Onto Innovation Inc. Q1 2023 Earnings Call
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Did not receive 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 Mark Schweitzer 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 the federal Securities laws. These statements are subject to a range of changes risks and uncertainties that can cause actual results to vary materially for more information regarding the risks.
They affect the onto innovation results I would encourage you to review our earnings release, and our SEC filings onto innovation does not undertake any obligation to update those forward looking statements in light of new information or future events.
As a reminder, today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified.
A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release 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.
Onto innovation closed the first quarter with revenue up 199 million near the midpoint of guidance while earnings came in near the high end of guidance.
Bank gross margin favorably impacted by product mix.
The primary shift in mix with an increase in revenue from higher margin Iris fill systems and two lithography tools sliding into the second quarter due to delays from our supply chain.
Following the growth of the last few years, we're increasing our focus on strategic supply chain initiatives and expanding our development engagements, we expect our investment in the supply chain to yield over $10 million in cost synergies in 'twenty 'twenty four with additional savings to follow.
Expansion of our development engagement allows us to participate earlier in our customers' process development. This provides us more time and insight to deliver the comprehensive solutions required for R&D and ultimately migrated into volume production in the quarter. We were honored to have been awarded by World Later T S and see what the.
Mobile technology collaboration award for our contributions last year too advanced to advance both front and back end process control.
With over 60% of our first quarter revenue tied to new R&D. Our pilot line investments. We believe we're setting a strong foundation for future growth across several exciting markets.
So let's start with the highlights from our advanced nodes as customers.
Advanced logic revenue was essentially flat from the fourth quarter and represented 53% of our advanced nodes revenue.
Over 85% of our advanced logic system revenue was for applications below five nanometer.
Our latest AI diffract software incorporates an exclusive modeling technique to enable earlier adoption of O C D and R&D lines, we now accurately compensate for the broader process shifts associated with R&D without frequent and time consuming model retraining.
Allows our customers to leverage the speed of Atlas three D metrology earlier in process development, including sub two nanometer structures.
Years ahead of volume production.
Not surprisingly revenue from memory customers declined roughly 50% from the fourth quarter in line with several publicly announced capacity reductions in expansion delays.
In the quarter.
Iris films Metrology was successfully qualified by a second top three semiconductor manufacturer.
These systems are now part of a volume purchase agreement that we believe implies a jump from zero to over 25% share of films metrology at this customer.
The agreement also implies integrated metrology share of over 70% and of course includes our flagship Atlas OCD platform and our Echo an element metrology systems for opaque films and materials applications.
The V P. A cover shipments in 2023 and is valued at over 90 million, adding some confidence to our current estimates for the year.
This account demonstrates the importance of our strategy to our customers by working together earlier in their development, we're able to provide a portfolio of technologies that deliver better dimensional and material metrology at speeds required by high volume production.
Similar to our advanced nodes customers, we see an increase in R&D engagements for inspection of new chip packaging designs. These designs require inspection resolution at sub micron levels and systems that must also provide a right range of metrology for denser three D interconnects and through silicon via his need.
For chip stacking.
In the quarter Dragonfly inspection was selected by a top five semiconductor manufacturer implementing new two and a half D packaging technology.
Second top five manufacturers selected dragonfly inspection and E. B 44 system on integrated chips are S. I S O I see the three D chip stacking applications.
Revenue from power devices in the first quarter was up 20% over the prior year.
Our portfolio of inspection technology, and dimensional and films metrology convinced 18 customers in the quarter to purchase a new onto innovation product for their process and several added combinations of three or more products.
Several of these systems went to support the high growth gallium nitride and silicon carbide segments of the power market.
In closing, we're happy to announce our second demo center opened in January in Taiwan to facilitate customers access to our most advanced equipment over 10 packaging and specialty customers have already hands carried their next generation wafers to our facility to work with our experts and latest.
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With our new training systems in place our training capacity has more than doubled in the course offerings offerings have expanded significantly this will allow us to cross train over 60% of our field service engineers at our most advanced equipment paving the way to more efficiently serve future growth.
Our improved support infrastructure and productivity is leading to a pickup in annual and multiyear service contracts in the first quarter, we had five new customers moving to recurring support contracts renewal rates for existing recurring contracts exceeds 95% in the future we.
See the opportunity to increase the value of these support offerings by integrating smarter software solutions.
And with that I'll turn the call over to Mark to review our financial highlights.
Thanks, Mike and good afternoon, everyone as Mike highlighted we closed the first quarter with revenue of $199 million down 17% over the same period last year and just below the midpoint of our first quarter guidance range, while achieving an E. P. S 92 cents, which is four cents above the midpoint of our EPS guidance range of 80 to 95.
Yeah.
The impact of memory, the memory market being the biggest driver of this revenue decline after coming off a record setting fourth quarter and year.
Now moving on to the quarterly revenue by market.
Vance nodes revenue of $66 million declined 35% year over year and represents 33% of revenue.
Specialty device in advanced packaging achieved $93 million in revenue declined 6% year over year and represents 47% of revenue.
Software and services revenue of $40 2 million was down 4% year over year and represents 20% of revenue.
As Mike stated, we achieved 54% gross margin for the first quarter exceeding our guidance range of 51% to 53% primarily from the shift of the two jet step systems into the second quarter due to delays from our supply chain.
First quarter operating expenses were $58 million down 3 million quarter over quarter, and 3 million above the high end of our guidance range, we exceeded the guidance range as we maintained a higher level of investment in R&D to drive our strategic growth priorities as well as several cost reduction initiatives didnt see the immediate drop.
Through expected in Q1, however, we are still committed to delivering $25 million to $30 million of cost reductions for the year.
Our operating income of $49 million was 25% of revenue for the first quarter compared to 31% from the prior year.
Our net income for the first quarter was 45 million or <unk> 92 per share down 30% over the same period last year and as previously previously mentioned four cents above the midpoint of our guidance range.
Now moving on to the balance sheet.
We ended the first quarter with cash and short term investments of 584 million up 36 million, who started the year with operating cash flow of $50 million, representing 25% of revenue.
Inventory ended the quarter at $338 million, an increase of 14 million since yearend primary primarily driven by the delay in the shipments of the two jet step systems as well as the continued receipt of parts to service our expanding installed base.
As stated during our prior earnings call a top priority for 2023 is to optimize our levels of inventory to return to mid $200 million range by the end of 'twenty three.
Inflows of raw materials are declining as we've worked with suppliers to continue to burn off our existing inventory.
This will continue.
This will contribute to our free cash flow returning to historical inconsistent performance levels of over 20%.
Accounts receivable decreased 32 million to $210 million in the quarter and our days sales outstanding increased nine days to 96 days.
During the quarter, we repurchased an additional 46000 shares of common stock, bringing our cumulative share repurchased to just over 1 million shares under the current program were $68 million return of capital to shareholders, we have $32 million remaining under our existing $100 million authorization.
Now turning to our outlook for Q2.
We currently expect revenues for the first quarter.
For the second quarter to be $203 million, plus or minus four percentage points. We expect gross margins will be between 50% to 52% down versus Q1 due to the forecasted mix in the second quarter, including a projected record six jets up systems.
For operating expenses, we expect to be between 58 million to $60 million.
For the full year 'twenty, three we expect our effective tax rate to be between 14% to 16% we.
We expect our diluted share count for Q2 to be approximately $49 2 million shares.
Based on these assumptions, we anticipate our non-GAAP earnings to be between 75 cents per share for 90 per share.
Looking ahead to the third quarter, we expect to be back to 54% gross margin levels due to the improving contribution from our jet steps chipset systems, we expect opex to be in the range of 55 million to $56 million as we move past the annual one time compensation elements in Q2 and see the full benefit of.
Cost reduction activities.
Together this will result in exceeding first quarter earnings levels.
As I referenced in my earlier comments and highlighted during our February earnings call, we are reducing costs in the range of $25 million to $30 million, which.
Which includes driving further further operational and supply chain efficiencies at our manufacturing sites staff reductions and reduced discretionary costs.
With these cost reductions predominantly permanent nature, we expect to move back into a gross margin and operating profit metrics of the long term operating model when industry growth returns.
And with that I will turn it back over to Mike for additional insights into Q2 and the remainder of 2023, Mike. Thank you Mark.
As Mark just mentioned, we expect only a slight uptick from the first quarter, reflecting the continued weakness in memory and weaker advanced logic spending projected in the second quarter.
Offsetting that weakness as strong demand from specialty customers and power packaging in <unk> wave for manufacturing.
Collectively we believe our specialty and advanced packaging packaging markets reached a bottom in the first quarter with solid growth into the second quarter and incrementally stronger second half.
Although we believe advanced nodes will bottom in the second quarter the rate of recovery remains uncertain.
So even while revenue projections reflect broader market challenges, we're very pleased with the progress, we're making expanding into new accounts and new markets. We continue to grow our position in the planar films market.
We're growing our layer shaft for leading edge logic and each quarter, we see new sub micron applications moving to our dragonfly G III platform, including power applications and Gan on Silicon carbide.
We expect these wins to position us well for outsized revenue growth when markets recover and our customers. Once again focus on ramping production to meet the growing demand for complex semiconductors.
With that demand combined with the initiatives to strengthen our financial model, we expect to be more we expect to more efficiently serve this projected growth, which should be reflected in higher margins and greater shareholder returns.
Now I'll turn the call over to Danielle for your questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to retreat Whitman.
Press Star one to ask a question, we'll pause for a moment to allow everyone an opportunity to signal.
We'll take our first question from the line of Quinn Bolton with Needham <unk> Company. Please go ahead. Your line is now open.
Hey, guys. Thanks for letting me ask a question Mike.
Mike I guess kind of going through the puts and takes in the business understand the weak memory environment and some pressure on the advanced foundry logic in the second quarter that you mentioned, but you talked about a $90 million contract you talked about strength in specialty I think the China and mature nodes businesses seem to be second.
Half weighted for the industry in whole and I guess I'm wondering.
Do you guys see a stronger second half relative to the first half.
Relative to the first half, yes, but you know I wouldn't say, we're expecting a massive snap back in the second half.
Okay.
Modest half over half growth.
Consistent with your expectations.
Yeah.
As I mentioned, the advanced logic, the advance nodes continue to be the most let's say the weather.
Where the recovery is the furthest out but.
But we do see our at least our specialty and advanced packaging markets growing fairly nicely in the second quarter in maintaining that.
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Our rate of growth or at least a strong growth rate through the second half so that that's really going to carry the strength of the growth we see in the second half.
Got it.
Thank you for that and then I guess the question. It looks like you guys continue to see strength there.
Share gains in the planar films segment with the Irish tool I think last year. You said you generated about $50 million of revenue as you look to 2023, how do you see iris.
What's the outlook there do you think you can continue to make.
Share gains.
In 2023 with that solution.
Yes, we definitely do I mean that was that was the exciting part of the the highlight I made for the first quarter, having high risk qualified by another top three semiconductor manufacturer. So we had one before and we had several other smaller customers now we have another one and we have.
As we mentioned in the fourth quarter evaluations at nearly all of the top five semiconductor manufacturers now so momentum is building the value proposition is being proven and I think that the moment that momentum will carry forward this year and revenue growth.
Certainly double digits I'm.
Fairly strong double digits and then once the industry really recovers and we see broad based expansions those tool of record positions. We win are going to have much longer or bigger tails, but a broader.
Impact on our revenue.
Got it and then just a quick one for Mark as you look to the third quarter, you mentioned gross margin coming back to the range of roughly 54%.
Should we assume that you're back to sort of a more normalized run rate of four litho jet step 500 systems.
In the third quarter.
Yes, yes, that's a good assumption, yes, I would I would say that that's consistent with what we're seeing.
And also just add to that we did we did say in the past that we were.
Working through the cost reduction on a barge and improvements in litho throughout this year with the fourth quarter being.
Sort of reaching our target model and so we'll see the benefit of that as well as we move into the second half not just a realized number but also better margins on those tools.
Excellent. Thank you.
We'll take our next question from the line of Craig Ellis with B Riley Securities. Please go ahead. Your line is now open.
Yes, thanks for taking the questions and I'll start with one for you, Mike and just make a high level. So in the past you've often characterized your expected performance versus industry.
Does either.
Neither in line are outgrowing it off now growing but as you look at this year and acknowledging we've got some pretty significant cross currents, where do you think the business shakes out versus industry growth.
[laughter], whereas the industry growth and up [laughter].
I've seen.
A lot of different numbers right now on where industry growth shakes out I think we're comfortable with the with the guidance. We provided we don't see any deterioration to that we're working hard to actually drive some upside to that to that previous guidance. So you see the the emphasis we have on.
On the power semiconductor as some of the.
Two and a half and three D packaging technologies, where we're engaged in.
Which are coming online the IC or the panel packaging business with the litho and then bringing in process control or introducing process control into those markets as well so where the spend is we have more to offer those customers and so far.
From our perspective, whereas our thesis for why we were going to outperform remains at the <unk>.
We've talked about the films also adding some some upside growth.
So if you look for US you know whenever you look at the market, we've said down.
Down, 20% and where we're expecting or at least we're fighting to be above that.
Got it that's real helpful and then Mark I wanted to dig.
Dig in deeper on.
Where we stand with our $25 million to $30 million in cost savings how much of the $25 million to $30 million is comprehended in the color that you've provided for operating expense to be back at $55 million in the third quarter, and yeah, and where does that leave for the fourth quarter.
Because it doesn't seem like we've really captured anything in the first quarter. So I want to understand how we're progressing and when we realize the full benefit of that.
Yeah, No I mean, we did we did capture some I mean, when you look at our run rate coming off of Q4 were in the low $60 million.
61 range of Opex. So we did have some reductions certainly not where we wanted to be for Q1, I think just coming off the strong year end and pivoting into the into the drop I mean, we're certainly trying to capture that we will see.
Some of it in Q2.
But again, we have the spike in the annual kind of compensation elements that are historically have always hit in Q2.
And then we'll see I think we'll see the bigger benefit in Q3 and Q4.
And that's why we're confident that we're back into that that 55 range of operating expense.
Which you know is certainly lower than as you would expect to R. 22 run rates, where we were topping out at you know we're at the 60 60 to 62 range.
So are you, saying that you think we've gotten perhaps a third of it now through the second quarter, but with some of.
The second quarter's really not visible because of the <unk>.
Annual.
Expense increases that you have kept the remaining two third gen three and for Q.
Correct, Yeah that would be.
Some of it would be some of it would be structural so how much of the savings that we're seeing a structural and how how much of that is.
It's just more term coral thanks Mark.
Yeah, I mean, I'd say a majority of it is as is permanent I mean, that's that's what we're striving for obviously as we want to see when the growth comes at backs, we want to be able to drive that leverage I mean, there. Obviously is some variable spend as you would expect items like sales commissions and things like that to come down, but again, where we're aiming to make.
Those structural changes the long term.
And you know I wouldn't consider this cutting variable spend.
That's going to come back up the second we see that growth that's going to be managed to the point, where we're going to get back into the model of a of an expense profile that has that contribution that drop through that we want to get as far as the model dictates. So.
To answer your question predominantly as I said.
Taking those out and then keeping those costs out and managing the other variables spend to the degree we can.
Got it.
Thanks Scott.
Thanks, Craig.
Once again, if you'd like to ask a question. Please press star one we'll take our next question from the line of Anthony <unk> with Jefferies. Please go ahead. Your line is now open.
Hi, Thanks for taking my questions.
Thank you Bill last quarter, you had quantified about Saturday.
Maybe Tom to your question.
J D.
Why.
Yeah.
In 2020.
Then the next two pieces right now with.
The panel.
Final question I think.
Has this changed.
James could you could you just give some puts and takes thank you expect to see more from that standpoint.
Alright Danielle.
Okay.
I think power not panel jet step is part of the panel piece, so that that is pretty well.
Established China, where we are.
Yes.
Yeah.
Oh, then the planar films, yes, so planar films, we definitely as we sort of alluded to we see some some growth there some upside that we expect to.
All exceed or meet or exceed our targets. There are power, where we are definitely going to exceed our targets. There based on on what we're seeing also a L.
<unk> from the adoption, we talked about in the call on the first quarter 18, new customers selecting one of our products in the portfolio and.
Our intent and expectation is we can sell them additional products in the portfolio as they realize the benefits of a suite of products tied tied together by our discover enterprise software platform. So that momentum is as I think building nicely and then the other other.
Piece, you mentioned was the Nova surge there were also constrained by manufacturing, which we're trying to.
Speed up or or release that constraint, but the.
That is at least going to maintain the guidance I provided I think roughly $70 million to $80 million.
If not exceed if we can release some more product customers will take it.
Alright.
Oh that's helpful.
Yeah.
Once again, if you'd like to ask a question press star one.
There are no further questions at this time, Mr. Sheffer I'll turn the call back to you for any additional closing remarks.
Thanks, Danielle just a quick reminder, for everybody about three upcoming events first onto management will be participating at the B Riley conference in L. A on May 24th and second we will be hosting our analyst event at the New York Stock Exchange on June 1st and third we're participating at the Stifel Conference in Boston on June <unk>.
Thanks.
Thanks again, everybody for joining us today, a replay of the call is going to be available on our website about 730 Eastern time. This evening, we'd like to thank you for your continued interest in onto innovation.
Danielle Please conclude the call.
This concludes today's call. Thank you for your participation you may now disconnect.
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Yeah.
Yeah.
Yeah.