Q2 2021 Onto Innovation Inc Earnings Call
[music].
Please standby.
Good day, everyone and welcome to the onto innovation second quarter earnings release Conference. Today's call is being recorded at this time I'd like to turn the call over to Michael Schafer. Please go ahead.
Thank you April and good afternoon, everyone onto innovate.
And as you did 2021 second quarter financial results. This afternoon and shortly after the market close if you have not received a copy of the release. Please refer to the company's website, where a copy of the release is posted joining us on the call today are Michael Plucinsky, Chief Executive Officer, and Steven Roth, Chief Financial Officer, as always I need to remind you of the safe Harbor regulations.
Any matters today that are not historical facts and specialty comments regarding the companys future plans products objectives forecasts and expected performance consist of forward looking statements within the meaning of the private Securities Litigation Reform Act. These estimates whether expressed or implied are based on currently available information and the company's best judgment at this time.
Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that these statements are subject to a range of uncertainties that can cause the actual results to vary materially. Thus the company cautions that these statements are no guarantees of future performance risk factors that may impact onto innovation results are currently described and onto innovation and form 10-K report.
For the year ended December 2020, as well as any other quarterly filings with the SEC onto innovation does not update forward looking statements and expressly disclaims any obligation to do so.
Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified as a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release I will now go ahead and turn the call over to Mike <unk> Mike.
Thank you Mike Good afternoon, and welcome to onto innovation second quarter conference call across the semiconductor value chain from silicon wafers to wafer fabrication and advanced packaging onto innovation products are contributing to the faster ramps and high yields necessary to support the unprecedented global demand for semi.
Conductors onto innovation is broadly participating and this growth from logic at 7 nanometer down to the 3 nanometer design nodes to the latest DRAM and <unk> communicated case and devices and out to the rapidly evolving advanced packaging markets, we're accelerating design strength, so creating strong demand.
For more sophisticated and and versatile and inspection solutions.
As a result, and the second quarter, we reported record revenue of $193 million well exceeding the high end of our guidance and we continue to see a stronger second half of the year.
So let's begin by looking at the highlights from the second quarter, starting with our largest segment specialty devices and advanced packaging.
And market demand for devices to support growing work from home and high performance compute applications propelled revenue and this segment to increase by 45% over the first quarter and more than double the second quarter of 2020, leading this growth was demand for inspection technology, which increased 24% over the first.
Quarter, and 65% year over year.
And our recently released Dragon fly G. III systems improved sensitivity speed and integrated clarifying technology is expanding our position and the most demanding and sophisticated packaging markets.
While also opening new markets such as high definition image sensors, where our growth continues ahead of expectations for example, and the second quarter. We received orders from our fourth new image sensor customer, while our top 3 image sensor customer doubled their existing installed base to support the ramp of their <unk>.
Latest sensor technology.
Another segment, we see expanding our served markets. This panel level packaging. We believe this market represents an important inflection point for the industry, particularly for high performance compute engines and large heterogeneous packages, our newest lithography tools deliver high resolution imaging across a very wide field of view, which is proving to.
To be a key enabler for next generation packaging technology for larger advanced packages. We have started shipping our backlog and have received an additional 4 orders for shipment and first half of 2022. Our total lithography backlog is now over $30 million and we expect to close 2021 with several more tool shipments and are for.
Book production schedule for 2022, we're working closely with our customers and suppliers to determine additional capacity needs for 2023.
Revenue to support both power and <unk> applications increased over $24 million and the second quarter. This included demand for our inspection systems, New overlay metrology from our acquisition of inspect Cholla G.
And strong demand for metal film Metrology. This also included the addition of for new RF and power customers, which we expect will contribute to our projected stronger half of the year.
Turning to the advanced nodes and the second quarter, we set a quarterly revenue record for our flagship Atlas OCD metrology platform. This record demand was primarily in support of expansions for leading edge DRAM and logic devices, where a greater sensitivity provides a central metrology for a growing number of crew.
<unk> dimensions at speeds required for volume manufacturing.
We expect demand for our Atlas OCD to continue to strengthen and then the second half of the year both to support additional investments in advanced logic, and DRAM and an increase and the number of applications on our tools and support of higher yields.
Even as demand for our core products hit record levels to support overall market growth, we're enabling future growth by expanding our position on new markets, such as planar films and high aspect ratio metrology for 3 D. NAND. We're also seeing revenue synergies and specialty markets as we introduce our metrology suite to these customers for example.
And the second quarter, we received orders for our latest film system from 6 new customers and the specialty device markets.
These orders will ship and the second half of 2021, and including projected repeat orders from our first customer we expect second half growth of our planer films to be over 50% from the first half providing nice momentum into 2022 and.
Finally, I wanted to also highlight our ongoing commitment to raising our corporate and social responsibilities by becoming and affiliate member of the responsible business Alliance. We were already actively committed to responsible environmental and social policies, but our membership and the responsible business Alliance is another important step forward.
By joining our fellow members of the RBA, we will serve and as example to our suppliers of how the RBA code of conduct can create a more successful industry climate and a better world.
I will now turn the call over to Steve Roth, who will cover the second quarter financial highlights before I provide some color on our third quarter.
Steve.
Thanks, Mike and good afternoon, everyone and my remarks. This afternoon I'll provide some details on our Q2 results and then follow that with what we're seeing for guidance for the third quarter.
As Mike mentioned, our second quarter revenue was $193.4 million up 43% over the same period last year and up 14% over last quarter.
During the quarter, we received approval from the U S government to ship certain systems that we had and backlogs since the end of 2020 to a customer and China.
Those shipments totaled $13.1 million and the quarter.
Due to a delay and getting this approval our customers' ramp plans and their customers order shifted downward and we agreed to cancel a portion of the original order totaling about approximately $8 million and redeploy those systems to other customers.
We still have other systems awaiting government approval, which at the end of the second quarter totaled approximately $7.3 million.
Breaking down the revenue by market <unk> 48 per cent of the sales were from our specialty device and advanced packaging market with strength coming from RF and power markets, which combined were up 200% over the first quarter.
The advanced node market represented 33% of sales and the quarter down from Q1.
While we did see growth and memory, both DRAM and NAND those increases were offset by a temporary pause from logic customers.
Finally software and services increased slightly in the quarter and represented 19% of revenue.
Our gross margin continued its strong quarter over quarter performance, increasing 55% compared to 54% and the first quarter.
Higher revenues, covering our fixed manufacturing costs and product mix help offset supply chain cost increases and the quarter and drive the gross for margin improvement.
Second quarter operating expenses were $55.8 million and increased from $49.2 million and the first quarter of 2021 and.
Unusual increase in operating expenses was mainly due to a back to our variable compensation plans now for forecast with 2 far exceed targets as well as and as such we had to true up our accruals, including a catch up of the Q1 shortfall.
In addition stock based compensation expense was higher in the quarter due to annual employee grants and head count increase to support growth, we are seeing now and in the future.
Even with the increase in operating expenses, our strong financial model resulted in an increase in operating margin to 26% up from 25% and the first quarter and.
In fact, our operating margin has improved every full quarter since we completed the merger of Rudolph and endometriosis and we feel confident in achieving our long term operating model, which had a revenue level and 800 million calls for gross margins of $55 to 56% and operating margins of 29% to 30%.
Net income increased and the second quarter and was 50, $45.9 million and 92 cents per share and above the high end of our guidance and the 2020, 1 and the 'twenty 'twenty..1 first quarter, we reported net income of $36.3 million or <unk> 73 per share.
Moving to the balance sheet, we ended the quarter with cash position of $411 million up $18 million from Q1.
Accounts receivable increased to $175 million and the quarter due to an increase in revenues and the linearity of our shipments which were heavily weighted to the back half for the quarter.
Our inventory turns improved and the quarter hour. However, overall inventory increase slightly and ended at $207 million.
Now turning to third quarter guidance.
We expect revenue to be and a range of $190 million to $200 million earned.
Earnings per share and this revenue range and is anticipated to be between 85 and 99 per diluted share.
We also expect our gross margins to be between 54% and 56%.
For operating expenses the compensation plan true up I, just discussed should have minimal impact on our quarterly operating expenses going forward, but we will continue to have active recruiting plans in place for the strong growth we are seeing.
Therefore, we anticipate operating expenses to decline and the third quarter, and B and a range of $52 million to $54 million.
And with that I'll turn the call back to Mike for additional insight into Q3, and the remainder of 2021 Mike.
Thank you Steve.
We entered the third quarter with strong momentum across all of our markets and strategic initiatives, which include continuing to increase operational efficiencies to further strengthen our foundation for sustainable growth.
We have a record backlog and visibility out to early 2022, so even with our strong results for the second quarter, we remain confident and the expectation set last quarter for continued growth and the second half with the fourth quarter stronger than the third specifically for the third quarter, we expect spending on logic to increase significantly.
And support of additional expansions by several larger suppliers on the second half of the year. We see continued strong demand from packaging and RF customers and the third quarter and expect a sharper increase and the fourth quarter as our expanding number of customers increase their investments and <unk> to support new applications and infrastructure and trans.
Potato and in addition to the current growth and mobile applications, we expect memory overall to decline and the third quarter with DRAM spending to pick up significantly and the fourth quarter to support investments from leading suppliers.
With the continued growth we see for the second half of the year, our supply chain team is increasing their focus on deliveries and supplier backlog from each of our supplier partners to minimize impact.
And to our customers as I mentioned earlier, our growth is not only driven by the surging demand for our products and existing markets, but also the progress progress we are making expanding into new markets such as the image sensors planar films panel packaging and high aspect ratio metrology.
And total these initiatives expand our served markets by over $350 million, creating additional revenue and revenue opportunities for 2022 and beyond.
And with that we'll open the line for questions from our covering analysts April. Please go ahead.
Thank you if you'd like to ask a question and simply press the star key followed by the digit 1 on your telephone keypad.
So if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal for each our equipment once again, Chris Star 1 at this time.
And we will hear from Patrick Ho of Stifel.
Alright, Thank you very much and congratulations on the really nice quarter and outlook Mike.
Mike maybe first of all and in terms of the advanced packaging market on theirs.
Clearly a lot of growth opportunities, particularly at the most leading edge you're seeing some of the top chipmakers talk about their opportunities.
On a base packaging can you give a little bit of a highlight of what those opportunities on a big picture basis and to holiday.
Guess come together and some of the volume purchase agreements that you've talked within the past.
And you're getting more of those because youre able to leverage kind of a 1 stock.
Yes.
Okay.
Okay.
Okay.
Some of the AP processes, becoming.
So Patrick you broke up a little bit, but I think I understand the gist of your question. So from an AP from a packaging perspective.
And the demands are increasing across a variety of different applications and the leading manufacturers. The leading idms are certainly investing significantly more R&D dollars and capex of capital.
Capital dollars towards.
Expanding advanced packaging technology and capacity.
From a volume purchase agreement you are right.
And these top idms, where we're also gaining traction with our.
Metrology platforms on the front and they are also seeing the opportunities on the backend and where we're able to leverage the increased volume.
Similar service organizations during Covid, we cross trained a lot of our service and support organization. So we now have significantly better coverage with.
A lot of overlap and capability. So they can see benefit and service and uptime and the capabilities of buying from onto as a supplier and that gives us some.
Some benefit to offer customers as we as we look and negotiate volume purchase agreements going into 2020.2.
For sure that's the case.
Great that's helpful and maybe as my follow up question for Steve first of all Steve.
Given your recent announcement on 1 again wish you the best of luck, it's been a pleasure all these years working with you and I think going forward.
I'll be 1 less person to harass you. So thank you again.
Thanks, Patrick Thanks for the words.
Going to the near term environment, given your results and outlook you, obviously manage the supply chain and very well the entire industry is going through constraints right now to varying degrees.
Given your results and outlook what have you been able to do for Lee from.
And other equipment accompanied with the full understanding each equipment company is very different their supply chains are different and the types of components. There is.
In short supply are also different so you could just give a little bit of color on what efforts you've done to mitigate the situation.
Yes, it's a good question.
I mean, I think a lot of congratulations goes to our supply chain team they've been doing a great job of just keeping our finger on the pulse of where we are seeing some of the component and assembly delays, but we've been able to manage through them for the most part I think we're obviously seeing stuff on the logistics side and just getting material to us.
So in some cases as I mentioned, a little bit of offsetting pressure on our gross margin, but that was really to cover expedited charges and things that we've been paying a little just to reduce transit time and make sure we get our stuff and on time, so doing that as well as obviously looking out a little further and making sure that we're making sure we have adequate.
Jeff on the books for the growth that we're seeing so I think we've been doing a fairly good job of managing it not that we're not experiencing it but I think we've been doing good job managing and overall.
Great. Thank you again.
Okay.
Yeah.
Quinn Bolton of Needham <unk> company.
Hey, guys. Congratulations on the nice results and Steve I'll say, this and congrats and best wishes to you.
I wanted to start with just sort of the visibility that you haven't for the second half sounds like Q3 up over Q2 Q4 up again.
If you look at <unk> I think many analysts predict Wi Fi up 30, plus percent, maybe even into the mid Thirty's and based on your visibility right. Now I'm wondering if you think overall product revenue and onto we'll sort of keep pace or perhaps even outperform that WMC level and 2021.
Yes, So Quinn, we believe that will will be outpacing the WMC.
Look at the expanding capital intensity for our process.
Atlas metrology platforms, and the advanced nodes and we look at the different applications, we see happening on the advanced packaging front, and then combine that with the new <unk>.
Market expansions that were only in the early stages of gaining traction.
Look at all of that combination and some of the guidance, we've given would indicate.
And that we're fairly confident and outperforming a 30% kind of WSB number.
And the second.
Question as you.
We're going through the comments looking into Q3 Q4, it sounds like.
You saw a memory picking up in the fourth quarter. It sounds like Thats driven more by DRAM, but wondering if you had.
Any any thoughts on the NAND outlook Q3 Q4.
For us, we see the NAND softening and the second half so.
Despite all the strength that is probably the 1 market that we have seen that we see softening a bit and.
Going into the second half and it's it's roughly equal from what we can tell.
It comes down and then stays at debt.
Reduced level.
Yes quarter over quarter and create a coupon.
Sorry for Steve on the Litho litho backlog up nicely again this quarter as you start to ship those systems I know that carries those systems carry lower gross margins.
Any concerns that that could could pull you below the 55 to 56 level.
That it looks like youre going to be getting pretty close to on a quarterly basis to that $200 million quarterly.
Quarterly run rate.
Probably.
Either at the high and again for Q3, but if not then definitely in Q4.
Yes, so that's a good question for Q3 Im not concerned.
Just started shipping systems or new systems. So we're going to have some rev rec.
Things that are going to delay probably when those tools get recognized I don't anticipate that tool is being recognized in Q3 Q.
Q4, we got to see how the mix shapes up but we could actually have a slot for tools. If they actually all were to get recognized in Q4. It could have some pressure on the margin on the overall model anticipates litho with the lower margins built into it. So it's just for you might be a question if they.
Yes.
Backup onto 1 quarter that might have a 1 quarter impact.
But overall the model does include litho at those lower than normal margins.
Got it great. Thank you very much.
And next we'll hear from Craig Ellis of B Riley Securities.
Thanks for taking the questions and guys congratulations on the strong performance.
Mike I wanted to start off with you and and go back to a point and the press release and and from your script I think the Sam expansion opportunity that you scope scope debt $350 million, but in my notes I have bad debt at $260 million from maybe my historic notes for incorrect, but.
But I think what's happening is that Tam expansion opportunity is growing and that's really what the question centers on.
As you are.
And as you are moving through.
Calendar 'twenty, 1 and approach and calendar 'twenty 2 do you actually see a larger Sam expansion opportunity in front of you than what you were seeing 6 to 9 months ago.
We do we do and panel panel level packaging, which is 1 of the areas. We we see a little bit more and the Cmos image sensor.
But the biggest probably shift is also on the planer films.
So that's another area, where we're starting to see a little more demand.
Not just in the not just in the traditional markets, but also on the specialty device markets.
You didn't.
We didn't appreciate just how much opportunity there was there and as we started to leverage our broader channels on a broader sales channels.
And the opportunities have been very positive on the customers have been very receptive to the to the new products.
Got it got it.
And then Steve I'll do a follow up with you so.
If I were to annualize.
The current quarter's revenue guidance I get something that that is close to 800 million not quite perfect close and kind of the gross margin and it's very close to the target and it looks like operating margin has a bigger GAAP targets. So I'm. Just wondering if you can walk through some of the things that will be needed to close the operating margin GAAP.
From where we are now to target.
Target levels at 29 and half.
Yes, so the only thing thats throwing you off a little Craig is that the.
As I mentioned in my prepared remarks, the comp plans the variable comp plans are running well above 100%.
And our model assumes there at 100% so theres a lot of catch up entry going on and the quarter.
Yes.
And thats throwing that off a little bit, but so thats why I say im confident that view and a back out debt that run rate as the run rate you would actually be very close to the long term model.
Great.
And then lastly, and I'll keep it there and before I ask for the last question of you Steve I just want to.
Join the group and echoing thanks for all the help over the years, you've been tremendously valuable not just with onto but with the broader industry and I greatly appreciate that and wish you well.
But as we look at the next milestone now that we're really at the midpoint gross margin target.
Looking out to the next level, which is 56, 5%.
And Rob and equal contribution between mix and volume that get us there or what are the what are the ingredients that take us to year.
We are 56, 5% target from today's levels.
Yes, just keeping the standard.
Mix of metrology inspection, and obviously litho is built into that too.
So it's really just for keeping a somewhat growth on across all the segments and that Mike talked about where you see a lot of the growth.
You keep that proportionately up you start leveraging up into those numbers that you see and the next level of our long term operating model.
That's helpful. Thanks, guys and good luck.
Next we'll hear from Tom definitely of da Davidson.
Yes, good afternoon, and thanks for the question.
First Steve very sorry to see you go <unk> been the 1 constant and the 20 years I've been on this business on Mr. Jeff.
So maybe starting with you.
When you look at the supply challenges you've seen over the last few quarters.
Would you characterize that.
The transition to owner mining.
Moving or they're getting better and things getting resolved is it getting worse, how do you view the supply chain issues.
I'd say right now we're kind of I don't see them getting worse right now I think they've been on kind of a level I think initially it was you saw it and the extended kind of logistics side of the shop first where you saw the freight and you are taking longer to get stuff here, especially we bring a lot of stuff and over 2 container.
<unk>.
And so I think we initially saw that I think it evolved a little bit obviously and you hear it among other people to a lot more on the components and <unk>.
Components side, and maybe assemblies and even even our supplier suppliers is where we're really seeing we're constantly with our suppliers to try and make sure they're testing where theyre getting their stuff from because we're seeing a couple of I'll call. It tier 2.
Issues that are causing our vendors to deliver to us on time. So I think that debt is probably what it's evolved to but I would say, it's kind of and.
At least over the last month or 2 it's kind of leveled out I haven't seen it get a dramatically dramatically worse.
Okay.
And quite helpful. And then Mike when you look at the long term drivers and your market.
And products, serving those markets what do you think for natural split between specialty and advanced nodes is for you.
And you.
Yes.
Over time, I think we're going to continue to be.
Right around that $50.50, Mark right now were 60, 40, where specialty and AP is.
Bit stronger, but as the as the expansion of our new metrology suite continues I would expect that to balance out so well.
And we'll alternate quarter to quarter, but I would say that when we look out for 5 years.
And full adoption of these new products and.
And additional new products and new markets and expansions.
I would.
I guess that we're going to maintain this 50.50.
Kind of.
Split maybe slightly tied to the advanced packaging specialty just because we have more products that play into that and a bigger way and thats growing.
Fairly aggressively.
Okay.
Michael.
Okay. That's helpful. So would you say over the next year that perhaps the biggest drivers just the products you have that service.
Emerging foundry war, that's going on for leading edge.
Not just that but also the the plaintiff films and some of the new market opportunities, we're seeing for the aspect or the.
IR CD metrology for <unk> NAND high aspect ratio metrology I think we're opening up the doors to some markets, we didn't participate in and advanced nodes and the path. So I think thats going to.
Drive some outsized growth for us and advanced nodes as well at the same time.
We have the growth on the advanced packaging and specialty.
Alright, alright, thanks for your time.
Yes.
<unk>.
And.
Once again star 1 if you would like to ask a question and I'll make a comment.
Next we'll hear from David Duley of Steelhead Securities.
Thanks for taking my question and congratulations on strong results.
And.
Steve Congratulations on on.
For retirement and good luck to you on on everything.
And I guess my first question involves.
Can you just help me with what the Tam of the planar films businesses of this new 350 that youre referring to.
So it's.
It's about $200 million of that.
So it's it's about half of the overall plan of films remember we split it into the really critical films. Some ultra thin films and then some more standard planar films and right now are our products are better suited for the common films.
It was about half of the overall plan of films market.
Okay and do you have.
Revenue target, perhaps you could share with us for this product either this year or next year or help us frame how.
And how big of an opportunity it is for you.
And the near term.
Steve how would you frame that.
Hi.
So.
And <unk>.
I mean.
Congratulations on I think you mentioned you got for additional orders. So you know the 30 million dollar backlog is Ah Ah Ah Ah great.
Great achievement and.
You know can you you mentioned your slots or fall through 20 twenty-two. So you know if your if your slots are full of and you kind of know if your if your if you execute what your revenue will be maybe you could share do you think you can ship. All this 30 million dollar backlog for you know what her.
How should we think about the revenue potential of this business over and over this year and next year. Thanks, Yeah, well, we'll provide that guy items as we get closer to it but I never I didn't say just for a correction I didn't say the slots for full and I said, we expect to and the year with full slots for 2022, So we're continuing to build.
The backlog now that backlog includes shipments we plan for this year as well as shipments expected or slots available for next year, and we expect and what the engagements we have to close out the back the open slots for 2022.
Well ahead of the end of this year.
So they're not they're not closed yet.
Okay.
And then I got theoretically if we do close all your slots for how should we think about the robin for potential for the advanced for the lithography business either this year and next year or however, you can help us frame it at this point.
[laughter].
Really good [noise].
Yeah I'd say.
You know yeah yeah.
You can look at the 30 million and and consider that a a pretty decent.