Q2 2024 Onto Innovation Inc Earnings Call

Speaker Change: Please stand by.

Speaker Change: Good day and welcome to the Onto Innovation second quarter earnings release conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Sidney Ho. Please go ahead.

Operator: Thank you, Justin, and good afternoon everyone. Onto Innovation issued its 2024 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 Plisinski, Chief Executive Officer, and Mark Slicer, Chief Financial Officer.

Sidney Ho: Thank you, Justin, and good afternoon, everyone. Onto Innovation issued its 2024 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.

Speaker Change: Joining us on the call today are Michael Plisinski, Chief Executive Officer, and Mark Slicer, Chief Financial Officer.

Operator: I'd like to remind you that the statements made by management on this call will contain forward-looking statements, within the meaning of the Federal Security Act. Those statements are subject to a range of changes, risks, and uncertainties that can cause the actual results of the barrier material to differ materially. For more information regarding the risk factors that may 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.

Speaker Change: I'd like to remind you that the statements made by management on this call will contain forward-looking statements within the meaning of the federal securities laws.

Speaker Change: Those statements are subject to a range of changes, risks, and uncertainties that can cause actual results to vary materially.

Speaker Change: For more information regarding the risk factors that may 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.

Operator: Today's discussions of our financial results will be presented on a non-gap financial basis unless other is specified. As a reminder, a detailed reconciliation between gap and non-gap results can be found in today's earnings release. Now, let me turn the call over to LCO Mike Blisinski.

Speaker Change: Today's discussions 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 release. Now let me turn the call over to our CEO , Mike Plisinski. Mike?

Michael Plisinski: Thank you, Sydney. Good afternoon, everyone, and thank you for joining our earnings call this afternoon. Our second quarter revenue exceeded the high end of our guidance range, driven by better than expected demand for DragonFly systems, supporting advanced packaging for AI devices, and Atlas and Iris Systems for gate all-around investments in the advanced nodes. Financially, we're pleased to see progress from our inventory management efforts resulting in a quarterly record generating $65 million in cash from operations. Margins also improved from the first quarter, and we expect them to improve again in the third quarter, which Mark will address shortly.

Mike Plisinski: Thank you, Sydney. Good afternoon, everyone, and thank you for joining our earnings call this afternoon. Our second quarter revenue exceeded the high end of our guidance range, driven by better than expected demand of DragonFly systems, supporting advanced packaging for AI devices.

Mike Plisinski: and Atlas and Iris systems for gate all-around investments in the advanced nodes. Financially, we are pleased to see progress from our inventory management efforts resulting in a quarterly record generating $65 million in cash from operations.

Mike Plisinski: Margins also improved from the first quarter, and we expect it to improve again in the third quarter, which Mark will address shortly.

Michael Plisinski: We will now review the second quarter highlights, starting with our specialty device and advanced packaging markets, where we achieved a fourth consecutive quarterly revenue record driven by AI packaging, which accounted for over half of the revenue in these markets. Advanced packaging has proven to be a key enabler for this new era of AI, and NVIDIA recently commented that it expects AI demand to outstrip supply well into next year, and we see the market attracting additional suppliers, each bringing unique requirements for wafers, substrates, as well as interconnect sizes and densities.

Mark Slicer: We will now review the second quarter highlights, starting with our specialty device and advanced packaging markets, where we achieved a fourth consecutive quarterly revenue record driven by AI packaging, which accounted for over half of the revenue in these markets.

Speaker Change: Advanced packaging has proven to be a key enabler for this new era of AI. NVIDIA recently commented that it expects AI demand to outstrip supply well into next year, and we see the market attracting additional suppliers.

Mark Slicer: Each bringing unique requirements for wafer substrates as well as interconnect sizes and densities.

Michael Plisinski: By broadly addressing these needs, the highly versatile DragonFly platform achieved another revenue record in the second quarter. In fact, based on our current visibility, we project our inspection business will grow by over 70% this year. And we continue to expand our capabilities.

Speaker Change: By broadly addressing these needs, the highly versatile DragonFly platform achieved another revenue record in the second quarter. In fact, based on our current visibility, we project our inspection business will grow by over 70% this year.

Michael Plisinski: Last quarter, we released a new sensor to detect yield-critical subsurface defects in ultra-thin wafers. And based on market response, we already expect over 80 systems to be delivered with this capability through the end of next year. More recently, we announced the new 3D bumpatology sensor to address the need for bumpite measurements of denser and smaller interconnects used in future high bandwidth memory and hybrid bonding applications, where bumpites and pitch will be less some half the size they are today.

Mark Slicer: And we continue to expand our capabilities. Last quarter, we released a new sensor to detect yield-critical subsurface defects in ultra-thin wafers. And based on market response, we already expect over 80 systems to be delivered with this capability through the end of next year.

Mark Slicer: More recently, we announced a new 3D bump metrology sensor to address the need for bump height measurements of denser and smaller interconnects used in future high bandwidth memory and hybrid bonding applications where bump heights and pitch will be less than half the size they are today.

Michael Plisinski: The new sensor uses proprietary technology, which we believe allows us to meet these new challenges with higher throughputs than alternative. Although these are still preliminary, initial customer feedback has been positive, and we expect to ship several systems for production of valuations over the next three months. In addition to new wafer-level packaging technologies, we see growing interest in panel packaging technologies to support chiplet architectures and larger package sizes. We engaged early with leaders in this market, and to date, we've shipped over 30 panel lithography systems to customers around the globe.

Mark Slicer: Our new sensor uses proprietary technology, which we believe allows us to meet these new challenges at higher throughputs than alternatives. Though still preliminary, initial customer feedback has been positive, and we expect to ship several systems for production evaluations over the next three months.

Mark Slicer: In addition to new wafer-level packaging technologies, we see growing interest in panel packaging technologies to support chiplet architectures and larger package sizes.

Mark Slicer: We engaged early with leaders in this market and to date we've shipped over 30 panel lithography systems to customers around the globe.

Michael Plisinski: In the quarter, we added a new customer to this list when we shipped our first fully automated Jetstep X500 to support glass and substrate applications on a single tool. We believe the stability of glass will allow for smaller interconnects across larger package sizes, which is critical to many of our customers' packaging roadmaps. Finally, revenue from power customers grew significantly, nearly achieving a quarterly record set last year. We continue to expect demand for process control to remain strong throughout the rest of this year for the power semiconductor market. Now, turning to advanced notes, spending is picking up, and we are seeing growth continuing through the second half of 2024 and into the next year.

Mark Slicer: In the quarter, we added a new customer to this list when we shipped our first fully automated JetStep X500 to support glass and substrate applications on a single tool.

Mark Slicer: We believe the stability of glass will allow for smaller interconnects across larger package sizes, which is critical to many of our customers' packaging roadmaps.

Mark Slicer: Finally, revenue from power customers grew significantly, nearly achieving a quarterly record set last year. We continue to expect demand for process control to remain strong throughout the rest of this year for the power semiconductor market.

Mark Slicer: Now turning to advanced nodes, spending is picking up and we are seeing growth continuing through the second half of 2024 and into the next year. In the quarter, orders from logic customers represented nearly half of the revenue from advanced node customers.

Mark Slicer: For gait all-around applications, we are seeing an increase in adoption of our Iris Films metrology in addition to our leading ATLAS OCD metrology.

Mark Slicer: Rounding out our optical metrology suite of Atlas, Iris, and Aspect is our integrated platform Impulse.

Mark Slicer: In the second quarter, we closed volume agreements from two of the top four manufacturers, which we believe will represent greater than 60% combined share at these accounts.

Mark Slicer: We've also successfully qualified multiple systems and logic for gate all-around applications below 2 nanometer where requirements for speed and stability are increasing. Now I'll turn the call over to Mark to review our financial highlights and provide third quarter guidance. Thank you.

Mark Slicer: Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we exceeded second quarter revenue and EPS guidance ranges while generating record operating cash flow of $65 million. Operating cash flow yield increased two percentage points to 27% of revenues, representing a doubling of operating cash during the same period last year. Second quarter revenue of 242 million was up 6% versus the first quarter and up 27% versus the prior year. The second quarter EPS increased 12% sequentially to $1.32, and it was up 67% versus the prior year.

Mark Slicer: Thanks, Mike, and good afternoon, everyone.

Mark Slicer: As Mike highlighted, we exceeded second quarter revenue and EPS guidance ranges while generating record operating cash flow of $65 million. Operating cash flow yield increased two percentage points to 27% of revenues, representing a doubling of operating cash during the same period last year.

Speaker Change: Second quarter revenue of $242 million was up 6% versus the first quarter and up 27% versus the prior year.

Speaker Change: Second quarter EPS increased 12% sequentially to $1.32 and up 67% versus the prior year.

Speaker Change: Both revenue and EPS exceeded our guidance ranges due to the better than expected demand for advanced packaging for AI devices, gate all-around investments, and advanced nodes and stronger software and services within the quarter.

Speaker Change: Looking at the quarterly revenue by markets, our biggest market remains specialty device and advanced packaging, which grew 3% sequentially to a record quarterly revenue of $164 million and represents 68% of our revenue.

Speaker Change: Our biggest sequential increase was Advanced Nodes, which had revenue of $32 million, increased 21% over Q1, and represents 13% of revenue.

Speaker Change: Software and Services with revenue of 46 million increased 6% over Q1 representing 19% of revenue.

Mark Slicer: We achieved 53% gross margin for the second quarter, in line with the midpoint of our guidance range of 52 to 54%, driving more than a 100 basis point improvement over the first quarter. Second quarter operating expenses were $64 million, just at the high end of our guidance range. We continue to make additional investments in R&D this quarter, extending our product capabilities and technology differentiation to expand our server markets for 3D metrology, as well as future hybrid bonding metrology and inspection.

Speaker Change: We achieved 53% gross margin for the second quarter in line with the midpoint of our guidance range of 52 to 54 percent, driving more than a hundred basis point improvement over the first quarter.

Speaker Change: 2nd quarter operating expenses were 64 million, just at the high end of our guidance range. We continue to make additional investments in R&D within the quarter.

Speaker Change: extending our product capabilities and technology differentiation to expand our server markets for 3D metrology as well as future hybrid bonding metrology and inspection.

Mark Slicer: Our operating income of $65 million was 27% of revenue for the second quarter compared to 25% for the first quarter, validating our ability to execute a leveraged operating model. Our net income performance, also 27% of revenue, was supported from favorable investment income resulting from our increased cash balance. Now moving to the balance sheet, we ended the second quarter with cash and short-term investments of 786 million, achieving operating cash flow of 65 million and converting 100% of our operating income into cash.

Speaker Change: Our operating income of $65 million was 27% of revenue for the second quarter, compared to 25% for the first quarter, validating our ability to execute a leveraged operating model.

Speaker Change: Our net income performance, also 27% of revenue, was supported from favorable investment income resulting from our increased cash balance.

Speaker Change: Now, moving to the balance sheet, we ended the second quarter with cash and short-term investments of $786 million, achieving operating cash flow of $65 million and converting 100% of our operating income into cash.

Mark Slicer: Inventory ended the quarter at $320 million, down $10 million versus Q1. The team made great progress optimizing our inventory levels, even with the drag-and-fly revenue growth and the expected increase in our advanced nodes business in the second half. We expect further inventory reduction of 10 to 15 million for the third quarter. We plan to be below 300 million as we exit 2024, which will be a $50 million reduction from our 2023 inventory level.

Speaker Change: Inventory ended the quarter at $320 million, down $10 million versus Q1. The team made great progress optimizing our inventory levels, even with a drag-and-fly revenue growth and the expected increase in our advanced nodes business in the second half.

Speaker Change: We expect further inventory reduction of 10 to 15 million for the third quarter. We plan to be below 300 million as we exit 2024, which will be a $50 million reduction from our 2023 inventory levels.

Mark Slicer: Now turning to our outlook for the third quarter. We currently expect revenue for the third quarter to be between $245 million and $255 million as HBM chip leaders continue to invest in advanced packaging capacity and new capabilities, as Mike discussed. We expect gross margins will be 53% to 55%, reflecting the improvements in manufacturing and supply chain initiatives discussed in prior quarters. For operating expenses, we expect to be between 64 to 66 million as we make additional investments in our R&D programs tied to customer roadmaps.

Speaker Change: Now turning to our outlook for the third quarter.

Mike Plisinski: We currently expect a revenue for the third quarter to be between 245 and 255 million as HBM's chip leaders continue investing in advanced packaging capacity and new capabilities as Mike discussed.

Speaker Change: We expect gross margins will be 53 to 55 percent, reflecting the improvements in manufacturing and supply chain initiatives discussed in prior quarters.

Speaker Change: For operating expenses we expect to be between 64 to 66 million as we make additional investments in our R&D programs tied to customer road maps.

Mark Slicer: For the third quarter, we expect our affected tax rate to be between 15 to 16% and 13 to 14% for the full year. We expect our Duley to check out for the third quarter to be approximately 49.7 million shares. Based upon these assumptions, we anticipate our non-gap earnings for the second quarter to be between $1.25 to $1.35 per share. Our focus for the second half of 24 remains and executing on our targeted programs for further quarter over quarter gross margin and operating margin improvements and continuing the progress made in the first half of the year.

Speaker Change: For the third quarter, we expect our effective tax rate to be between 15 to 16% and 13 to 14% for the full year. We expect our diluted share count for the third quarter to be approximately 49.7 million shares.

Speaker Change: Based upon these assumptions, we anticipate our non-GAAP earnings for the second quarter to be between $1.25 to $1.35 per share.

Speaker Change: Our focus for the second half of 24 remains on executing on our targeted programs for

Speaker Change: Further, quarter-over-quarter gross margin and operating margin improvements and continuing the progress made in the first half of the year.

Speaker Change: In addition, further growth of the advanced nodes business driven by increasing orders for memory and gate all-around logic should improve our margin profiles as we exit 2024.

Speaker Change: And with that, I will turn it back to Mike for additional insights into Q3 and the remainder of 2024. Mike? Thank you, Mark. For the third quarter, we see revenue from our advanced node customers increasing over 25%, with growth coming from both memory and logic customers.

Michael Plisinski: Thank you, Mark. For the third quarter, we see revenue from our advanced node customers increasing over 25%, with growth coming from both memory and logic.

Michael Plisinski: About half of our logic revenue will support some films and also the applications for the gate all around nodes. Looking ahead, we expect to see logic revenue grow further in the fourth quarter with over 70% of logic revenue in support of Gate All-Around applications. We expect our specialty and advanced faculty and customers to remain at these record levels in the third quarter and grow in the fourth quarter, potentially leading to a new quarterly record for the company. Leading this growth is, of course, the demand for dragonfly systems. We also see growing demand for our films in acoustic metrology systems and packaging for both logic and HBM applications.

Mike Plisinski: About half of our Logic Revenue will support films and OCD applications for the Gate All-Around node. Looking ahead, we expect to see Logic Revenue grow further in the fourth quarter, with over 70% of Logic Revenue in support of Gate All-Around applications.

Speaker Change: We expect our specialty in advanced packaging customers to remain at these record levels in the third quarter and growing in the fourth quarter, potentially leading to a new quarterly record for the company.

Mike Plisinski: Leading this growth is, of course, the demand for DragonFly systems, but we also see growing demand for our films and acoustic metrology systems and packaging for both Logic and HBM applications.

Michael Plisinski: We are still in the early stages of adoption for these systems but expect to deliver over 50 million packages of metrology system revenues by year end. In aggregate, our view is improved for the second half of the year, and we now expect second half revenue to be 5 to 10% stronger than the first half of 2024. Although it's still early, we're encouraged by the setup leading into 2025. We expect to benefit from continuing investments and gate all around capacity, and the announced capacity expansions from several high bandwidth memory and logic packaging manufacturers, specifically for HPM, or high bandwidth memory, we expect new capacity coming online in the first half of the year to support the increase of HPM content for Nvidia's AI processors from 80 to 192 gigabytes, and for AMD, for its AI processors from 192 gigabytes to 288 giga

Mike Plisinski: We are still in the early stages of adoption for these systems, but expect to deliver over $50 million in package metrology system revenue by year end.

Speaker Change: In aggregate, our view has improved for the second half of the year, and we now expect second half revenue to be 5 to 10 percent stronger than the first half of 2024.

Mike Plisinski: Though still early, we're encouraged by the setup leading into 2025. We expect to benefit from continued investments in gate all-around capacity and the announced capacity expansions from several high-bandwidth memory and logic packaging manufacturers.

Speaker Change: Specifically for HBM, or High Bandwidth Memory, we expect new capacity coming online in the first half of the year to support the increase.

Speaker Change: of HBM content for Nvidia's AI processors.

Speaker Change: From 80 to 192 gigabytes and for AMD, AMD's AI processors from 192 gigabyte to 288 gigabytes.

Michael Plisinski: Adding to our optimism, we closed volume purchasing agreements with two customers with a combined value of over $300 million in the quarter. These agreements covered both AI packaging applications and gate all around investments through roughly 2025. A positive sign, not just for a strong finish for this year, but a stronger 2025 as well. And that concludes our prepared remarks. Justin, please open the call to questions from our covering analysts.

Speaker Change: Adding to our optimism, we closed volume purchasing agreements with two customers with a combined value of over 300 million in the quarter.

Speaker Change: These agreements covered both AI packaging applications and gate all-around investments through roughly 2025. A positive sign not just for a strong finish for this year, but a stronger 2025 as well.

Speaker Change: and that concludes our prepared remarks. Justin, please open the call for questions from our covering analysts.

Justin: Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone.

Speaker Change: If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to signal, star 1 for questions. The first question will come from Brian Chin with Stiefel.

Brian Chin: Hi there, good afternoon, nice results, and I'll look and thanks for letting us ask a few questions. Mike, previously you thought that advanced packaging revenue could pause or dip in three cube, but you're at what is more positive today. What improved, and is it more on the foundry or HPM memory side?

Brian Chin: Hi there. Good afternoon. Nice results and outlook, and thanks for letting us ask a few questions. Mike, previously you thought that advanced packaging revenue could pause or dip in 3Q, but your outlook today is more positive.

Brian Chin: What improved and is it more on the foundry or HPM memory side?

Michael Plisinski: I think there was some confusion, what I said the pause would be... specific to AI packaging, which is a specific set of really four customers, you know, one logic and three memory. I did say that overall, we expected growth to continue sequentially through the next couple quarters. Though we are seeing more revenue from those customers, there are still supply constraints that are limiting their ability to expand and to reach the levels of revenue that they were delivering, you know, or that we've been delivering to them in the first half. So we do still see a pause. I think it's definitely more constructive.

Mike Plisinski: Thanks Brian. I think there was some confusion. What I said would pause would be, uh...

Mike Plisinski: Specific to AI packaging, which is a specific set of really four customers, you know, one logic and three memory, I did say that overall we expected growth to continue sequentially through the next couple quarters.

Brian Chin: Though we are seeing more revenue from those customers, there are still supply constraints.

Justin: that are limiting their ability to expand and to reach the levels of revenue that they were delivering, you know, or that we've been delivering to them in the first half.

Justin: So, we do still see a pause. I think it's...

Justin: Definitely more constructive. Some of their announced expansions have been delayed. We've seen some customers actually get creative and push on some of their subcons.

Justin: To open up capacity and make room for, you know, a faster ramp where their green fields are taking a little bit longer. That said.

Justin: We are more bullish, but I think there was a lot of confusion around my definition of strictly AI packaging and just a handful of customers versus, you know, overall advanced packaging and our overall business for the specialty devices and advanced packaging markets.

Operator: Thank you. Thank you. Thank you.

Speaker Change: Yeah, thanks for clarifying that. And then looking at the 300 million in DPAs that you're announcing,

Speaker Change: It's sort of a multi-part, but can you give us a rough idea of one?

Speaker Change: How that $300 million maybe splits amongst those two customers. Is it kind of like evenly weighted or maybe biased to one or the other? And then second

Justin: Within that, maybe how that roughly splits amongst GATE All-Around and Advanced Packaging, and then if you're still with me, lastly, kind of, is that revenue recognition expected to be linear or kind of maybe more weighted to the last three quarters as opposed to the next three?

Michael Plisinski: Yeah, I don't have the breakdown in front of me, but by memory, I would say that the advanced packaging piece was a larger chunk of that $300 million. The breakdown, of course, is going to depend on when the expansions come out, but most of it was tied to 2020. Sorry, 2025, you know, for next year.

Justin: i

Speaker Change: Yeah, I don't have the breakdown in front of me, but by memory I would say that the advanced packaging piece was larger, a chunk of that $300 million.

Speaker Change: The breakdown, of course, is going to depend on when the expansions come out, but most of it was tied to 2020—sorry, 2025, you know, for—

Justin: Yeah, for next year.

Brian Chin: It's mostly packaging. I don't have the breakdown quarter to quarter, but it's roughly 60% for packaging, and 40% or so for the gate all around.

Speaker Change: Thanks, maybe this last question. It's mostly packaging, so it's about, I just looked, I don't have the breakdown quarter-to-quarter, but it's roughly 60% for packaging, 40% or so for the gate all around.

Brian Chin: Got it. Okay. That's really helpful. One last quick thing. What impact, if any, are you seeing this year in light of the reduced capacity expansion plans from advanced logic that were communicated last week? And how does this affect your thinking for data all around revenue potential in 2000?

Speaker Change: Got it. Okay, that's really helpful. Just one last quick thing.

Speaker Change: What impact have any are you seeing this year and why did the reduce the past the expansion plans from advanced logic that was communicated last week and how does this effective thinking or get all around revenue potential in 2012 and 2012?

Michael Plisinski: Well, we're more constructive. We're definitely seeing a good adoption of our products, and in the gate all around logic, we're seeing customers continuing to take more products. And as we mentioned, we see the fourth quarter growing from the third. So, you know, that's a positive sign. And you can tell from what I just mentioned about the volume purchase agreements that customers are working with us to make sure we can continue a ramp of supply for them next year.

Speaker Change: Well, we're more constructive. We're definitely seeing a good adoption of our products and in the gate all around logic, we're seeing customers continuing to take more product. As we mentioned, we see the fourth quarter growing from the...

Justin: from the third, so, you know, that's a positive sign.

Justin: And you can tell from the, what I just mentioned on the volume purchase agreements that customers are working with us to make sure we can continue a ramp of supply for them next year, so, and that's all still before they hit.

Justin: They're volume production targets in largely in 2026, so we expect that to continue to improve. What's probably...

Justin: A nice surprise is the increased adoption of the Iris planar films in this mix. So, in addition to the strong position we've had with OCD, we've been adding more layer share for our planar films tool, the Iris system.

Brian Chin: Yeah, great. Thanks for the update.

Speaker Change: Okay, great. Thanks for the update.

Operator: And the next question will come from... Vedvati Shrotre with Evercore.

Justin: And the next question will come from Vedvati Shrotre with Evercore.

Vedvati Shrotre: Hi, thanks for taking my question. I guess the first one I had was, you know, we had an idea; I'm going to have to tomorrow for your kind of right-down gap expenditure for 2025. Can you just help us understand how the conversations have changed for you or if, you know, your expectations going forward from that particular case.

Vedvati Shrotre: Hi, thanks for taking my question. I guess the first one I had was, you know, we had an IDM customer of yours kind of cut down gap expanding for 2025.

Vedvati Shrotre: Can you just help us think through how the conversations have changed for you or if your expectations going forward from that particular customer?

Michael Plisinski: Well, that remains to be seen. So, they're certainly announcing capex cuts in general, but they're also, let's say, reaffirming their desire to hit their next generation nodes and to ramp up their latest generation processing nodes by 2026. I believe it was So, it depends on where they reallocate the rest of their capital, but it's still a pretty big number. And, you know, to us, we are on the leading edge. So, my expectations are that their spend will be more towards that leading edge. And we may not see any negative impact, maybe even a positive impact as an acceleration.

Speaker Change: Well, that remains to be seen. So they're certainly announcing CapEx.

Speaker Change: cuts in general, but they're also reaffirming their

Speaker Change: their desire to hit their next generation nodes and to ramp their...

Speaker Change: Ladies Generation Processing Ed.

Speaker Change: Processing Nodes.

Speaker Change: By 2026, I believe it was.

Speaker Change: Depends on where they reallocate the rest of their capital, it's still a pretty big number.

Speaker Change: And, you know, to us, we are on the leading edge, so my expectations are their spend will be more towards that leading edge and we may not see any negative impact, maybe even a positive impact as an acceleration.

Vedvati Shrotre: And then on the next question I had is, I think you mentioned, second half, that you see the AI packaging spend and the portal advanced packaging spend actually continuing to grow. Could you maybe help us understand the, what's in takes into what's driving that, that now between the two, like, are the offsets starting to spend again, is that, is that what's going on?

Speaker Change: And then the next question I had is, I think you mentioned second half,

Speaker Change: that you see the pause in AI packaging spend and the total advanced packaging spend actually continues to grow. Could you maybe help us understand the puts and takes into what's driving that?

Speaker Change: that is now between the two, like we are the OSS starting to spend again, is that what's really going on?

Michael Plisinski: We definitely see OSET starting to spend more, but if we take a look at our advanced packaging spend, that includes all of the high-performance computers to include the lithography, etc., etc., so it would be a significantly bigger number.

Speaker Change: We definitely see OSOT starting to spend more, but if we take a look at our advanced packaging spend, that includes

Speaker Change: All of high performance compute would include lithography, et cetera, et cetera, so it would be a significantly bigger number to try and help people understand specific advanced packaging or the AI.

Vedvati Shrotre: To try and help people understand specific advanced packaging or AI packaging spend, we limited it to just the four customers that are playing and spending in that space. And I think they've been pretty clear where their capacity growth is going and what constraints they've had on spending have been for them, so I don't think there's anything new that we're highlighting.

Speaker Change: at Packaging Spend, we limited it to just the four customers that are playing and spending in that space. And I think they've been pretty clear where their capacity growth is going and what constraints they've had and what...

Speaker Change: Spending has been like for them, so I don't think there's anything new that we're highlighting.

Michael Plisinski: And so, can you remind me again what kind of decline or kind of pause you're seeing? Is it like a 10, 15 percent decline in your AI packaging revenues, first half versus second half? Or how would you characterize that?

Speaker Change: But you remind me again what's kind of declining or kind of falls, you're seeing as it like then. Then 15% decline in your ear after getting revenues for us half a second half or how would you characterize that?

Michael Plisinski: Overall, in aggregate, maybe around 10% staying steady, but between different customers, some are growing significantly, some are doubling, some are cutting back, and it just really depends on the... You know, the flow of each individual of those four customers. But in aggregate, it's around the 10% that I just mentioned. And the thing that's not like... One last one, if I may, on your gross margins is the kind of 150th increase, quarter and quarter, if that's primarily driven by your plan of mixed changing with more advanced notes coming.

Speaker Change: Overall, in aggregate, maybe around 10% staying steady, but between different customers, some are growing significantly, some are doubling, some are cutting back, and it just really depends on the market.

Speaker Change: You know, the ebb and flow of each individual of those four customers.

Speaker Change: But in aggregate, it's around the 10% that I just mentioned.

Speaker Change: And then one last one, if I may. On your gross margins, is the kind of 100 bits increase quarter on quarter, is that primarily driven by your product mix changing with more advance notes coming back?

Vedvati Shrotre: Not all of it. I mean, certainly the improvements we've been talking about are certainly paying dividends within our manufacturing and supply chain. So, I think as we get into the second half of the year and see advanced nodes certainly improving, yes, that will help accelerate that gross margin improvement.

Speaker Change: Not all of it. I mean, certainly the improvements we've been talking about are certainly paying dividends within our manufacturing and supply chain, so I think as we get into the second half of the year and see advanced nodes certainly improving, yes, that will help accelerate that gross margin improvement.

Mark Slicer: I think it's also important, you know, there's Yeah, let me just finish one thing, please Justin. There's a discussion around the AI packaging.

Speaker Change: All right, thank you.

Speaker Change: I think it's also important, you know, there's...

Speaker Change: Yeah, let me just finish one thing, please, Justin.

Speaker Change: There's a discussion around the AI packaging and I think it's important to note just how big that's been for us.

Speaker Change: We gave some guidance over 50% of our advanced packaging specialty market, that's around $88-90 million. That's a lot of capacity that customers have been taking on.

Speaker Change: And as Dave mentioned and we've reported today, there are capacity constraints and the customers are announcing new factories for both HBM and Logic Co-op, so I think that's

Operator: Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining today, use a speaker phone. Please make sure the mute function is turned off to allow your signal to reach our equipment. Again, that is star 1. The first question comes from Brian Chin, with Stiefle.

Dave: It needs to be put in context as well, just how much of that we've been already achieving.

Operator: And the next question will come from David Duley with Steelhead Securities. Thanks for taking my question.

Speaker Change: Bye, thank you.

Speaker Change: And the next question will come from David Duley with Steelhead Securities.

David Duley: Thanks for taking my questions. I have a kind of two-part technical question. It's the CPU and GPU companies adopt rectangular glass substrates as, you know, a lot of technical papers are suggesting, how in total will that impact the chip? And then specifically drill down, what exactly would your lithography tool do on the substrates? Would you be layering the art date? Would you be... putting down the RDL layers, or what are the steps that you would address if that were to take place?

David Duley: Thanks for taking my questions. I have a kind of a two-part technical question. If the CPU and GPU companies adopt rectangular glass substrates as

David Duley: A lot of technical papers are suggesting. How in total will that impact Onto? And then specifically drill down in what exactly would your lithography tool do on these substrates? Would you be layering the RD?

Speaker Change: putting down the RDL layers, or what are the steps that you would address if that were to take place?

Michael Plisinski: To address your first question, what it would mean for us is that we would get opportunities; all the different process control technologies we're applying from the DragonFly in the packaging areas now would likely translate to the panel side through the FireFly, which is a panel version of the DragonFly tool. So, we would expect all of the inspection, clear find opportunities we already see, and various metrology opportunities, as well, to drive a FireFly business.

Speaker Change: Yep.

Speaker Change: so

Speaker Change: To address your first question, what would mean for us is we would get opportunities all the different process control technologies were applying from the Dragonfly in the packaging areas now, would likely translate into the panel side, through the Firefly, which is a panel version of the Dragonfly tool.

Speaker Change: So we would expect all of the inspection, clear-fined opportunities we already see various metrology opportunities as well to drive a firefly business. In addition, there's software opportunities, of course.

Michael Plisinski: In addition, there are software opportunities, of course. Those customers aren't, let's say they're coming from a different point in the supply chain; they have opportunities to advance their process control capabilities through some of our FabWide software. In addition, of course, the biggest thing is the lithography piece, and there we would be printing the RDL lines. Primarily, all the RDL lines, which would be, you know, right now in advanced icy substrates, we're doing up to, you know, 10 layers per side for glass. We expected it to be less, because we can go to finer resolution, and we expected it'll be all on one side, but, you know, we are seeing customers talk about polls on both sides.

Speaker Change: Those customers aren't, let's say they're coming from a different point in the supply chain. They have opportunities to advance their process control capabilities through some of our bad-blides software.

Speaker Change: Primarily all the RDL lines, which...

Speaker Change: Would be, you know, right now in advanced IC substrates, we're doing up to, you know, 10 layers per side.

Speaker Change: For glass, we expect it to be less because we can go to finer resolution and we expect it will be all on one side, but we are seeing customers talk about both sides.

David Duley: Okay, and then as a follow-on to that, when you look at TSMC's roadmap, these substrates, whatever they're made of, are going to get much, much larger. And I was wondering how that might impact, if we did move to, you know, larger substrates, how that might impact the lithography business. And then finally, if you do move to glass panel substrates or some sort of more panel lithography solution, would that help the co-auth bottleneck?

Speaker Change: Okay, and then as a follow-on to that is

Speaker Change: You know...

Speaker Change: When you look at TSMC's roadmap, these substrates, whatever they're made of, are going to get much, much larger.

Michael Plisinski: I believe so. I mean, that would be a significant improvement in terms of economies of scale. It might help some of the challenges that are being seen with different substrates and thermal issues between the substrates, you know, heating at different rates, and heating and expanding at different rates. So, I think there'd be a technical advantage to going in addition to an economy of scale advantage to moving to panel, and for the steppers, of course, it's iterative, so you're going to have steppers to support this volume of steppers would be required to... Support the volume of chips.

Speaker Change: And I was wondering how that might impact.

Speaker Change: If we did move to, you know, logger subs, how that might factor of how geography business. And then finally, if you do move to glass panel substrate, or some sort of more of a panel of the loggeric solutions, would that help to co- loss bottleneck?

Speaker Change: i

Speaker Change: I believe so. I mean, that would be a significant improvement in economies of scale. It might help some of the challenges that are being seen with different substrates and thermal issues between the substrates, you know, heating at different rates, heating and expanding at different rates.

Speaker Change: So, so I think there'd be it.

Michael Plisinski: But also the number of layers, so it's an iterative process, so if they're going to do eight layers, that's, you know, that all adds to the utilization of our tools and drives up the opportunity.

Speaker Change: Support the volume of chips.

Speaker Change: But also the number of layers, so it's an iterative process, so it would be, you know, if they're going to do eight layers, that's, you know, that all adds to the utilization of our tools and drives up the opportunity for us.

Speaker Change: and then the five of us. So we think that. And we think that.

Speaker Change: Sorry, the size of the substrate, I think that's, you know, obviously good for us because we tend to have a, because we came from the flat panel, the display world, we have the ability to handle.

Speaker Change: Significantly larger sizes of panels than anyone's even talking about now, so 650 by 650 is

Speaker Change: like a display 10, 20 years ago.

Speaker Change: So, from that standpoint, there's no problem, but the real benefit that we offer is the high-resolution wide-field optics, and if customers want to print large package sizes without stitching and highly repeatable,

Speaker Change: They can pretty much only go to our tool right now for that capability, which will be demonstrated downstairs in our advanced packaging lab.

Michael Plisinski: And we're already scheduling demos for that system. Today, I think we have over seven or eight demos already planned.

Speaker Change: We're already scheduling demos for that system. Today, I think we have over seven or eight demos already planned.

David Duley: So I guess what I'm just interpreting what you said is that you have some tools that are highly aligned to TSMC's size of their interposers or substrates going forward.

Speaker Change: So I guess what I'm just interpreting what you said is you have some tools that are highly aligned to TSMC's size of their interposers or substrates going forward.

Michael Plisinski: I definitely didn't say that, but we're aligned to the market needs, let's put it that way. All right, thank you.

Speaker Change: I definitely didn't say that, but we're aligned to the market needs. Let's put it that way.

Speaker Change: All right. Thank you. I'll get back in the queue.

Operator: And the next question will come from Mayor Popperi with B-Riley Secure.

Speaker Change: and the next question come from Mayor Popperry with B-Riley Securities.

Craig Ellis: Yeah, I'm actually honest with Craig Ellis, but you obviously had some really great quarters in advanced packaging. I think, you know, three really, really incredible quarters. And then this one was just great too.

Mayor Popperry: I'm actually on for Craig Ellis.

Mayor Popperry: But, you know, you've obviously had some really great quarters and advanced packaging. I think, you know, three really, really incredible quarters.

Mayor Popperry: And then this one was just great too. Kind of how do you see that ramp going? I know you said that next quarter is supposed to be even and then you go back up again, but you also said this is just the beginning. So is this kind of a sustainable ramp and how long do we kind of see this coming forward and how sustainable is it?

Michael Plisinski: Well, like I mentioned, we see the capacities for each. Let's say if you take an AI compute engine, we see the amount of HBM doubling on those, essentially doubling on those. So even if AI just stayed flat, which nobody's projecting AI is supposed to go up, the HBM side is already doubling. In addition, of course, we do see AI demands continuing through next year, and we see that both from the end customers driving the demand side and our own customers talking about supply constraints and that they're, you know, looking at, you know, expanding factories into next year, the early half of next year, in order to So, you know, that makes us pretty bullish about growth through 2025.

Speaker Change: i

Speaker Change: Well, I can mention we see the capacities for each let's say if you take an AI.

Speaker Change: Compute Engine [inaudible]

Speaker Change: We see the amount of HBM doubling.

Speaker Change: on those, essentially doubling on those. So even if, say, I just stayed flat, which nobody's projecting. Hey, I suppose to go up, HPM side is already doubling. In addition, of course, we do see,

Speaker Change: AI demand continuing through.

Speaker Change: Next year, and we see that both from the end customers driving the, or talking about their demand side, and our own customers talking about supply constraints, and that they're, you know, looking at

Speaker Change: Expanding factors into next year, early half of next year, in order to alleviate these supply constraints. So that makes us pretty bullish about growth through 2025.

Craig Ellis: Okay, yeah, that's great. Thank you.

Speaker Change: Okay, yeah, that's great. Thank you. I got another one that's kind of hopping off the bat. So in the last week or so, we've seen kind of some meaningful signs of growing diversification.

Speaker Change: Which I think is probably, you know, a bullish signal for your business. Have you guys seen any, or how do you expect at least, kind of better pricing power or your ability to kind of penetrate these different suppliers in HBM?

Michael Plisinski: Well, we're already in all, all suppliers for HBM. So it's a matter of maintaining our position and providing, you know, value propositions that matter. And then, generally, we negotiate our fair share of that value.

Speaker Change: Well, we're already in all suppliers for HBM, so it's a matter of maintaining our position and providing, you know, value propositions that matter, and then generally we negotiate, you know.

Speaker Change: and Mark Fairshare of that value.

Craig Ellis: I don't see that changing in any way. I think, if anything, it's getting better as we continue to add new technologies and accelerate our pace of innovation and release new capabilities that they need. That's only helping them to ramp faster, helping them to provide higher yields and become more profitable or gain more share from their customers. I think, from that standpoint, it gives us a win-win scenario with our customers.

Speaker Change: Hi, I don't see that's changing in any way, I think

Speaker Change: If anything, it's getting better as we continue to add new technologies and accelerate our pace of innovation and release new capabilities that they need.

Speaker Change: That's only helping them to ramp faster, helping them to provide higher yields and become more profitable or gain more share from their customers. So I think from that standpoint, it gives us a win-win scenario with our customers.

Michael Plisinski: Okay, that's great as well. And just one last thing, I'm kind of bouncing off of David's question. So, you know, obviously, we've seen a lot of different challenges with co-ops, especially co-ops L, and, you know, kind of the thermal design challenges and what have you. Do you expect that, as this becomes more difficult than maybe some people expected, your products can deliver more value towards feeding co-ops?

Speaker Change: Okay, that's great as well. And just one last thing, I'm kind of bouncing off of David's question. So, you know, obviously, we've seen a lot of different challenges with CoOS, especially CoOS L, and, you know, kind of

Speaker Change: The thermal design challenges and we'll have you few spec that, you know, as this becomes more physical and then there you want some people infected, your product can deliver more value towards feeding close to life.

Michael Plisinski: I think our products help to drive yield and identify the root cause for some of these challenges and issues. But some of these are physics, and of course, our products are not going to change the physics.

Speaker Change: I think our products help to drive yields.

Speaker Change: for an Identify...

Speaker Change: Rook Cause for some of these challenges and issues, but some of these are physics and of course our products are not going to change the physics, the customers need to use our tools to measure identify and determine.

Speaker Change: how to adjust the process and adjust the physics in order to drive the yields up. So we're critical. That's why we're seeing demands for new types of sensors, new capabilities, and we react very quickly working with our customers.

Speaker Change: I think the one change to that is with the lithography where there we are helping to define a process, our pace lab down stairs is focused.

Speaker Change: With our partners, several very talented partners and collaborators, are focused on solving challenges associated with the adoption of glass.

Speaker Change: And as we do that, we hope that that will be adopted by our customers and help propel the chiplet and advanced packaging roadmaps to the next level.

Operator: Hey, yeah, thank you so much; that's great.

Speaker Change: Thank you so much. That's your answer.

Yu Shi: And the next question will come from Charles Shee with Needham.

Speaker Change: and the next question come from Charles Shee with Needham.

Michael Plisinski: Hey, good evening, Mike Mark. The question I want to ask is about China, I know you tended to do a little bit more business with a leading customers and the China exposure you had, the last year was not in the meetings and the... First quarter was actually self-elect single-digit percent of your total revenue, right? I haven't seen a few two numbers, but I just want to get a sense from you, because this year's WFP upside, a lot of that actually is coming from China based on the commentary from your large cap years. And are you capturing some of that upside? What's your expectation for a China revenue contribution for the whole year? Any, any, any, any, any trend from first half to second half.

Charles Shee: Hey, good evening, Mike, Mark.

Charles Shee: The question I want to ask is about China. I know you tend to do a little bit more business with the leading customers, and the China exposure you had last year was kind of in the mid-teens.

Speaker Change: First quarter was actually fell to like single-digit percent of your total revenue. I haven't seen your Q2 numbers, but...

Speaker Change: I just want to get a sense from you because this year's WFP upside, a lot of that actually is coming from China based on the commentary from your large cap years.

Speaker Change: Are you capturing some of that upside? What's your expectation for a China revenue contribution for the full year? Any trend from first half to second half?

Michael Plisinski: Yeah, I think... You know, if I look at our numbers, we think second half China revenue will be up over the first half, but it's not massive, it's still in the teens level, so we're seeing growth. We saw growth from Q1 to Q2 from China, which was a fairly significant growth, which you'll see. In general, I would say China for us is really about a lot of the specialties. We've talked a lot about power and semiconductor markets. We are making progress in some of the mature logic areas within China as well, but that's a little bit slower.

Speaker Change: Yeah, I think...

Speaker Change: You know, if I look at our numbers, we think second half China revenue will be up over the first half.

Speaker Change: But it's not massive. It's still in the teens level, so we're seeing growth. We saw growth from Q1 into Q2 from China. That was a fairly significant growth.

Speaker Change: which you'll see, but...

Speaker Change: In general, I would say China for us is really about a lot of the specialty. We've talked a lot about power, semiconductor markets. We are making progress in some of the mature logic areas within China as well, but that's a little bit slower.

Speaker Change: Yeah, I mean, you know the challenges we have selling into China, so I don't think that's a surprise, I think it's good that we're able to achieve the growth rates we're projecting, even without the tailwinds of China that some of our peers are enjoying.

Yu Shi: I think what we think, you know, eventually is going to... Go ahead, finish your thought, please. I'm going to say...

Speaker Change: I think what we think, you know, eventually is going to...

Speaker Change: Good.

Michael Plisinski: I was going to say, there's local competition in China, and they're getting stronger, and we see that at the lower end, starting to take share. But, you know, for us, our strategy is to focus on the higher-end applications, the most challenging applications, and where those applications are that we add the most value.

Speaker Change: Go have finished your thought, please.

Speaker Change: I was going to say, which, you know, there's local competition in China and they're getting stronger, and we see that at the lower end starting to take share.

Speaker Change: You know, I think for us, our strategy is to focus on the higher end applications, the most challenging applications, and where those applications are that we add the most value.

Yu Shi: Got it. The other question is about that $400 million VPA, new 2025. When do you expect to ship that $300 million VPA? When does the ship start, and when do you think we'll get to that peak shipment? If you can talk about some color about that, that would be great.

Speaker Change: God. The other question is about that $300 million VPA new 2025. When do you start?

Speaker Change: When do you expect to ship that 300 million VPA? When does that start? When does the shipment start and when do you think we'll get to that peak shipment? If you can provide some color about that, that would be great.

Michael Plisinski: There'll be some initial shipments at the beginning, you know, in the second half, but most of the bulk of it is going through 2025.

Speaker Change: There will be some initial shipments at the beginning, you know, in the second half, but most of the bulk of it is going through 2025.

Speaker Change: www.ontioninnovation.com

Operator: And the next question will come from Mark Miller with the benchmark.

Speaker Change: Thank you.

Speaker Change: and the next question will come from Mark Miller with the benchmark company.

Mark Miller: Congratulations on another quarter. Just wondering, it appears that youre doing very well. Can you give us some insights into where you think youve gained the most share?

Mark Miller: Congratulations, I'm not even a quarter, just wondering it appears that you're doing very well. Can you give us some insights where you think you're getting the most sure in one area?

Michael Plisinski: Uh, I think we've maintained a very high share in AI packaging, so in the HBM and the, and the, um... To an afty logic, the coloss packaging, we've done well there, and then I think the gate all around, we've certainly had some knife. Increased adoption of our iris-planar films that I hope will translate into, you know, further growth into 2025 and 2026 as the gate all around node goes into full production. And we see the full benefits of the slots that we're winning.

Speaker Change: Uh, I think we've maintained a very high share in AI packaging, so in the HBM and the, and the, um...

Speaker Change: To an AFDI logic, the CoWASP packaging, we've done well there. And then I think the gate all around. We've certainly had some nice...

Speaker Change: increases in adoption of our iris planar films that I hope will translate into, you know, further growth into 2025 and 2026 as the gait all around node goes into full production. And we see the full benefits of the.

Speaker Change: slots that were winning.

Michael Plisinski: I think those are the two biggest areas. Of course, panel packaging is a strong position for us as well. Still small, you know, and not a lot of... Let's say growth right now. There was a lot of overcapacity from a couple years ago, but our position continues to strengthen. We continue to add new customers, and I believe this move to glass and our wide field optics with high resolution is setting us apart from the competition and creating opportunities for meaningful share gains there as well.

Speaker Change: I think those are the two biggest areas. Of course, the panel packaging is a strong position for us as well. Still small, you know, and not a lot of...

Speaker Change: Let's say growth right now, there's a lot of overcapacity from a couple years ago, but our position continues to strengthen. We continue to add new customers, and I believe this move to the glass.

Operator: Alright, thank you; I'll get back to you.

Michael Plisinski: And then the five of us. So we think that And we think that, sorry, the size of the substrate, I think that. You know, obviously good for us because we tend to have a tendency to have a, because we came from the flat panel age, the ability to handle significantly larger sizes of panels than anyone's even talking about now. So 650 by 650 is like a display 10, 20 years ago. So from that standpoint, there's no problem.

Speaker Change: and our wide field optics with high resolution is setting us apart from competition and creating opportunities for meaningful share games there as well.

Michael Plisinski: You just briefly mentioned Atlas, and I just wonder what's going on with Atlas and OCD.

Speaker Change: You just briefly mentioned Atlas and just wondering what's holding with Atlas in OCD.

Michael Plisinski: Oh, that's going very well. The OCD to the Atlas OCD tool is qualified, and all of the gate all around applications are at least the three major players.

Speaker Change: Oh, that's going very well. The OCD, the Atlas OCD tool is qualified in all of the GATE all around.

Speaker Change: Applications are at least the three major players. We've continued to, you know, we've talked about the increased capital intensity of...

Speaker Change: of OCD and gait all around, and that's in our opportunities for share gains there. That's continuing to prove out. So that's for sure a, you know,

Speaker Change: That's an older story, so I didn't mention it earlier, but thanks for reminding me to bring that up.

Mark Miller: To just squeeze one more in, people are talking, Michael Dell in particular, about AI chips going into... PCs. Do you see that as an opportunity? And if so, when do you think that starts to become an opportunity?

Speaker Change: He just squeezed one in more people talking about Michael Dell in particular about the eyed ships falling into a PC, do you see that as an opportunity, and if so when you think that starts to become an opportunity.

Michael Plisinski: Well, yep, we've seen that. That's why I mentioned several new players are trying to enter this space. I think it really depends on what the company means by an AI chip. So if it's just a repackaging or some software wrapped around their current architectures, it probably won't change too much unless it drives up adoption. If it's more around packaging and bringing memory and logic closer together, and what Nvidia has been doing and some others, then I think it can mean a lot to us because it drives up that specialty, more advanced packaging that we're so good at right now and creates more opportunities for our DragonFly tools and sales.

Speaker Change: Well, yep, we've seen that. That's why I mentioned several new players are trying to enter into this space.

Speaker Change: I think it really depends on what is the company mean by AI chips, so if it's...

Speaker Change: Just a repackaging or some software wrapped around their current architectures probably won't change too much unless it drives up adoption.

Speaker Change: If it's more around packaging and bringing memory and logic closer together, hence what NVIDIA has been doing, and some others, then I think it can mean a lot to us because it drives up that specialty, more advanced packaging that we're...

Speaker Change: So good at right now and creates more opportunities for our DragonFly tools and sales.

Michael Plisinski: I think another big opportunity is where we hear customers from smartphone manufacturers talking about integrating more AI capability into their phones. And that could drive a refresh of phones, which of course drives a tremendous amount of advanced packaging content and would, you know, nicely recover NAND memory and as well as the advanced packaging OSEP.

Speaker Change: I think another big opportunity is...

Speaker Change: where we hear customers from smartphone manufacturers talking about integrating more AI capability in their phones. And that could drive a refresh of phones, which of course drives a tremendous amount of advanced packaging content.

Speaker Change: and would, you know, nicely recover NAND memory and as well as the advanced packaging OSAP business.

Speaker Change: Thank you!

Operator: And the next question will come from Blaine Curtis with Jeff.

Blayne Curtis: and the next question comes from playing Curtis with Jeffries.

Blaine Curtis: Hey, thanks for taking my question and the great results. It's going to cure some more color on the growth you've seen in Vedvati packaging or advanced nodes. I think it was like 50-50 logic memory. Can you just, you know, kind of talk about where you've seen the strength in markets and it's also, you know, the question had been the pace of recovery there, but you also have new products with like planar. So just kind of curious how much of it is recovery versus new products as well.

Blayne Curtis: Hey, thanks for taking my question and the great results. I'm just kind of curious, more color on the growth you've seen in advanced packaging or advanced nodes.

playing Curtis: I think it was like 50-50 logic memory. Can you just kind of talk about where you've seen the strength in markets? And it's also, you know, the question had been the pace of recovery there, but you also have new products with like planar. So just kind of curious how much of it is recovery versus new products as well.

Michael Plisinski: I wouldn't say a lot about its recovery. For Gate All Around, of course, that's more investment in the future and a new node, a new inflection or transition. Most of the others are the same. So are the NANDs. Expansions that we've seen have been driven by both new products. So, like the aspect for high-stack 3D NAND and then some additional of our more traditional products, again to support high-stack 3D NAND. So, these are mostly technical transitions or technical buys versus... Let's say indications of a recovery in the market.

Speaker Change: I wouldn't say a lot of it's recovery. For a gate all around, of course, you there's that's more investment in in the future and and

playing Curtis: you know, a new node, a new inflection or transition.

Speaker Change: Expansions that we've seen have been driven by both new products.

playing Curtis: So, like the aspect for High Stack 3D NAND and then some additional of our more traditional products, again, to support High Stack 3D NAND. So, these are mostly technical transitions or technical buys versus

Speaker Change: Let's say indications of a recovery in the market. I'd say the positive sign or the positive takeaway is these customers are seeing utilizations coming up, they are seeing

Michael Plisinski: I'd say the positive sign or the positive takeaway is these customers are seeing utilization coming up. They are seeing inventory coming down, and so they're preparing and investing in these inflections for the next wave of orders and product launches.

Speaker Change: Inventories coming down and so they're preparing and investing in these inflections for the next wave of orders and product launches.

Blaine Curtis: And then I just wanted to ask on gross margin. I think your long-term model is a little dated, but at a billion run rate, which I guess you're at where you're guiding, it was 56 to 57. I'm assuming the mix is different, but can you maybe just kind of talk through the ability to get gross margins back into that range of 56, 58 and whether some of the mix that you laid out back then is different now, and if that's still the right range?

Speaker Change: Thanks, and then I just wanted to ask on gross margin, I think your model, long-term model is a little dated, but you know at a billion run rate, which I guess you're at where you're guiding, it was 56 to 57. I'm assuming the mix is different, but can you maybe just kind of...

Speaker Change: Talks through the ability to get growth margins back into that range of, you know, 56, 58 and, you know, if some of the mix that you laid out back then is different now and if that's still the right range.

Mark Slicer: Yeah, no. Thanks for the question.

Speaker Change: Yeah, no, thanks for the question. We, you know, obviously when it comes to a long term model, you know, we're not in the, we're not ready to update that yet. Obviously we're commentary is when we're going to get back into the model. And once we do that, we'll look at the,

Mark Slicer: Obviously, when it comes to the long-term model, we're not ready to update that yet. Obviously, our commentary is when we're going to get back into the model, and once we do that, we'll look at updating it further. But when we look at gross margin, I mean, our goal this year is just to see quarter-over-quarter gross margin improvement with the objective to get back into that model gross margin at that $250 million, $260 million quarter run rate and then look beyond that. But I think the things that we've done with our manufacturing capabilities, driving continued leverage, and obviously, the mix will help as we drive more back into advanced nodes, which is our higher-margin product.

Mark Slicer: Further, but when we look at the gross margin, I mean, our goal this year is just to see quarter over quarter gross margin improvement, you know, with the objective to get back into that model gross margin, you know, at that 250, 260 million.

Mark Slicer: And I think we're going to have to look beyond that. But I think the things that we've done from our manufacturing capabilities, driving continued leverage, and obviously the mix will help as we drive more back into advanced nodes, which is our higher margin product.

Operator: And that does conclude the question and answer session. I'll now turn the conference back over to Sidney Ho for any additional or closing remarks.

Brian Chin: Thanks a lot.

Operator: And that does conclude the question and answer session. I'll now turn the conference back over to Sidney Ho for any additional or closing remarks.

Brian Chin: I'm looking at the 300 million VPAs that you're announcing. It's sort of a multi-part plan, but can you give us a rough idea of one? How that 300 million maybe splits amongst those two customers; is it kind of like evenly weighted or maybe biased to one or the other? And then second, within that, maybe how that roughly splits amongst GATE all around and advanced packaging. And then, if you're still with me, lastly, kind of, is revenue recognition expected to be linear or maybe more weighted to the last three quarters as opposed to the next three?

Operator: We will be participating in a number of investor conferences throughout the quarter. We look forward to seeing many of you at these conferences. A replay of the call today will be available on our website at approximately 7.30 Eastern Time this evening. We'd like to thank you for your continual interest and non-innovation. Justin, please thank Luke Carl.

Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Operator: and Justin, we will be participating in a number of investor conferences throughout the quarter. We look forward to seeing many of you at these conferences.

Operator: A replay of the call today will be available on our website at approximately 7.30 Eastern Time this evening. We'd like to thank you for your continual interest in Onto Innovation. Justin, please conclude the call.

Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Michael Plisinski: We've also successfully qualified multiple systems in logic for gate all around applications below two nanometers, where requirements for speed and stability are increased. Now I'll turn the call over to Mark to review our financial highlights and provide third quarter guidance.

Craig Ellis: Again, another one that's kind of popping off the bat. So, in the last week or so, we've seen kind of some meaningful signs of growing diversification, which I think is probably, you know, a bullish signal for your business. And you guys have seen any, or how do you expect at least kind of better pricing tower or your ability to kind of penetrate these different suppliers in HBM?

Michael Plisinski: And I think it's important to note just how big that was for us. We gave some guidance to over 50% of our advanced packaging specialty market. That's around $88.90 million. That's a lot of capacity that customers have been taking. And as Dave mentioned, and we've reported today, there are capacity constraints, and the customers are announcing new factories for both HBM and Logic Co-op, so I think that needs to be put in context as well, just how much of that we've already achieved.

Mark Slicer: Both revenue and EPS exceeded our guidance ranges due to the better than expected demand for advanced packaging for AI devices, gate-all-around investments in advanced nodes, and stronger software and services within the quarter. Looking at the quarterly revenue by markets, our biggest market remains, especially device and advanced packaging, which grew 3% sequentially to a record quarterly revenue of 164 million and represents 68% of our revenue. Our biggest sequential increase was advanced nodes, which had revenue of 32 million, increased 21% over Q1 and represents 13% of revenue. Software and services, with revenue of $46 million, increased 6% over Q1, representing 19% of revenue.

Michael Plisinski: In the quarter, orders from logic customers represented nearly half of the revenue from advanced note custody. For gate all around applications, we're seeing an increase in adoption of our Iris film's metrology, in addition to our leading Atlas OCD metrology. Rounding out our optical metrology suite of Atlas Iris and Aspect is our integrated platform impulse. In the second quarter, we closed volume agreements from two of the top four manufacturers, which we believe will represent greater than 60% combined share at these accounts.

Michael Plisinski: The customers need to use our tools to measure, identify, and determine how to adjust the process and adjust the physics in order to drive the yields up. So we're critical. That's why we're seeing demands for new types of sensors, new capabilities, and we react very quickly, working with our customers. I think the one change to that is with lithography, where we are helping to define a process. Our PACE lab downstairs is focused with our partners; several very talented partners and collaborators are focused on solving challenges associated with the adoption of glass. And as we do that, we hope that it will be adopted by our customers and help propel the chiplet and advanced packaging roadmaps to the next level.

Mark Slicer: In addition, further growth of the advanced nodes, business driven by increasing orders from memory and gate-all around logic, should improve our margin profiles as we exit 2024. And with that, I will turn it back to Mike for additional insights into Q3 and the remainder of 2024.

Michael Plisinski: But the real benefit that we offer is the high resolution, wide field optics. And if customers want to print large package sizes without stitching, and it is highly repeatable, they can pretty much only go to our tool right now for that capability, which will be demonstrated downstairs in our advanced packaging lab.

Michael Plisinski: Kind of how do you see that ramp going? I want to use that, but, you know, next quarter is supposed to be even, and then you go back up again, but you also said this is just in the beginning. So is this kind of a sustainable ramp, and how long do you kind of see this kind of forward, and how sustainable?

Michael Plisinski: We've continued to, you know, we've talked about the increased capital intensity of OCD and gait all around. And that's in our opportunities for share gains there that's continuing to prove out. So that's for sure a tailwind for us and a strong one. That's an older story so I didn't mention it earlier, but thanks for reminding me to bring that up.

Michael Plisinski: And, um... Yeah, I mean, you know the challenges we have. We are selling into China, so I don't think that's a surprise. I think it's good that we're able to achieve the growth rates we're projecting even without the tailwinds of China that some of our competitors have.

Michael Plisinski: Some of their announced expansions have been delayed. We've seen some customers actually get creative and push on some of their subcontractors to open up capacity and make room for, you know, a faster ramp, where their green fields are taking a little bit longer. That's it. We are more bullish, but I think there was a lot of confusion around my definition of strictly AA packaging and just a handful of customers versus, you know, overall advanced packaging and our overall business for the specialty devices and advanced packaging mark. Yeah, thank you very much.

Michael Plisinski: So, and that's all still before they hit their volume production targets in largely 2026. So, we expect that to continue to improve. What's probably... A nice surprise is the increased adoption of the Iris planar films in this mix. So in addition to the strong position we've had with OCD, we've been adding more layer share for our planar films tool, the Iris system.