Q4 2023 Onto Innovation Inc Earnings Call
Good day and welcome to the onto innovation fourth quarter and full year earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference everybody, Mike Shaffer Investor Relations. Please go ahead.
Operator: Good day, and welcome to the Onto Innovation fourth quarter and full year earnings conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Schaefer, Investor Relations. Please go ahead.
Michael Sheaffer Senior Director: Thank you, Rachel, and good afternoon, everyone. Onto Innovation issued its 2023 fourth quarter and full year 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 Plisinski, Chief Executive Officer, and Mark Slicer, 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. 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 impact Onto Innovation's results, I would encourage you to review our earnings release and our SEC filings. Onto Innovation does not undertake the obligation to update these forward-looking statements in light of new information or future events.
Thank you Rachel and good afternoon, everyone onto innovation issued its 2023 fourth quarter and full year financial results. This afternoon. Shortly after the market close 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 <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 federal securities laws and those statements are subject to a rate changes risks and uncertainties that can cause actual results to vary materially for more information regarding the risk factors that impact onto your innovations.
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.
Michael Sheaffer Senior Director: Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings report. I will now go ahead and turn the call over to our CEO, Mike Plisinski.
Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified.
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 Plucinsky Mike.
Thank you Mike Good afternoon, everyone and thank you for joining our call today as you may have already seen onto innovation and had a strong end to the year with fourth quarter revenues exceeding the high end of our guidance range. This was primarily due to stronger than projected demand for dragonfly inspection systems to support package.
Michael P. Plisinski: Thank you, Mike. Good afternoon, everyone, and thank you for joining us on our call today. As you may have already seen, Onto Innovation had a strong end to the year with fourth-quarter revenues exceeding the high end of our guidance range. This was primarily due to stronger than projected demand for Dragonfly inspection systems to support packaging of memory and logic devices for AI applications. We expect this demand to continue, as reflected in our increased guidance range for the first quarter. Financially, we're starting to benefit from tighter controls and operational efficiencies, which resulted in generating over 28 percent of cash from operations in the quarter, while still supporting the multi-quarter surge in demand for the Dragonfly system. We expect improvements and margins will soon follow, bringing us back in line with our long-term operating model by the end of the year.
Zing of memory and logic devices for AI applications. We expect this demand to continue as reflected in our increased guidance range for the first quarter, but actually we're starting to benefit from tighter controls and operational efficiencies, which resulted in generating over 28% of cash from operations in the quarter.
While still supporting the multi quarter surge in demand for the dragonfly systems we.
We expect improvements in margins will soon follow bringing us back in line with our long term operating model by end of the year.
Michael P. Plisinski: So let's begin with our specialty in advanced packaging customers, where the boom in AI spending lifted revenue from this market by 17 percent over the prior quarter and set a consecutive quarterly record. In fact, since the start of the year, quarterly revenue for the specialty device and advanced packaging markets has grown 65 percent, while on an annual basis, revenues have risen from $220 million in 2020 to just over $500 million in 2023. Several markets have contributed to this growth, including power semiconductors, where demand for our solutions increased 50 percent this year. But the greatest and most consistent growth has come from our longstanding partnerships with the top semiconductor manufacturers and their increasing investments in advanced packaging, including chiplet and 3D memory architecture. Over the next several years, as these architectures increase in complexity and interconnect density, we expect additional process steps to create the need for more dragonfly inspection and pneumatology applications.
So, let's begin with our specialty and advanced packaging customers, where the boom in AI spending lifted revenue from this market by 17% over the prior quarter and set a consecutive quarterly record.
In fact since the start of the year quarterly revenue for the specialty device and advanced packaging markets has grown 65% well on an annual basis revenues have risen from 220 million in 2020 to just over $500 million in 2023 seven.
Several markets have contributed to this growth, including power semiconductors, where demand for our solutions increased 50% this year.
But the greatest and most consistent growth has come from my long standing partnerships with the top semiconductor manufacturers and their increasing investments in advanced packaging, including triplet in three D memory architectures over the next several years as these architectures, increasing complexity and interconnect density.
We expect additional process steps to create the need for more dragonfly inspection of new metrology applications. For example in the fourth quarter, we shipped several of our newer front end metrology systems, including ethical films and aspect metrology to leading manufacturers of no satisfy emerging packaging applications.
Michael P. Plisinski: For example, in the fourth quarter, we shipped several of our newer front-end metrology systems, including Echo Films and Aspect Metrology, to leading manufacturers and OSATs for emerging packaging applications. Another highlight for the quarter was our lithography team shipping three systems as planned to two customers supporting mobile and high-performance compute applications. To complement our lithography tools and provide additional technology for leading-edge panel manufacturers, we announced the availability of our latest Firefly G3 panel inspection system in the fourth quarter. This third generation of our FireFly panel tool now includes all of the metrology capabilities of the DragonFly G3 and shares the same high-performance optical design. This tool's inspection and metrology capability is being used to qualify glass panel substrates as well as more traditional panels.
Other highlights for the quarter was a lithography team shipping three systems as planned to two customers supporting mobile and high performance compute applications.
To complement our lithography tools and provide additional technology for leading edge panel manufacturers, we announced the availability of our latest Firefly G. III panel inspection system in the fourth quarter.
The third generation of this third generation of our Firefly panel tool now includes all of the metrology capabilities of the Dragon Slide G III and shares the same high performance optical design.
Tools inspection and metrology capability is being used to qualified glass panel substrates as well as more traditional panels. It is fully integrated with our software solutions, which we expect will help our customers accelerate their ability to reach productivity and yield targets, especially for the next generation of heterogeneous packaging technologies.
Michael P. Plisinski: It is fully integrated with our software solutions, which we expect will help our customers accelerate their ability to reach productivity and yield targets, especially for the next generation of heterogeneous packaging technology. Turning briefly to the advanced nodes, as we projected, revenue from these customers declined in the fourth quarter, and we believe it has finally reached a bottom. Consistent with historical performance, revenue was split nearly equally between DRAM, NAND, and Logic.
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Turning briefly to the advanced nodes as we projected revenue from these customers declined in the fourth quarter and we believe it has finally reached a bottom.
Consistent with historical performance the revenue was split nearly equally between DRAM NAND and logic.
Although revenue was light overall, we continued to receive early orders for gate all around pilot lines and in the fourth quarter. We received approximately $20 million of additional orders for Atlas and Iris systems for deliveries in the first half of 'twenty 'twenty four.
Michael P. Plisinski: Although revenue is light overall, we continue to receive early orders for gate all-around pilot lines, and in the fourth quarter, we received approximately $20 million in additional orders for Atlas and Iris systems for deliveries in the first half of 2024. We're optimistic that these placements indicate a strengthening of our position when volume ramps occur, likely in early 2025. Now I will turn the call over to Mark to discuss our financial performance in the fourth quarter and guidance for the first quarter. Thanks, Mike, and good afternoon, everyone.
We're optimistic that these placements indicate a strengthening of our position when volume ramps occur likely in early 2025.
Now I will turn the call over to Mark to discuss our financial performance in the fourth quarter and guidance for the first quarter.
Thanks, Mike and good afternoon, everyone as Mike highlighted we closed the fourth quarter with revenue of $219 million up 6% versus the third quarter and a revenue milestone for us in 2023 exceeding our guidance range, while achieving a high mark for revenue within the year.
Mark S. Miller: As Mike highlighted, we closed the fourth quarter with revenue of $219 million, up 6% versus the third quarter, and a revenue milestone for us in 2023, exceeding our guidance range while achieving a high mark for revenue within the year. Fourth quarter EPS increased 10% sequentially to $1.06, exceeding the midpoint of our guidance, but constrained by the decline in our high-margin advanced nodes business and lower services parts revenue within the quarter. Looking at the quarterly revenue by markets, advanced nodes, which had revenue of $18 million, declined 30% over Q3 and represented 8% of revenue. Specialty device and advanced packaging, with record revenue of $158 million, increased 17% over Q3 and represents 72% of revenue. Software and Services, with revenue of $42 million, declined 8% over Q3, while representing 20% of revenue.
Fourth quarter, EPS increased 10% sequentially to $1 <unk>.
Exceeding the midpoint of our guidance, but constrained by the decline in our high margin advanced nodes business and lower service parts revenue within the quarter.
Looking at the quarterly revenue by markets advance nodes, which had revenue 18 million declined 30% over Q3 and represents 8% of revenue.
Specialty device in advanced packaging with record revenue of $158 million increased 17% over Q3 and represents 72% of revenue.
Software and services with revenue of $42 million declined 8% over Q3, representing 20% of revenue.
Fourth quarter operating expenses were $56 million at the low end of our guidance range of <unk> $56 million to $58 million. We continue to actively manage costs, while realizing the benefits of our cost reduction initiatives put in place earlier in the year and driving our Opex run rate back to Q4 'twenty one levels.
Our operating income of 56 million was 26% of revenue for the fourth quarter compared to 24% for the third quarter.
Net income for the fourth quarter was 52 million, 24% of revenue versus 23% for the third quarter, both operating income and net income performance versus the third quarter highlight our improving operating leverage within the year.
Mark S. Miller: Fourth quarter operating expenses were $56 million, at the low end of our guidance range of $56 to $58 million. We continue to actively manage costs while realizing the benefits of our cost reduction initiatives put in place early in the year and driving our OPEX run rate back to Q4'21 levels. Our operating income of $56 million was 26% of revenue for the fourth quarter, compared to 24% for the third quarter. Our net income for the fourth quarter was $52 million, 24% of revenue versus 23% for the third quarter. Both operating income and net income performance versus the third quarter highlight our improving operating leverage within the year. Now moving to the balance sheet. We ended the fourth quarter with cash and short-term investments of $698 million, an increase of $150 million from the beginning of the year, with operating cash flow of $62 million in the quarter, representing 28% of revenue and achieving a quarterly record for operating cash. Inventory ended the quarter at $328 million, a decrease of $18 million from Q3, representing a 14% reduction of our day's inventory outstanding.
Now moving to the balance sheet, we ended the fourth quarter with cash and short term investments of $698 million, an increase of 150 million from the beginning of the year with operating cash flow of 62 million within the quarter, representing 28% of revenue and achieving a quarterly record for operating cash flow.
Inventory ended the quarter.
At $328 million, a decrease of eight 2 million from Q3, representing a 14% reduction of our days inventory outstanding.
Even with ramping dragonfly production, requiring us to procure long lead time items. We do expect further reduction in inventory days outstanding as inventory optimization remains a critical working capital focus area to drive consistent cash flow performance levels exceeding 20% of revenue.
Accounts receivable increased $17 million to $227 million in the quarter and our days sales outstanding increased two days to 94 days.
Now turning to our outlook for Q1, we currently expect our revenue for the first quarter to be between $215 million and $230 million.
We expect gross margins will be between 51% to 53% as we continued to experience historical lows in the advanced nodes business.
And only the initial phases of our supply chain reductions taking hold in the quarter.
For operating expenses, we expect to be between 58 million to $60 million higher versus Q4, primarily due to the annual reset of payroll taxes and other compensation components.
For the full year 'twenty four we expect our effective tax rate to be between 14% to 16%.
Mark S. Miller: Even with ramping drag-and-fly production, requiring us to procure long lead time items, we do expect further reduction in inventory data is outstanding as inventory optimization remains a critical working capital focus area to drive consistent cash flow performance levels exceeding 20 percent of revenue. Accounts receivable increased $17 million to $227 million in the quarter, and our sales outstanding increased two days to 94 days.
Which does not assume any impact for potential tax legislative changes that may occur during the year.
We expect our diluted share count for Q1 to be approximately $49 8 million shares.
Based on these assumptions, we anticipate our non-GAAP earnings for the first quarter to be between $1 per share to $1 20 to $1 20 per share.
Looking forward to 2024 critical focus area for us to continues for US continues to be our targeted programs for operating improvements necessary to return to our operating model.
And with that I will turn it back to Mike for additional insights into Q1 in 2024.
Mark S. Miller: Now turning to our outlook for Q1, we currently expect our revenue for the first quarter to be between $215 million and $230 million. We expect gross margins to be between 51% to 53% as we continue to experience historical lows in the advanced nodes business and only the initial phases of our supply chain reductions taking hold in the quarter. For operating expenses, we expect them to be between $58 million and $60 million, higher versus Q4, primarily due to the annual reset of payroll taxes and other compensation components. For the full year 24, we expect our expected tax rate to be between 14% to 16%, which does not assume any impact from potential tax legislative changes that may occur during the year.
Thank you Mike.
Our guidance range for the first quarter reflects continued strong demand for our dragonfly inspection systems to support increases in AI device production.
The way of comparison, our inspection business in the first quarter is expected to be three times larger than Q1 of last year before the generate of AI and L. L. M started to hit the market.
In contrast, advanced node spending is still at historical lows, but we do expect advanced node revenue to pick up a bit in the first quarter and gained some strength through the year.
Broadly speaking, we see advanced packaging, especially for the leading edge AI devices will be a healthy multiyear driver for our business.
<unk> by the recent comments from TSMC during their earnings call and which they are forecasting a 50% CAGR through 2027 for the AI application processors. In addition.
They also are forecasting greatly increase silicon content for networking and edge devices that will begin, adding neuro processing and phones and Pcs.
Michael P. Plisinski: We expect our diluted share count for Q1 to be approximately 49.8 million shares. Based on these assumptions, we anticipate our non-GAAP earnings for the first quarter to be between $1 per share and $1.20 per share. Looking forward to 2024, a critical focus area for us continues to be our targeted programs for operating improvements necessary to return to our operating model. And with that, I will turn it back to Mike for additional insights into Q1 in 2024. Mike?
Gartner provided a similar outlook with their expectation that AI semiconductor revenues forecast to be about $140 billion by 2027.
Subdued 27% CAGR.
We find exciting is that in addition to the growth rate for AI devices, we expect an increase in capital intensity of process control for those devices as manufacturers increase stacks of DRAM implement denser and smaller interconnects and include a greater number of chipsets per package.
Michael P. Plisinski: Thank you, Mark. Our guidance range for the first quarter reflects continued strong demand for our DragonFly inspection systems to support increases in AI device production. By way of comparison, our inspection business in the first quarter is expected to be three times larger than Q1 of last year, before generative AI and LLM started to hit the market. In contrast, advanced node spending is still at historical lows, but we do expect advanced node revenue to pick up a bit in the first quarter and gain some strength through the year.
The increase in complexity will require greater emphasis on the interconnect quality and the number of steps will increase with layers and complexity by continuing our partnerships with leaders in this market. We are developing the technologies they require to maintain that pace of innovation and meat production yield targets.
We are only in the dawn of the AI era and the outlook is very exciting we expect AI packaging to be a strong driver for 2024 with our backyard backlog already extending into the second half of the year. However, the timing and magnitude of the recovery in advance nodes remains uncertain, even as we see tool you'd.
Michael P. Plisinski: Broadly speaking, we see advanced packaging, especially for the leading-edge AI devices, will be a healthy multi-year driver for our business. We're encouraged by the recent comments from TSMC during their earnings call, in which they are forecasting a 50% CAGR through 2027 for AI application processors. In addition, they also are forecasting greatly increased silicon content for networking and edge devices that will begin adding neural processing in phones and PCs. Gartner provided a similar outlook with their expectation that AI semiconductor revenues are forecast to be about $140 billion by 2027, a more subdued 27% CAGR. What we find exciting is that, in addition to the growth rate for AI devices, we expect an increase in capital intensity of process control for those devices as manufacturers increase the stacks of DRAM, implement denser and smaller interconnects, and include a greater number of chiplets per package. The increase in complexity will require greater emphasis on interconnect quality, and the number of steps will increase with layers and complexity.
<unk>, improving and incremental technology buys increasing.
Based on the strength of our AI packaging business and gradual recovery in the advanced nodes, we project low double digit growth for the year.
With that Rachel will open the call to your questions Rachel.
Thank you.
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Again, Please press star one to ask a question.
Our first question comes from Doug <unk> with Jefferies.
Hi, Thanks for taking my question.
So question one is.
So last couple of quarters, you talked about.
Going for 30 million.
Packaging revenue.
Could you talk about.
The order momentum you are seeing is that kind of the trajectory that continually.
And your next question.
Going into the next two.
Yes.
So the backlog is there too.
So going into the next two quarters will be strong and that's reflected in the increase in our guidance.
Operator: By continuing our partnerships with leaders in this market, we're developing the technologies they require to maintain their pace of innovation and meet production yield targets. We're only in the dawn of the AI era, and the outlook is very exciting. We expect AI packaging to be a strong driver for 2024, with our backyard backlog already extending into the second half of the year. However, the timing and magnitude of the recovery in advanced nodes remains uncertain, even as we see tool utilization improving and incremental technology buys increasing. Based on the strength of our AI packaging business and gradual recovery in the advanced nodes, we project low double-digit growth for the year. With that, Rachel, we'll open the call to your questions. Rachel? You are dialed in via the telephone and would like to... Signal by pressing star one on your telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our users.
Second half as we mentioned we've got some backlog that extends all the way through the second half not at the same level, but it's still early and we'll see where we're at.
Customers start to increase as they come out of Chinese new year lunar new year.
Alright.
And for my second.
Ask a follow up can you talk about the front end metrology tool starting to gag.
Packaging application could you compare and contrast, what you.
Keith is there are four <unk>.
What got you excited thank.
Thank you.
It's different types of metrology and more complex so.
Some cases, we could be looking for.
Voids in the in metals or we're looking for metal thicknesses that.
The Dragon fly doesn't do as well as the eco product line does and Theres different applications for that whether you are looking at TSV or bump.
Vedvati Shrotri: Again, please press star one to ask. Our first question comes from Vedvati Shrotri with Jeff. Hi, thanks for taking my question. The 1st question is, you know, so in the last couple of quarters, you've talked about multiple orders. I think going to 30Million for your packaging revenue. Could you talk about...
The creation of the metal stacking of bumps and bond pads.
Things like that.
There are some other applications as well, but thats that gives you an idea.
Okay. That's helpful. Thank you.
Okay.
Your next question comes from the line of Craig Ellis with B Riley Securities.
Michael P. Plisinski: The order momentum you're seeing is that kind of trajectory that you expect that continues as we go into the next quarter. Going into the next two, uh, So the backlog is there to, yep, so going into the next two quarters will be strong, and that's reflected in the increase in our guidance. Second half, as we mentioned, we've got some backlog that extends all the way through the second half, not at the same level, but it's still early, and we'll see where our customers start to increase as they come out of the Chinese New Year, the Lunar New Year. And for my second question, if I may ask a follow-up, you talked about the front-end metrology tools starting to get used in packaging applications.
Yes, thanks for taking the question, Mike I wanted to start with.
Coupled with you one.
To see the strength in.
Advanced packaging and Dragon fly. The question is this given given how robustly that business has ramped up three <unk> year over year can you just talk about.
Some of the the manufacturing and fulfillment issues, how are you doing on capacity any constraints.
Tetra as you'd like to meet demand that exists through your.
First quarter Guide and then just the further momentum in the second quarter.
Michael P. Plisinski: Could you compare and contrast what kind of use cases there are for front-end tools versus, you know, what Dragonfly did on the inspection side? It's different types of metrologies and more complex, so in some cases, we could be looking for, You know, voids in metals, or we're looking for metal thicknesses that the Dragonfly doesn't do as well as the Echo product line does, and there are different applications for that, whether you're looking at TSVs or the creation of the metal stacking of bumps and bond pads, things like that.
Yeah. That's a good question and it's a good concerned, but I'm actually very impressed with our team they've done a great job working with our suppliers working internally moving resources from one factory to another for instance from California to Minnesota in order to ensure.
Sure that we're able to meet the ramp with the level of quality that customers expect from us and <unk> and even increase it again. So we talked about Q4, we're increasing the capacity again for the first half of the year as well.
So so far the team has done an outstanding job working through everything and we don't see.
Michael P. Plisinski: There are some other applications as well, but that gives you an idea. Okay, that's helpful. Thank you. Yeah, thanks for taking the question. Mike, I want to start with you on one, great to see the strength of Advanced Packaging and Dragonfly.
We're overcoming every hiccup that we see.
Yep got it.
Okay.
Here and then.
Currently you did mentioned that you expect some.
Pretty modest advance nodes pick up in the first half of the year and that to accelerate can you talk about which end use areas. So the first two.
Unidentified Speaker: The question is this: given how robustly that business has ramped up 3x year over year, can you talk about some of the manufacturing and fulfillment issues? How are you doing on capacity? Thank you, etc.
She increase tool.
Tool shipment activity and and how would you expect the other and juice areas to layer on as you got through the second half and into next year.
Yeah, I think it's mostly logic and then followed by DRAM.
Michael P. Plisinski: as you'd like to meet demand that exists through your first quarter guide and then just the further momentum in the, Yeah, that's a good question. And it's a good concern. But I'm actually very impressed with our team; they've done a great job working with our suppliers and working internally, moving resources from one factory to another, for instance, from California to Minnesota, in order to ensure that we're able to meet the ramp with the level of quality that customers expect from us and, and even increase it again. So we talked about Q4 and we're increasing the capacity again for the first half of the year as well. So, so far, the team's done an outstanding job working through everything, and we don't see, you know, we're overcoming every hiccup that we see.
And again these are <unk>.
Incremental improvements.
I think.
There's still a lot as I mentioned still a lot of uncertainty is when will see rail volumes picking up.
Maybe in the second half or maybe into early next year.
We're definitely seeing some incremental improvements we've even seen some incremental improvements in NAND, but.
That'll be a little bit further out.
Sure and then if I could just sneak one in for Mark Mark.
Nice to hear that the efficiency enhancements are benefiting things like cash generation with record operating cash flow for question as an impact to gross margin. You indicated you expect to be back in that target model by the end of the year, what's the what's the contour for getting there are some fairly linear.
Michael P. Plisinski: Yep, got it, okay. And then secondly, you did mention that you expect some pretty modest advanced node growth to pick up in the first half of the year and that to accelerate. Can you talk about which end use areas are the first to see increased tool shipment activity? And how would you expect the other end use areas to layer on as you go through the second half and into next year? Yeah, I think it's mostly logic, followed by DRAM.
From here or is it really more backend loaded with a little help from advanced nodes. Thank you.
Yeah, Craig No certainly as we look at the model for the year I mean, our goal is certainly to show quarter over quarter improvement in gross margin.
It really comes down to just executing similar to what we did with operating expenses and working capital management, just executing what we have in place right now for supplier management price commodity pricing and executing the supply chain initiatives that we have.
Michael P. Plisinski: And again, these are, you know, incremental improvements. I think, as I mentioned, there's still a lot of uncertainty about when we'll see real volumes picking up, maybe in the second half or maybe into early next year. But we're definitely seeing some incremental improvements. We've even seen some incremental improvements in NAND, but that'll be a little bit further out. Sure. And then I could just sneak one in for Mark.
It does certainly help to have advanced nodes back in the area of what it was previously I mean that is our historically higher margin business.
But again, there's a lot of things that are in our control.
Unidentified Speaker: It's nice to hear that the efficiency enhancements are benefiting things like cash generation with record operating cash flow. The question is about the impact of gross margin. You indicated you expect to be back in the target model by the end of the year. What's the, what's the contour for getting there?
From a cost perspective that we still need to need to need to get moving in the year to continue to show that improvement.
Got it thanks guys.
Okay.
Your next question comes from the line of Brian Chin with Stifel.
Hi, there good.
Good afternoon, and thanks for letting us ask a few questions.
Maybe.
Mike.
Mark S. Miller: Is it fairly linear from here, or is it really more back-end heavy with a little help from advanced nodes? Thank you. Yeah, Craig, no, certainly as we look at the model for the year, I mean, our goal is certainly to show, you know, quarter over quarter improvement in gross margin. It really comes down to just executing, similar to what we did with operating expenses and working capital management, just executing what we have in place right now for supplier management, price, and commodity pricing, and executing, you know, the supply chain initiatives that we have.
Or have you managed to keep lead times on the dragonfly given given the demand and your ability to stay in front of it and.
More broadly we've been talking to customers what are your discussions around second half capacity needs for AI packaging and shouldn't we really think about second half expansion being a function.
With expectations for growth in the market in 2025.
That kind of the right way to think about that.
Yes, Brian so from a lead time perspective of course.
And the packaging World for Forever, we had very short visibility and we would always build to a forecast or projection. So lead times are somewhat misleading, but I would say round.
Unidentified Speaker: It does certainly help to have advanced nodes back in the area of where they were previously. I mean, that is our historically higher-margin business. But again, there's a lot of things in our control from a cost perspective that we still need to get moving in the year to continue to show that improvement. Got it. Thanks, guys. Hi there. Good afternoon.
Two quarters sort of lead times right.
Right now given the high demand for the Dragon fly.
The second half expansion is a is a question right now.
There's more certainty and a 20% 25 another round of expansion.
Unidentified Speaker: Thanks for letting us ask a few questions. Um, maybe Mike, how have you managed to keep lead times on the dragonfly given the demand and your ability to stay in front of it? More broadly, when talking to customers, what are your discussions around second half capacity needs for AI packaging? And shouldn't we really think about second half expansion being a function?
Our customers are our.
Looking at their order books, and influx and seeing if the capacity they have that they are bringing online now and the.
In the last three quarters, Q4, Q1, Q2 will be enough to get them through the second half or if they need to add additional capacity.
Okay.
Okay.
We've been given more more stronger indication that 2025 would be a year that they need to add.
Michael P. Plisinski: of expectations for growth in the AI market in 2025. Is that kind of the right way to think about that? Yeah, Brian.
Okay got it but I guess looking at your <unk> guide sort of your commentary about the full year.
It looks like you still have even though you have a harder compare in probably in a lot of peers with maybe a few companies guiding for growth in <unk>.
Michael P. Plisinski: So, from a lead time perspective, of course... In the packaging world forever, we had very short visibility, and we would always build to a forecast or projection. So lead time is somewhat misleading, but I would say around two quarters sort of lead times right now, given the high demand for the DragonFly. The second half expansion is a question right now. I think there's more certainty in 2025, another round of expansion. Our customers are looking at their order books and influx and seeing if the capacity they have that they're bringing online now in the, you know, the last three quarters, Q4, Q1, Q2, will be enough to get them through the second half or if they need to add additional capacity.
First half versus second half last year.
It looks like based on overall improvement in the business you see some pickup in the second half, although maybe you are kind of tempering it at the moment.
I'm tempering it at the moment.
Okay sorry.
Fair enough and then maybe.
Mark question additional follow up on the gross margins the.
Obviously advanced nodes is very cyclically depressed in your.
You had calling for that big of a pickup in that business at the moment. This year, but you do expect to be in the model.
The target model so it kind of suggests that win.
No.
Any sort of start to pick up not even close to sort of prior peak levels, but.
Some take up in the advanced nodes, you should be really comfortable within that target model, probably even exceeding it.
Okay.
Yeah, absolutely I mean that when we get those.
Numbers backup certainly there are.
Michael P. Plisinski: Okay, but we've been given more stronger indications that 2025 would be a year that they need to add. Okay, got it. But I guess looking at your 1Q guide, sort of your commentary about the full year, it looks like you still have, even though you have a harder comparison probably than a lot of peers with, you know, maybe one of the few companies guiding for growth in the first half versus the second half last year, it looks like, based on overall improvement in the business, you see some pickup in the second half, although maybe you're kind of tempering it I'm tempering it at the moment.
Things, we're doing now from a cost and operational standpoint.
Kind of accelerate that.
Yes, and how many points of drag on gross margins as the depressed revenue level and advanced nodes right now.
Yes, I wouldn't comment specifically on that I would just say, we've always stated that advanced nodes was well above company average and.
And the.
The inspection business was at company average.
Okay. Thank you.
Okay.
Your next question comes from the line of Charles <unk> with Needham.
Hi, Good afternoon. The first question, Michael I think one quarter ago, you were you expecting the AI chip packaging related revenue to be up by.
Unidentified Speaker: OK. Fair enough, and then maybe. Mark, a question, additional follow-up on the gross margins. Obviously, advanced nodes are very cyclically depressed, and you're not calling for that big of a pickup in that business at the moment this year. But you do expect to be in the model, back in the target model.
50% in Q4.
Was the actual number it has given you did beat your guidance by roughly 10 million probably is a little bit over 50 would be my guess.
Mark S. Miller: So it kind of suggests that when you just get any sort of initial pickup, not even close to sort of prior peak levels but some pickup in the advanced nodes, you should be really comfortable within that target model, probably even exceeding that. Yeah, absolutely. I mean, when we get those numbers back up, certainly there are things we're doing now from a cost and operational standpoint that are going to accelerate. Yeah, and how many points of drag on gross margins is the depressed revenue level in advance notes right now? Yeah, I wouldn't comment specifically on that.
What was the actual number.
Okay.
Yeah, that's a good question Brian.
Sorry Charles.
But I don't have that number in front of me. However, nearly all of the upside we saw in the quarter if not all of it was tied to the to the AI packaging. So.
Uh huh.
That basically that $10 million increase was primarily from that.
Got it.
The second question I think it's interesting you mentioned that aspect I believe.
<unk> adopted if I heard you correctly.
For AI packaging applications.
But when I look at the aspect that you it seems like a top tier OCD systems in our portfolio and Thats interesting thats being adopted.
Mark S. Miller: I would just say, you know, we've always stated that Advanced Nodes was well above company average and, you know, the inspection business was at company average. Okay, thank you. Hi, good afternoon.
Packaging, we're about a little bit of Hollywood exactly four.
Some unique capability remember was designed to to measure the channel holes for three D. NAND, So big Big high deep aspect ratio.
Unidentified Speaker: The first question, Mike, I think one quarter ago you were expecting the AI chip packaging related to revenue to be up by, Uh, 50% in Q4. What was the actual number? Because given you did beat your guidance by roughly 10M, probably it's a little bit over 50%, my guess, but I really want to hear what was the actual number. Yeah, that's a good question, Brian. Sorry, Charles.
Metrology applications for <unk>, NAND and you could imagine that there is some applications similar to that in advanced packaging that the product is being applied to.
<unk> for instance, and some other other things that I am not sure how much is public from our customers.
Unidentified Speaker: But I don't have that number in front of me. However, nearly all of the upside we saw in the quarter, if not all of it, was tied to the AI packaging. So, that basically that $10 million increase is primarily from that. Got it. The second question, I think it's interesting you mentioned that aspect.
Rob is that more of our HCM application now or more on the logic of packaging side.
Yeah, No I think it's more on the HBM applications right now.
Got it got it.
We're really thanks for the color you provided about.
The trend in this AI side of the business I wanted to ask you what's the status for the <unk> in terms of orders I think.
Michael P. Plisinski: I believe I'm being adopted if I heard you correctly for an AI packaging application. When I look at the aspects, it seems like a top-tier OCD system in your portfolio, and it's interesting that it's being adopted for packaging. Can you provide a little bit of color?
When you started to seeing all of these orders are you starting to see one customer primarily the HBM customer.
Michael P. Plisinski: What exactly is that? Well, it has some unique capabilities. Remember, it was designed to measure the channel holes for 3D NAND, so big, big, high, deep aspect ratio metrology applications for 3D NAND.
Last quarter, you talked about a second HBM custom becomes a graph.
The third was felt like it was still a little bit Neil did was not the same.
Like a one quarter later now is the status and when do you think.
Michael P. Plisinski: And you can imagine that there are some applications similar to that in advanced packaging that the product is being applied to. TSVs, for instance, and some other things that I'm not sure how much is public from our customers. Is it more the HBM application or more on the logic? Yeah, no, I think it's more the HBM applications right now. Yeah. Yeah, I got it. So lastly, really, thanks for the color you provided.
The third guy is going to pick up orders.
We think the third guys picking up so not saying who is who but in the shell game of 123. We think the third is also picking up now and investing and they have some.
<unk>.
Unique technology that they think is going to help.
Michael P. Plisinski: I want to ask you what the status is on HBM in terms of orders. I think when you started seeing all these orders, you started to see them from one customer primarily, right? The HBM customer, and then last quarter, you're talking about a second HBM customer becoming a graduate student. The third one. It felt like it was still a little bit muted.
Give them some market share advantages.
Thanks, Mike.
Youre welcome.
Your next question comes from the line of David Duley with Steelhead Securities.
Okay.
Okay.
Hear you. Please check your mute, yes, im sorry, Im on mute, yes, I'm on mute I'm sorry.
My first question is on gross margins.
Just wanted to understand it sounds like gross margins will improve without volume or mix.
Unidentified Speaker: Was that the same like a one quarter later? Now, what is the status? I'm going to go ahead and close out the meeting. Thank you. Thank you. The third guy is going to pick up.
Because of cost reductions and what <unk> been focusing in on is that accurate.
Yes.
Yes, great.
As far as as far as the.
Michael P. Plisinski: We think the third guy is picking up, so. Not saying who's who, but in the shell game of 1, 2, 3, we think the third is also picking up now and investing, and they have some, you know, unique technology that they think is going to help, you know, give them some market share advantage. Thank you so much. Thank you. Well, yeah, I'm sorry. I'm on mute. Yeah, I'm on mut
Hi inspection revenue could you help us understand whatever the growth rate you had last year was how much do you think this is driven by units.
Or how much do you think it's driven by much greater levels of intensity.
And then as a follow up to that as far as onto goes.
Operator: I'm sorry. My first question is about Grossmar. So I understand it sounds like gross margins will improve without volume because of cost reduction. What you've been focusing on is that act. Yes, yes, Great. David, as far as, as far as the AI is concerned. Please help us understand whatever the growth rate you had. You know, how much do you think this is driven by unit? or how much do you think it's driven by a much greater level?
Does your business have a.
Which is a greater piece of this.
Our inspection business is it high bandwidth memory or the GPU inspection. Thank you.
Thanks, Dave.
So.
I mean, a year ago. It wasn't really on the on the radar. So I would say and you know the volumes of the pure number of wafers tied to AI is not that high. So this is really about capital intensity. This is really about the complexity of these advanced architectures and how.
Unidentified Speaker: And then as a follow-up to that, Thank you. Does your business have a, Which is a greater, Uh, inspection businesses at High Bandwidth Memory or the GPU inspections?
Much.
Precise metrology and inspection is required to yield these devices.
Unidentified Speaker: Thanks, Dave. So, I mean, a year ago, A.I.
I think thats always been something we've talked about for years that on these in these really advanced applications, our dragonfly tends to to shine.
Michael P. Plisinski: wasn't really on the radar. So I would say, and you know, the volumes or the pure number of wafers tied to A.I. is not that high. So this is really about capital intensity. This is really about the complexity of these advanced architectures and how much. Precise metrology and inspection is required to yield these devices.
The Swiss army knife containing both inspection metrology unique capabilities and clarifying that our customers have driven us to ever greater levels of performance.
As far as the mix goes.
Michael P. Plisinski: I think that's always been something we've talked about for years, that in these really advanced applications, our dragonfly tends to shine. The Swiss Army knife containing both inspection, metrology, unique capabilities, and a clear find that our customers have driven us to ever greater levels of performance. As far as the mix goes, I think the capital intensity is higher for Logic, but there are three HBM players.
I think the capital intensity.
As well as higher for logic, but there are three HBM players. So at least right now what we've said is our backlog was roughly half and half.
<unk> and logic.
Okay. Thank you.
Okay.
Your next question comes from the line of Mark Miller with Benchmark company.
Thank you for the question you mentioned, good all round youre getting some traction there.
I'm just wondering when does that fully ramp isn't it later this year 2025 and also.
Michael P. Plisinski: So at least right now, what we've said is our backlog was roughly half and half, HBM and Logic. OK, thank you. Thank you. Thank you. Thank you. Mark.
About the new fab the funded by U S.
Europe, and Japan for new Fabs internal chip production.
When does that start to really become full bloom.
Unidentified Speaker: Thank you. Thank you. You mentioned the kiddo around you.
Yeah, so as far as when gate all around really ramps that that's the million dollar question. We all like to know I don't have any.
Unidentified Speaker: The Ontario Media Group, 2013. I'm just wondering when that fully ramps up, is it later this year? New Fab, the funding by U.S. government. When does that start?
Great clarity there.
You know right now.
Unidentified Speaker: Yeah, so as far as when gait all around really ramps up, that's the million dollar question we all like to know. I don't have any great clarity there. You know, right now, we bet on early 2025.
Bet on in early 2025.
There are some signs I read recently.
And two.
And certainly they are seeing stronger demand, so maybe that pulls in but we're not seeing anything yet definitive one way or another where that ends up ramping we just know our job right now is to make sure we have as strong a position and gate all around as possible. So when it does ramp we can benefit the most we possibly can.
Michael P. Plisinski: There are some signs I read recently, you know, and certainly they're seeing stronger demand, so maybe that pulls in. But we're not seeing anything yet definitive one way or another where that ends up ramping up. We just know our job right now is to make sure we have as strong a position in GATE all around as possible, so when it does ramp, we can benefit as much as we possibly can. As far as the fabs around the world that are being incented, whether it's Europe, Japan, the U.S., we've already taken some orders for. At least, I don't know, I don't remember from memory about Thank you for joining us. We hope you enjoy the rest of your day. And we'll see you next time. I'd like to ask an audience question. To cancel this request, please press...
As far as the Fabs around the world that are being incentive whether it's Europe, Japan U S. We've already taking some some orders.
Sure.
At least I don't know I don't know on memory about the European but for sure in Japan, and then the U S. We've already taken orders, but these are very small in those fabs Arne.
As you know ramping.
Just yet.
Thank you.
Okay.
Once again, if you would like to asking a question. Please press star one to cancel this request. Please press star two.
Operator: Your next question comes from the line of Vedvati Shruthi, with, Hi, thanks for taking my question again. So, you provided some color on the power specialty markets, which are growing 40% this year. Could you talk about what you're seeing into 2024, does this continue to be strong, or are you starting to see weakness there? No, we continue to see very strong specialty devices and packaging going into 2024. Oh, I did. Well over. I just meant the power piece of it. Does the power piece of it grow as well?
Your next question comes from the line of <unk> <unk> with Jefferies.
Hi, Thanks for taking my question.
So you provided some color on the power.
The specialty markets, which are growing 40% over here could you talk about what you're seeing.
Into 2020 or does it continue to be strong or are you starting to see weakness there.
No we continue to see very strong specialty device and packaging.
Going into 2024 so.
Oh well over.
I just meant the power.
The power grid.
Unidentified Speaker: Ah, power. Sorry. No, we, we think it could grow. We're more comfortable with a kind of flat at this record level.
<unk>.
Our.
Sorry no.
We think it could grow more.
More comfortable kind of flat at this record level.
Michael P. Plisinski: And, and there are opportunities for it to grow. We're working with customers on the timing of their expansions. One of the things that we benefit from being process control is that our value proposition isn't just tied to expansions of these with these customers; it's tied to output and the quality of the output. So some of these fabs still have a lot of opportunity to improve yields and therefore improve output without huge capital expense.
And there's opportunities to grow where were working with customers and certain timing of of their expansions one of the things that we benefit from being process control is.
Our value proposition isn't just tied to expansions of these with these customers, it's tied to output and the quality of the output. So some of these fabs still have a lot of opportunity to improve.
Yields and therefore improve output without huge capital expense, so a lot of customers.
Michael P. Plisinski: So a lot of customers we're talking to are still, we're still focusing on that value proposition and seeing some traction there. And if I may double-click on that. So, as far as I understand it, most of your Chinese revenues really come from power power revenue. So is that, could you talk about the non-China versus China spend and how that's looking? Is it different from each other, or are the trends different from each other in the two markets? No, I don't believe they're different.
Talking to are still we're still focusing on that value proposition and seeing some traction there.
Okay.
If I may double click on that.
As far as I understood like most of your China revenue is really come from.
The power.
So if I could.
Could you talk about non China, China's Zhang and how that's looking at it.
<unk> alright.
I think different from each other in metro markets.
No I don't believe Theyre difference, we have activity in Japan, Europe U S as well as China.
Michael P. Plisinski: We have activity in Japan, Europe, the U.S., as well as China, so we're including them in discussions into 2024, so I wouldn't say there's any difference from that perspective. Okay. Thank you. Yeah, a couple more questions. Mike, could you talk a little bit more about the LaSalka?
So including into in discussions into 2024, so so I wouldn't say, there's any any difference from that perspective.
Okay.
Okay.
Thank you.
Our next question.
Your next question comes from the line of David Duley with Steelhead Securities.
Yeah, a couple of questions from me, Mike could you talk a little bit more about the lithography tool deliveries during the quarter I think I missed some of the detail I think you said there was three systems to customers I didn't catch which applications.
Unidentified Speaker: I think I missed some of the detail. I think you said there were three systems, two customers. I didn't catch which application. I was wondering if you could also elaborate, are these new customers, or are they current customers that are bringing more tools on? Hmmm, good questions. You pretty much got it. There are two applications: mobile and high-performance compute.
Was wondering if you could also elaborate are these new customers are they current customers that are bringing more tools online.
Good question.
Yes.
You pretty much got it there are two applications mobile and high performance compute so those are the primary applications in there to existing customers so buying.
Michael P. Plisinski: So those are the primary applications, and there are two existing customers. So, they are buying repeat business. So it's mostly repeat orders from existing customers. And Would you expect to see this customer base continue to expand or as far as growth in that? In 24, if it does grow, is it going to come from the current customers or add new customers or how should it? Well, we already have a new customer that we've talked about for glass, so that's a new customer, and we mentioned we'll be shipping that tool sometime in the summer. Ray. Ray. Ray. But the bulk of 2024 will be repeat business, and then I think in 2025, we'll see more new customers as well as some repeat business as well. It's that glass substrate customer for Onto Innovation, Inc., I believe so. Okay, the final question from me is. I'm sorry if you are, talked about. I think 3X last year. Thank you. What would you guess the growth rate would be?
Repeat business, so as repeat orders from existing customers.
Yeah.
Okay.
And.
Would you expect to see this customer base continues to expand or or as far as the growth in that segment.
In 24, if it does grow is it going to come from current customers for adding new customers or how should we think about that.
Well, we already have a new customer that we've talked about for glass. So that is a new customer we mentioned, we'll be shipping that tool sometime in the summer.
The.
But the bulk of the 2024 will be a repeat business and then I think in 2025, we will see more of our new customers as well as some repeat business as well.
Is that glass substrate customer for.
Logic application.
I believe so.
Okay final question from me is.
I'm sorry, if you already mentioned it you talked about how youre packaging revenue has grown dramatically I think <unk> last year.
What are you.
What would you guess to the growth rate would be.
Unidentified Speaker: for that segment. Uh... I don't know specifically because, with that comment, I was speaking about DragonFly and DragonFly systems in particular.
For that segment of your business in 2024.
Okay.
Okay.
Uh huh.
I don't know specifically because with that comment I was speaking about dragonfly.
And dragonfly systems in particular.
Michael P. Plisinski: It's continuing to grow. That much I know. How much I don't have in front of me. The whole segment, specialty devices and advanced packaging, will be pretty high, double-digit.
It's continuing to grow that much I know how much I don't have in front of me.
The whole segments specialty devices and advanced packaging will be.
Pretty high double digits.
Michael P. Plisinski: Okay, thank you. Thank you. Thank you. Thank you.
Okay. Thank you.
Well.
This concludes today's question and answer session I will turn the call back to Mike Shaffer for any additional or closing remarks.
Michael Sheaffer Senior Director: I will turn the call back to Mike Sheehan. Thanks again to everyone who joined us on the call today. A replay of the call will be available on our website at approximately 7.30 Eastern time this evening.
Thanks, again to everyone, who joined us on the call today, a replay of the call will be available on our website at approximately 730 Eastern time. This evening I would like to thank you for your continued interest in onto innovation. Rachel. Please conclude the call. Thank you.
Operator: I would like to thank you for your continued interest in Onto Innovation. Rachel, please conclude the call. Thank you. This concludes today's call. Thank you for your participation. And you may now disconnect.
This concludes today's call.
Thank you for your participation and you may now disconnect.
Operator: © The Online Advertising Agency of the USA, © The Online Edition of Onto Innovation, LLC, www.ontioninnovation.com www.ontario.ca, © The Online Edition of Onto Innovation, LLC, www.ontioninnovation.com, © The Online Edition of Onto Innovation, LLC.. .. © The Online Edition of Onto Innovation, LLC. © The Online Advertising Agency of the U.S. Department of Education, www.ontioninnovation.com, Thanks for watching. See you next time. © The Online Edition of Onto Innovation, LLC. TORONTO 2015 PAN AM, PARAPAN AM GAMES, www.ontioninnovation.com © The Online Advertising Agency of the U.S. Department of Education, © The Ontario Media Group www.ontioninnovation.com, © The Online Edition of Onto Innovation, LLC. ®MD-BO¯
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Okay.
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