Q2 2023 Onto Innovation Inc Earnings Call

August 10, 2023

Innovation second quarter earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mike Shaffer Investor Relations. Please go ahead Sir.

Thank you Cynthia and good afternoon, everyone.

Onto innovation issued its 2023 second quarter financial results. This afternoon. Shortly after the market closed if you 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 Plucinsky, Chief Executive Officer, and Mark Slicer, Chief Financial Officer, I would like to remind you that statements made by management on this call we will.

<unk> forward looking statements within the meaning of the federal Securities laws. Those statements are subject to a range of changes risks and uncertainties that can cause actual results to vary materially for more information regarding the risk factors that may impact onto innovations results I would encourage you to review our earnings release, and our SEC filings onto 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 we specify otherwise 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 our CEO Mike <unk>.

Mike.

Thank you Mike Good afternoon, everyone and thank you for joining our call today.

I'll begin with a shift in timing of shipments for three lithography tools, which impacted our second quarter results and third quarter guidance.

All three tools, but for a specific customer and scheduled to ship near the end of the second quarter.

During the quarter, we accepted a customer request.

For specific enhancement package to be added to the tools and manufacturing.

We estimated this could be installed and tested in the quarter, but ultimately the full verification took longer than planned the customers since approved this new functionality and the tools are included in our outlook for the third quarter.

In aggregate the second quarter revenue and third quarter outlook remains consistent with our prior guidance of just over 400 million for the sum of those two quarters. This reflects the weak demand from our advanced nodes customers being offset by strong power semiconductor revenue and the more recent lease surging demand for our Dragon.

<unk> inspection systems to support heterogeneous packaging and high bandwidth memory customers. In fact, we expect the specific demand to drive more than $90 million in revenue over the next three quarters.

I'll provide additional details about our outlook in a few minutes, but first let's dig a little deeper into the second quarter we.

We will start with our specialty and advanced packaging customers, where revenue from this customer group grew by over 20% from the prior quarter.

Revenue from our power device customers grew over 35% and included our product portfolio of inspection metrology and software solutions.

This was our largest market in the quarter and in fact revenue exceeded total power device revenue in all of 2021.

Building on this demand in the quarter, we announced the intent to expand our metrology portfolio with the release of element S material metrology and Atlas OCD metrology, each specifically designed to address challenges in the compound semiconductor manufacturing.

We've already secured orders for these tools and shipments will begin in the fourth quarter with these additional products. We believe we are positioned to address an estimated 80% of process control steps in this high growth.

Market, which is estimated to require 10 times the current volume of wafers by 2030.

In advanced packaging, we delivered over $20 million of inspection systems to customers ramping heterogeneous packaging lines to support growing end market demand for high performance compute.

The flexibility of our dragonfly systems, which integrate submicron <unk> defect detection <unk> metrology and our unique clarifying capability into a single system is proving to be a powerful tool for the heterogeneous packaging applications used in high performance compute.

For example, clarifying technology is able to detect residue on die to die or died of substrate interconnects and ensures good die bonding, while our <unk> metrology sensors provide critical stack height information and co planarity data for the package.

Metrology is a sensor is proving essential to controlling yields and is leading to higher attach rates.

In sharp contrast revenue from our advanced nodes customers declined 43% in the quarter. However, even as capacity buys Wayne R&D investments have continued and in the second quarter. We were pleased to see further proliferation of Iris films. When it was successfully qualified by a top <unk> three DRAM.

By a top three DRAM manufacturer in the quarter in.

In addition, we delivered several OCD Atlas OCD systems to two customers for gate all around applications.

We believe the declines in advanced nodes will reach a bottom in the third quarter with strong demand in specialty and advanced packaging continuing in the second half of the year.

Before moving to our outlook for the third quarter, Mark will now cover the financial results for the second quarter.

Thanks, Mike and good afternoon, everyone.

As Mike highlighted we closed the second quarter with revenue of $191 million down 26% over the same period last year and below the second quarter guidance range of $195 million to $203 million due to the shift in timing of the three jet step systems. Mike commented on despite the lower revenue, we did achieve an EPS of <unk> 79.

For the second quarter within our EPS guidance range of 75 to 90.

The revenue decline from the same period last year is primarily due to the decline in our advanced <unk> business, which had revenue of $38 million and represents 20% of revenue.

Specialty device in advanced packaging revenue of 100 $212 million represents 59% of revenue in software and services had revenue of $41 million, which represents 21% of revenue.

We achieved 53% gross margin for the second quarter exceeding our guidance range of 50% to 52% driven by the favorable mix shipping fewer jet step systems and seeing an initial favorability due to our supply chain optimization efforts.

Second quarter operating expenses were $59 9 million within our guidance range of $58 million to $60 million.

We're still executing to our cost reduction activities. However, we have continued to maintain a slightly higher and higher level of investment in R&D initiatives as Mike mentioned aligning to R&D engagements in planar films and power semiconductor applications.

Primarily due to the decline in our advanced nodes business, which had revenue of 38 million and represents 20% of revenue.

Specialty device in advanced packaging revenue of 100 $212 million.

Our operating income of $41 million was 21% of revenue for the second quarter compared to 29% from the prior year. Our net income in the second quarter was $39 million or <unk> 79 per share.

<unk> represents 59% of revenue in software and services had revenue of $41 million, which represents 21% of revenue.

Now moving to the balance sheet, we ended the second quarter with cash and short term investments of $610 million, an increase of $62 million from the start of the year with operating cash flow of $31 million within the quarter, representing 17% of revenue for Q2.

Second quarter operating expenses were $59 9 million within our guidance range of $58 million to $60 million.

Inventory ended the quarter at $352 million, an increase of $14 million. We continued to actively manage down our inventory levels across the network. However, we had increases in lithography and services inventory within the quarter.

We are still executing to our cost reduction activities. However, we have continued to maintain a slightly higher higher level of investment in R&D initiatives as Mike mentioned aligning to R&D engagements in planar films and power semiconductor applications.

We are projecting a decline in Q3 and are now targeting to be between $275 and $300 million by the end of the year.

Our operating income of $41 million was 21% of revenue for the second quarter compared to 29% from the prior year. Our net income in the second quarter was $39 million or <unk> 79 per share.

Accounts receivable decreased $22 million to $188 million in the quarter and our days sales outstanding decreased six days to 90 days.

With our inventory reduction goals and focus on cash collections, we expect to return cash flow to consistent performance of over 20%.

Now moving to the balance sheet, we ended the second quarter with cash and short term investments of $610 million, an increase of $62 million from the start of the year with operating cash flow of 31 million within the quarter, representing 17% of revenue for Q2.

During the quarter, we did not execute any share repurchases, we have $32 million remaining under our existing $100 million authorization.

Now turning to our outlook for Q3, we currently expect revenue for the third quarter to be between $205 million and $225 million.

Inventory ended the quarter at $352 million, an increase of $14 million, we continue to actively manage down our inventory levels across the network. However, we had increases in lithography and services inventory within the quarter.

We expect gross margins will be between 50% to 51% primarily due to lower advanced nodes revenue, which typically carries higher margins above our corporate average as well as the shift of the jet set.

We are projecting a decline in Q3 and are now targeting to be between $275 and $300 million by the end of the year.

<unk> systems built in Q2 now shipping in Q3.

Accounts receivable decreased $22 million to $188 million in the quarter and our days sales outstanding decreased six days to 90 days.

For operating expenses, we expect to be between 57 million to $59 million.

For the full year 'twenty, three we expect our effective tax rate to be between 14% to 16%.

With our inventory reduction goals and focus on cash collections, we expect to return cash flow to consistent performance of over 20%.

We expect our diluted share count for Q3 to be approximately $49 949 4 million shares.

During the quarter, we did not execute any share repurchases, we have $32 million remaining under our existing $100 million authorization.

Based upon these assumptions, we anticipate our non-GAAP earnings to be between <unk> 85 per share to $1 <unk> per share.

Now turning to our outlook for Q3, we currently expect revenue for the third quarter to be between $205 million and $225 million.

We are making progress towards reducing our fixed cost structure by optimizing our supply chain and manufacturing sites, while maintaining our strategic priorities in several R&D programs and ensuring our ability to.

To deliver financial performance in line in line with our long term operating model.

Step systems built in Q2 now shipping in Q3.

The team has made significant progress to date, expanding our second shift to drive higher absorption of fixed or fixed costs, while improving cycle times and outsourcing several noncore sub assemblies to global supply chain partners.

For operating expenses, we expect to be between 57 million to $59 million.

For the full year 'twenty, three we expect our effective tax rate to be between 14% to 16%.

We have set aggressive, but achievable targets with our global partners consolidating our supplier base by greater than 50% over the next two years, while also simplifying our key components such as moving to a common automation system, which will drive a 25% cost reduction and as part of our identified savings for 'twenty four and 'twenty five.

We expect our diluted share count for Q3 to be approximately $49 949 4 million shares.

Based upon these assumptions, we anticipate our non-GAAP earnings to be between <unk> 85 per share to $1 <unk> per share.

As highlighted during our recent analyst day.

And with that I will turn it back to Mike for additional insights into Q3, and the remainder of 2023 Mike.

Thank you Mark.

To deliver financial performance in line in line with our long term operating model.

As Mark mentioned, we expect the third quarter to be up 8% to 18%, reflecting an increase in both process control in lithography revenue over the second quarter.

The team has made significant progress to date, expanding our second shift to drive higher absorption of fixed or fixed cost, while improving cycle times and outsourcing several noncore sub assemblies to global supply chain partners.

Expected increase in process control revenues, mostly driven by capacity expansions in higher process control intensity to support heterogeneous integration of Gpus and high bandwidth memory.

Combining these two powerful technologies into a single package is enabling customers like Nvidia to supply the specialized compute platforms to support the growing demand for large language model applications by Hyperscale and corporate enterprises. These.

These assembly processes are more complex and with multiple die, becoming a single package the impact to yield of a single interconnect failures much higher the proven ability of our dragonfly G. III system to reliably monitor for these failures is driving the projected increase in demand of over $90 million in revenue, which we mentioned earlier we are.

As highlighted during our recent analyst day.

And with that I will turn it back to Mike for additional insights into Q3, and the remainder of 2023 Mike.

Thank you Mike.

As Mark mentioned, we expect the third quarter to be up to 18%, reflecting an increase in both process control in lithography revenue over the second quarter.

Also project demand for our portfolio of products supporting power semiconductor customers to remain near current record levels, we still see headwinds in the advanced nodes, primarily from DRAM manufacturers and we expect revenue to decline again in the third quarter, which we believe will mark a bottom for front end memory overall.

Expected increase in process control revenue was mostly driven by capacity expansions in higher process control intensity to support heterogeneous integration of Gpus and high bandwidth memory.

Are optimistic for a possible recovery in the second half next year as customers like Samsung are beginning to talk about the launch of new smartphones and PC promotions in the second half of 2023 being a catalyst for customer inventory reductions going into next year.

In summary, we see strong demand for our products to support power semiconductor device manufacturers and heterogeneous packaging on both wafer and panel substrates. In these markets. We believe our portfolio of connected solutions provides differentiated value further contributing to the adoption rate we're seeing.

In the advanced nodes those spending is down significantly this year, our customer collaborations are resulting in new tool of record positions for our Iris planar films metrology and integrated metrology, while progressing the capability of Atlas OCD metrology to new applications and more challenging transistor geometries.

We're optimistic for a possible recovery in the second half of next year as customers like Samsung are beginning to talk about the launch of new smartphones and PC promotions in the second half of 2023 being a catalyst for customer inventory reductions going into next year.

We expect these new product position should lead to higher wallet share when investments resume in the advanced logic and memory markets at.

At the same time, we are implementing the structural improvements to our operations and supply chain that should result in a stronger financial foundation as we close in 2023 and prepare for the new year.

I'll now turn the call over to Cynthia for questions from our covering analysts.

Thank you if you 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 the signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to assemble the queue.

In the advanced nodes those spending was down significantly this year, our customer collaborations are resulting in new tool of record positions for our Iris planar films metrology and integrated metrology, while progressing the capability of Atlas OCD metrology to new applications and more challenging transistor geometries.

And we will take our first question from Charles <unk> with Needham. Please go ahead.

We expect these new product position should lead to higher wallet share when investments resume in the advanced logic and memory markets at.

Hello, Thank you for taking my question here.

Mike.

Mark maybe just wanted to start out with some of my commentary around heterogeneous integration and high bandwidth memory.

So on.

One with memory can you kind of provide us a little bit Bob further outlook beyond what you think of a $19 million over the next three quarters do you think of high bandwidth memory. The weaker starts is going to grow what kind of fashion. There is it more linear.

I'll now turn the call over to Cynthia for questions from our covering analysts.

Thank you Yeah. If you 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 the signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to assemble the queue.

Some other management team seems to believe by that or you think it's going to be a much higher growth.

Any indication from our customers on our high bandwidth memory will be great. But then a related question related to yourself.

And we will take our first question from Charles <unk> with Needham. Please go ahead.

<unk> very specific new co Los <unk> heterogeneous integration, probably cover a lot of stock not just all about co ops by both specific and co ops, how much opportunity you are seeing to that can you quantify for us. Thank you.

Thank you for taking my question here.

Mike.

Mark I really just wanted to start out with.

My commentary around heterogeneous integration and high bandwidth memory.

Sure.

So I'll answer the last one first regarding coal was when we talked about heterogeneous integration specific for AI I think it's pretty pretty clear that for instance in video who is driving a lot of this is tied to TSMC in Cola. So that's a fair.

So on a high.

Bandwidth memory can you kind of provide us a little bit further outlook beyond what you would think about $19 million over the next three quarters do you think how long with memory, but weaker starts it's going to grow in what kind of fashion. This attack more linear.

Significant driver for us and for that $90 million that we mentioned as.

Some other management team seems to believe that that or you think it's going to be a much higher growth.

As far as HBM and the growth overall, what we're seeing is a pretty pretty.

Any indication from our customers on our high bandwidth memory. It will be great. But then a related question. It really is.

The rapid increase in demand right now part of it is capacity expansion part of it is I think a little bit of process control intensity increase certainly that's the case and the co ops area.

<unk> very specific with my co was Idaho heterogeneous integration probably cover a lot of staff not just stop all co ops by both specific and co ops, how much opportunity you are seeing to that can you quantify for us. Thank you.

So it's hard to say how that rapid increase.

Sure.

Continues into 2024, we certainly expect additional orders in 2024, and we're already having some of those discussions.

So I'll answer the last one first.

<unk> co was when we talked about heterogeneous integration specific for a I think it's pretty pretty clear that for instance in video who is driving a lot of this is tied to TSMC and <unk>. So that's a.

Beyond the first quarter, but is it going to continue on this rapid trajectory this rapid growth trajectory or will it start to slow down.

Fairly significant driver for us and for that $90 million that we mentioned.

That's going to remain to be seen and a lot will depend on how quickly I believe the enterprise customers adopt AI and these large language models for applications.

As far as HBM and the growth overall, what we're seeing is a pretty.

The rapid increase in demand right now part of it is capacity expansion part of it is I think a little bit of process control intensity increase certainly that's the case and the co ops area.

Internally.

Got it got it Okay Africa second question.

Maybe.

Advanced nodes, you said advanced nodes you believe it's bottoming in Q3.

So it's hard to say how that rapid increase.

Can you clarify a little bit more because of bank notes or were you guys. It's not just about memory about the also advanced foundry logic.

Continues into 2024, we certainly expect additional orders in 2024, and we're already having some of those discussions.

Between these two.

I think you said memory was bottoming in Q3, but what about the mass foundry and logic.

Beyond the first quarter, but is it going to continue on this rapid trajectory this rapid growth trajectory or will it start to slow down.

Clarify if I heard something Ralph Thank you.

Yes, I think where I was talking to us overall I think the bottoms there primarily from DRAM. So DRAM has been the biggest.

That's going to remain to be seen and a lot will depend on how quickly I believe the enterprise customers adopt AI and these large language models for applications.

Drop.

Advanced logic has been a little more stable and we.

We've seen that.

Internally.

Have less of a big.

Got it got high Africa second question.

Big impact on our advanced nodes.

Trajectory.

Maybe.

Advanced nodes.

So we do think advanced nodes do we know if logic is going to snap back right away no, but we we do see several new fabs being built everybody is aware of Samsung and Taylor and TSMC, Arizona and opportunities at Intel as well we continue to see.

Advanced nodes you believe it's bottoming in Q3.

Can you clarify a little bit more because of bank notes or for you guys. It's not just about memory, but also.

Foundry logic.

Between these two.

I think you said memory was bottoming in Q3, but what about what about some of the largest product can you clarify if I heard something Ralph Thank you.

<unk> and seed pilot lines and deliver systems as those fabs are being constructed and starting to take some initial systems, but we are also seeing the construction delays announced by several of these many manufacturers.

Yes, I think where I was talking to the overall I think the bottoms there primarily from DRAM. So DRAM has been the biggest.

Drop.

The manufacturers so.

Advanced logic has been a little more stable and we.

Do we do we hope for some growth in <unk>.

Second half next year for sure.

We've seen that.

But we're already starting to see that plateauing on advanced logic.

We have less of a big.

Big impact on our advanced nodes.

As it is.

Trajectory.

So DRAM thank you Mike.

So we do think advanced nodes do we know if logic is going to snap back right away no, but we do see several new fabs being built everybody is aware of Samsung and Taylor and TSMC, Arizona and opportunities at Intel as well we continue to see.

<unk> chain.

I see as the DRAM comment is it more on the HTM related.

Sure.

Original reaching that inflection point is that mainly the HBM being the driver or do you see the blended DRAM.

The Capex is also seeing some inflection point just wanted to ask a little bit more on that <unk> comment.

<unk> seed pilot lines and deliver systems as those fabs are being constructed and starting to take some initial systems.

Yes, I think so.

Certainly the more common DRAM, that's that's driving the drops were seeing in.

But we have also seen the construction delays announced by several of these manufacturers.

<unk> is great and it's great for our packaging business and Thats picking up some some DDR five four but its not enough to make up for Pcs and smartphones that are that are down right. So so.

Manufacturers so.

Do we do we hope for some growth in <unk>.

Second half next year for sure.

But we're already starting to see that plateauing on vet Vance logic.

As it is.

<unk> overall is impacting us because of the vast rest of the market outside of high performance compute.

So DRAM and thank you Mike.

<unk> chain.

I see as the DRAM comment is it more on the HTM related.

Okay.

We will take our next question from Craig Ellis with B Riley Securities. Please go ahead.

The original reaching that inflection point is that mainly the HBM being the driver or do you see the standard DRAM.

Yes, thanks for taking the questions guys I just wanted to see if I could start with you might can look beyond the calendar third quarter, because it seems like with.

The Capex is also seeing some inflection point just wanted to ask a little bit more on that <unk> comment.

The panel litho shipment timing issue that we will have at least three and maybe more tools for I was hoping you could clarify how many tools.

Yes, I think.

Certainly the more common DRAM.

What's driving the drops were seeing in.

<unk> is great and it's great for our packaging business and it's picking up some some DDR five four but its not enough to make up for Pcs and smartphones that are that are down right. So so.

<unk> in the third quarter, there and then from there can you just talk about the Gibson takes four fourth quarter revenue not looking for specific guidance, but just want to understand how the Gibson takes play out as we exit the year.

Hey, Ram overall is impacting us because of the vast rest of the market outside of high performance compute.

Sure so.

It's actually a continuation of what we're what we're guiding in the third quarter. So we see power semiconductors for the fourth quarter.

Okay.

We will take our next question from Craig Ellis with B Riley Securities. Please go ahead.

Remaining fairly strong demand there is strong we're going to introduce the new tools that will help a little bit but that was.

Yes, thanks for taking the questions guys I just wanted to see if I could start with you might can look beyond the calendar third quarter, because it seems like with.

More a driver for 2024 and the power semiconductor space.

The panel litho shipment timing issue that we will have at least three and maybe more tools for I was hoping you could clarify how many tools.

And then heterogeneous packaging our support specifically for.

AI devices, AE, Nvidia and some of the co Los and HBM that were mentioned.

That we can see continuing to strengthen straight through the year. So those are the positive obviously, the litho will will remain sort of stable and continue once we catch up with the with the shift here with the.

Sure so.

It's actually a continuation of what we're what we're guiding in the third quarter. So we see power semiconductors for the fourth quarter.

With the three tools.

And then the advanced nodes I mean, that's the tailwind so as I look at Q4, it's a lot of the the same store's real strong inherent genius packaging real strong empower.

Remaining fairly strong demand there is strong we're going to introduce the new tools that will help a little bit but that was.

More a driver for 2024 and the power semiconductor space.

Advanced nodes a bit of a.

A bit of a tailwind.

Got it and then Brian and overall, we think that the.

And then heterogeneous packaging our support specifically for.

Sorry.

AI devices E Nvidia and some of the co Los and HBM that were mentioned.

Interrupt the overall overall, we expect to be.

Similar similar levels of of guidance for the fourth quarter, we would expect it to be around the same.

<unk>.

Yes real helpful. Mike and then Marc I'll follow up with you. So so the company had a program for.

Optimization and I think.

With the three tools.

Just more careful expense management and.

And then the advanced nodes I mean, that's the tailwind so as I look at Q4, it's a lot of the the same store is real strong inherent genius packaging real strong empower advair.

And that was about $27 5 million at analyst day, there was a $25 million program that was announced can you just help us understand.

To what extent are benefits from those programs factored into the third quarter's guide what does that mean for the excellent level of gross margin.

Advanced nodes a bit of a.

A bit of a tailwind.

Got it and then Mark and overall, where do you think that the.

This calendar year, so working gross margin be in the fourth quarter and then how much of the benefit of those two programs do we see hit in gross.

Alright.

Sorry, Greg.

Interrupt the overall overall, we expect to be.

Similar similar levels of of guidance for the fourth quarter, we would expect it to be around the same.

Gross margin and Opex next year. Thank you.

Yes, no I mean, let me start with the.

Coming off the analyst day, and the commentary around the 25 million.

Yes real helpful. Mike and then Marc I'll follow up with you. So so the company had a program for.

Of optimization $24 25, I mean those that activity.

We're executing now obviously, we haven't seen.

Optimization and I think.

Just more careful expense management and.

The brunt of those savings are in 2000 expected to be in 2025, we are as I commented in my prepared remarks, seeing some of that now and some slight shifts of suppliers and things like that so we still focused on that.

And that was about $27 5 million at analyst day. There was the $25 million program that was announced can you just help us understand.

To what extent are benefits from those programs factored into the third quarter's guide what does that mean for the excellent level of gross margin.

I think for Q3 and Q4, we still have a lot more work to do certainly we have seen some savings in operating expenses.

This calendar year, so working gross margin be in the fourth quarter and then how much of the benefit of those two programs do we see hit in gross.

As it relates to taking costs out in offsetting the kind of the annualized <unk> year over year.

Gross margin and Opex next year. Thank you.

Certainly in the back half we're focused on that.

Yes, no I mean, let me start with the.

Those continued reduction plans the Q3.

Coming off the analyst day, and the commentary around the 25 million.

We do have certainly some of that continue to be baked in.

Optimization, 24, and 25, I mean those that activity.

Where we are from a gross margin and Opex standpoint.

We're executing now obviously, we haven't seen.

I think.

As we look at the decline in advanced nodes.

Fortunately, we have programs in place right now, we're looking at and executing even even further reductions in Q3 and Q4 as we look towards that decline and making sure that we can continue to drive gross margin accretion.

I think for Q3 and Q4, we still have a lot more work to do certainly we have seen some savings in operating expenses.

Back up above 50.

<unk>, 53% to 54%.

Our goal is.

From a full year perspective is still the target that 53% to 54%.

As it relates to taking costs out in offsetting the kind of the annualized <unk> year over year.

And aligned to the long term operating model of getting back to 55% plus longer term.

Certainly in the back half we're focused on that.

That's that's our target.

Those continued reduction plans the Q3.

So that would imply that you should be at least 54% in the fourth quarter to get to 53 to 54 for the full year Mark.

We do have certainly some of that continued to be baked in.

Where we are from a gross margin and Opex standpoint.

I think.

We're still I won't comment on it specifically, but I think from a.

As we look at the decline in advanced nodes.

No.

From where we are and trying to figure out what the business will be in Q4, I think our goal is obviously to continue to drive that.

<unk> 53 target 53, plus in Q4.

Got it thanks guys.

Back up above the.

Yes.

<unk>, 53% to 54%.

We will take our next question from Brian Chin with Stifel. Please go ahead.

Our goal is.

From a full year perspective is still the target that 53% to 54%.

Hi, there good.

And aligned to the long term operating model of getting back to 55% plus longer term.

Good evening or early evening, Thanks, Mike I wanted to ask a few questions.

Let me maybe.

To start with Mike.

That's that's our target.

Yes, I think.

So that would imply that you should be at least 54% in the fourth quarter to get to 53 to 54 for the full year Mark.

You have really good strong visibility on the packaging and specialty side of the business and the visibility clearly not great.

In terms of the advance nodes.

But would you characterize the level that is DRAM, but also memory investments, including non volatile memory does it feel like it's below sort of normalized.

We're still I won't comment on it specifically, but I think from a.

From where we are and trying to figure out what the business will be in Q4, I think our goal is obviously to continue to drive that.

Kind of maintenance or even sub maintenance levels. At this point does that give you some of the conviction in saying that Q3 looks like a bottom.

<unk> 53 target 53, plus in Q4.

Right now.

Got it thanks guys.

Yeah.

Meaning couldnt go lower.

Yes.

It is pretty it is pretty.

We will take our next question from Brian Chin with Stifel. Please go ahead.

Well as I don't know if I've ever seen.

This much of a drop for this long of a period of time. So yeah. I think that then you're starting to hear from our from our customers as well.

Good.

Good evening or early evening and thanks, Mike I wanted to ask a few questions.

Let me maybe.

To start with Mike.

Yes, I think.

Theyre beginning to see signs of price increase in inventories are coming down and that kind of thing. So yes, I think it's it's at or below maintenance levels.

You have really good strong visibility on the packaging and specialty side of the business and the visibility clearly not great.

In terms of the advanced nodes.

But would you characterize the level that is DRAM, but also memory investments, including non volatile memory is it feels like it's below sort of normalized.

When it recovers I don't know, but I am not expecting a very quick snapback, we're not planning for that.

That'd be a nice surprise, but right now it's that's why we're saying we don't expect Q3 to we expect Q3 to be the bottom.

Kind of maintenance or even sub maintenance levels. At this point does that give you some of the conviction in saying that Q3 looks like a bottom.

Right now.

Okay fair enough.

Yeah.

Meaning couldnt go lower.

I know that the.

It is it is pretty it is pretty.

<unk> has always been a bit bumpy a bit lumpy for you guys.

Well as I don't know if I've ever seen.

It sounds like obviously you take the three units if you park them in the <unk> you kind of.

This much of a drop for this long of a period of time. So yeah. I think that then you're starting to hear from our from our customers as well.

Revenue is up.

Take it out of the third quarter guidance Youre kind of flat, but.

Given that dynamic and you maybe you shipped six tools in <unk> does that kind of.

They are beginning to see signs of price increase in inventories are coming down and that kind of thing. So yes, I think it's it's at or below maintenance levels.

Flat flattish preliminary fourth quarter outlook.

Is that really saying that the X 500 lithography ships may be back to normalized levels, maybe down a few units.

When it recovers I don't know, but I am not expecting a very quick snapback, we're not planning for that.

In Q and then you make that up with some of the growth that youre seeing in the other businesses.

That'd be a nice surprise, but right now it's that's why we're saying we don't expect Q3, we expect Q3 to be the bottom.

Yeah, we think.

The litho will be.

It depends a little bit.

Okay fair enough.

On timing because we are trying to catch up on things. So there may be one or two tools that would move.

I know that the.

What progress has always been a bit bumpy a bit lumpy for you guys.

Forward into the first quarter, but it would more or less normalized at that $20 million or so that we've always talked about so $20 million $25 million.

It sounds like obviously you take the three units if you parked in the <unk> you kind of.

Revenue is up.

Revenue.

Take it out of the third quarter guidance Youre kind of flat.

Okay got it got it and then just.

But given that dynamic and you maybe you shipped six tools in <unk> is that kind of.

Framing up sort of the specialty business where.

That's the synergies you've talked about in terms of technology and customer synergies.

Flat flattish preliminary fourth quarter outlook.

That really saying that the X 500 lithography ships may be back to normalized levels, maybe down a few units Q on Q and then you make that up with some of the growth that youre seeing in the other businesses.

I think you would expect to bear more fruit this up cycle than kind of what youre able to progress on last up cycle. So if you look at kind of calendar 'twenty two and already you are having some pretty good run rates on the specialty side of the business.

Yes, we think.

Much larger than three years could that specialty revenue for you guys. The relative to the calendar 'twenty two year. When you guys were at a $1 billion and that was going to be a smaller amount of the of the of the revenue contribution to 1 billion, how much bigger could specialty be in three years.

The litho will be.

It depends a little bit on <unk>.

<unk> because we are trying to catch up on things. So there may be one or two tools that would move.

Forward into the first quarter, but it would more or less normalized that that $20 million or so that we've always talked about so $20 million $25 million.

Compared to current level I mean, it depends on spending from the customers right. So the estimate out three years is always tough, but I can say that our adoption rate is only beginning so we're just winning new customers I think we added.

Revenue.

Okay got it got it and then just.

Framing up sort of the specialty business where.

That's the synergies you've talked about in terms of technology and customer synergies and I think you would expect to bear more fruit this up cycle than kind of what youre able to progress on last up cycle. So if you look at kind of calendar 'twenty two and already you are having some pretty good run rates on the specialty side of the business, how much larger and three years because thats.

<unk>.

Five new customers in the quarter.

So those are just the initial sales up by a couple of tools, then theres going to be repeat sales as they continue to grow in every one of those customers has a potential to sell more of the portfolio. So we have opportunities to not only continue to add customers, but continue to grow our portfolio within the customers. So.

Specialty revenue for.

For you guys the relative to the calendar 'twenty two year. When you guys were at $1 billion and that was going to be a smaller amount.

Sure.

The revenue contribution to 1 billion, how much bigger could specialty be in three years.

Looking at where we ended up for this year I wouldn't be surprised if we could double that revenue in three years.

Yeah.

Compared to current level I mean, it depends on spending from the customers right. So the estimate out three years is always tough, but I can say that.

Okay.

Given the growth dynamics in the industry and giving given our positions in the new products, we're releasing and the value that we're delivering with these connected solutions. These integrated portfolios to solve unique problems.

Our adoption rate is only beginning so we're just winning new customers I think we added.

Five new customers in the quarter.

Thanks, Mike.

Okay.

So those are just the initial sales up by a couple of tools and theres going to be repeat sales as they continue to grow in every one of those customers has a potential to sell more of the portfolio. So we have opportunities to not only continue to add customers, but continue to grow our portfolio within the customers. So.

We will take our next question from David Duley with Steelhead Securities. Please go ahead.

Yes, thanks for taking my questions.

High bandwidth memory goes could you just talk about how much more inspection and.

Intensive it is versus just.

A standard DDR five product.

Sure.

Looking at where we ended up for this year I wouldn't be surprised if we could double that revenue in three years.

And then.

That's my second question.

As far as your advanced nodes business goes for calendar 2023, how much would you expect the memory business to be down and how much would you expect the foundry and logic to be down.

Okay, alright, given the growth dynamics in the industry and giving given our positions in the new products, we're releasing and the value that we're delivering what these connected solutions. These integrated portfolios to solve unique problems.

Again, I'll start with the last one.

For 2023, I would expect I don't have the numbers directly in front of me, but I would expect.

Thanks, Michael.

Okay.

Memory to be down probably double what logic is down.

We will take our next question from David Duley with Steelhead Securities. Please go ahead.

So.

It doesn't help you too much.

Yes, thanks for taking my questions.

So I don't know if logic, because it might be down 20%.

As far as high bandwidth memory goes could you just talk about how much more inspection and.

DRAM memory might be down double that 40%.

Intensive it is versus just.

A standard DDR five product.

As for HBM and the attach rates the process control intensity versus normal DRAM. So a good question.

Then.

That's my second question.

As far as your advanced nodes business goes for calendar 2023, how much would you expect the memory business to be down and how much would you expect the foundry and logic to be down.

I would.

The number of applications. So I would say, it's two to three times more.

Again, I'll start with the last one.

<unk> control intensive at least for our applications on our dragonfly than normal DRAM.

For 2023, I would expect I don't have the numbers directly in front of me, but I would expect.

And DRAM packaging and Thats because of the layers and the amount of metrology and inspection involved in preparing these die to be stacked and to be connected to other die in the stack. So theres a lot lot more.

Memory to be down probably double what logic is down.

So.

It doesn't help you too much.

So I don't know if logic, because it might be down 20%.

Metrology.

Coinciding with our inspection and.

DRAM memory might be down double that 40%.

In order to make those those packages yield.

As for HBM and the attach rates the process control intensity versus normal DRAM. So a good question.

And as far as the metrology is on our inspection tool so that drives the utilization of our inspection tool. It's all integrated just not to add any confusion.

I would.

Okay.

The number of applications. So I would say, it's two to three times more.

Far as high bandwidth memory goes.

And your outlook there is that I'm, assuming that's just with one lead lead.

Process control intensive at least for our applications on our dragonfly than normal DRAM.

DRAM manufacturer I don't really think the other guys have a lot of.

Product in the marketplace at this point is that the way to look at it or are you working with more than one guy in high bandwidth memory.

We are working with more than one.

But one certainly dominate more than the other.

Metrology.

Okay. Thanks.

Coinciding with our inspection and.

In order to make those those packages yield.

We will take our next question from <unk> <unk> with Jefferies. Please go ahead.

And as far as the metrology is on our inspection tool so that drives the utilization of our inspection tool. It's all integrated just not add any confusion.

Hi, Thanks for taking my question.

Yes, I wanted to ask about the packaging a little bit more.

You talked about the 90 million.

Okay.

E <unk>.

As far as high bandwidth memory goes.

<unk> quite clearly is that molecule.

<unk> like HBM.

And your outlook there is that I'm, assuming that's just with one lead lead DRAM manufacturer I don't really think the other guys have a lot of.

Make a car wash capacity.

Got it great.

Well.

Kind of what the split is between the heterogeneous integration of Oasis HBM.

Product in the marketplace at this point is that the way to look at it or are you working with more than one guy in high bandwidth memory.

<unk>.

Yeah, I would say 60 40 so.

We are working with more than one.

A lot of it is on the logic side, So Carlos let's say and then.

But one certainly dominate more than the other.

The rest on the HBM.

Okay. Thanks.

And then for my follow up Dan.

We will take our next question from <unk> <unk> with Jefferies. Please go ahead.

So you have TSMC talking about doubling <unk> capacity add Courtney Kipling.

Hi, Thanks for taking my question.

<unk> capacity.

I guess I wanted to ask about the packaging a little bit more.

How should we think about like how did they gently ramping new opportunity for you.

You talked about the 90 million upward Yankee <unk> quite clearly is that.

Direct link of doubling capacity means doubling revenues for you.

Good morning.

Okay.

Any questions Blake.

Nick a cold wash capacity can you characterize what.

And so far it looks that way.

Well.

Kind of what the split is between the heterogeneous integration related HBM.

Yes, so far it looks that way there is a very high attach rate what we're seeing so.

Yeah, I would say 60 40 so.

<unk>.

You know that.

Right now that would be how I'd allied model at fields improve and they start to drive.

A lot of it is on the logic side, so call us and say and then.

The rest on the HBM.

Let's say, a normalization and an optimization they may reduce the process control, but if anything were seeing an increase in process control as they are trying to add improved yield and that's why I mentioned the the increase in process control intensity. So we think maybe even.

Hi.

And for my follow up Dan.

So you have TSMC talking about doubling <unk> capacity add courtney sort of tripling.

<unk> capacity.

How should we think about.

Since the beginning of the year till now maybe 20% or more increase in process control intensity on the logic side. So.

Gently ramping new opportunity for you does it is it like a direct link of Dublin.

Doubling capacity means doubling revenues for you or how does that equation look.

Janus packaging on the logic side.

Goodbye.

And so far it looks that yes.

And then kind of going.

Yes, so far it looks that way.

If I think about what your installed base.

High attach rate, what we're seeing so.

In 'twenty, one 'twenty two for nickel dragonfly inspection tool.

<unk>.

You know that right now that would be how I'd allied model at fields improve and they start to drive let.

Of that one.

Kind of smartphone market.

Great.

Holly Thank you Brady of Deutsche Bank.

As the utilization at your arm.

Maybe Mike I gave fungible and can they be used from.

For packaged tour call Westar is that is that a possibility.

Or do you need a different sales towards different content.

Since the beginning of the year till now maybe 20% or more increase in process control intensity on the logic side. So.

Sure.

Generally they're in different different lines. So the tools are apt to be moved.

And the tools are configured very differently for your traditional fan out or just traditional bump.

Janus packaging on the logic side.

<unk>.

And then kind of going.

If I think about what youre in <unk> 2021 2022 for nickel dragonfly inspection tool.

The amount of sensors.

The Cape.

Capabilities like clear find which is a.

Another option on our tool those are all required for for the HBM and for the.

Of that one.

Turning to the smartphone market.

Great.

How is your ability of Deutsche Bank.

Heterogeneous the logic side.

As the utilization at your arm.

Maybe my R&D fungible, I think can they be used from.

So it's not really fungible, we havent seen anyone trying to move our product.

Existing tools into those lines Thats, all new tools.

For packaged tour called Westpac is that is that a possibility.

Okay. So does that mean that gross margin.

Or do you need a different story.

Hi.

Interesting.

Great.

<unk> PMA application USA.

Sure.

Generally they're in different different lines. So the tools are apt to be moved and the tools are configured very differently for your traditional fan out or just traditional bump.

Got it.

I believe so but I'd have to we'd have to get back to you on that.

Okay. Thank you that's all I had and I'll get back in the queue.

Okay.

The amount of sensors.

We will take our next question from Mark Miller with benchmark. Please go ahead.

The Cape.

Capabilities like clear fine which is.

Thank you for the question.

Another option on our tool those are all required for for the HBM and for the fifth.

<unk> million dollars volume per purchase order for process control.

How does how does that order ship.

Heterogeneous the logic side.

In terms of the third and fourth quarter or is it equally divided.

So it's not really fungible, we havent seen anyone trying to move our product our existing tools into those lines Thats all new tools.

Going to be more back end loaded.

That we're working on so we are projecting the $90 million and when it's when it's finalized with the customers will be able to provide clarity on the on the rollout of that and the follow on the size of the follow on.

Okay.

That means gross margin sort of hang up high.

King.

Well I think BMI application USA.

I agree.

I believe so but I'd have to we'd have to get back to you on that.

Additional orders, we expect but I would expect Q3 to be little lighter Q3, and Q4 and Q1 to be maybe semi equal.

Okay. Thank you that's all I had and I'll get back in the queue.

Yeah.

Between that between that ramp.

We will take our next question from Mark Miller with benchmark. Please go ahead.

Sure.

Announced 18 power customers first time orders any new power customers this quarter or the June quarter.

Thank you for the question the $90 million volume.

<unk> order for process control.

How does.

How does that order ship.

We had five new power customers this quarter.

The third and fourth quarter or is it equally divided as good or is it going to be more back end loaded.

Thank you.

Youre welcome.

And there are no further questions at this time I will now turn the conference back over to Mr. Shaffer for any additional or closing remarks.

Okay.

Cynthia just a quick reminder, for everybody about three upcoming events first onto management will be participating in the Needham semi cap virtual conference on August 23.

Additional orders, we expect but I would expect Q3 to be a little lighter Q3, and Q4 and Q1 to be maybe semi equal.

<unk> will be participating in the Jefferies semi conference in Chicago on August 29, and third we will be at the benchmark Conference in New York City on September 13.

Between that between that ramp.

Sure.

Thanks again 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 Cynthia. Please conclude the call. Thank you.

Announced 18 power customers first time orders any any new power customers this quarter or the June quarter.

Yes, we have.

Add five new power customers this quarter.

Thank you gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect.

Thank you.

Youre welcome.

And there are no further questions at this time I will now turn the conference back over to Mr. Shaffer for any additional or closing remarks.

Okay.

Thanks, Cynthia just a quick reminder, for everybody about three upcoming events first onto management will be participating in the Needham semi cap virtual conference on August 23.

Second we will be participating in the Jefferies semi conference in Chicago on August 29, and third we will be at the benchmark Conference in New York City on September 13th.

Thanks again for joining us today, a replay of the call is going to be available.

On our website at about 730 Eastern time. This evening wed like to thank you for your continued interest in onto innovation Cynthia. Please conclude the call. Thank you.

Thank you gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect.

Q2 2023 Onto Innovation Inc Earnings Call

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