Q4 2022 Onto Innovation Inc Earnings Call
Yeah.
Good day and welcome to the onto innovation fourth quarter earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Michael Schafer Investor Relations. Please go ahead Sir.
Thank you Jenny and good afternoon, everyone onto innovation issued its 2022 fourth quarter and full year financial results. This afternoon. 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 Mark <unk>.
Our Chief Financial Officer, I would like to remind you that the statements made by management on this call will contain forward looking statements within the meaning of federal Securities laws. These statements are subject to a range of changes risks and uncertainties that could cause actual results to vary materially for more information regarding the risk factors that may impact onto Intubations results I would encourage you to review.
Our earnings release, and our SEC filings once the innovation does not undertake any obligation to update. These forward looking statements in light of new information or future events. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified as a reminder, the detailed reconciliation between GAAP and non-GAAP results can be found in <unk>.
Today's earnings release I will now go ahead and turn the call over to our CEO , Mike Plucinsky Mike.
Thank you Mike Good afternoon, everyone and thank you for joining our call today with a strong finish in the fourth quarter onto innovation has achieved an exciting milestone crossing $1 billion in revenue this year throughout.
Throughout the year, we saw consistently strong demand for our systems with revenue growing 32% well exceeding market estimates of 9% growth for wafer fab equipment in 2022.
Even more exciting earnings for the year grew 43%, while we increased investments in R&D manufacturing capacity and establish new training centers closer to our customers in Asia.
Beyond the strong financial performance, we expanded our position in several areas of future growth starting with advanced nodes Atlas optical metrology has been qualified by all three of the market leaders developing gate all around transistors. This increases our logic opportunity by over 20% versus prior nodes.
And then we extended our already strong position with Atlas OCD by qualifying our aspect I am metrology at four of the top three top.
Top three D NAND producers.
Imagine critical parameters are manned with over 230 layers.
Moving across the value chain to specialty devices and advanced packaging, our latest inspection products have proven themselves capable himself micron applications in both front end and advanced packaging.
This year, we had over 15 customers to replace their incumbent competitors tools with the dragonfly G III for sub micron inspection.
We estimate this to be one of the fastest growing segments in our macro inspection market.
Finally in panel packaging, we finished the year with roughly $40 million in revenue and expect to double that in 2023, we estimate this market to be roughly 280 million with you're projecting a cargo of 12% to 2026. This.
This high level of performance across the value chain with not impossible without the passion and talent of our entire global team and their unrelenting commitment to our customers' success.
Based on these results, we see even greater years ahead for onto innovation team as these technologies migrate into production.
Now turning to our fourth quarter capped off this record year with revenue of $253 million above our midpoint of guidance.
However earnings of $1 57 per share.
It's well above the high end of guidance aided by favorable tax and investment income.
Which mark will speak to shortly.
In the fourth quarter revenues from our specialty and advanced packaging customers grew 2020, 22% sequentially setting a new revenue record.
As expected leading that growth without power and compound semi market, which grew 54% over the third quarter.
Several of these customers selected onto innovation, specifically for our connected solutions integrating software and systems to improve yield for example, aligning patterns layer two layer is particularly challenging in compound semiconductor applications do they use of thick transparent materials.
By employing discover run to run software to analyze our overlay data and other process data, we're able to automatically provide more precise corrections to the lithography systems. This improves led to lay accuracy by over 50% translating to several million dollars in additional yield per year.
In the quarter, our inspection sensitivity and compelling cost of ownership resulted in several notable wins in hybrid bonding for future <unk> chip stacking applications. In addition, dragonfly G. Three inspection was selected to provide process control to a supplier of mini Leds for next generation displays.
Other leading smartphone manufacturer.
The many LCD market is still small, but we expect additional orders in 2023 from this customer as well as others ramping to support growth estimates of 22% annually through 2028.
Turning to the advanced nodes after a record third quarter revenue declined 23% impacted by both the U S restrictions announced last October and market declines in memory, especially now.
However, lifting the deeper we see nearly half of our advanced nodes revenue in the quarter was in support of R&D and pilot line production of next generation nodes.
As mentioned earlier this included the sign off and repeat order for Atlas metrology, yet a third customer investing in gate all around technology.
Also successfully completed an aspect of metrology evaluation at our fourth leading NAND manufacturer the.
The aspect I, our metrology is the only airline solution for characterizing lateral recesses, which are critical to maintaining the correct electrical parameters Fernand.
Alright aspect metrology customers would resort to far slower sampling measurements using all flat X Ray systems.
Finally in the fourth quarter, we want a tool of record position for Iris films at another top five semiconductor manufacturer since its market released two years ago. Iris metrology has now been qualified at three of the top five semiconductor manufacturers as well as several new power device customers.
So even while factory expansion slow our customers are fully engaged with us to develop and deliver the solutions. They require to successfully migrate their new technologies into full production.
Before I go into our outlook for the first quarter and give some color on the year I'll turn the call over to Mark for the financial highlights Mark.
Thanks, Mike and good afternoon, everyone as Mike highlighted we had another strong quarter with fourth quarter revenues of $253 million up 12% over the same period last year and $3 million above the midpoint of our fourth quarter guidance range. This strong fourth quarter finish helped us achieved a significant milestone surpassing one bill.
And revenue in 2022.
This is an incredible achievement for a team that just came together three years ago and started at a base of just under 600 million and annual combined revenue.
We also achieved several other financial records sitting company is in full year operating income of $302 million and net income of $275 million contributing to our strong financial performance for the year.
Now I'll move onto quarterly revenue by market.
Vance nodes revenue of $85 3 million grew 16% year over year and represents 34% of revenue.
Specialty device in advanced packaging.
$125 4 million in revenue grew 15% year over year and represents 49% of revenue.
Software and services revenue of $42 6 million was slightly down 1% year over year and represented 17% of revenue.
We achieved 54% gross margins for the fourth quarter in line with our previous guidance range, we continue to experience inflationary pressures on raw materials and labor.
Fourth quarter operating expenses were $61 million at the midpoint of our previous guidance and flat to the previous quarter. Our operating expenses slightly declined as a percent of revenue year over year and flat to the prior quarter, our mixed within operating expenses shifted with more investment into R&D during 2022 to support the strategic.
Programs and Mike highlighted earlier in his opening comments, which will help propel our growth during the next phase of expansion.
Our operating income of 76 million, which increased 10% year over year was 30% of revenue for the fourth quarter.
Our record level net income in the third and the fourth quarter was $78 million or $1 57 per share up 28% over the same period last year and 17 cents above the high end of our previous guidance range of $1 25 per share to $1 40 per share.
During the quarter, we had several one time discrete tax items that positively impacted our full year effective tax rate, bringing it down to 10, 4% as compared to our previous guidance range of 12% to 13%.
Excluding the impact of these onetime tax benefits, we would still have exceeded the high end of our guidance range by approximately one penny.
Now moving to the balance sheet, our cash and short term investments were 548 million with operating cash flow of $137 million for the year.
Down from 2021 levels, driven primarily by the increase in inventory within the year as we manage through supply chain issues increased safety stock levels and ordered long lead time items.
Inventory ended the year at $324 million as we continued to receive and key components within the quarter to support the growth in our lithography business and to service our expanded installed base.
One of our top priorities for 2023 is to optimize our levels of inventory. They returned to the mid $200 million range in 2023 as a result, we expect inventories to start declining in the first half of 'twenty three and throughout the year.
This will continue this will contribute to our free cash flow returning to historic performance levels of over 20%.
Accounts receivable increased to $241 million in the quarter and our days sales outstanding increased three days to 87 days, primarily due to the timing of revenue and receipts within the quarter.
As commented on during previous quarters, we continually assess our capital allocation strategy, which includes the balance between internal investments M&A and share repurchases during the quarter, we repurchased an additional 846000 shares of common stock, bringing our year to date total share repurchases to just over one.
<unk> shares, resulting in a return of capital to shareholders of $65 $2 million the share repurchases were executed under our existing $100 million authorization.
Now turning to our outlook for Q1.
We currently expect revenue for the fourth first quarter to be $200 million, plus or minus three percentage points. We expect gross margins will be between 51% to 53% as we pivot from and manage through our man if manufacturing cost profile in place supporting a record year.
For operating expenses, we expect to be between 53 million to $55 million.
For the full year 'twenty, three we expect our effective tax rate to be between 14% to 16%.
We expect our diluted share count for Q1 to be approximately $49 2 million shares.
Based upon these assumptions, we anticipate our non-GAAP earnings to be between 80 cents per share to <unk> 95 per share.
As we enter 2023.
We've already started to execute plans to reduce annual spending in the range of $25 million to $30 million, which includes driving further operational efficiencies our manufacturing sites.
<unk> reductions.
Discretionary spending such as travel and outside services, well offsetting our annual employee compensation increases.
With these efforts, we expect to move back into our long term operating model when industry growth returns.
And with that I will turn it back to Mike for additional insights into 2023, Mike. Thank you Mark.
As Mark just mentioned, we expect a slow start to 'twenty two 'twenty three.
For the first quarter, we see specialty and advanced packaging declining by mid to upper teens impacted by both the broader market slowdowns and the effects of seasonality.
We expect advanced nodes revenue to decline by an estimated 30% primarily due to sharp reductions in memory spending and restrictions in China.
Looking beyond the quarter, we see customers, reducing wafer starts or delaying expansion plans in response to the current oversupply of chip inventories.
Advanced logic investments continue but higher volumes are not expected until 2024 with slowing smartphone sales driving down utilization of lines and advanced packaging.
Overall wafer fab equipment spending estimates are down 20% for 2023, however, analysts at Stifel and Morgan Stanley are forecasting equipment spending to be down an estimated 30% after excluding front end and let's talk or fee spending.
Despite this weakening environment, we remain confident in our thesis felt performance, which includes backlog to support our lithography business doubling in revenue this year.
<unk> inspection, increasing 50% to support E V wafer manufacturing and we expect revenue from our power and compound semiconductor customers to grow this year.
In total we say at least 70 million in incremental revenue from these markets.
Giving us a range of market outperformance that is down about 18% to 22% year over year.
In response to the industry slowdown we've taken steps this quarter reduced our overall expenses by about 11%, which includes both operating and manufacturing expenses the.
The majority of these reductions were in variable cost with minimal impact to our full time employees is adjustments will allow us to maintain a healthy financial model, while continuing to invest in the R&D programs critical to our customers.
We'll also take advantage of this time to focus on supply chain initiatives that will strengthen our margins and again move us closer to our long term operating model when growth returns to our markets.
So the timing for that return to growth is not clear the longer term estimates for chip growth has not diminished and is currently estimated to be one trillion by 2030 nearly double the current demand.
In addition to strong unit growth the complexity of the devices, increasing and thus requiring additional process control innovations at a higher capital intensity to maintain viable yields. This is a great environment for onto innovation to continue to expand our customer partnerships across the semiconductor value chain.
And contribute to the introduction of the exciting new devices that will enable a smarter greener and more connected future.
And with that we'll open the call for your questions operator.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad.
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Equipment.
Wanted to ask a question on just a moment to allow everyone an opportunity to taking my question.
And we will go to our first question from Brian Chin with Stifel.
Hi, there good evening, thanks for letting us ask a few questions.
And Mike maybe just to clarify I think what I heard in the remarks, but.
Okay.
The way you are kind of allowing the air at this point.
Do you see revenues down was it 18% to 22% year over year.
And I guess that would track.
Let me clarify.
Clarify that.
And I guess do you see maybe revenue tapering off a little bit further into <unk>, and then maybe stabilizing there and kind of flattening out for the year is that sort of the contour that you're anticipating or is there sort of a different pattern.
We see a lot of.
Movement right now that's that's what we believed we think we're going to stabilize a Q1 Q2 and start to see some improvements, but again theres been a lot of movement, both in and out we've seen movements into Q2, we can see movements out but right now we're expecting that to be flattish maybe slightly up.
From Q1.
Flattish to slightly up okay.
How about gross margins relative to some.
Some of the cost reduction efforts.
You talked about I think the 25 to 30 for the year.
They focused sort of balance between opex and above the line or how should we sort of maybe dial that into our models.
Yeah, Yeah, Brian It's Mark Yeah, No I think you know.
I would say, it's probably 60 40.
There is definitely more down in the Opex because I think there's you know, there's a little bit more discretionary in that level related to traveling.
Third party services and things like that I mean, we are looking at all areas of gross margin as well.
Driving efficiencies there we've had some benefit from freight reductions and things like that so that will flow through margin.
Okay got it that's helpful and then.
Uh huh.
Tied to the gross margin guide for Q1.
Obviously, there's some volume impact.
Impacts there, but how much is mix come into play there. It sounded like you know the panel lithography business should still be incrementally strong this year.
How much was maybe mix related to in that.
Gross margin guide.
Yes, certainly there is there is some amount of mix in there but.
I think the bulk of it is being able to make the adjustments relative to the change in volumes the adjustments to manufacturing costs and capacity relative to the change in volumes.
So that that's the bulk of it there is some impact of a relatively strong lithography quarter. So its a nearly 50% greater than the prior quarter, but we do expect margins to start to move back into our level, even as as early as Q.
And moving into the second half of the year as well.
As a reminder, we did say we were going to have incremental improvements throughout the year on the lithography tool margins and the end 'twenty to 'twenty three with those margins at target.
Okay, Great Alright.
Thanks, I appreciate that.
And we'll go next to Craig Ellis with B Riley Securities.
Yeah. Thanks for taking the question and congratulations on all the financial records in calendar 'twenty, two guys nice to see.
I wanted to start just by taking a little bit deeper into the cost savings. So nice to see that you're protecting margins. The question is for the.
The savings that looked like about 16 million in Opex and $11 million in Cogs, how much of that is included in the guidance that you've given for the first quarter and then with with some incremental benefit through the year.
How should we think about the linearity of what's left beyond what you realized in <unk>.
Yes, Craig its Mark Yes, no certainly a portion of that those savings are in our guide for Q1.
We've certainly tried to start executing even at the end of Q4 to have.
We have those reductions be impactful to our Q1 guide in our results.
And Theres certainly a lot of work, we still need to do and we plan to do.
As we said to as Mike just made note that the improvement around margin.
That'll that'll occur in Q2 and beyond.
We will see obviously historically Q2 does.
Pop up from an operating expense standpoint, with annualized nation of of our merit and other stock based comp items.
But again, we're doing our best and we've got plans in place and we've done it.
We started to execute to offset those as much as we can.
So I think Youll see you know I would say its probably proportional.
Throughout the year and.
We're going to continue to look for areas to drive the efficiencies up.
Okay proportionate through the year, but with Koch really starting in <unk> rather than more in queue.
Alright.
Yeah, I would say there are some elements in Q1, but I see I think youll see the majority of that you're right probably in Q2 and beyond.
Okay got it because I think the yeah go ahead.
No. It's just it's just the pivot from Q4 into Q1, and just looking through the kind of the overall absorption and volume issues.
Got it and then Mike just very helpful to get your view on industry generally in and where the company will shake out it looks like the excess growth industry.
It's pretty similar to what you saw three months ago, we take litho out of.
W. P worried about minus 28 your midpoint minus 20. So that's about the 750 basis points you were looking for or is that the right read in and related to that it looks like at least versus my tracking panel with those up a little bit versus what we were expecting before I was looking for.
This year I think you talked about 80 or so.
Help me frame the macro and then come back to the micro point on Palo Alto.
Okay.
So definitely since our last call in November we've seen let's say more of a pull back a more broad pullback from.
As I mentioned in my prepared remarks.
From there the advance nodes, even logic, a little bit, but DRAM and memory NAND and DRAM very significant pullbacks.
And then even in the packaging area.
Yeah.
And as far as the Joe what we're seeing so that when we originally talked we've talked about a 20% down market now we're looking at maybe a 30% down ex front end litho, so that that looks to be where the markets are.
Leveling out and based on the several areas of booked outperformance in litho being being one of the areas as you pointed out than we've had those bookings of of the full $80 million.
In place with it and then the Novus edge is also booked with that upside and then we're already have several orders for compound semiconductor manufacturers that but complete suites of tools, which is quite exciting the value proposition of our broad portfolio and the connected solutions, we have with the.
The software is really resonating in the compound semi market. So we see bookings there going up primarily from power customers and that's part of why we believe we're going to you know why we're confident.
<unk> and our thesis for outperformance in 2023.
Yes.
Last point, Mike I think if I think back over the last 18 months, we first started changing.
Mers buying full suite of tools and I think I remember seeing that yeah in DRAM and NAND and so now you're seeing it as well and compound semi so it seems like.
The solutions that you're offering are really resonating and.
Any any thoughts on what the demand profile looks like more intermediate term beyond just 2023.
How do you look at the growth potential compound semi on a multiyear basis.
Oh, we think on a multiyear basis, we think our position in compound semi is just in the early stages of building out we've always had a very strong software focus there and we have a good software position, but as far as the inspection and metrology.
<unk> that hasn't been as big a focus as we as we looked at other areas and now what we're finding out is theres a number of high value problems that for instance, our sub micron resolution for the inspection many of those 15 customers were tied to.
Several of the fifth of those 15 customers were tied to power applications and then the metrology where it wasn't really promoted to those customers were finding some real opportunities as far as the size. What you ask for them, we haven't really looked at 2020 for it obviously.
Depend on.
They're on the continued growth there the numbers, we see as double digit continued growth annual growth rate at least for the next few years, so with that we expect to grow better than that better than double digit well I mean, if it's if it's 10% maybe we're going to grow another 50%.
And as solving real problems for them go ahead.
Yes, sorry, I just mentioned, it's also solving yep.
Yeah, Yeah, I think that's correct.
We've been picking up data points that the yields are certainly tough in certain areas of compound semi so your solutions would be quite appropriate lastly.
You mentioned that there were three specific initiatives.
<unk> nervous edge and panel that could add an incremental $70 million of revenue looks like panel would be about half of that to the other two shake out about 50 per cent nature, how do we think about the relative contribution of the three.
So thin films as additional upside that could be potential upside. So we mentioned a lot of that but a lot of that is tied to some of the front end.
So where we didnt mention that what we said was Nova surge and then compound semi power devices and that includes a suite of products, but it's the power market that we see driving a fairly good growth.
As far as the Shakeout I'd say, it's 50 50 of the of the other $30 million right, 50%, so $15 million each roughly.
Yes.
Got it thanks very much guys. Good luck.
Youre welcome.
And we will go next to Quinn Bolton with Needham <unk> company.
Hey, guys just wanted to maybe follow up on the compound and power.
Mark and I think last quarter, you said it was the second largest segment I apologize if I missed what you said it was.
This quarter, but wondering if you could just sort of give us a size how big is that business for you now on an annualized basis.
Uh huh.
Quinn, we don't break it out, but it's definitely becoming a more significant I'm looking now at where it's definitely becoming a more significant part of the business. It remains one of the largest segments in the fourth quarter. It grew a lot, but we also had a lot of foundry logic spend as we as we mentioned you know DRAM tank for foundry law.
<unk>.
Stayed state Okay. So it's still relatively second in the in the categories.
Which is which is the high end it like it's like I mentioned it grew 50, 454%.
Quarter to quarter. So does it continue that way no I don't think so it's the law of small numbers right now, but does it continued double digits.
Yeah, I think that's reasonable.
Got it got it Okay, and then just thinking about the year.
You got it to 200 million at the midpoint for for the March quarter. If I just look at your down 20% outlook for 2023 from $1 billion base kind of feels like Youre going to run right at about 200 million for each of the four quarters.
And so I just wanted to make sure that I'm thinking about the linearity it sounded like in response to an earlier question. Mike you thought maybe there was a little bit of chance for growth in Q2 and.
I think previously you were looking for a slightly stronger second half so.
Just trying to get get the shape of the E rate in terms of your current expectations.
Yes, Quinn I think that's that's about right.
Obviously things changed a lot from last November when when we first guided so we're just trying to reflect what we believe is a.
I guess, a bottom end scenario and hopefully we can start you know as we start getting better visibility and seeing more of the.
The other activity packaging for instance, we'll see what the smartphone refresh cycle looks like et cetera, five G. A transition you know when we move past this.
Inflationary periods in a recessionary mindset and we'll see what that does too.
The inventories and then further expansions, but right now that's that would sort of be our bottom case.
Got it Okay, and then I guess for Mark.
It sounds like with the cost reduction actions you can get back towards the 54% gross margin in Q2, and if not Q2, certainly by second half of the year, but that's on a kind of flattish revenue as I look into 'twenty four 'twenty five.
Revenue gets back to the 250 million or higher quarterly level.
It feels like there'll be some pretty good absorption benefits to gross margin. So I guess I wanted to ask you getting to 55 or 56 feels like you could get there pretty easily just just on an absorption.
Basis, and so I wonder are there some cost offsets that maybe come back as revenue starts to grow that would pressure margins are or do you think that you know.
Getting to $55 56, maybe even higher as revenue recovers is now possible with some of these cost reduction actions you've taken.
Yeah, no clean Youre, absolutely right I mean, our goal is obviously to go through and have these reductions be affected this year helped drive the profitability and stay where we stay saying that range of that.
Higher margin and <unk>.
Maintain the opex, but certainly for 'twenty four and beyond I mean, our goal is to to get quickly back on track to the long term operating model in <unk>.
Reap the benefits of the I guess, the operational efficiencies that we're trying to drive in 'twenty three.
Kind of funny to say, but you know never let a good downturn go to waste and so what we mentioned is we're going to still invest and supply chain initiatives and some of the remember the second level synergies, we talked about after the merger that we never got to because we were just so growing so fast now we have a chance to get.
To those and we've got some pretty aggressive plans to try and complete some of them. This year. So there'll be impactful in 2024, so there's there's quite a bit of.
Of strength that we hope to.
Bring into our foundation for 2024.
Great and then my last question was just really just a clarification on the on the lithography margins. Mike I think he said that you now expect you get to kind of target levels by the end of 2023 I thought previously you thought some of those margin improvements might not happen until 24 because of the time to increase manufacturing.
Just just time to reduced component costs and so I'm wondering have you been able to pull in some of that margin benefit or perhaps improve pricing that that's leading to better margins.
Or did I misinterpret your comments around lithography margins.
Yeah, I think it's a little bit of both we've been very aggressively pursuing the margin situation both from a cost side as well as a little bit on the pricing side, but we're also seeing some of our advances we're able to so some of the new advanced technology, we're beginning to release where.
We're seeing the ability to charge for for the value of that were.
Two years ago, when we booked a lot of these orders we were still selling ill Powerpoint presentations and demo lab equipment. So they didn't really get to see now a proven were understood with the capability is clear and we're able to charge more of the value for the new the new capabilities were.
Bringing in whether it's overlay upgrades are or illumination and throughput upgrades and things like this.
Got it okay. Thank you.
And we'll go next to with.
D a davidson.
Hi.
Good afternoon, and thank you for taking my questions.
First I wanted to follow up on the.
Industry commentary I was wondering.
Paul.
The memory downturn.
Kevin given your conversation.
Customer.
When do you think that memory spending ratio.
[laughter].
I would say at the earliest it's it's the tail end of 2023 and possibly into 2024. The caveat to that is that would be production, but there could be some spending in in R&D. So so more spending in some of the.
Hi, stack three D NAND lines, which is still in the infancy.
We could see that where the customers want to.
When they go to market be more aggressive with their newer products going to market and hopefully make up some of the ASP erosion.
And there's a similar story in DRAM, so that'll be the influx or that'll be the decision points that our customers are thinking through but right now, they're they're really focused on watching the inventory levels watching asps and working this through the supply chain.
Got it Okay and then.
Thank you Kevin.
Our prepared remarks so.
The Atlas.
Bye.
Being selected by <unk>.
The manufacturer for the gate all around our translator so.
Does that imply you have 100% market share.
And just wondering.
Any competition.
On that.
There is competition.
So we don't have 100% sure.
But that's what we're fighting for so we're depending on which customer we talk about our share position is is different each one.
In general we're fighting to achieve over 50% share and we have that at the majority and if I take the average it would be well over 50% market share.
If I take the majority of the average of all three of them.
And again these decisions aren't aren't fully made so we continue to fight and try and bring more layers onto our systems.
We're also looking at the gate all around transistor is the hardest thing to measure, but we're also looking at moving outwards outside of that into the back end of line metallization layers that are further downstream they are a little easier.
But again with our platform.
The capability of our platform to be optimized for price performance wear.
There were better suited for those applications as well.
I see.
Is that share.
And you hear or higher.
Compared to the previous nodes.
It's definitely higher and in my remarks, I mentioned that based on this we would expect at least a 20% improvement in revenue based on the dynamics of higher capital intensity and higher share.
Got it versus prior nodes.
Got it Okay and then.
Okay.
I was wondering you mentioned many L E D.
Kind of smaller right now but.
Alright.
It could have some potential here could you just wondering how would you characterize that.
Yes.
The opportunity funnel.
<unk>.
[laughter] so.
I chuckled, because I have got several display customers and they have different opinions on on the mini Leds, So I want to be a little bit careful.
I think there are certain applications, where the mini Leds are being.
Looked at.
And certainly very aggressively by one of the large <unk>.
<unk> phone manufacturers, whether or not that proliferates and becomes the the.
You know the new display type it replacing <unk>.
Displays.
Not sure yet.
There are certainly different opinions from the experts in the display manufacturing.
Okay.
Got it and then.
Lastly, just.
I Wonder if you have any any update on the capital allocation strategy.
Especially in Gs.
Yes.
Healthy balance sheets.
And would you consider more share buyback or would you kind of prioritize.
Angela.
Yes.
As we look at the.
The capital allocation I mean, if the opportunity presents itself based on our <unk>.
Set criteria for buybacks, we will we will execute that in the quarter.
Continue to do that within the approved limits.
And we're also of course looking for M&A opportunities and being as aggressive as we can there is a great time right now.
So we will continue to search side as well.
Okay. Thank you.
Yeah.
Thank you Hans.
And we'll go next to David Duley with Steelhead Securities.
Yeah. Thanks for taking my question.
One of the things I think in your press release, you were talking about how Youre dragonfly systems qualified I think to do some hybrid bonding applications could you just talk a little bit about <unk>.
What's going on in that particular product line an area.
Yeah. So it turns out one of the critical.
Issues with hybrid bonding is the surface roughness of these of these pads and when you're pushing them together any kind of deformity particle or issue with the roughness you have a bad adhesion and of course. It just takes one of the thousands or millions of Interconnects per day, depending on what we're taught.
Looking about here too to then now destroy two packages. They have just tried to connect so the ability for the for the.
The dragonfly G III to not only have the sensitivity to detect the defects, but also leveraging the ADC to eliminate all the nuisance defects. So the customers can really focus on the true yield killing defect that is a big advantage. In addition, you may recall the clarified.
Has always been a source of a reliability like improve reliability, where resist residue, which can't be seen through normal optical techniques can also beyond these pads and you can have a good bond you can have an electrical test, okay, but because of the resist residue that bond through heating.
In cooling and from cars and taking your phone out walking around in.
And the weather.
You have a break it ends up being a.
Electrical failure, so that is another big advantage for the Dragonfly G III.
No. It's just die to die attachment or died of substrate is when you talk to pads that upside of substrate or.
We're seeing applications for both so we're involved in both die to die and die to substrate.
Okay and.
Regarding your compound semiconductor business.
Is the recent.
Increase in growth rate you talked about power I was just wondering is there a significant contribution from silicon carbide at this point or is that a focus or or can you help us understand what your exposure is there.
Yes, we definitely have.
Seen more interest in growing interest from Silicon carbide, it's still small part of the you know the overall power, but it's certainly a fast growing area and an area that people are investing a lot in and they have a lot of yield issues, so where we're.
We're engaged there, but I'd say you know from the growth we saw in <unk>.
In the last quarter.
It was I'd say less than half, maybe a third maybe a little less than a third silicon carbide in the rest of the Gan and some other.
Compound semi applications.
Okay and then final question from me is.
You talked about.
Additional qualifications I think.
For the Iris tool, but it wasn't on the list of products that are going to grow on a year over year basis I'm imagining that's because of.
The memory sector, but.
Maybe just give us a little bit more color I think that product was a quarter ago was expected to grow year over year and now.
<unk> excluded on that list and so.
The area, where youre seeing the most reductions.
To kind of adjust for your guidance for next year.
Yeah.
Actually the Iris is going to grow but not as significantly as some of the other products. So and it's relatively mild growth is in the face of several of those customers you know reducing expense fairly significantly you mentioned the man.
Memory is expected to be down 50% for wafer.
Capital equipment.
Logic will also be down maybe in the 10% to 15% range and yet our Iris platform based on the initial penetration and the new customers that continue to adopt it and including some power customers that are adopting it the iris platform will grow but it'll be incremental it won't be huge the beautiful.
Part is we're planting all of these seeds across the across the major customers. So when expansions do occur next year hopefully.
Earlier. This late this year, we should see fairly significant growth in iris.
Okay, great. Thank you.
Yes.
And as a reminder, it is star one for questions. If you have a question at this time and we will go next to Mark Miller with benchmark.
Let me add my congratulations on a very good year in 2022 I was wondering if you could estimate in terms of the projected sales decline what percent of that is coming from the related to the new U S restrictions.
All of us at least it was about 8% to 10%.
8% to 10% okay.
Yeah.
Yes, and that was mostly booked so.
That was a big a big hit.
Okay.
Sure.
There's been a lot of funding by the U S Europe and Japan.
As well as several new fabs have been announcing her.
Currently coming up but youre not optimistic.
We're optimistic one these.
These opportunities will start to show up in orders for Ya will it be more 2024.
We're seeing orders now so you know from Oh.
Although that's not chipset money, but some of the like the TSMC fab going into Arizona, We're seeing orders now.
No.
So those incremental orders are happening, but the Samsung Taylor Fab C, Ohio fab from Intel et cetera.
I don't think we see any real significant volume of orders until 2024.
Thank you.
Okay.
Okay.
And at this time I would like to turn the call back to Michael Sheaffer for any additional or closing comments.
Thank you we'd like to thank everybody for joining us today, a replay of the call will be available on our website about 730 eastern time this evening.
Thank you for your continued interest in onto innovation Jenny. Please conclude the call. Thank you.
And again this concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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Yeah.
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