Officer
Yeah Krish, I think that's the right math. I think maybe even a little north of the number you just said. And again as I said earlier, the dep part is higher than the litho metrology inspection part. But you're in the right zip code.
Krish Sankar, Analyst at TD Cowen
Gotcha. Any comments on how inventory is managed by semicaps compared to prior cycles?
John T.C. Lee, President & Chief Executive Officer
Yeah, no, I think I don't expect any difference. I think right now though we are shipping to demand. Even though inventory may be rising a little bit in some of the large semi cap guys, I think it's because they have to be higher to ship the revenues they want to ship. And as you know, the turns are even better. Right. So there is no stocking of extra inventory given what they're trying to ship. And so we as an industry are just ramping up the factories of our suppliers and ourselves to meet that. So at some point I'm sure everyone would like to build a little extra inventory. But we are not in that stage right now in the ramp.
Krish Sankar, Analyst at TD Cowen
Gotcha. A little quick follow up on E and P side. It looks like when you look at the chemistry business, some of your chemistry customers, especially the substrate folks from Taiwan and Japan, they seem to be capacity concern though they're raising capex in the short term. Is that happening or do you think chemistry is going to continue growing or is that going to have any impact on your chemistry growth?
John T.C. Lee, President & Chief Executive Officer
Yeah, no, I think just like in semi, people finding ways to utilize tools better, faster. So I think the chemistry revenue will continue to grow. That's our expectation. And at the same time the equipment we're putting in as well as other people's equipment going into these factories get turned on and that will increase the chemistry as well. So I think we expect chemistry to continue to grow even though there is a constraint in capacity and that's why the equipment orders are so high for us. So I think that portends well for the future of chemistry revenue.
Krish Sankar, Analyst at TD Cowen
Thanks a lot John.
John T.C. Lee, President & Chief Executive Officer
Thanks Krish.
OPERATOR
Our next question comes from Vijay Rakesh at Mizuho.
Vijay Rakesh, Analyst at Mizuho
Yeah, hi John and Ram, good quarter and guide here. Just looking at the June and September quarters here. Obviously very strong growth in semis you mentioned up 50% year on year. What is driving the acceleration into September? If you can give us some color, if it's like dep or etch or inspection or if you want to break it out differently, the foundry or memory or something. Thanks. And a follow up.
John T.C. Lee, President & Chief Executive Officer
Yeah, thanks Vijay. Yeah, I think both we are seeing acceleration in dep etch as well as litho metrology inspection. Both are growing but they're growing at the normal expectations depending on the lead times of those sub segments of the market. So dep etch as I said earlier is growing much faster year over year. The average is over 50% in Q3 year over year. And so those are the dynamics, those haven't changed. So they're both growing, but they're growing at the expected ratio, if you will, of the two sub segments.
Vijay Rakesh, Analyst at Mizuho
Got it. And then as you look at 2027, you know, obviously your semis are growing way faster than WFE. I mean WFE is probably going 25, 30%, 30% year on year, you're growing 50%. Packaging is also doing some massive increase versus WFE. How should we look at the growth there? As you look at 2027 versus WFE, if you look at semis and the ENP segment because both all these trends seem to be in place if not accelerating into next year. Thanks.
John T.C. Lee, President & Chief Executive Officer
Yeah, I think right now we do see this acceleration? We are planning on the acceleration. Our customer conversations all say we should expand capacity and be prepared for an accelerating environment into 27. And so. So it's hard to know what that will mean. But certainly if that's true and our plans meet that, then certainly we would expect continued outperformance of WFE. And as you know, that's always the case during the first half of the ramp.
At some point we will meet WFE just because the ramp will peak and then of course on the downturn it reverses. But right now everything is pointing up and we are preparing to meet that.
Vijay Rakesh, Analyst at Mizuho
Great. Thanks.
John T.C. Lee, President & Chief Executive Officer
Thanks, Vijay.
OPERATOR
Our next question comes from Jim Ricchiuti at Needham & Company.
Jim Ricchiuti, Analyst at Needham & Company
Hi, good morning. You may have said this. Could you provide the chemistry growth in the quarter?
John T.C. Lee, President & Chief Executive Officer
Yeah, Jim, I think the question was can we provide the chemistry growth quarter on quarter? I think year over year, I guess is one way to look at it. That was about 21% and so we're pretty healthy. Quarter to quarter, I can't give you that number. But it was also an increase and very healthy. So we're pretty happy with the chemistry growth.
Jim Ricchiuti, Analyst at Needham & Company
John, any way of knowing that 21% growth that you're seeing, how much of that is coming from new capacity versus just what we built and hearing about the higher layer counts within the existing installed base?
John T.C. Lee, President & Chief Executive Officer
Yeah, I think hard to tell, Jim, but part of it is coming definitely from newer capacity of equipment that we and our peers have shipped to those customers. But most of it today is still driven by capacity that was already there. And maybe some customers are taking tools that were mothballed even and turning them on. We know that's happened earlier in the cycle. So I would say the majority of the chemistry growth right now, Jim, is still with previously installed capacity.
Jim Ricchiuti, Analyst at Needham & Company
And the timing on the new capacity — you may have given that. When do you expect to have that facility, the second factory?
John T.C. Lee, President & Chief Executive Officer
Yeah. So the capacity that we're shipping now, I think if that's the question, those tools are going in now. It takes, I think, between 24 to 30 months for chemistry to go into that at volume to go into a piece of equipment. And so some of that equipment is already going in. So I think it portends well for the several years because of the equipment that's going in now, next year and perhaps the year after.
Jim Ricchiuti, Analyst at Needham & Company
I'm sorry, I apologize. Thank you for that. I was just curious about the new capacity that you're adding in Guangzhou. What is the timing of that?
John T.C. Lee, President & Chief Executive Officer
Yeah, Q3 2027, Jim, the Guangzhou factory will be online, but thank you.
Jim Ricchiuti, Analyst at Needham & Company
Thank you.
OPERATOR
Our next question comes from Elizabeth Sun at Citi.
Elizabeth Sun, Analyst at Citi
Oh, good morning. Thanks for taking my question. I guess my question is on the E&P for the Selective Plating equipment part. I'm just trying to understand which part of PCB or AI PCB or AI substrates those flex drilling equipment are more exposed to.
John T.C. Lee, President & Chief Executive Officer
Yeah, the flex drilling PCB revenue is really mostly targeted to the smartphone and peripherals markets, Elizabeth. So a lot of flex used in foldables and smartphones and AirPods, if you will. So most of it is there, not much of it is being used in AI. But we did mention in our prepared remarks that we are starting to see more progress on our rigid PCB drilling and that is driven by two markets, AI being one of them, but also the low earth orbit market that we've talked about in the past.
So we're starting to see some momentum there as well. But the flex is really targeted towards more consumer products, smartphones.
Elizabeth Sun, Analyst at Citi
And then on the chemistry side you just talked about, starting to see some of the revenue coming from the new capacities that got in on the chemistry equipment side. So I was wondering when do you expect to see more of the chemistry revenue show up that is attached to the equipment you shipped for the past two years?
John T.C. Lee, President & Chief Executive Officer
Yeah, I think it's going to be continuous over the next couple years. As I said earlier, the lead times can be anywhere from 24 to 30 months before you see volume chemistry in equipment we started building. So I think — and we're shipping equipment every quarter and they're being installed as fast as customers can install them and they're being turned on as fast as they can turn them on. So I think it's going to be this continuous ramp. We talked about equipment revenue in the past being at most 200 million a year.
This year will be significantly higher than that, as you can imagine. And then we expect that to continue to grow and that's why we committed to building the new Guangzhou factory. So I think it will be more of a continuous ramp for the next couple of years.
Elizabeth Sun, Analyst at Citi
Got it. Thanks, John.
John T.C. Lee, President & Chief Executive Officer
Thanks, Elizabeth.
OPERATOR
Our next question comes from Joe Quatrochi at Wells Fargo.
Joe Quatrochi, Analyst at Wells Fargo
Yeah, thanks for taking the question. On the E&P equipment side of the capacity ramp, are you expecting to be somewhat constrained in your own capacity to fulfill demand until that facility opens in 3Q next year, or does it ramp kind of modularly?
John T.C. Lee, President & Chief Executive Officer
Thanks for the question, Joe. Yeah, no, we are not constrained because we always had that Germany factory in order to meet any shorter term demand before the second factory comes online in Guangzhou in Q3 of 27. So as I said earlier, we have turned that Germany factory back on. It was running at a pretty low level. Now it's running, it's much busier. At the same time in Guangzhou with the current factory, we continue to eke out new space here and there, so we continue to increase that capacity as well.
So we are bursting at the seams. But we've been able to take every order that our customers needed. And so that's really an area where we're pretty happy with our capacity plans.
Joe Quatrochi, Analyst at Wells Fargo
Thanks for that. And then as a follow up, maybe, you know, I think your services revenue is actually really strong this quarter. Kind of one of the highest levels we've really ever seen. Just curious what drove that?
John T.C. Lee, President & Chief Executive Officer
Yeah, I think utilization of our semi customers is what's driving that, Joe. You can imagine they're all running, you know, 100% utilization if they can. You know, when you do that, of course equipment, you know, needs more service. So we are seeing this kind of a step up in new elevated service revenue and we kind of expect that to continue. I don't know if it's going to step up again, but I think this is just a reflection of utilization. Semi — the fabs have been running really hot for a couple years, but you know, the parts that need servicing, that take a little time right after utilization goes to these high levels.
So I think it's really a step up that we kind of feel this is the new level for the foreseeable future. Yep. Thanks, Joe.
OPERATOR
Our next question comes from Jim Schneider at Goldman Sachs.
Jim Schneider, Analyst at Goldman Sachs
Good morning. Thanks for taking my question. Given the factory ramps both in Malaysia and Guangzhou, can you maybe talk about some of the accounting in terms of how the expenses are loaded into cost of goods and, if any, or in opex. And as those factories get qualified and production ready, should we expect those startup cost headwinds to start to abate and would that accrue mainly to the gross margin line? Sorry if I missed that before.
Ram
Hi Jim. So you're right, the cost right now will get charged through COGS and will impact our gross margin. It's mostly about the gross margin. There's not much OPEX impact there. The magnitude of that now is in the 50 to 80 basis points a quarter each quarter, and that will continue for a few quarters now — next couple at least. And you're right, once that plant gets up and running and gets fully loaded, we will start seeing improvement flow through.
So most of these investments will be self-liquidating and come back as margin improvements in the future.
Jim Ricchiuti, Analyst at Needham & Company
Thank you. And then maybe just as a follow up on the earlier pricing input cost question, understand you don't want to be opportunistic in terms of taking price today, but do you expect that over the next, say 12 to 18 months your level of pricing increase can more than offset the level of input cost pressure you've been seeing. Thank you,
John T.C. Lee, President & Chief Executive Officer
Jim. We always strive to do that and we've been pretty successful in the past in doing that. You know, it's really two things. It's, you know, getting the best suppliers and the valuable, you know, the ones that can scale and lower cost because they have scale. You know, that's one strategy on the input side. And then on the other side, as I talked about, it's really about, you know, delivering valuable products that customers are willing to pay for.
So I think we've done pretty well, Jim, in the past and we expect to continue that kind of performance.
OPERATOR
Thank you. This concludes the question and answer session. I would now like to turn it back over to Paretosh for closing remarks.
Paretosh Misra, Vice President of Investor Relations
Thank you all for joining us today and for your interest in MKS Instruments. Operator, you may close the call, please.
OPERATOR
This does conclude the program. You may now disconnect.
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