Q1 2021 Onto Innovation Inc Earnings Call
And our served markets. So let's begin with highlights from the first quarter, starting with our advanced node customers.
Demand for our optical CD metrology systems by multiple larger customers more than doubled over the fourth quarter to support expansion and below the seven nanometer node.
And at these nodes the complex interaction of shrinking geometries, and new materials and the introduction of new <unk> transistor structures is creating the need for additional metrology steps and additional measurements per step.
We believe this increase and capital intensity will favor onto innovation proven metrology performance and optical speeds, which are orders of magnitude faster. The next rate. We see this value of extending through the three nanometer node and Novartis received requests for a second additional systems add of partner using our latest platform to develop.
The three nanometer process.
We believe our platforms configure Bill Configurable performance and cost ratio was a key factor and the decision by a top three logic manufacturer to select onto innovation for optical metrology of the critical interconnect layers and the back end of line.
And this selection over and entrenched incumbent is for our customers next generation product ramp and we expect shipments to begin in the second half and carry through to 2022.
In addition to expanding our opportunities in existing markets, we are making great progress expanding our available markets, including in the assets, including the estimated 400 million plan of films market.
After shipping the first of our plane of film systems, and the fourth quarter, we've already booked an additional seven tools for shipments to that customer and the second and third quarter of this year with follow on orders expected in the second half of this year and addition, three more customers placed orders for our thin film solution with deliveries and the second half of <unk>.
'twenty, one and with further expansions expected by all four customers.
In 2022.
Similar advances are being made and the advanced packaging and specialty markets, which continue to experience strong growth from multiple well documented drivers and <unk> high performance compute and AI as.
As we guided last quarter, we see incredible we saw incredibly strong demand from advanced packaging customers, which resulted in growth of nearly 50% over the fourth quarter offsetting an expected pause and the five <unk> expansions, we experienced in the fourth quarter the.
The majority of the packaging growth was to support high performance compute and memory devices, where our inspection systems integrated with our AI classification software is proving to be a critical combination for process control.
Our unique ability to leverage proprietary AI software to transform process control data streams into actionable intelligence has migrated from the mission critical automotive market to these leading edge devices were faster and more accurate decisions are crucial to not only detecting but also resolving process issues.
Before impacting production.
Similarly, our steadfast solution for panel lithography has demonstrated at <unk> gain and productivity, while simultaneously improving yield by employing sophisticated machine learning algorithms to optimize step of performance and the first quarter. We received a repeat order for our steadfast solution and excess of.
$6 million for delivery and the fourth quarter of this year.
This order brings our backlog for lithography to over $20 million with additional orders expected in the quarter.
In addition to the strong demand and our currently served markets. We're encouraged by the progress we are making and two new specialty device markets and the first quarter. We received several repeat orders ahead of plan from a top three Cmos image sensor manufacturer to support the ramp of their latest imaging device. We're seeing this demand because exist.
<unk> systems, we are unable to detect critical defects associated with the more advanced process.
For the year, we expect the orders from multiple top tier Cif suppliers totaling in the double digits.
Likewise progress with our newly acquired overlay metrology business is also going very well.
And we've already integrated our proven renter and software into the latest overlay product, which shipped to multiple compound semi customer pump and semiconductor customers and the first quarter. This new overlay solution will be fully released and the second half of the year and not only optimizes the law.
Lithography process, but also has the potential to improve sales productivity of significant value proposition and and already constrained market projecting a CAGR of 25% growth through 2025.
Now I'd like to turn to the turn the call over to Steve to discuss the first quarter financial highlights Steve.
Thanks, Mike and good afternoon, everyone as I mentioned on our last call. We closed on the and Spectrology acquisition. After our fourth quarter book close so the first quarter of 2021 as the first quarter and that includes the results and.
And there was the result, and our numbers however of the overall amounts were not material to the quarter.
And as Mike mentioned, and our fourth quarter revenue was $169 3 million above the high end of our previous guidance of <unk>.
91% year over year, and up 9% of the 2024th quarter.
Breaking down the revenue by market, 42% of sales were from our advanced nodes market with strength coming with strength coming from a lot with from logic, which more than doubled over the previous quarter.
We also saw strong growth from DRAM customers, but that was offset by a weakening of NAND.
Advanced packaging and specialty devices represented 37% of revenue and the quarter and essentially flat overall with the previous quarter.
And finally software and services represented 21% of revenue and the quarter.
Our gross margins continued to stay strong and 54% consistent with the fourth quarter.
The product mix did impact the quarter with over half of the sales volume increase over Q4 coming from established product lines.
We expect to see continued and improving margins and our new products, providing enhanced value to our customers and.
Apply chain true synergies that we've implemented from the merger and then.
Impact our product costs.
First quarter operating expenses were $49 2 million and increase from $46 3 million and the fourth quarter the.
The increase was primarily due to operating expenses of and Spectrology operations and the reset of compensation related expenses, such as payroll taxes.
Currently being ending of the year.
While we did experience an increase of operating expenses, our strong financial model resulted in an increase and our operating margin of 25% well within our long term operating model for these revenue levels.
Our effective tax rate for the first quarter was 11% due to a higher than anticipated discrete tax benefit and the quarter.
We also expect several other discreet tax benefits to reduce the tax rate and the second quarter to between 8% and 10%.
With the reduced Q1, and Q2 effective rates, we now expect our full year effective tax rate to be somewhere in the range of 12% to 14%.
Net income increased and the first quarter and.
Was $36 3 million or <unk> 73 per share and above the high end of our guidance.
And the 2024th quarter, we reported net income of $35 6 million of <unk> 72 per share.
Fourth quarter earnings and was impacted by of benefit from the benefit of a low of 5% effective tax rate, mainly due to the closure of an IRS audit.
Moving to the balance sheet, which is on a GAAP basis, we had strong free cash flow of $47 million per the FERC for the quarter and 28% of revenue.
We ended the quarter with the cash position of $393 million up $19 million from Q4 and.
And that's after approximately 26 million and cash used for the into Spectrology acquisition.
Accounts receivable decreased in the quarter on higher revenues and better collections, moving our dsos and ended at $142 million.
Inventory increased in the quarter of $201 million on the inclusion of Inspector all of its inventory and increase and purchases for higher forecasted sales volume and margin.
Increase and the systems and finished goods the weighting shipment to China that require licenses.
Now turning of the second quarter guidance.
We expect revenue to be in the range of $173 million of $184 million.
Earnings per share and this revenue range is anticipated to be seen.
76, and <unk> 85 per diluted share.
We also expect that within this range of gross margins will be between $54, 55%.
Operating expenses.
Active recruiting plans in place for the strong growth. We are seeing we're also seeing an increase and other variable compensation expenses and currently anticipate operating expenses for the quarter to be between 51, five and $53 5 million.
Even with this new increase level of Opex. We are confident we will continue to be operating within our long term operating model as we grow towards our next benchmark of $800 million revenue.
With that I'd like to turn the call back to Mike for additional insight into the Q2 and 2021 Mike.
Thank you Steve.
And I'd like to note that the guidance Steve provided for the second quarter does not include over $25 million and bookings that are pending license approvals from the U S Department of Commerce to.
And to the uncertainty of timing of these licensed the licensing decisions, we will leave them out of future discussions until we have greater clarity.
So clearly the demand for semiconductor technology is strong and broad based the increasing number of connected smart devices drives both chip volume and datacenter growth to support explosion and data being generated by each device and enable greater remote work life experiences.
These data centers of becoming digital gold mines, and they are increasing the demand for high performance compute engines to mine that data and transform it into valuable information the value of this information to the consumer then drives higher product adoption, thus, creating a virtuous cycle onto innovation sits at the center of this verse.
Two of cycle, providing comprehensive process solutions to challenging metrology problems from the <unk> transistor formation to <unk> and heterogeneous packaging, which is the key enabler for future product innovations.
To that point and the second quarter, we project the strongest growth to come from advanced packaging and specialty customers, we see expansions from <unk> and packaging customers leading that growth.
We expect DRAM revenue to increase for the fourth straight quarter and NAND revenue to hold steady while logic revenue declines following of two X surge from the first quarter.
In summary, we see solid growth within our existing markets and we're making great progress expanding into new markets such as the plane of films and the Cmos image sensing market.
In addition, we are beginning to realize revenue synergies through our broader sales channels. For example, we currently expect to add over eight new customers for optical metrology suite by the end of 2021 simply by leveraging our existing inspection channels into the specialty device markets.
Likewise, we are beginning to see the potential for revenue synergies with our overlay of products and inspection systems outside of the <unk>.
Compound semiconductor markets.
Each of these dynamics many of the early stages of realization contribute to our positive outlook for next year and into 2020 two.
It's certainly an exciting time to be a part of the onto innovation and I want to thank the entire team for their continued dedication to our customers' success.
Also want to call attention to our first annual corporate social responsibility report for 2020, which is available on our web site the <unk>.
Report outlines several of onto innovation, the ESG initiatives and our commitment to have a positive impact on our communities the environment, both local and global and our dedicated employees.
Thank you and Connor, we can now open the call for questions.
Thank you.
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Okay.
And we will take our first question this will come from Craig Ellis with B Riley Securities.
Thanks for taking the question and guys congratulations on the strong execution and the first quarter.
I wanted to start just by following up on point of the points you made early in your remarks, and then came back to one of your conclusion, you talked about and even stronger second half and I was wondering in.
In the past, you've sometimes characterized huron share growth overall.
Ah period, encompassing two quarters like you've done with the first quarter of this year.
Any color on magnitude of increase and the second half either half on half of our year on year and an issue look at the the second half would you expect.
The revenues to rise sequentially through the year or or for <unk>.
Different dynamics that you see would you expect things to potentially peak and the third quarter. So thats per question.
So what we see right now we believe revenues will rise sequentially throughout the remainder of the year. So we expect Q4 to be stronger than Q3, and we expect Q3 to be stronger than Q2.
The.
That's what we're seeing right now contributing to that is not just the general market dynamics, but also the expansions that we're making into some new markets for us where we're seeing like I mentioned earlier and the planar films additional adoption. There. We've also mentioned the increasing backlog and and lithography.
<unk>, which we began shipping those systems and the second quarter and this quarter and start to see revenue impacting and the second half so.
Yes, so that's what's giving us confidence and the.
And our statement, which has improved since the last time, we spoke in the second half and the strength of the second half as far as <unk>.
I won't give you of that but.
Yes, okay.
And to try and nice to see the the broadening customer traction and the thin film market just real nice momentum there.
And then Steve for my second question I'll ask when do you. So I just wanted to understand some of the dynamics that are leading to what looks like potentially a 70 basis point gross margin increase quarter on quarter and the second quarter is that more from.
And <unk> segment mix say.
More about sequential gain and and software and services versus the first quarter of things going on.
Inside of some of the segments intra segment mix and then any color on what we should expect with gross margin since we look to the back half of the year and that strong demand environment that has good potential to grow quarter on quarter as Mike just described.
Yes.
Yes, I would say there was there was again.
Go back to my remarks, when you analyze Q1, we did have we had obviously a nice growth quarter.
And when you look at it I think some of it was people expanding in line with that existing tool sets and to some of the newer products that we've talked about and I think with Ed and.
And again, some incrementally to the to the gross margin. So it didn't have a.
And of the incremental revenue and impacting with some older product lines that have healthy margins, but maybe not as good as we're anticipating with some of the newer stuff.
Going forward.
For sure.
I think.
Youll see the just the growth and.
And the product mix, we do have the lithography detailed set of.
Tools that are.
And that Mike talked about that will be starting to ship.
In Q Q2 forward, so the I'll add a little bit of it will be able to give and take all of that a little bit of pressure on the margin there, but again, while the increased volume. So we think we can offset that and stay within our model, but I'm comfortable if you look at our model of these ranges up to 800 million and Youre talking of.
And our continued miles between 50 to 155 through 800 million to the.
And the beginning of the $800 million.
And I think we feel pretty comfortable that we're going to be and those revenue range or and those margin ranges.
Sounds good guys. Thank you very much and I'll hop back in the queue.
We can take our next question this will come from Patrick Ho with Stifel.
Thank you very much and and congrats on the nice quarter and outlook, Mike maybe first off in terms of some of the advanced packaging opportunities.
And both near term and over the long term Inc.
And whether some of the upside you're seeing right now.
Coming from increased capacity expansion plans from existing customers versus wins that you've gotten on new applications, whether they are on the high performance computing side, you mentioned heterogeneous packaging.
Can you just I guess kind of provide a little bit of color.
Of the kind of the mix of.
The increase capacity expansion versus new applications of Windsor and Youre right.
Okay.
It's a little bit of the mix and I don't have the exact split but by new within the last so a lot of the the growth is what I would call new.
But it's not wins in the quarter or two it's wins from last year, even 18 months ago, where we were installing systems to help customers develop some of these more advanced processes help them develop them yield them and then work them into product designs and so that's.
And what now we're starting to see and both the DRAM and the advanced logic markets and then the last few quarters. We've tried to highlight that with the share gains that we've.
Anecdotally put together and describe too to the.
The investors about.
Our growth within the.
Let's say, the five idms, where theyre driving a lot more dollars and a lot more R&D into advanced packaging, such as heterogeneous die such as <unk> die stack and Si heterogeneous sort of fan out packaging substrate manufacturing of panel packaging as well as <unk> stacking for Hyatt.
Bandwidth memory, and TSV and so we're seeing a lot of the expansions coming there and we're seeing more devices being applied to that so for instance, some of the foundry customers they are having more and more.
Demand for that advanced packaging technology also running through and that's adding to our.
Growth trajectory as well.
Great that's helpful and maybe as my follow up question for Steve <unk>.
Generated really good cash flow during the quarter and working capital management was particularly sharp given a lot of the constraints and the environment can you discuss I guess some of the.
And the supply constraint, maybe in the ecosystem and how that's impacting one.
And your ability to build inventory.
And also.
Just make sure that youre able to deliver to the higher demand thats out there right now by your customers.
Yeah. Thanks, Patrick I mean, clearly that's something that the industry why we're looking at we're keeping a pretty good pulse on the overall supply chain.
From that perspective, we are seeing.
And kind of the vendor times stretch, a little bit, especially and actually transportation side of it more and cargoes and things of that come on cargo ships were starting to see <unk>.
And a little out of low longer to get here, but we're working that into our plans.
Right now, we don't see of supply constraints.
With the what we're doing but we're obviously planning for the fact that we see.
These longer time stretching and some key components.
Actually coming from overseas so yes.
Yes, we're.
Working those with the with the growth, we're seeing and we're planning accordingly and we've.
Got it and built into the plan. So we don't expect anything at this time.
Great. Thank you very much and congrats again.
Thanks, Patrick.
Our next question will come from Quinn, Bolton with Needham and company.
Yes.
Hey, guys.
Also offer my congratulations Mike wanted to start on the Planer films traction you talked about and the script. It sounds like Youre seeing multiple systems at multiple customers can you just sort of give us a sense of.
Of the total number of planar films systems do you expect to ship in 2021 or perhaps the dollar basis, how much how much how significant is this to the overall business.
I think it's still and the early stages, so as far as significant I would say.
Yes.
Oh, it's less than 10% certainly less than 10% of revenue I think for US right now where we're encouraged by that rapid adoption from the first top three customer.
But then also the seeds that we're planting and the adoption we're seeing with other customers. That's all going to mean more expansions and this and the.
Following year of 2022, so I think for US, it's all about where youre seeing a lot of growth right now of just from the markets. We're planting a lot of seeds for future growth and then we will see that become much more significant part of our revenue stream. Just a reminder, we said that the overall market is $400 million and size split but.
Tween some critical.
Films, and then some more common films.
And it's the common films, we're going after right now, so roughly $250 million or so and so.
20% of that is another $50 million.
And would hope we could.
Achieve.
Maybe a little better than that going into 2022.
Great. Thank you for that additional color and then the second question I had is.
I think and the press release, you talked about the inspection business growing roughly 20% quarter on quarter. So.
The back end advanced packaging, certainly feels like it's seeing good momentum.
Your main competitor in that space sort of talks about <unk>, 80% growth.
And its inspection business and the first half of 'twenty, one versus the first half of 2020. So so perhaps a different time base, but wondering if you could give us your thoughts on just overall market share position and the <unk>.
Section.
Segment of the market do you think you are keeping pace with with your largest competitor there in terms of market share.
I think it depends on how you segment the market. So we're certainly extending our position at all of the leading edges.
Talked about that multiple times, that's I think.
We've got plenty of data points there.
We're certainly struggling is in China, and I think Thats an area that the competition is taking advantage of with the restrictions. We have we've talked about significant amount of orders pending licenses. That's what we have and hands. There is also the dynamic.
And where.
Many of the second tier suppliers preferred to work with the.
Our non U S.
Option.
Non U S and non American company is an option so.
And some.
Low hanging fruit that the competition has taken care of there I think that that's a temporary dynamic I believe that the.
What we're seeing from the Commerce Department and what we're seeing from Gina and the communications that Theres, a desire to find a way to work and not punish the U S and equipment industry, which is so critical to the overall growth and <unk>.
Success of semi over the last several decades really and so I think that that's going to turnaround.
And we're happy with where we are and how we've been gaining share at all of the leading edge and critical devices and the specialty markets as well.
Yes.
Thank you Michael.
And we will take our next question this will come from David Duley with Steelhead Securities.
Hello, and thanks for taking my question, Mike I, just wanted to clarify one of the statements. He made earlier on I think Greg was also asking about it and you mentioned the growth in the.
First half of the year versus the first of all the last year I think was up 26% and you made a reference out of the second half growth would be stronger than the first half do you mean that the second half of this calendar year will be up more than 26% versus the first of all excuse me the second half of last year.
Or just help me understand of what you mean by stronger then up 26% of the first half of it.
That's a good question. So what I meant is it'll be stronger than the revenue and the first half. So we see the second half.
As stronger than the first half of 2021.
Okay.
And as far as and when you look at Europe, I guess funding wafer business and metrology business.
And kind of.
We've heard from the big wafer fab equipment companies that the <unk>.
It's growing somewhere around 30%.
And calendar 2021 do you think your metrology business will grow at a faster rate or a slower rate than that.
Okay.
Uh huh.
Yes.
Sure.
And if I can see and I think where we're growing.
Around that rate and I think there is opportunities for us to.
Grow faster and it.
It depends on timing of some of the adoptions of the new products, we've talked about the.
Certainly, we're seeing some activity and the <unk>, NAND, which could drive acceleration and aspect.
Our channel whole metrology tool that we right now we're not seeing a huge impact and this year marks and next year that could pull in and that could change, but I think right now thats the.
The 30% numbers.
Is reasonable.
Okay excuse me and then I think generally people have talked about.
The growth of 12 of 14% this calendar year and I suspect that that will continue given all of the big wafer fab equipment investments we're seeing.
12 of 14% of kind of the unit volume growth what would you expect to kind of annual growth to be for your pack and business.
Well last year, our back end business grew over 20% and we think it's going to continue at those kinds of levels back and what we're seeing for demand for our advanced the advanced.
Equipment is it's pretty it's pretty strong and it's driven by a lot of different products, but also by those top <unk>.
<unk> that are that are migrating and now competing on the the advances theyre, making and packaging and you can hear from nearly all of them TSMC has talked about Intel's talked about samsung's talked about it.
So net.
And is helping to propel this.
Massive transition of demand, we see for our advanced systems and <unk>.
Part of the advanced systems isn't just can we see the defect and measure it and it's also what do we do with that data and customers want fast decisions. They want that actionable intelligence. So they can make adjustments to the process right away and that's what we're providing and have been providing to the automotive industry for.
Better part of a decade, and now that that whole value proposition is resonating very well with the advances and the and the high end here and more traditional semiconductor.
Okay final question for me.
Could you just elaborate a little bit more on your lithography business. You mentioned I think that you picked up on top of the order and that's your backlogs now greater than $20 million could you talk about the shipment of those.
And as tools and what is what is the reason the third.
So to speak that everyone all of the sudden wants to take delivery.
Delivery of panel lithography tools, what has changed and.
And the development processes of your Big IDM.
All of the sudden.
The first starting to order panel lithography tools.
Mhm.
Well.
One thing we've talked about is there some and the reason we've had orders and have been driving the backlog is there is there is the customization and theres. Some new features and capabilities that we'll be announcing as part of these as part of the system. So that's one thing.
And that's opening up the doors and capabilities into another aspect of panel, where we're seeing.
Tremendous amount of not just interest, but but ramping of volume production.
And that production is what we talked about early this year that we could see and count to volume moving not just in 2021, but through the next several years 2022 2023.
We're seeing nearly.
Every major.
Large.
All of the high performance compute engines that we're seeing are moving towards.
This this type of technology this panel level packaging technology.
As a follow onto that.
It sounds like you are kind of part of a broad base of customers that are going to take systems.
The largest customer and this segment is the big foundry in Taiwan, and they did mentioned on their conference call. Obviously, they've raised our capex like three times and three or four months.
The 10% of the Capex budget on the backend, which is roughly $3 billion.
Do you see them, adding a bunch of capacity and fan out and that's what we will acquire a bunch of more litho systems of this calendar year.
From a panel side I would say there, they're not leading but from the fan out you know what the info process and some of their other advanced packaging co Los and there are certainly investing heavily and gaining more customer demand for those products.
Thank you.
Yes.
Once again, if you would like to ask a question. Please press star one on your telephone keypad now.
We can take our next question this will come from Tom definitely with the D. A Davidson.
Yes.
Yes, good afternoon.
First of all Mike a question on the $25 million of bookings.
Booked but not shipped.
It's going to China is that.
Are those and built in there and the inventory right now or the and.
And process.
Some have been built and are and inventory that's the.
We didn't expect such long delays, we did foresee a lot of growth and didn't want to.
Double up and up and particular quarters, so having whole influx hit all at once so we did build some now we're working with customers to manage through the build so.
It's not the full amount, but I did mentioned thats over $25 million.
But those could be and we can.
And figures for the customers the worst case scenario.
Case scenario, yes, and we also but.
Payments upfront because of the uncertainty so.
Okay.
Excuse me the Steve you talked about lead times and supply challenges have your lead times changed at all.
Glenn the customers.
No not really.
And we we've only just starting to see some of this.
The commentary on shipping and shipping dates for the.
And coming but we're not.
We're ramping for the volume, we're seeing and we're not stretching out of our lead time of day thing.
And the per se.
Okay, that's encouraging and then finally when you look at the software and services space. When you look at the projected.
Projected growth over the next few years is the more heavily weighted to software side of the traditional services side and what.
And that mean for the margins.
So.
I would say some of that growth the growth is probably more on the services side and the software software is going I think as you recall, we always kind of considered the steady Eddie has got this nice.
Aggressive growth, but but unlike the days prior to the merger software isn't.
It isn't as big as the overall the overall once the Rudolph so its impact on the margins while helpful. Clearly.
It doesn't really it moves and it doesn't move the needle as much of that used to so.
I mean, I expect software and continue to grow I think it will continue to enhance the margins, but we're talking.
Percentage percentage of of a percentage point.
Impact on the overall margin on the service side I think.
Seeing some steady growth and the service over the last day.
And you actually track back a year and a half.
Services is continuing to grow.
We expect that to continue to grow obviously in this environment and our service business overall.
As a pretty good a pretty healthy margin business.
Okay, and then I guess finally is the services business more leverage to the advanced node products or the advanced packaging products.
Yeah, Yeah, so the more of the.
The advanced node that was a bigger piece of our business. So yes.
Alright, thank you.
Okay.
I would now like to turn the call back to Mike Shaffer.
Thank you we'd like to thank everyone for participating in the call today and for your interest and onto innovation that concludes our remarks of the call Conor. Please wrap it up thank you.
Thank you. This concludes today's conference. Thank you for your participation you may now disconnect.