Q3 2019 Earnings Call
Ladies and gentlemen.
Onto innovation third quarter earnings release.
Somewhere selling today's audience sampling shortly we appreciate your patience.
[noise]. Please standby we're about to begin.
Welcome to the onto innovation third quarter earnings release.
Which is being recorded at this time I'd like to turn the conference over to Mr. Michael Shaffer. Please go ahead Sir.
Thank you Aaron and good afternoon, everyone.
Renovation issued its press released this afternoon shortly after the market close it included Nanometrics Rudolph technologies anyway Teen third quarter financial results in order to innovations fourth quarter outlook, if you've not received a copy the release. Please refer to the company's website onto innovation Dot com, where a copy of the release is posted.
Joining us on the call today is the chief Executive officer of onto innovation, Mike Kupinski and the Chief Executive She financial officer of onto a nation Steven Ross.
Always the case, we need to remind you of the safe Harbor regulations any matters today that are not historical facts, particularly comments regarding the company's future plans objectives forecast and expected performance consist of forward looking statements within the meeting of the private Securities Litigation Reform Act with 1990 sites, such as submits, whether expressed or implied or being.
Made based on currently available information into companies best judgment at this time.
Within these a wide range of assumptions at the company believes to be reasonable. However, it must be recognized at the statements are subject to arrangements certainties that can cause actual results to vary materially does the company cautions that these statements are no guarantees of future performance risk factors that may impact Rudolphs results are describing the company's latest form 10.
Okay. That's what was other periodic filings for the FCC.
Technologies and Nanometrics does not update forward looking statements and expressly disclaims any obligation to do so today's discussion more financial results will be presented on a non-GAAP financial basis, unless otherwise specified a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release.
And now I will turn the call over to Mike was Minsky Mike. Please go ahead. Thank you Mike and good afternoon, everyone. It's a pleasure to introduce onto innovation to all of you today.
Before I begin I want to congratulate the entire onto innovation team. So the outstanding team work, which ultimately resulted in a smooth and successful launch of this exciting new company that teamwork is strengthening as we collectively identify opportunities to unlock operational efficiencies and explore the potential for additional value create.
And by leveraging a complimentary technologies across broader served markets.
This is an exciting time for the emergence of onto innovation, but semiconductor content expanding into a wide array of consumer devices. These devices varian complexity from the latest Fiveg enabled smart products in I O T devices to advance computing and storage to support growing applications and artificial intelligence and.
Autonomous driving.
These product innovations are made possible by advances in logic and memory architectures and also in the complex integration of additional functionality such as wireless communication environmental sensing and vision.
Onto innovation process control solutions are positioned across this entire value chain from silicon wafer manufacturing through to package devices, we see onto innovations greater scale and broader insight into the value chain has an advantage for customers seeking strong partners to help overcome the challenges of.
What complex and distributed manufacturing process.
Now turning to our results in commentary will cover the third quarter from the Nanometrics and Rudolph perspectives separately in order to make it easier to bridge the progression from our individual second quarter earnings releases in July .
As a reminder, at that time, we're in a quiet period and neither company was able to conduct earnings calls to provide forward looking guidance for the third quarter.
Following the summarized finance results from each company will provide fourth quarter guidance for onto innovation, along with an explanation of how the closing in October impacts the financial statements for the fourth quarter.
So, let's begin with Nanometrics and the results for the third quarter as outlined in our earnings release revenue increased 8% over the prior quarter to 73 million spending from logic and foundry customers grew in the third quarter and as a result, our product revenues from foundry logic. Another devices were up 40. So.
7% from the second quarter.
This growth was primarily driven by repeat orders of our Atlas optical metrology platform by customers, adding capacity for their advanced nodes at 10 nanometer and below.
Nance product revenues grew as well with customers, adding outlets systems to provide more precise control of critical dimensions, such as high aspect ratio channel holes.
Overall memory was flat quarter over quarter would strengthen NAND offsetting the weaker DRAM environment.
Also in the third quarter, our integrated metrology tool impulse TV was selected by a leading memory customer for Threed NAND C. M. P. Applications. This by off was after an extensive evaluation of systems to support their demanding requirements for across the wafer and wafer to wafer process control.
We expect production orders to begin later in 2020.
Overall for the first nine months of 2019 foundry logic and other device revenues have increased 139% year over year outperforming the overall industry well our memory revenue has declined 46%, which is consistent with the overall industry decline in memory W.
I see I.
I'll now ask Steve Ross onto innovation CFO to cover the financial highlights.
Thanks, Mike before I begin my prepared remarks, I want to remind everyone as usual the financial results discussed here will be provided on a non-GAAP basis and will be presented as each company has historically accounted for non-GAAP items.
Later in my remarks, I'll, let you know how the new merged company will present, our financial information going forward.
So let's begin as Mike mentioned Nanometrics third quarter revenues were 73 Dot 1 million, an 8% increase in the second quarter at 5% lower than the third quarter of 2018.
Product revenues were 60 Dot 1 million, an increase of 14% from the prior quarter.
Service revenues, which comprised 18% of revenues was 13 million a decrease of 14% from the prior.
By end market product sales to the NAND segment were 41% DRAM sales were 19%, resulting in the memory business being essentially flat with the second quarter.
Addition, total foundry logic in other devices increased quarter over quarter to contribute 40% of revenue compared to 31% in the second quarter.
Nanometrics at five customers in the third quarter, representing 10% or greater sales they were Samsung Intel SK Hynix Sheba at TSMC.
Third quarter gross margin was 53 dot, 5% and was flat with the previous quarter.
Gross margins increased to 143 basis points from the second quarter to 55.5%.
Over that increase was offset by lower service margins, mainly due to lower service margin service contracts in the quarter.
Operating expenses were 29.9 million flat with the prior quarter with slight decreases in R&D offset by similar increases in sales and marketing.
Net income for the third quarter was 74 million or 30 cents per share compared to 5.3 million or 21 cents per share in the 2019 second quarter.
Now turning to the balance sheet cash and investments decreased to 144 Dot 1 million.
The decrease is primarily driven by cash used to pay for merger related expenses.
Year to date capital expenditures were 9.9 million.
Those expenditures completed most of the previously announced upgrades to the manufacturing and information technology infrastructure and global office space.
Now I'd like to turn the call back over to Mike Mike.
Thank you Steve now turning to our historical Rudolph business revenue came in at 62.9 million, representing a 2.4% increase over the second quarter.
Macro inspection business grew 20% over the second quarter, partially driven by strong sales of Novus edge systems. As a reminder, novus said systems are being adopted by leading silicon wafer manufacturers to meet the evolving process control requirements for wafers targeted for easy applications.
In addition, dragonfly GE to continues to gain traction in a number of segments, including an additional.
Top five memory manufacturer that will use three D stat packaging for their advanced memory product.
Type of package uses through silicon via their T.S. these to gain speed and reduce power losses between the stack DRAM chips. In addition to Twod inspection the demand for high Fidelity Threed measurement has been growing with the adoption of copper pillar and micro bumps in advanced logic and memory devices as a result.
Over the last three years, the adoption of our Threed metrology sensors increased with the CAGR of over 20%, including our current forecast through 2019.
We have taken orders to support both three D. N. Two d. applications from this memory customer and expect additional orders in 2020.
Our metrology business in the third quarter was down approximately 40% from the second quarter again, primarily due to declining capex spending from memory customers. Despite the decrease in volume. We qualified Metapulse said two additional nands manufacturers for improved its control of the hard mask less.
We added our six panel customer far Jetstep lithography tool in the third quarter. This tool to use for process development of next generation packaging technology of a novel two and a half D or multi die application as we've stated previously the growing demand for heterogeneous packages as well served by the larger panel.
Format. So production ramp has been slower than expected we continued to see investments in R&D in pilot lines from a growing number of customers. This positive development was offset by a number of lithography opportunities impacted by the prolong trade dispute between China and the United States.
Now I'll turn it back to Steve Ross to briefly cover the financial highlights.
Thanks, Mike here the details behind the third quarter results Rudolph technologies as Mike mentioned third quarter revenue was 62 Dot 9 million up slightly from 61 5 million into 2019 second quarter.
Increases in our inspection lithography businesses, partially offset by lower metrology and software.
Gross margin moving to gross margin, our gross margin decreased to 50% in the in the quarter from 52% in the second quarter software represented 8% as of the total sales compared to 12% in the previous quarter and that coupled with the lower metrology sales had a jetstep lithography system combined to pressures and margins in the quarter.
Looking at the details of gross operating expenses, which it which are on a non-GAAP basis, excluding merger related expenses, we continue to maintain tight control over our spending.
Third quarter operating expenses were 21 got 9 million down slightly from 22 million in the second quarter.
Slight decreases in R&D project costs were offset by minor increases at Ash DNA.
Net income for the third quarter was 9.8 million or 31 cents per share compared to 9 million or 29 cents per share in the second quarter.
Increasing net income was primarily driven by higher foreign exchange gains and slightly lower revised tax rate for the year.
Now during the balance sheet cash and marketable securities increased 13.3 million to number 193 million in the quarter and our free cash flow for the quarter was 13.6 million.
While we do expect the new company to be a significant free cash flow generator fourth quarter cash flow will be negative due to the payment of the majority of the merger expenses in the quarter.
Got it receivable increased slightly to 63 to 3 million in our inventory declined 204 million.
That wraps up my comments on Rudolph for the third quarter.
So now before I turn the call back over to Mike I would like to take a couple of minutes to discuss some important financial changes that we will be making as we move forward as onto innovation.
As we've discussed the combination of Rudolph Nanometrics is a merger of equals and further merger agreement Nanometrics is the legal or acquire in the transaction.
However from a financial accounting perspective, Rudolph is the accounting acquire and that means rudolphs financial results will be the surviving entity to be used from historical comparative basis.
We also need to conform our financial presentation basis of the to come as the two companies differed in certain areas.
As such here a couple of changes we will be implemented.
We have aligned our reporting formats as it relates to how what's included in cost of goods sold.
Certain costs Rudolph Reserve Gordon operating expenses will be moved above the line above the gross margin line and some of the Nanometrics costs.
We're in the gross margin line will be moved the operating expenses.
The net result of these changes will decrease the overall gross margin by approximately 1% combined basis compared to what you might expect if you just as the to historical results of the company's together.
In addition, we will no longer adjust our non-GAAP results to remove Rudolph stock compensation expense to be consistent with that of Nanometrics presentation format.
The impact will result in a decrease in non-GAAP operating income.
Approximately six to 7 million annually in the new company compared to historical results.
GAAP operating income of course will remain unchanged.
These changes will it will affect obviously all quarters going moving forward.
Another important factor relates the timing of the close of the merger and the effect on Q4 guidance.
Since the merger close during the quarter on October 25th our fourth quarter financial results will be comprised of a full quarter Rudolph operations, but only the activity of nanometrics from the closing date through the end of the year.
This resulted in approximately 14 million in revenue and 10 million of operating expenses not included in the Q4 guidance that Mike will provide and a couple of minutes.
Addition.
While the total shares outstanding post merger will you will be approximately 15 million shares.
Weighted average shares used in the calculation of the fourth quarter earnings per share will be approximately 43 to.
5 million shares do the exclusion of the fourth quarter Nanometrics shares prior to the closing.
And with that I'll turn the call back over to Mike for comments on the next quarter Mike.
Thank you again, Steve as you may have already seen from our earnings release, we expect fourth quarter revenue for onto innovation in the range of 117 million plus or minus 5%. This excludes the 14 million in October revenue from Nanometrics, which Steve discussed a moment ago.
At the midpoint the pro forma combined revenue decline year over year for onto innovation in 2019 is approximately 12% showing solid performance relative to forecasted WFP. When we last provided forward looking outlook on our respective first quarter earnings calls our expectations were high.
There, but since then the memory spending environment further worsens, rather than improving as expected and as previously mentioned lithography opportunities were negatively impacted by the prolonged trade dispute with China.
And this revenue range, we expect gross margin to fall between 51, and 53% impacted by the 1% change Steve discussed and product mix.
Operating expenses are projected in the range of 42 to 43 million, which excludes approximately $10 million pre merger fourth quarter expenses.
Those expected revenues and expenses would then produce non-GAAP net income per diluted share to be in the range of 32 to 42 cents, we're confident in our ability to him to move the gross and operating margins into our model as we have focused on unlocking the synergies. This combination provides.
Similar to what has been reported by appears in customers, we see the fourth quarter, driven by increasing spending from foundry and logic investments, particularly at the advanced nodes, where betting benefiting from this in two ways. The first is from the growing adoption of our Atlas three plus metrology tool used for advanced optical.
Critical dimension measurements.
Second way, we're benefiting supplying process control solutions upstream to the leading suppliers of this advanced silicon in fact onto innovation has two product lines qualified by multiple top way for manufacturers. The novus edge inspection system and the Q S series F T I a metrology system.
The composition monitoring of substrate NFI processes. This combination provides a more comprehensive process control suite for the most advanced silicon wafers targeting you'd be process nodes. The recent announcement from its a mill highlighting strong growth and easy stepper backlog underscores the optimism we have for demand.
End of our solutions not only in the fourth quarter, but also as we look ahead to 2020.
It's interesting to note the growing adoption of Fiveg technology and handheld is contributing to the increasing demand for sub 10 nanometer process technology. This is underscored by the recent statements from TSMC quote since the middle of this year, we've been seeing an acceleration in the worldwide Fiveg development. This.
Will speed up the introduction and deployment of Fiveg network for smartphones and several major markets around the world, which leads to the increase of our Capex for this year. Meanwhile, we expect the silicon content of Fiveg smartphones will be substantially higher than that of fourg smartphones power efficiency speed and the ability to cooperate.
Eight additional functionality are critically important to five GE smartphones, which required TSMC is leading edge and 10, and then five technology unquote.
The full transformation to Fiveg will take a number of years, but in addition to increasing demand for advanced logic. It is also driving new packaging requirements in the form of heterogeneous two and a hefty packages novel incentive package designs and advanced Silicon carbide based power devices Likewise.
We see packaging activities by tier one idea I'm in foundry customers continue to accelerate as they seek to add competitive differentiation through new packaging technologies.
Illustrating this is TSMC is co Watson info development with a projected 3 billion in revenue for 2019, and Intel's continued development of he may have been phobos packaging technologies into 2020.
In support of these investments, we expect another double digit increase and inspection revenue for the fourth quarter, which would represent a 50% increase compared to the fourth quarter of 2018. We believe this increase reflects the growing optimism for fiveg enabled devices and the growing demand for more precise process.
Since.
We see a continued decline in spending on DRAM memory in the fourth quarter offsetting the growth in foundry logic in advance packaging and resulting in low single digit decline at the midpoint of our guidance on a pro forma basis.
While the exacerbated weakness in DRAM. This year has impacted our expected growth in the second half of 2019 potential rebound in DRAM and 2020 would also contribute to our optimism as we look ahead to next year.
In summary onto innovation has opportunities across the semiconductor value chain spanning wafer manufacturing, leading edge memory logic in specialty devices as well as advanced packaging, which enables all of this technology to come together in smaller high performance form factors, we take pride in recognize.
During our innovations across this value chain I, helping our customers to release, new and innovative products that are changing the world [noise].
I want to conclude by conveying how excited I am to be a part of the into onto innovation team. This team has made up of an amazing collection of passionate and talented individuals that are eager to solve new challenges and maximize the opportunities ahead of us to the benefit of our customers shareholders and ultimately our onto another.
Jason team and with that we'll open the line for your question.
Aaron.
Thank you, Sir ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure your mute function is turned off.
<unk>.
Again, ladies and gentlemen that a star one for your questions. At this time Star one and we'll go first to Quinn Bolton with Needham.
Hey, guys congratulations on the combination and.
Nice job on on the result, so far I wanted to start with some of the accounting treatments I guess, if I if I look at the revenue on a standalone basis for Nanometrics and Rudolph <unk> third quarter.
You would have combined to about 136 million.
Guidance for the fourth quarter inclusive of your 117 midpoint plus the 14 from nano gets you to 131. So so on a sort of pro form a full quarter to full quarter comparison revenues are down is that all sort of driven by the decline in DRAM or are there some revenue.
To that will not be able to be recognized as result of the purchase accounting treatment of the transaction.
Hi, when there's a this is Steve Ross so yeah factored into the lost revenue number of 14 million is some revenue deferred revenue that is lost.
Purchase accounting so that is factored into the numbers. So your comparison of 136 pro forma to 131 is the accurate math.
Okay, Okay understood.
And then just looking into the Nanometrics.
non-GAAP results.
We're running at about 30 million in the September quarter that includes some level of stock based compensation since the company will not be backing out stock based comp going forward.
Has there been any change.
So the combination to the historical stock based compensation of about 3 million that Nanometrics had included in there in their opex.
No I mean, the number there's no change because of the merger and the expense hit that would normally hit on a quarterly basis on them Datametrics side, obviously as we work through integrations there'll be some synergies and things that might impact.
Stock based compensation as you can imagine, especially on the kind of a higher level corporate overhead level.
Yeah. So those number will change and we'll be giving more guidance as those start to materialize going forward, but.
Basically the basis of which they've been that emissions and do their stock based compensations remains unchanged.
Okay.
Any chance you can give us a sort of a stock based comp number for the fourth quarter.
So.
Ours.
For our side is that annual basis between six and seven.
That would company would be yet and then.
For us for the root outside is about 1.3 million that was in our historical results what was the.
Reported.
Okay, we'll have to get to that number because I don't have.
Break it out it's just in the numbers.
It's already out of the.
<unk>.
I'll jump back. Thank you. Thank you.
And ladies and gentlemen that star one for your questions well go next to Tom definitely with D.A. Davidson.
Oh, yes. Good afternoon. Another question along the lines of ER.
The nanometrics business level. So before you wouldn't quite a couple of quarters ago thought was that business would grow 20, 530% half over half and obviously, it's a level right now that's a fair about below that so I just wanted to clarify is the difference between what we heard back then it today.
Really just the DRAM side or has the logic foundry portion, which was supposed to be part of the ramp come down a bit as well.
Hi, Tom no.
It's truly the DRAM side as it has come down quite significantly from where the expectations, where when when those guidance numbers, where what provided on the logic foundry and other side. There you know when we look at.
The.
Trailing.
Nine months, it's up a 100 and something percent hundred 30, something percent and we expect it to be up again in Q4, but not enough to offset the continuing decline and the DRAM.
Okay and those are the 10 and seven nanometer in five data <unk> lines.
Quarter build outs.
Hi, Yes, Yep, we saw some ramping in Q3, we see continued ramping in Q4 and and we don't have from numbers for Q1, but lot of these are continuing into 2020.
Okay, and then Steve on the on the fourth quarter model.
All the expenses.
From the nano portion in the first you know pre close or those also excluded from the numbers.
Yes, so that that was $10 million that we talked about in the prepared remark. So the guidance Mike gave on the op expenses, there's 10 million of caught October op expenses not in that number.
Okay, and then a sound like the services business on the Mattersight was down a bit is that just because of what's going on with the acquisition or more to within that.
I think it was primarily related to fewer upgrades they had a big surge and upgrades in the third quarter, a mix of software and hardware upgrades and that came down a little bit than the and the a.
And this quarter and third quarter sorry.
Okay.
And then you'll Mike on your and your comments you talked about complimentary product lines between the two companies.
Maybe a little more color on that are these products that from copper and point of view at some point worked together or are these just call center in fact that they don't overlap.
Oh, we're exploring that so there's certainly in the same parts of the line. So we're looking at Metapulse technology and some of the Atlas products are in the same parts of the lines and there could be opportunities to provide additional data streams to provide more insight for for customers.
On critical challenges and then the wafer wafer manufacturers.
Those technologies, it's the same there in the same parts of the line and where we're just now starting to open up discussions about what does this mean can we wrap software around these two data streams and provide additional insight and potential equipment control solutions to further.
Further improve yields and time to ramp for these customers.
Okay.
Good High then finally, when you look at.
Bush that nano has especially on to the memory. So there was I should say that the NAND side are you starting to see some early signs of potential recovery like we heard from lamanna few others I'm a little bit of.
Little bit of hope on them and so even though the DRAM side of the market is still pretty weak.
So we saw that I think as a matter of timing, we did see a pretty strong growth in NAND in the third quarter.
And that was largely to support installations of a number of process equipment. So obviously you need the metrology systems in place first to qualify and ramp up that process equipment. So we saw some of that.
Hi from talking to the the team we do see continued investment in NAND growing into the 2020, but for this quarter.
We have more US you know insights.
NAND is is down and DRAM is also down.
Okay.
All right well thanks for your time today.
Yep.
Thanks, Tom.
Our next to Patrick Ho with Stifel.
Thank you very much and congratulations Mike to you in your team to getting to steal close and going forward.
And Steve. Thank you for a lot of these clarification and I'm sure you've aged a few years with all the number crunching you've had to do over the past several weeks.
This is Mike this question, maybe a little bit unfair given that it's still early in the combination of the two companies.
Given a lot of the complementary solutions that both Nanometrics and we love you off first to say memory customers and puts you get with some of the larger.
Every suppliers, where you're seeing both next generation fraud and changes in the manufacturing as well as advanced packaging have any the customers already come to you and asked you about hey can you help us in somebody's now that you're one company and how do you address some of those potential projects on a go.
And what basis.
That's a great question Patrick so.
The short answer is no we haven't had that insight or direct questions from customers, but it's only been less than two weeks. Since we are even allowed to start sharing you know technology and and product roadmaps and that kind of thing. So I think it's premature for to expect customers to be thinking along those.
As lines that said and the initial discussions we've had I think we've been pleasantly surprised to find out [noise].
Capabilities of systems that we didn't understand and various problems. Each each team was was solving with customers that are combination may help accelerate the solution. So well we're still early in that exploratory phase, but we're encouraged by what were seeing already and.
Including.
Including the impact software it can have on.
On tying these data streams together from the from the different metrology systems were going on a pretty extensive road show and next month.
There will be meeting with the leading customers a executives from all of our customers top customers and that's where I expect we'll have some more detailed discussions around exactly that.
Great. That's really helpful. I, maybe as my follow up question in terms of.
How we should look at Opex, I'm, particularly R&D on a going forward basis again, it's early in the consolidation of the two companies.
Given that a lot of projects are probably being evaluated as we speak maybe Steve how do we look at R&D, maybe on a kind of qualitative or big picture basis as we go into 2020.
[noise]. So I'm, obviously, you're right. We just started that process from integration perspective, I mean, our R&D, which I think pretty robust R&D programs and the opex. So.
I mean, we've we've identified a number synergies as part of our integration planning I think you would start with the base numbers you have probably for both companies I don't see any historic you know any big change right off the bat from there, but then we will work in synergies clearly as Mike said looking at products and platforms and things that are overlap we're going to come out, we'll we'll probably give you more guidance going forward as we.
We layout that synergy plan, but I wouldn't expect any significant change in the overall I could you see the guys that Mike gave.
For Q4.
Thats somewhat the run rate of the two companies and we'll be taking obviously synergies off of that number but there is clearly synergies in that and that in that area. I would expect Patrick that we'll be able to provide more clarity to that and that January in April calls.
Great. Thanks, a lot guy.
As a reminder, ladies and gentlemen that a star one for your questions Star one.
Our next question from Craig Ellis with B. Riley FBR.
Yeah. Thanks for taking my question I'll, just ask a follow up to Patrick's question to make sure I'm looking at things correctly in terms of the information can provide I think the the cost synergies target previously was 20 million guys can you provide any color on how much of that is it's pure opex versus anything that you would get in Cogs and and just rough timing.
In terms of where where and when that can be realized.
Yeah.
I would say that of the 20 million it was probably something like 25% in the Cogs line and 75% Opex I mean, it's I'd.
Basis. So that's kind of that you could expect to start seeing come out of the Opex line of the 20.
The timing.
I'd say, that's something where were just now starting to dig into and put together plans on on.
What what exactly were going to do to achieve the synergy targets and look at the timing for those plans and that's what I was referring to Patrick about in the January and May or April or May earnings calls will be able to provide more guidance to that I will say there is a priority too.
Adjust and bring in some of those synergies a little sooner rather than later.
Okay. That's helpful and then Mike just a clarification on some of your fourth quarter.
Commentary and helpful to get the insights on inspection and advanced packaging and DRAM I I don't think I cut anything on NAND is the expectation that given the strong third quarter that that's down sequentially or how do you expect an end business to play out in Fourq.
NAND in the fourth quarter is is also had down.
And so DRAM and NAND are both down again, we had a pretty strong third quarter, a set of orders for NAND and we don't expect that to continue so that is down in the fourth quarter, but offsetting that is very strong orders from logic foundry up almost.
50% between the two.
And from what your teams, you're seeing out and I feel but your sense for the for how long. This the foundry launch logic strength can last you have visibility.
Ended the first quarter of next year would it Stan extend beyond that just any further color on the momentum in that part of the business would be helpful.
Yeah, it's probably a little early to say, but.
From what were what we see most of these expansions will probably continuing to continue into the first quarter. The question is well DRAM well some of the memory business recover as well and that's that's what would be looking for to really start to to see some significant growth in the numbers.
Okay and then my last question is gonna be a higher level question for you Mike.
So obviously this call has a lot to do with the specifics of bringing the companies together and congratulations on getting that job town and getting us started.
The question really is about calendar 20, and and I'm wondering if you can just reflect a little bit on the things that you're excited about as you look at the combined portfolios the opportunities that you see.
That exist for the company the New company next year.
What are some of the the things that investors should look for us as milestone says as has gone to.
Unleashes innovation and and tries to realize significant growth in the market. Thank you.
Sure. Thanks, Craig.
Well I think we're most excited about the the inflection that fiveg is bringing so as fiveg starts to drive both the advanced.
Logic.
And the you know in support of the growing smartphones growing number of smartphones that'll also pulling and create some some potential driving growth for the NAND ER and all the specialty devices that we've been working on penetrating over several several years now so you know a prayer.
We're excited about that inflection or what it means for a number of areas where onto innovation plays a so obviously milestone wise you'd look for continued growth and those and those areas. We're also excited about the wafer manufacturing the position that we have now as well.
Onto innovation with multiple products supporting these advanced wafer process control for wafers for you V., that's a spend a significant growth driver and it looks like a significant growth driver moving forward and then I think from a.
Sort of financial perspective, Big milestone is to see and we haven't laid this out for you yet, but we will as to see us start to hit and deliver on the synergies that we that we forecasted and again you know we wanted to do that sooner rather than later.
Thanks, guys. Good luck.
Right.
The next to David Duley with Steelhead Securities.
Thanks for taking my question I'm, just a couple of clarifications I think as people are flushed out your guidance is down sequentially on a combined basis could you just talk about <unk>, you mentioned memory DRAM I guess, but there was also something about advanced packaging could you just elaborate exactly why revenue was down sequentially.
Okay. So it's primarily.
Memory. So it's primarily DRAM. That's been you know drove down some atlas potential which was offset by the you know meaningful growth on the logic foundry side and then on the Metapulse, which is also pretty heavily tied to memory.
Obviously, that's down I think I said 40 something percent in the in the prepared remarks, and that's really the three 4 million that we're talking about being down quarter over quarter.
As far as advanced packaging actually I believe we were implying.
That's gonna grow we expect after a 20% or so growth in the third quarter from Q2. The Q3, we expect still a double digit growth in and our inspection business moving into the fourth quarter.
Oh and could you talk elaborate a little bit more about the lithography business. I guess you referenced a couple of shipments that are going to happen or <unk> or just elaborate on what that with what was going on.
Yeah, So we had.
A number of accounts that we were expecting to close at least a several two three and.
In China.
Which did not happen for a variety of really reasons related to the trade dispute. So that was one a negative side. The other is not always shipped a panel school in the in the.
[noise].
Third quarter. So that was a positive we expected another customer is similar to take a panel tool and that that also did not happen that looks like a push out into 2020. So you know.
Most of it as push outs or delays related to the China a situation, but overall you know the.
Advanced packaging.
Research and the Lithographies position in that research for the next generation of packages remains pretty strong and we remain encouraged by our position there.
Okay.
Vacation question, you gave gross margin guidance for Q4 for the combined company and I just missed that could you repeat what the Q4.
Gross margin is.
Sure It was 51% to 53% right that got impacted by the the change that we're confirming the presentations by about 1%.
When versus where if you had added two companies together, what you might think it would be okay. So that's just shifted the costs around between operating expenses and gross margins.
But that doesn't and there's no change in stock comp because you didnt have a lot of stock comp on the Rudolph side and the cost of goods sold number just like two or 300000 right.
Correct.
Thanks for that clarification now I'm, a couple of things going forward.
Fighting a revenue breakout on a quarterly basis amongst metrology inspection lithography in software or how would you be presenting the numbers to us as far as the breakouts of revenue.
We're having discussions on that now and we'll we'll have that laid out for you in Jan in the January call.
January February whenever the next earnings call is.
Okay and then final question for me as you mentioned cash flow would be negative in the fourth quarter, driven by M&A expenses or merger expenses.
Could you just articulate how much those are without those what the cash flow cabinets for what cash from operations might be.
Yeah, So a few [noise].
So you're talking about a 20, you over 20 million you'll get the guidance in the press as you can see the impact on a per share.
Perspective that we put in there.
But you're talking about 20 million or so 25 to 28.
8 million I think is the total but it's not all cash.
The quarter so.
Yes, so about 20 million a cash flow probably impact on the quarter in those numbers.
Okay, and then you set of capital would be Nuggets, yet what.
To give an exact number so we can just basically back into a capsule from operations might be without the onetime events.
[noise] I think.
No.
Combined basis.
Uh huh.
No we have we would.
That's what we think we would just be a couple of million cash flow positive I think at the end of the quarter without that in there we're going from a combined hole on second three.
Well, we with or 13.
Yeah, I'm just trying to find this stuff.
They get to that number at this 20 something million, obviously of cash out the door and I got to see what the cash the pro forma would be on on without that.
Will you be providing pro forma numbers on a historical basis.
That's a little more difficult.
Obviously with the because the purchase account is going to change the numbers going forward, but we'll be able to.
Two.
Sure.
It would be almost yeah, we won't we will be we can't put him in the documents for say, but you can add the two companies together I mean, obviously from historical basis, but they'll be accounting differences that won't allow us to Derek do comparatives.
Okay. Thank you.
Thanks, David.
Well take a follow up from Quinn Bolton with Needham.
[noise] <unk> you guys, Steve on the gross margin I understand the reclassification hit yet by about 100 basis points as we look out to that long term model that you gave with margins of 55 to 56 was at 55 to 56 inclusive of those changes or do we need to think about that 55 to six coming down by 100 basis points.
To the Reclassifications.
Yeah, I would take the O I would take the a 100 basis points up that's I think desktop and probably fine, but I would think it would probably be 54 to 56 Quinn.
Okay, Great and then just on the business side, I think you'd mentioned Oh when on the integrated metrology side and I wasn't sure. If you said that that was part of the current a strength you're seeing in the NAND business or whether that was business that you expected to ship.
Either in Q4 or sometime into 2020.
'cause business that will be.
That has been pushed out to 2020.
Thank you.
Welcome.
Ladies and gentlemen that will conclude our community session I'd like to turn the call back to Michael Schafer for any additional in closing remarks.
Thank you are well, we'd like to thank everyone for participating on the call today and for your interest in onto innovation. We are clearly excited about beginning this new era with the company and look forward to future calls that concludes our remarks for today. Please reference up there.
Ladies and gentlemen, this does conclude todays conference. We thank you for your participation you may now disconnect.
Oh [noise].