Q3 2024 Onto Innovation Inc Earnings Call
Ladies and gentlemen, good day and welcome to the Onto, Onto, Innovation 3rd 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, sir.
Sidney Ho: Thank you, Lisa and good afternoon everyone. On to innovation issue, this 2024-3rd quarter 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.
Sidney Ho: Joining us on the call today on Michael Plisinski, Chief Executive Officer and Mark Slicer, Chief Financial Officer.
I'd like to remind you that the statements made by Manichvin on this call will contain forward-looking statements within the meaning of the federal security's laws. Those statements are subject to a range of changes, risks and uncertainties that can cause actual results to very materially.
Sidney Ho: 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 file links.
On to innovation does not undertake the application to update these forward-looking statements in light of new information of future events.
Today's discussion of our financial results will be presented on a non-gap financial basis, unless otherwise specified as a reminder, a detailed reconciliation between gap and non-gap results can be found in today's earnings release.
Let me now turn the call over to your CEO, Michael Sincice, Mark.
Thank you, Sidney. Good afternoon, everyone, and thank you for joining us today. Overall, we executed well in the third quarter, with revenue coming in at $252 million and setting a new quarterly record for inspection.
In fact, we're on pace to nearly double our inspection revenue this calendar year. We also improved our gross margin to 54.5% and operating margin to 28%.
This resulted in record cash generation from operations of $67 million. Mark will soon discuss these highlights and our outlook for Q4, which was negatively impacted by over $10 million in JetStep lithography pushouts due to customers' capacity needs.
But first, we'll review the third quarter highlights, starting with our specialty device and advanced packaging markets, where AI Packaging Revenue led the inspection business with growth in high bandwidth memory, offsetting a little less than projected decline in 2.5D logic packaging.
Sidney Ho: Looking ahead, we expect to see increases in volume for logic packaging, as well as an increase in capital intensity for process control to address the growing complexity and need for higher process yields.
This includes new demand for our front-end metrology systems, particularly for films and acoustic metrology. In fact, Advanced Packaging was one of the largest markets for our metrology business this quarter.
Revenue from power devices was the second largest market and also set a quarterly record.
Growth came from both metrology and inspection process control systems. Our power semiconductor customers continue to focus on driving yield improvements, especially with challenges associated with transitioning to larger wafer sizes.
even as end demand remains temporarily muted. We expect this focus on yield to continue into next year and at least sustain this record level of revenue.
Inspection has clearly been a strong driver for us and we're expanding our core inspection technology with the tuck-in of Lumina instruments announced earlier today. Lumina is a small company with a very rich background in laser based inspection technologies used in unpatterned, wafer, and emerging panel applications.
Their patented technology will allow us to simultaneously scan top, bottom, and subsurfaces with sensitivities below 100 nanometers for silicon carbide and gallium nitride applications.
We believe this technology will also be important for inspection of glass substrates and carriers used in 2.5D and 3D advanced packages, where detecting surface defects, buried inclusion defects, and residues on the silicon or glass core are important to yield.
This new capability is complementary to our patterned inspection technologies with no overlap in capability. And as a result, we expect the new applications will expand our SAM by $250 million annually in the next three years.
In addition to Lumina Instruments, we announced the acquisition of the lithography business from Kulik & Sofa. With this tuck-in, we add an incredibly talented team with over 200 man-years of lithography experience, 24 issued patents, and 8 more pending.
Sidney Ho: Based in Eindhoven, we believe this team and technology will contribute to the acceleration of our gestaplithography roadmaps and extend our competitive differentiation.
We expect the combination of these two small tuck-ins to be accretive to earnings within 12 months and generate up to $100 million in annual revenue in the next three years. For reference, revenue today is negligible.
While we strengthen our opportunities in the specialty and advanced packaging markets, we also see recovery from the advanced nodes.
Sidney Ho: As expected, we saw growth in Logic, DRAM, and NAND in the quarter. In addition to our strong position in OCD metrology for these markets,
We're seeing solid traction with our film metrology.
This year, we're on pace to grow films metrology by over 50% versus 2023. Now, I'll turn the call over to Mark to review our financial highlights and provide fourth-quarter guidance.
Mark: Thanks, Mike, and good afternoon, everyone.
Operating cash flow yield at 27% represents more than doubling of operating cash during the same period last year.
Third quarter revenue of $252 million was up 4% versus the second quarter and up 22% versus the prior year. The third quarter EPS increased 2% sequentially to $1.34 and up 40% versus the prior year.
Mark: Looking at the quarterly revenue by markets, our biggest market remains specialty devices and advanced packaging, which was down slightly from Q2 with quarterly revenue of $161 million and represents 64% of revenue. Our biggest sequential increase was Advanced Nodes, which had revenue of $42 million, increased 32% over Q2 and represents 17% of revenue.
Software and Services with revenue of $49 million increased 5% over Q2, representing 19% of revenue.
We achieved a 55% gross margin for the third quarter at the high end of our guidance range of 53 to 55%, driving more than 100 basis point improvement over the second quarter and over 300 basis point improvement since the beginning of the year.
Third quarter operating expenses were $67 million, exceeding the high end of our guidance range as we accelerated our RAMP and R&D investments within the quarter, extending our product capabilities in integrated metrology and technology differentiation to expand our 3D metrology for advanced packaging applications.
The operating income of $70 million was 28% of revenue for the third quarter, compared to 27% from the second quarter.
We achieved quarter-over-quarter operating margin improvement, with three consecutive quarters totaling approximately 300 basis point improvements since the start of the year. Our net income performance, also 26% of revenue, was supported from favorable investment income resulting from our increased cash balance.
Now turning to the balance sheet, we ended the third quarter with cash and short-term investments of $855 million, achieving operating cash flow of $67 million and converting 100% of our operating income into cash.
Mark: Inventory ended the quarter at $308 million, down $12 million versus Q2 and achieving five quarters of sequential decline.
We expect further inventory reduction of another $8-10 million for the fourth quarter as we
Speaker Change: This is the operator. Please stand by.
This is the operator. Please stand by.
Speaker Change: We are experiencing technical difficulties. Please stand by. I'll place you back on a music hold.
You're holding for the on to innovation. We are just experiencing brief interruption in today's conference. Please continue to stand by and the conference should resume momentarily. Thank you for your patience.
Speaker Change: Audience.
Speaker Change: Thank you.
Speaker Change: You may continue the conference, sir.
Speaker Change: Okay, well thank you very much.
prepared remarks and we'll go to questions. So, in summary, we're aligned to several diverse end-market drivers and we're well positioned to leverage our portfolio of inspection metrology and software to solve our manufacturing customers' high-value problems.
Through close customer collaborations, we have many exciting new product launches, such as 3D Bump Metrology, which we recently delivered to a leading memory manufacturer, and Void Inspection for wafer bonding applications that we expect to ship this year.
In addition to the organically developed technology, our recent tuck-ins further enhance both our portfolio of synergistic technologies and the markets that we can pursue.
Speaker Change: Combining the outlook for the end markets we're serving with our new product opportunities, we expect another solid year growth in 2025. And that concludes our prepared remarks. Lisa, please open the call for questions from our covering analysts.
Thank you, sir. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Again, star 1 to ask a question.
And our first question comes from Brian Chen of Stiefel.
Brian Chen: Are there? Thanks for letting us ask a few questions.
Speaker Change: I'll just FYI, Mike, I think where you picked up versus where Mark may have left off, I think there might have been a break there in terms of some of that content, but just FYI. Oh. Anyways.
Speaker Change: Back on script here.
Speaker Change: So TSMC effectively ran out of space to expand its co-op's footprint this year, but the demand is very high.
And so I was kind of curious, what do you currently see as timing for when that activity could pick up again? And when you combine that with the visibility you have on gate all-around expansion,
Speaker Change: How confident are you that ON2 revenue will show further improvement from existing levels moving into first quarter or first half of next year?
Speaker Change: Good question. Where...
I'd say, you know, highly confident, we're confident in revenues growing from here as we move into the first half of next year.
Speaker Change: and it's driven by not just Gate All Around but we also mentioned
DRAM capacity expansions that we're seeing to support both the enterprise server starting to pick up a little bit, but also the lack of capacity due to supporting all of the HBM growth.
So we see both and as far as the TSMC that or sorry the yeah, well you mentioned TSMC
The COAS expansion, they have been very aggressive at adding the capacity. We did mention on the prepared remarks that may or may not have made it out there that we expect.
the fourth quarter to see a fairly significant increase while the, yeah, while the HBM maybe is a little more muted in the fourth quarter from an AI packaging perspective.
So they're already starting to find a FAD capacity and we expect that to be remain fairly strong in the first half.
Okay, got it. And that's helpful. And so maybe a little bit earlier customer readiness from that standpoint to take equipment.
Speaker Change: It sounds like. And then in terms of that $10 million orthography delay, was that customer driven? Any other sort of color behind that? And when has that been rescheduled to?
Speaker Change: We're not clear on the reschedule, so that's still, you know, being discussed. But yes, it was customer-driven based on their needs.
The tools are ready to go.
Okay, got it.
And maybe just kind of one more question in broader strokes.
KLA last night on its earnings call, in addition to sort of being pretty upbeat on process control intensity, they're seeing a TSMC as that customer shifts from pilot to high volume production.
I guess, how much confidence do you have in Ontu's ability to outgrow WSC again in 2025 like you did in 2024?
Well, it depends on what you're expecting WF to be, but if it's in this 5-10% range, which is where I think most of the consensus is landing, then we're highly confident in outperforming those numbers for the same reasons, and I did talk about increased process control intensity, especially in the area of QNAP, the logic or AI packaging.
Based on the complexity of the process as well as the the needs for much better yields. These are very expensive devices and you know
Any yield issue across any of the products is going to drive a pretty expensive loss, so.
Speaker Change: So yeah, there's a lot of process control intensity.
And yeah, we're seeing that as well. And they're still learning. So a lot of the capabilities of our DragonFly with the many different sensors, we see the customers working with us to...
Combine different sensors to find the solutions and metrologies that don't exist.
today and any other tool. So there's a lot of learning that's going on through our collaborations with the customers.
Thanks. I'll appreciate that. I'll recue for any follow-ups. Thanks.
Go to Beadaholique.com for all of your beading supplies needs!
And our next question comes from Vidvati Charote. Please go ahead.
Hi, thanks for taking my question. So the first thing I wanted to ask about is last quarter you had talked about, you know, volume purchase agreements for gate all-around nodes. I think they were roughly 120 million.
Speaker Change: Can you give us an idea or a sense of how, how that, you know,
Speaker Change: splits out between customers, given that
You know, some of the leading edge customers are now facing issues with their data around transition. So has your visibility on those VPS changed? Is there any conversation changes where you may not get that whole $120 million?
Speaker Change: Not to any major degree, no. In fact, you know, we continue to work off some of that
That VPA, there's still quite a bit left for 2025, and our backlog continues to strengthen and look relatively good, you know, across the board.
So, no, I would say that, yes, there's certainly some movement by some customers, but our position remains strong and growing, or strengthening, I should say.
Speaker Change: Is it primarily because of the leading Foundry customer being strong? Is that a way to think about it?
You know, that's one, but we did mention that the number we talked about were two customers, and both look still strong.
Speaker Change: Okay.
Speaker Change: So now maybe on changing tracks on the HBM kind of a ramp.
What's the visibility you have on the HBM capacity additions? Like one of the things Teradyne pointed out on their call is they're seeing HBM capacity additions could be muted next year, as in the growth for Teradyne's HBM revenues could be muted next year.
What is your sense or, you know, visibility into how that HBM piece of the business goes into or, you know, the trajectory of that business into 2025?
Speaker Change: Well, I also mentioned that in my remarks around, you know, we're seeing quite an increase, a doubling in capacity from the 2.5 D-Logic side, and last quarter we talked about
Speaker Change: HBM
increasing so that alone would drive an increase an expected increase in HBM and then of course you have an additional intensity an additional number of HBM around each each GPU for the new for the new latest devices
Speaker Change: That said, we also see.
Speaker Change: Let's say, we're not seeing movement on HBM expansion yet.
Speaker Change: And so I echo that, and that's what I mentioned in the prepared remarks is that, you know, it's not clear yet, but we would expect that some kind of expansion would have to follow to support all of that new
Two and a half D logic that's coming on board my guess
is there could be, you know, still some conservatism.
by the players and still trying to understand who's going to win what share from, let's say, the major driver, the major end customer, and so they're careful with the capacity expansions. That's my guess, but, you know, I don't know, but we are seeing that muted behavior from HBM right now.
Got it. That's fair. And then the last one I had was on the power semiconductors. Could you help us on sort of the size of that revenue opportunity for you?
Speaker Change: And given that we're, you know, seeing a big downturn in the auto market, but your inspection revenues continue to be strong on the power side, it'd be great if you could provide, like, what's the disparity there, what continues to drive your revenues versus, you know, we're seeing capex cuts across the board.
impact on yields and sort of creates a requirement for additional process control or better process control capabilities.
Speaker Change: So, we're seeing some of that, and then I think it's pretty well publicized that the yields in general are not that high, so customers tend to want to, you know, if they want to increase output or prepare for increased output.
Speaker Change: And they can focus on yield instead of adding just capacity and throwing away. So that makes them more profitable when they do actually ramp.
Thank you. Thank you. Thank you.
Speaker Change: So how should we think about opportunity for you as in kind of the size of the business or any color that would be helpful?
Well, you know we don't break it all down there, but it's becoming, you know, one of our top markets behind AI packaging in the...
in the specialty and advanced packaging market. So I think it is number two in that space.
Thank you. I'll get back in the queue.
Speaker Change: And we'll move to our next question from Edward Yang with Oppenheimer.
Edward Yang: Hi, Mark. Hi, Mike. Hi, Mark. Congrats on a great quarter. Just wanted to drill down a little bit deeper into your outlook into 2025. You're expecting continued growth there.
and outpacing WFE, but, you know, obviously this year you're looking for revenue to grow, you know, about 20% and that's well a multiple of how much WFE grew this year. So, thinking about all the different puts and takes.
What are the things that give you confidence or less confidence, and can you size up again? Are there any reasons why growth should meaningfully accelerate or decelerate from your 24 run rate?
I would say, since I said we'd grow, there'd be a meaningful acceleration. And that would be in advanced nodes, for sure.
You know, bouncing along the bottom and now...
We've talked about gate all around opportunity expansions, but we now also are starting to see and gain more confidence.
Edward Yang: and DRAM, additional DRAM capacity and growth there driving our advanced nodes. So we see that staying, you know, growing quite nicely. The AI packaging, for sure.
Gate all around and the process control intensity and volume increases there
We'll see what happens with the HBM. Does it stay muted or not? If not, I think there'll be some significant growth there. I don't see how it could stay as it is if the
You know, the co-auth essentially doubles.
Edward Yang: So, we'll see, but that's...
That's that and then we we talked about the Power Semi and
In there, I said we would at least sustain these record levels in the prepared remarks, which implies we would expect to exceed and set new record levels. So this would be a floor for us. And so that will be another growth driver for us as we look at 2025.
Speaker Change: Good point. No, I'm not trying to imply we'd grow above 20%.
No, so I should have used the word.
Speaker Change: Not Accelerate.
Go to Beadaholique.com for all of your beading supply needs!
Again, can you speak to the broader ability of your customers to place tools at this point? It seems like things are loosening up a little bit. Is space still a bottleneck?
Speaker Change: Things are loosening up so there's new capacity coming on but even signing that deal there's there's
timelines to transfer and to qualify and to bring in tools etc which some of it's it's it's in process so but there's not an immediate like a launch right so so yes it's all part of the
Speaker Change: breaking of the current bottlenecks in the co-op's capacity. There's also, you know, actions being taken by that large customer as well, internally. And there's been discussions about the Inalex purchase.
Speaker Change: and my prepared remarks. I did mention Q4. We see a nice big uptick from the Gate All Around, sorry, for the 2.5 D logic packaging, and we expect that to maintain pretty healthy in the first half.
Speaker Change: And just a final question, maybe for Mark. I saw the SG&A ticked up a little bit sequentially, and is that a good run rate going forward, or was there any?
Edward Yang: Any extra spending in there that impacted the quarter.
Speaker Change: Yeah, I mean, I would think our goal is to hold total OPEX, you know, in line or better than Q3.
So I'd use that run rate from Q3 into Q4. In my prepared remarks, which might have been abbreviated, our goal is to drive offsets to the cost of the tuck-ins within Q4. So our goal is to stay at those levels.
Speaker Change: for IQ4.
Edward Yang: All the best.
Thanks. And we'll move to our next question from Mayor Potpourri from B. Riley Securities.
Yeah, hi there. I'm actually on for Craig Ellis.
But you mentioned packaging pickup in the fourth quarter. Is that kind of related to the increased complexity needs as we move into this RDL-based packaging? Or is it more to do with just general volume increases? And if it's to do with this RDL-based packaging increase, is that a trend that we can expect to continue as RDL picks up over the incumbents?
I think that the complexity increases is from two things, a couple things. One is, yes, they're introducing some new processes that they've talked about, but two is yields haven't been, you know, yields have room to improve, so they're also looking at
areas that could be impacting yield and how can they measure, so you can't fix what you can't see, so how can we help them see what is impacting yield so then they can make the adjustments and fix it.
to bring to bear different types of sensors and metrologies and inspection in order to combine that data and see things that you wouldn't see on any single tool. So that provides new insights into the yield.
Edward Yang: Opportunities to improve.
Speaker Change: Okay, yeah, right. No, that's a great answer.
Speaker Change: So I have a question on the flies, the dragonfly and the firefly. Obviously, they're really capable tools in 2D metrology, but you've also pointed out before how they're incredibly capable in the 3D inspection space.
Speaker Change: Do you see that kind of picking up, Cher? I know you mentioned one memory customer who wanted it for these 3D inspection processes. Do you see that 3D inspection aspect to these tools picking up?
Speaker Change: So there's localized 3D capability, which is very powerful. And we use that for high aspect ratio, 3D, very high precision metrology. That is part of the.
2D applications. What I was talking about was 3D bump metrology.
And that's still early stages, so it's too soon to predict.
Speaker Change: How big or how much that could be depends on adoption rate and how well we do in production. The tool we shipped is an evaluation tool.
So they'll now, based on the data exchanges we've had and all the wafers we've run for them in our facility, they now want to take the tool on-site.
Speaker Change: prove it in production and then hopefully we start to see revenue and that that's probably you know three to six to nine month on the outside type process
All right, gotcha. I hope that goes well. And then about those volume purchases.
Speaker Change: I was going to say we do expect to ship additional tools in the fourth quarter to additional customers for evaluation.
And that's Evaluation on 3D.
Speaker Change: Yep.
Speaker Change: Okay, great, great.
And again, about those Volume Purchase Agreements.
So, you know, we were talking about last quarter. I forgot exactly who asked this question, but, you know, there was some talk about how these might convert into kind of larger agreements in the future.
I think what I might have said is that we would expect perhaps additional revenue through the year and right now they're still working on this so you know I think it will will it
They got to cut through this and then we'll see what happens in the second half of the year, but that's still my.
My projection, I wouldn't, if I was going to bias it, I'd bias it towards they're going to need some additional tools in the second half versus not.
Speaker Change: Okay, thank you so much. Yeah, that's all I have. Thanks for talking to me.
Speaker Change: My pleasure.
And our next question comes from Charles Shea with Needham.
So, you guys got to cut off the big chunk of the prepared remarks we actually didn't hear. So, maybe, Mark, can you kind of repeat what the Q4 guidance, line by line, was in your prepared remarks? Because I think it's kind of important that if you can repeat for us, that would be great. This doesn't count as a question.
Edward Yang: Thanks.
Edward Yang: Thank you. Thank you.
Mark Slicer: Yeah, so, I mean, I'll just start out, Charles, I'll just start out at inventory.
So, inventory ended the quarter at $308 million, down $12 million versus Q2 and achieving five-quarters of a sequential decline.
Mark Slicer: We expect further inventory reduction of another $8-10 million for the fourth quarter as we project to be below $300 million as we exit 2024, which will be a $50 million reduction from our peak of 2023 inventory levels.
As we look at the fourth quarter, we currently expect revenue for the fourth quarter to be between $253 million and $267 million.
We expect gross margins will be 54 to 55 percent. With our inventory still above our target level, this is delaying our ability to cut in these supply chain cost reductions as we continue to prioritize the burndown of existing component levels.
For operating expenses, we expect to be between $66 million to $68 million as we look to hold OPEX flat or better versus Q3 as we optimize R&D to minimize the cost impact of the tuck-ins we announced earlier.
For the fourth quarter, we expect our effective tax rate to be between 15 to 16 percent. We expect our diluted share count for the fourth quarter to be approximately 49.8 million shares.
Based upon these assumptions, we anticipate our non-GAAP earnings for the fourth quarter to be between $1.33 and $1.48 per share.
So, Charles, we can ask you a real question.
Charles: Yeah, thanks.
Speaker Change: So, I'm trying to connect it off here, Mike.
Speaker Change: Over the last quarter, let's say three months, two out of, let's say, four leading-edge customers you have
have had pretty tough news coverage, their struggles, and the potential pressure on COVAX. But we know that your lethal, which unfortunately has been
quite often a downside contributor to your quarterly earnings for the past one year, one and a half, has a lot of sales tied into those two customers.
Am I
Connecting the dots right here because I would be thinking maybe some of the push-out or maybe look sounds like it's more like a
So, I don't know which two customers particularly you have in mind. It doesn't matter too much. I think if you look at...
substrate market where the lithography tool plays, there was massive
Charles: Let's say...
Edward Yang: bottlenecks that
Several of the enterprise server customers, manufacturers, complained about publicly that, you know, they were supply-constrained by lack of substrates, and so there was a really, really aggressive expansion.
Edward Yang: through 2022, maybe a little bit into 2023. And then, as we all know, the markets really softened, especially for enterprise high performance compute. And so, and, you know, NVIDIA is the, you know, the AI is the big, big engine now, and that's on a wafer basis.
Speaker Change: Lot of good stuff to cover. Excellent. Okay. Good luck. Thank you. Thank you.
That capacity, that excess capacity, is starting to be picked up and we see a little bit of pickup but it's still off of a kind of a low base.
And you can see that reflected in the comments I made about DRAM and the strength we're seeing now in DRAM, and that's driven by some of the enterprise hyperscalers and some enterprise compute warming up.
Edward Yang: So,
I'm not sure that answers your question, but I'm not sure what you're trying to get at.
Yeah, okay, okay. So, it sounds like you think the push-out is probably more of the cyclical factor at play rather than anything that's structural. I mean, those two customers are probably having more of a structural problem than the cyclical problem. That was what I'm trying to figure out.
Edward Yang: Yeah, I think it's more...
Good, yeah.
Edward Yang: So the other thing I do want to talk to you about really is the AI packaging business. I think last quarter you talked about, maybe second half this year,
Based on what you said, it sounds like in Q3, HVM was okay, 2.5D was down a bit. Q4, 2.5D coming back up, but HVM a little bit more muted. But do you still view that minus 10%, half over half the right number? Is it?
Is there any upside or downside to that number so far based on what you see?
Yeah, that's a good question. It was in my prepared remarks, which, of course, no one seemed to have heard. But I did say that it's cut in half. So if I had said 5% to 10%, it's about half of that now, as far as the down goes.
There's about half the decline that we originally projected.
Okay, okay, okay.
It's roughly 5% down compared with the first half level.
Speaker Change: because, oh, allow me to finish this question.
You kind of said that you expect that it will be higher than second half.
This is for AI packaging specifically? AI packaging, yes.
Yeah, I think for Logic, it's going to be relatively healthy. So maybe at the same level, I'd have to double check. But the real question mark is the HBM piece.
Speaker Change: Got it.
Thanks, Mike.
Mike: You're welcome, Charles.
And our next question comes from Mark Miller with The Benchmark Company.
She's wondering if you can give us a feeling for what you're expecting in China and Korea next year.
Well, 10 to 15% range. And I would expect to be in that same range, maybe. Yeah, I would expect to be in that same range.
Speaker Change: So, 10 to 15 percent of sales from Chavez next year.
Speaker Change: Yep.
Speaker Change: Thank you.
Speaker Change: You're welcome.
And our next question comes from David Dooley with Steelhead Securities.
David Dooley: Yes, thanks for taking my question. My first question is on the NAN market. You know, your big Korean HBM customer also plays in that market. I think they were talking about their
growing for us in 2025?
Speaker Change: And on a percentage basis, it would look very impressive, but it's still off of a very small base. So we don't see NAND recovering. So it's probably, as we mentioned a couple, I think now two quarters ago, it's really the high level, high stack NAND to support AI devices and AI server farms, the high speed data. So that's...
Speaker Change: You know that's that's essentially what we see as far as
Speaker Change: You know, the high stack and then, you know, the more layers mean a lot more of our process control. Not as much, so the capital intensity...
Well, there'll be a couple of extra steps in there, and that's where the aspect metrology comes into play, but we don't see any, you know, massive increases in let's say our OCD metrology as a result.
Speaker Change: Okay, and my second question is kind of around the high bandwidth memory market. I realize, you know, your customers aren't giving you a lot of visibility, I guess, into when they might expand the capacity.
But, you know, when you think about, I think you've highlighted this.
Speaker Change: The number of chips per GPU is probably going to double with Blackwell versus Hopper. You got them stack it going from stacking 8 to 12.
And you also have Micron ramping up, and I think Samsung just announced yesterday or the day before that they're close to signing their agreement with NVIDIA as well. So, I'm kind of curious why you wouldn't be much more positive about the growth in that in-market, given...
Speaker Change: all the unit volume growth and more customers coming online and is there but anyway I just maybe you could elaborate a little bit more.
Speaker Change: Wow!
What makes me positive is orders, so I see all the activity and I like, you know, our position and we're...
Speaker Change: You know, trying to expand our position with the work we're doing on the 3D metrology. So, going after more, let's say, wallet share. But, you know, we're not seeing the orders yet. And as I mentioned, I think, earlier, that there's some conservatism.
Speaker Change: with these customers. If everyone's ramping and qualified, they may not know yet what share they're going to have and how much they want to expand in order to serve that share. I'm sure.
NVIDIA is working them all against each other. So I don't know if, you know, that's just a guess, but yeah, when I start seeing orders.
I'll get a lot more confident. What we can do is look at the model and say, hey, the capacity we see is not matching the demand that that 2.5D upgrade or expansion is going to need. So something has to give.
Speaker Change: and you keep highlighting how all this co-op capacity expansion should mean that HBM capacity expands. I think I understand what you're saying but could you just elaborate a little bit more on that?
Speaker Change: Well if the markets were a perfect equilibrium and we're going to double the two and a half D logics side and we're saying that for each two and a half D logic the amount of HBM around it is going to increase let's say a factor of two like the number you use that's a 4x increase in in D or HBM that that would be required.
Speaker Change: That's it.
just if everything was in equilibrium. So now you have to say, okay, well, some capacity was added. Not everybody got cut into, you know, to let's say the NVIDIA supply chain early on. So who's going to win? How much excess capacity is there? I mean, we try and model this out. But to us, no matter how we look at this, it looks like some capacity expansion is going to be required.
Yes. Okay. And two final questions.
What are your lead times for your HPM inspection tools? And the second question is, a lot of this co-op capacity that's going to come online is not necessarily going to come online at TSMC. If you listen to ASE, they're ramping up as fast as they can.
Speaker Change: as TSMC's partner to expand co-auth, and you know, there was another question earlier about AMCOR, but that's a couple years out, I would think. Do you benefit...
Speaker Change: from Capacity Expansions at the Taiwanese OSATs, the same degree that you would benefit from Capacity Expansions at TSMC for 2.5D packaging.
If they run the exact same process, then yes.
That's yet to be determined. So we are benefiting, we are seeing engagement, we are getting orders. Obviously not to the same degree right now as...
The leader that you mentioned, but you know, they're also nowhere near, I mean, they're not even ramping yet, right? They're just, they're just starting to ramp.
Speaker Change: So I would say that remains to be seen. But again, yields are yields. It's hard to believe anyone's going to have better yields or better process than TSMC. So my guess is we'd see at least an equivalent process control intensity.
Speaker Change: Thank you.
Okay, thank you. Oh, and the lead time.
Speaker Change: Lead time, well I was not going to answer that anyway but I would say we're looking at three months or so you know it's it's it's definitely increasing the volumes gone way up but as you know we we've we've always mentioned we build to a forecast to the extent we have a good forecast data you know we we we can adjust lead times but things are
Speaker Change: ticking out a little bit because of the such strong demand we have right now.
So, with that kind of short lead time, obviously, if a customer came in and won a bunch of tools, you have the capacity to meet that order.
Yeah, we work hard to make sure we do.
Speaker Change: No one expected us to have to double the capacity output for, you know, dragonflies this year, and yet that's, that's essentially what we've done, so.
Speaker Change: Yeah, we're the team's outstanding at getting creative, reducing cycle times, leveraging our supply chain partners and making sure we serve our customers. And as we've commented before, we have the capacity within our manufacturing to do that.
Excellent, you guys. We appreciate the excellent execution.
David Dooley: Thanks David. Thank you.
And we'll take our last question in queue from Brian Chin with Stiefel.
Hi there, um, you know,
Brian Chin: It wasn't really a question, but what I was going to suggest or maybe just put out there is that I appreciate Mark repeating the complete fourth quarter guidance, and I was going to ask Mike if you had substantive commentary after Mark's guidance
I think we missed pretty much all that so if there was something there it might be worth repeating if not then...
You know, no bother, but I just wanted to throw that out there.
Sure. I can, uh, yeah, Brian, we're just aligning to where on the, his prepared remarks was cut, so he picked up.
David Dooley: Okay, so essentially...
I, uh, I had said that...
Demand for process control and AI packaging gate all around power semiconductors remains.
quite strong. Specifically with AI packaging, we've seen improvements over our prior second half 2024 projections. And this I've already mentioned, so that I'll skip.
And I mentioned that's helping to offset that.
added growth in the AI packaging is offsetting the 10 million push-out that we had expected from the lithography so in fact we would have been a significant beat.
And then I mentioned that the market leader in AI logic packaging recently announced a doubling of 2.5D logic capacity for next year. Though not yet certain, we would expect to see orders supporting HBM memory to also improve to support this growth in logic, again something we discussed.
David Dooley: I mentioned that the growth in high bandwidth memory has taken...
a meaningful amount of capacity away from standard DRAM as HBM requires roughly three times more wafer capacity and this in turn is contributing to an expansion and advanced DRAM to support a recovery in enterprise servers and investments by hyperscale customers.
Speaker Change: which we expect to see or benefit from more meaningfully in the first half of 2025. Yeah, I think that's the essential message. I tried to bring that all in when I answered some of the questions.
Okay, yeah, yeah, I think you were able to incorporate some of that. No, I appreciate that. Maybe just, maybe one last question against that.
I know you don't dictate your customer's intake and demand and shipment timing, but to the extent that you kind of can have some...
some, you know, I guess modulation here where kind of one customer is bigger, another customer maybe subsides for a quarter or two or whatever the case is.
I guess that alleviates sort of your manufacturing, upward pressure on your manufacturing footprint. To the extent you may have HBM stronger in the same period that COAS is strong, do you have that ability to flex upwards in terms of higher output in manufacturing?
Some of the subassemblies to partners where we can take that off and free up the floor and free up our
are higher trained technical people, so...
to focus on the...
Speaker Change: more difficult integration. So yeah, we definitely have the ability to serve the customers and their needs as they grow.
Yeah, and maybe just to clarify one comment you may have. I think you said backlog continues to strengthen, so it sounds like.
You're running a positive book-to-bill with orders ahead of revenue across the business.
Well we don't I don't have it exactly in front of me I just mentioned the backlog has strengthened so you know we don't really report on it but I knew people would be concerned around or asking about the VPA and what does that mean how's that being worked down and in fact you know where we continue to to blow our backlog even as we work through that VPA so
To me that was a comment just to indicate we still see strong Demand and not much softening at least in the areas. We're focused on right now
And I imagine even, you know, the fact that you have that BPA and HBM is a portion of that, I guess that does give you some comfort that some of that activity is still.
on the come next year.
Yeah, for sure. I didn't say it would go to zero. HBM is still going to be there, I just think it could be even stronger based on the, you know, the demand supply models we have between the the 2.5 D logic and the HBM.
Speaker Change: Hopefully there's some upside we can talk about and keep recording. Yep.
Speaker Change: Appreciate that. Thank you.
And ladies and gentlemen, this concludes today's Q&A session. I'd like now to turn the call back to Sidney Ho for any additional or closing remarks.
Sidney Ho: Thank you. We will be participating in a number of investor conferences throughout this quarter. We look forward to seeing many of you there. 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. Lisa, please conclude the call.
And ladies and gentlemen, this concludes today's call. Thank you for your patience and your participation. You may now disconnect.
Speaker Change: [music]
Speaker Change: [music]