MKSI's Ransomware Attack Could Have Significant Implications For Applied Materials

Trifonov_Evgeniy

On February 3, 2023, MKS Instruments, Inc. (MKSI) became alert of a ransomware onslaught and reported it connected February 6. Now, it plans to denote its 4th fourth net connected February 28 alternatively of February 13, arsenic primitively scheduled. According to MKSI, the incident has affected circumstantial business systems, including production-related systems.

The institution said successful a filing pinch nan U.S. Securities and Exchange Commission.

"The Company's investigation and appraisal of nan effect of this incident is ongoing and due incident consequence professionals person been engaged."

It is important to understand nan value of this "event" because MKSI's 2 largest customers are nan 2 largest U.S. semiconductor instrumentality companies - Lam Research (LRCX) and Applied Materials (NASDAQ:AMAT). Together they accounted for astir 27%, 24%, and 18% of nett revenues for nan years 2021, 2020, and 2019, respectively, arsenic shown successful Table 1.

MSK Instruments

MKS supplies subsystems, instruments, and components to semiconductor manufacturing instrumentality OEMS and end-users. MKS is nan largest shaper of gas-phase process power instruments and subsystems and components for nan IC industry.

Supply Chain Impact connected AMAT and LRCX

Supply concatenation disruptions person plagued semiconductor instrumentality companies and I discussed this successful a November 9, 2022 Seeking Alpha article entitled "Ultra Clean Holdings' Downplayed China Sanctions Inconsistent With Peers And Customers." For clarification, MKSI was discussed successful nan article, and Ultra Clean Holdings (UCTT) is simply a awesome supplier of parts to AMAT and LRCX.

I've written respective articles astir these problems from LRCX successful my SA article "Lam Research: Expect More Supply Chain Woes In Upcoming Earnings Call" and AMAT "Applied Materials Earnings Call Following Poor Quarter Still Left Unanswered Questions."

AMAT's Earnings Call is Today, So Guidance beryllium Unreliable

AMAT will beryllium announcing its F1Q 2023 net telephone connected Thursday, February 15. Guidance for Q2 2023 and CY 2024 will beryllium based connected respective factors, but pinch constricted visibility astir supplies of products from MKSI, guidance will beryllium unreliable.

What we do cognize is that AMAT has astir $20 cardinal successful backlog and is astir to participate a play of antagonistic semiconductor instrumentality maturation successful 2023. I discussed expected revenues for AMAT and nan rationale for my mid-2021 thesis for a semi-cap meltdown successful my February 9, 2023 Seeking Alpha article entitled "Applied Materials: Important Questions Are Still Unresolved Leading Up To Its Next Earnings Call."

MKSI's Q4 net telephone was scheduled for February 13, and we could person estimated AMAT's net telephone group for February 16 based connected financial results and guidance from MKSI. That has changed.

MKS' Q4 2022 statement EPS Estimate is $1.34 (+0.8% YoY) and nan statement Revenue Estimate is $994.01M (+157.2% YoY). Taking a person look, nan $994.01M statement would correspond a +4.2% QoQ maturation for nan company, which would beryllium down from a +24.7% QoQ maturation nan institution reported nan erstwhile Q3 2022 quarter, arsenic shown successful Table 2.

MKS Instruments

MKS didn't supply guidance connected Semiconductor, truthful we tin infer what to expect from customers and competitors from only LRCX and Ichor (ICHR) that person already announced. It's important to statement that for 2021, ICHR's 2 largest customers were Lam Research and Applied Materials, which accounted for 53% and 32% of sales, truthful their guidance is valid for estimating AMAT's guidance for its 4th ending April 2023.

Table 3 shows guidance provided by LRCX and its awesome supplier ICHR for CY Q1 2023 of -26.9% and -25.4%, respectively. These are important drops from nan erstwhile quarter. Because of MKSI, these besides whitethorn beryllium invalid, because if LRCX is supply-chain limited, it will impact deliveries from ICHR.

The Information Network

Investor Takeaway

MKSI was a unfortunate of a ransomware onslaught connected February 3. Since then, its net telephone has been postponed from February 13 to February 28. Importantly, its website is down aft 2 weeks arsenic it determines nan grade of immoderate harm to nan company.

MKS reported nan ransomware incident only 1 time aft nationalist cybersecurity agencies and information experts astir nan world warned astir a world ransomware onslaught that deed 3,200 servers successful France, Germany, Finland, nan US, and Canada moving connected VMware ESXi.

There are important takeaways for MKSI, its customers, and its competitors:

• Since nan February 3 announcement, MKSI's stock value has dropped 10%, from $109 to $99.
• The net telephone tin ideally shed immoderate ray connected nan near-term effect connected MKSI.
• Applied Materials announces its net connected February 16, and immoderate guidance it provides will beryllium subjected to nan uncertainties from nan ransomware onslaught connected MKSI.
• Lam Research provided gross guidance of -26.9% QoQ for nan 4th ending successful March 2023, but that guidance was provided earlier nan onslaught connected MKSI, meaning its guidance whitethorn beryllium invalid.
• If Applied Materials and Lam Research are supply-chain limited, they will push retired deliveries from different suppliers specified arsenic ICHR and UCTT.

Applied Materials whitethorn supply penetration connected Thursday's call, which I expect will travel that of LRCX, KLA (KLAC), and Onto Innovation (ONTO), which indicated headwinds successful nan adjacent term. That would see expected announcements of pushouts of instrumentality purchases and imaginable cancellations.

Already, Intel (INTC) and Micron (MU) person announced a deceleration successful their fab construction. This raises nan rumor of whether AMAT's $20 cardinal of inventory tin beryllium reduced arsenic supply-chain challenges, aliases whether its customers will garbage acceptance of instrumentality arsenic spot request plummets.

Finally, my thesis that location would beryllium plummeting instrumentality purchases successful 2023, which I made successful mid-2021 and is referenced supra successful this article, contends that nan downturn successful instrumentality purchases owed to excess capex walk and resultant spot oversupply will past good into 2024.

It took 1 twelvemonth aft my forecast for analysts to commencement projecting a downturn of equipment, but their forecasts task that nan downturn will past only for 2023. According to our study entitled Global Semiconductor Equipment: Markets, Market Shares, and Market Forecasts, this downturn will widen into 2024.

I complaint AMAT a sell. The headwinds it has been facing regarding sanctions successful China, plummeting purchases of instrumentality by representation companies, and a 2nd driblet successful instrumentality purchases by logic/foundry companies successful 2023, will beryllium further analyzable by supply-chain disruptions from MKSI.