Q3 2021 Onto Innovation Inc Earnings Call
Good day and welcome to the onto onto innovation third quarter earnings release Conference call. Today's call is being recorded at this time I'd like to turn the call over to Michael Schafer Investor Relations. Please go ahead Sir.
Thank you David and good afternoon, everyone onto innovation issued its 2021 third quarter financial results. This afternoon. Shortly after the market closed if you've 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 <unk>, 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, especially comments regarding the company's 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.
Nation and the Companys 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.
<unk> results are currently described in order to innovations Form 10-K report for the year ended December 2020, as well as the other quarterly filings within the FCC onto innovation does not update forward looking statements and expressly disclaims any obligations to do so.
Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified and 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 Lozinski Mike.
Thank you Mike Good afternoon, everyone and thank you for joining onto innovations third quarter earnings call.
The onto innovation team delivered a strong quarter exceeding the high end of our revenue guidance and improving both gross and operating margins.
While supply chain continued to be challenging we expect demand to increase in the fourth quarter with revenue growing 5% to 10% over the third quarter.
So let's begin with highlights from the third quarter, starting with the advanced nodes market, which grew by 10% driven by a surge in logic spending in the quarter.
Smaller geometries and new three D transistor structures are creating an increase in capital intensity for high sensitivity high speed optical metrology systems. As an example, metrology applications to support the next generation Finfet structures could increase as much as 50% over prior structures.
Customers indicate that our combination of greater sensitivity and AI enhanced modeling software is proving to be a powerful differentiator in these applications in the third quarter more than half our revenue at advanced logic came and supportive investments for pilot lines for transistor structures below five nanometer.
Our strategy to grow share in integrated metrology is also progressing well with another leading DRAM manufacturer selecting onto integrated metrology to support their production ramp of next generation high bandwidth memory, starting the first half of 2022.
This year, we've already added six new customers for integrated metrology and each are expected to move to volume production next year.
In addition to being positioned for those future expansions, we've seen a strong increase in demand this year from existing customers in the first nine months of the year integrated revenue increased 50% over the same period in 2020.
The impulse five technology further improves our value proposition as we believe it is the only system capable of speeds matching the latest CMP tools, while maintaining required sensitivity below 30 angstroms. This capability allows customers to increase line productivity by reducing rework due to over polishing.
CMP.
Now turning to our largest market revenue from our specialty and advanced packaging customers was comparable to the second quarter and 43% greater than last year's third quarter.
Within these markets demand for our inspection technology continued to accelerate and for the second straight quarter, our inspection revenue increased by over 20%.
The strongest demand is coming from the top idms to support investments in new heterogeneous packaging micro bump in three D. T. S. V technologies, we uniquely meet these challenges by augmenting our inspection platforms with advanced Stanek analytics, leveraging artificial intelligence to provide actionable information to our.
Customers for example, DRAM memory menu customers have been challenged by micro cracks induced by stressing the sawing process. These cracks can become costly reliability issues, especially when several dire stacked into single H P M. Our high bandwidth packages.
Increase in sensitivity would find the cracks, but also thousands of nuisance defects, resulting an overkill of good dye or shipping die with potential reliability issues by leveraging our proven machine learning algorithms, we're able to detect the critical defects of interest while eliminating the noise, which resulted in a more robust solution and improved year.
Ill.
In addition to our tool centric solutions, we see stronger demand for enterprise software, particularly from the specialty device markets, including power and RF customers, which represented 50% of our enterprise sales in the quarter. The combination of enterprise wide revenue and expanding tool centric applications help set a new record for the bill.
In the third quarter.
We also see a new point of leverage for the software to enable enhanced productivity services to our fleet of installed equipment. Since the merger we've been steadily transitioning our services business from a traditional break fix model to a more customer focused recurring revenue model with an emphasis on contracted services aligned with customer performance.
Metrics as a result of these efforts contract revenue has increased each of the last eight quarters.
Over the last several years, our software and services business has grown by about 30% and is roughly 20% of our revenue today and we believe leveraging our software will provide additional future growth opportunities for this business.
So it was certainly an exciting quarter across several areas of our portfolio, but perhaps most exciting is the progress being made on our latest jet step lithography platform for advanced packaging. The first tool has been installed and are starting process qualification for panel size heterogeneous package technology.
We shipped our second tool in the third quarter and we received commitments for six additional manufacturing slots for delivery mostly in 2023.
In order to support the commitments for 'twenty 'twenty three we're expanding the manufacturing capacity at our Wilmington, Wilmington facility and with our key suppliers.
Now I'll turn over the call to Steve to discuss the financial highlights.
Thanks, Mike and good afternoon, everyone. In my remarks. This afternoon I'll provide some details on our Q3 results and then follow with our guidance for the fourth quarter. So let's get started.
Our third quarter revenue was $200 6 million up 59% over the same period last year and up 4% over last quarter <unk>.
Our sequential quarter over quarter increase was mainly driven by inspection sales and our software group, which Mike mentioned had a record quarter.
Breaking down the revenue by market, 45% of our sales were from our specialty devices and advanced packaging markets, which continue to strength from the previous quarter.
The advanced node market represented 35% of sales in the quarter and increased 10% over the prior quarter.
That increase was driven biologic sales, which grew 80% quarter over quarter offset by weakening in memory.
Following are finally software and services increased slightly in the quarter and represented 20% of revenue.
Our gross margin continued its strong quarter over quarter performance, increasing to 55, 1% compared to 54, 5% in the second quarter.
Higher revenues, including stronger software sales offset supply chain and logistic cost increases in the quarter and drove the gross margin improvement.
Third quarter operating expenses were $51 6 million a decrease of $4 2 million from $55 8 million in the second quarter and lower than our guidance.
The decrease was primarily due to variable compensation plan adjustments, which were recorded in the second quarter, which increased operating expenses in that quarter.
In addition, there was lower stock based compensation expense in the third quarter.
Those decreases were partially offset by an increase in head count in the quarter to support our revenue growth.
We continued our quarterly operating margin improvements each quarter since the merger with third quarter operating margin of 29%, achieving our published $800 million long term operating model on a quarterly run rate basis.
We also remain confident in our 1 billion operating model, which calls for gross margin between 56%, 57% and operating margins between 31 and 32%.
Net income increased in the third quarter and was $48 7 million or <unk> 98 per share and.
And at the high end of our guidance for the second quarter, We reported net income of $45 9 million or <unk> 92 cents per share.
Moving to the balance sheet, we ended the quarter with a cash position of $461 million up 51 million from Q2.
Free cash flow for Q3 was $48 million or 24% of revenue and our year to date and year to date, we have generated over $115 million of free cash flow.
Scott's receivable increased to $180 million in the quarter, primarily due to the increase in revenue, but our days sales outstanding remained at 82 days.
Our inventory increased to 222 million in the quarter on higher plan revenues for Q4 and acceleration of inventory deliveries as a hedge against supply chain disruptions.
Now turning to the fourth quarter guidance, we expect revenue to be in the range of $210 million to $220 million.
Earnings per share in this range will be anticipated to be between $1 $2 16 per share.
We also expect that our gross margins will be between 50, 556%.
For operating expenses, we are aggressively recruiting and expect additional head count on board by the end of the quarter. Therefore, we're currently anticipating that our operating expenses will increase in the fourth quarter and be in the range of $53 million to $55 million.
And with that I'd like to turn the call back to Mike for additional insight into Q4 and into 2022 Mike.
Thank you, Steve I'll start with commentary on the supply chain challenges impacting many companies including onto innovation.
We see risks in the supply chain likely to continue through the first half of next year, we believe our U S based manufacturing operations and predominantly domestic suppliers are proven to be an advantage by enabling closer cooperation and some reduction in logistics risk.
We have a supply chain is a multi tiered and complex and overall, we expect challenges will continue therefore, we're increasing our cooperation and proactive oversight with our vendors, we're taking an inventory as soon as its available and we're sharing our extended visibility with suppliers. So they are better prepared to support the growing demand we see for our solutions.
So assuming no dramatic surprises from the supply chain demand in the fourth quarter will result in our fifth consecutive quarter of growth up seven 5% at the midpoint of our guidance range, we see the strongest demand coming from our specialty device and packaging customers with revenue growing over 15% from the third quarter and.
We see increasing we see spending increasing for compound semiconductor materials, such as silicon carbide and gallium nitride. The so called third generation semiconductors for electric vehicles solar energy Inverters charging stations and power storage applications in the last year, we've added significantly to our.
<unk> suites, serving these markets, we now offer overlay metrology inspection planar films and integrated metrology all connected through our enterprise software to reduce customer ramp times and improve yields.
In fact, we expect revenue growth from RF power and image sensor customers to more than double in the fourth quarter, representing roughly 20% of overall system revenue projected in the quarter.
Within the advanced node segment, we see a surge in DRAM offsetting pauses in both logic and NAND essentially matching the record setting third quarter.
We expect 2022 to be another growth year for the industry supported by many customers announcing capacity increases across our core markets and advanced nodes and specialty devices.
We expect 2022 to be another growth year for the industry supported by many customers announcing capacity increases across our core markets and advanced nodes and specialty devices.
With record backlog over twice the size of this time last year and success expanding our served markets, including traction in panel lithography were optimistic we will exceed the current wafer fab equipment projections of 10% for 2022.
Finally on the second anniversary for onto innovation I'd like to close by acknowledging and thanking the entire onto innovation team for their dedication to our customers' success and their innovative spirit demonstrated not only in the products. We produce but also how we approach and more importantly overcome exciting new challenges.
It's truly an inspiring team to be a part of and with that I'll turn the call back and open the lineup for your questions.
Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Craig Ellis with B Riley Securities.
Yes, thanks for taking the question and congratulations on the strong results and guidance, Mike I wanted to start by following up on some of the software comments that you made it seems like there's some real strength in the business and it.
It sounds like its multi pronged. So can you just talk a little bit more about what you're seeing with respect to customer engagement in software because.
Certainly the 28% quarter on quarter, Gayness eye catching and al.
And that the interest is whether that.
That was something that's really more episodic in the back half or if you see that following through as.
As you go into 2022.
No Craig we've seen it a steady gains in the software business over the last several quarters and we didn't mention it because we wanted to make sure. This is a you know.
The trajectory that we're going to maintain and not just a.
Talking point for a quarter or two and we do believe it's a long term trajectory what we're seeing is.
Demand, especially this rapid demand.
Demand or growth for smaller companies the OS at the specialty device makers are there, they're sparing such demand they need.
Systems and software that can be more turnkey and allow for rapid deployment and rapid yield. So you know rapid deployment of the equipment and then the resulting analytics to drive yield. So we're seeing this playing out both at our equipment level. That's what we would call the tool centric and we gave an example of that there are several others.
Leveraging other technologies we have.
And also at the factory wide level.
And that includes not just you know fab wide analytics, but also control software.
For automatic process control or or equipment fault monitoring and things like this.
And then I'm sorry.
The third people have talked about this.
Leveraging the the tool centric capability and those equipment control capabilities I just spoke about to augment the services, we're offering in our in our services business, our customer success group by providing predictive analytics and predictive capabilities that.
Increase the value of of our equipment of our installed base.
Got it.
Got it.
It seems that that strength is something that's giving gross margins shrink in the fourth quarter I wanted to follow up on the panel at the comments because that has been something that you've talked about recently as Saab.
Getting to that on ramp that we've been looking for and it seems like that's here are the question is as we look ahead to a calendar 'twenty two from the three shipments that I think you mentioned you had in the quarter, what's possible from a shipment standpoint and Steve on your end, how should we be thinking about rep rack with Sop.
Panel, but though.
So what's possible from a shipment standpoint were basically up.
Booked out for capacity, so I won't give exactly what that number is but it's it would be record year for sure. So if you go back I think prior record year might be a eight systems six states system shipped so it'd be more than that.
And then I'll, let Steve talk about Rick.
Yeah from a Rev Rec standpoint, as Mike said in his prepared remarks, we shipped our second tool, but this is the first of this model. So we're.
We're going through the process Quarles now.
But I would not expect that because of the process towards would be done by the end of the fourth quarter. So we're looking probably in Q1 were the tools that we shipped this year will be recognized in Q1.
Got it Craig just help add onto that.
In case it wasn't clear.
The demand, we're seeing all the way through 2022 and into actually all through 2023.
Is is driving us to increase the capacity to fill that demand so were actually increasing capacity, which will come online in 2023 to fulfill the increased demand, we see and booked.
Or at least have commitments for in 'twenty three.
On that point, Mike and I know the portfolio is diverse across advanced.
Advanced packaging and advanced nodes can you just comment on the level of visibility that you have across the business right now certainly in panel litho it extends way out, but what about in other parts of the business.
We certainly have more visibility as we've become.
Much larger more important supplier to our customers, we're getting access and having discussions earlier on about.
Expansions going out into the following year. So visibility is definitely stronger just from that then you increase or you add on top of that the concerns with supply chain and being able to secure slots in some of our equipments in fairly high demand. So we're getting in.
Added a level of discussion as customers want to ensure that they have access to our equipment.
Got it that's real helpful guys. Good luck and thanks for the help.
Thank you Craig.
Our next question comes from Patrick Ho with Stifel.
Well, thank you very much and congrats on the nice quarter and outlook, Mike maybe first off in terms of the advanced packaging business you mentioned jet.
By heterogeneous integration from your overall advanced packaging portfolio.
The big driver or are you seeing broad based type of adoption of your different.
Portfolio across fan out.
Can you just give a little color in terms of the application and what's driving your overall.
Packaging business.
Yeah overall I would say, it's more what we mentioned, it's a lot driven by Oh.
Wafer level type packaging, whether it's a three D T S V structures or micro bump.
And.
In fan out packaging, we've seen some resurgence in fan out as well so I'd say.
The more traditional wafer level packaging is certainly driving especially as we've seen you know.
Large foundries investments in packaging and driving down design nodes or the RTL the interconnect.
<unk> has continued to shrink and that drives the demand for much higher resolution a much more precise systems, which we're seeing playing out across the.
The idms in the OS that's trying to support that business as well.
Great that's helpful and maybe as my follow up questions.
Really strong gross margins in a challenging.
Supply chain environment, you did highlight some of the variables and things you've done over the past few quarters.
To mitigate it but with those strong gross margins how are you able to manage costs.
Given that probably.
Sure.
We're not going down.
How are you keeping gross margins did not meet.
Percent range in the near term while these.
Yes.
Well for the most part because as I've said on previous calls we really I mean, there has been some impact.
From the supply chain.
Obviously, the one that people talk about the most is the shipping cost the freight costs going up.
Obviously.
Stuff that we bring over the water or taking longer and longer lead times. So we've had some we've done some expediting to get around those longer lead times. So we had some increase in costs in the freight and logistics side.
That we've seen and I mentioned that was kind of a little bit of an offset but not really enough to move the margins. Because obviously, we have pretty strong product product margins as for the overall cost increases from from the suppliers.
You got to realize that.
We order out well in advance you know obviously, we're out without purchase order. So we haven't seen any material price increases hit the numbers, yet, but I think that the risk that's out there that we keep looking at but I think overall you know our product mix. We've got a very strong product portfolio with a nice strong product margins. We've got the new products that are.
Obviously, adding more value and therefore coming with a higher more so as they continue to gain traction I think they help.
Help any of the negative when that might be coming the other direction.
Great. Thank you again and congrats again on the really nice work.
Thanks, Patrick.
We'll take our next question from Quinn Bolton with Needham <unk> company.
Hey, guys I'll offer my congratulations as well I guess its sort of big picture question, Mike and Steve as you look into 2022, you talked about Wi Fi growing 10% in your.
<unk> hopes or confidence that you'll be able to outgrow. The W. A fee next year I was just wondering could you sort of rank order maybe the top two or three drivers that allow you to outperform you've talked about a lot of drivers on the call you've talked about advanced packaging heterogeneous integration you've talked about <unk>.
<unk>.
You know what what are what are some of the biggest drivers you see going into next year.
Yes.
Well I think we see one of the biggest drivers as packaging in general.
When I look at some of the numbers here, we see some significant spending happening in an advanced packaging, particularly at the higher end the more advanced.
Our smaller interconnects that that we just talked about so that's that's in both the driving both the inspection. So it's both at the wafer level, but also at the panel level. So it's as you know that those steppers are fairly expensive so such a backlog is pretty.
Pretty impactful to the business.
And then beyond that we still see a lot of strengthen in the advanced nodes. So the adoption of the Atlas for some of the more critical measurements the rolling out of sub five nanometer across several different customers that we're expecting a that's also driving.
What we talked about was a higher capital intensity and something that we think were you know pretty well positioned to benefit from so we see some.
Nice growth there.
DRAM memory is also going to be much stronger next year, and we've always been well positioned for a strength in memory. So that'll be part of that advance nodes growth, we just talked about.
And also the specialty devices. So if I go into three different buckets. The third would be the specialty devices, which we think is continue at some relatively high levels, so relatively meaning compared to several years back prior peaks specialty devices is growing pretty.
Pretty meaningfully.
Okay, great. Thank you for that color and then just wanted to ask sort of a specific follow up Mike.
Mike you highlighted some wins with the new integrated metrology I think he mentioned six new customers that start to ramp next year, how big of an opportunity is that in terms of share gains is it you know a few million dollars is it tens of millions of dollars across those six customers are wondering if you might be able to size that for us a little bit.
Yeah.
I think it's on the orders of tens of millions of maybe you know.
Thanks for taking my questions.
Did you guys mentioned, what the backlog was I think you mentioned that you have a record backlog could you share with us what it is at this point.
Well, we don't we don't normally give out the actual backlog number I think Mike mentioned in his prepared remarks that you know that we've seen a double from where it was at this point last year, but we don't put out a specific number.
Yeah.
But Steve maybe just tell me what the backlog was the last time you published it that's probably at year end.
Actually we didn't publish its not even a requirement anymore. Dave. So we don't actually we don't publish but we haven't published backlog in a long time.
Okay Oaky.
You mentioned that you got I think orders.
For six more jet steps could you remind us I think in the last few conference calls you've mentioned how many just steps are in our backlog to be shipped could you share that number with us now.
Last time, we mentioned, we gave an indication that could be around $30 million.
And this would be you know on top of that but keep in mind. These are with these were commitment. So some of them are you know dollars to reserve the slot some purchase orders so far.
Formal.
Commitments.
Okay.
And.
As far as the.
Are you seeing any activity from the <unk>.
Arm Hyperscale or type guys is that started to.
<unk> creep up into you know, where those guys are starting to order tools or starting to move the needle on any sort of purchasing.
Yes.
You're speaking specifically about jet step or generally.
Just generally.
Yeah did you want to answer it on that stuff that would be fine.
Yeah, No I think generally.
Apple has been you know.
Sequentially for the second quarter in a row now that you've given guidance for Q4 could you share with US what you think the size of your inspection business.
Will be in 2021, and do you expect inspection to grow in 2022.
We we don't break out the inspection per se bye Bye sighs, we talk about advanced snowed specialty a T et cetera, So we try and tie it to markets, but we do expect this inspection to grow.
Ahead of if if the the market's gonna grow by 10% next year, you know our expectations would be inspection grows more than that based on what we are seeing from.
Like I mentioned, the specialty device in AP customers growing fairly significantly.
[noise], so just to kind of recap I guess, you expect growth in you know the.
Your jet stuff business, there's growth in the inspection business, which is kind of the old Rudolph business and then there's gross and the advance nodes, which is the combination of both the Rudolph and.
And the Nanometrics business, so all kind of.
All the pockets of growing in the upcoming year.
Yeah, that's I guess.
And impacts when there's you know these chip shortages, there's a lot of customers trying to fill that demand and we're seeing the demand right across the <unk>.
Right across the market's we serve which are not just the the leading edge logic and DRAM in nan's, but also the R F and the power customers and compound semi and Mems for automotive.
And with everybody announced.
Announcing expansions, we're seeing some pretty decent demand for our solutions.
[laughter] well excellent congratulations on nice results and it looks like the future is going to be quite proud as well.
Thanks, and you hope so.
[laughter] me too.
[laughter] Thanks, Dave.
And that concludes today's question and answer session. Michael Shafer at this time I will turn the conference back to you for any additional or closing remarks.
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