Onto Innovation Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 10 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to the Onto Innovation Third 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.

Speaker 1

Thank you, Lisa, and good afternoon, everyone. ON2 Innovation issued its 2024 Q3 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 Placzynski, Chief Executive Officer and Mark Slizer, Chief Financial Officer. 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 1

Those statements are subject to a range of changes, risks and uncertainties that can cause actual results to vary materially. For more information regarding the risk factors that may impact Onto 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. Today's discussion of our financial results will be presented on a non GAAP financial basis unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non GAAP results can be found in today's earnings release.

Speaker 1

Let me now turn the call over to our CEO, Mike Lesinski. Mike?

Speaker 2

Thank you, Sydney. Good afternoon, everyone, and thank you for joining us today. Overall, we executed well in the Q3 with revenue coming in at $252,000,000 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%.

Speaker 2

This resulted in record cash generation from operations of $67,000,000 Mark will soon discuss these highlights and our outlook for Q4, which was negatively impacted by over $10,000,000 in JetStep lithography push outs due to customers' capacity needs. But first, we'll review the Q3 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. 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.

Speaker 2

Revenue from power devices was the 2nd 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 are expanding our core inspection technology with the tuck in of Lumina instruments announced earlier today.

Speaker 2

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 you. 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 $250,000,000 annually in the next 3 years.

Speaker 2

In addition to Lumina Instruments, we announced the acquisition of the lithography business from Kulicke and Sofa. With this tuck in, we had an incredibly talented team with over 200 man years of lithography experience, 24 issued patents and 8 more pending. Based on Eindhoven, we believe this team and technology will contribute to the acceleration of our JetStep lithography roadmaps and extend our competitive differentiation. We expect the combination of these 2 small tuck ins to be accretive to earnings within 12 months and generate up to $100,000,000 in annual revenue in the next 3 years. For reference, revenue today is negligible.

Speaker 2

While we strengthen our opportunities in the specialty and advanced packaging markets, we also see recovery from the advanced nodes. 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 4th quarter guidance.

Speaker 3

Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we exceeded the midpoint of our revenue and EPS guidance, executing towards the high end of these ranges due to 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. We achieved another record operating cash flow of $67,000,000 for the 2nd straight quarter. Operating cash flow yielded 27% represents more than doubling of operating cash during the same period last year. 3rd quarter revenue of $252,000,000 was up 4% versus the 2nd quarter and up 22% versus the prior year.

Speaker 3

The 3rd quarter EPS increased 2% sequentially to 1.34 and up 40% versus the prior year. 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 $161,000,000 and represents 64% of revenue. Our biggest sequential increase was Advanced Nodes, which had revenue of $42,000,000 increased 32% over Q2 and represents 17% of revenue. Software and services with revenue of $49,000,000 increased 5% over Q2, representing 19% of revenue. We achieved 55% gross margin for the 3rd quarter at the high end of our guidance range of 53% to 55%, driving more than 100 basis point improvement over the 2nd quarter and over 300 basis point improvement since the beginning of the year.

Speaker 3

3rd quarter operating expenses were $67,000,000 exceeding the high end of our guidance range as we accelerated our ramp in R and D investments within the quarter, extending our product capabilities in integrated metrology and technology differentiation to expand our 3 d metrology for advanced packaging applications. Our operating income of $70,000,000 was 28% of revenue for the 3rd quarter compared to 27% from the 2nd quarter. We achieved quarter over quarter operating margin improvement with 3 consecutive quarters totaling approximately 300 basis point improvement since the start of the year. Our net income performance also 26 percent of revenue was supported from favorable investment income resulting from our increased cash balance. Now turning to the balance sheet.

Speaker 3

We ended the second quarter sorry, we ended the Q3 with cash and short term investments of $855,000,000 achieving operating cash flow of $67,000,000 and converting 100 percent of our operating cash and operating income into cash. Inventory ended the quarter at $308,000,000 down $12,000,000 versus Q2 and achieving 5 quarters of sequential decline. We expect further inventory reduction of another $8,000,000 to $10,000,000 for the 4th quarter as we

Speaker 1

We are holding for the ONTU Innovation. We are just experiencing brief interruption in today's conference. Please continue to

Operator

You may continue the conference, sir.

Speaker 2

Okay. Well, thank you very much. Hopefully, everybody is still on the line. And I will finish my 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 manufacturers' customer our manufacturing customers' high value problems.

Speaker 2

Through close customer collaborations, we have many exciting new product launches, such as 3 d 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 our both our portfolio of synergistic technologies and the markets that we can pursue. Combining the outlook for the end markets we're serving with our new product opportunities, we expect another solid year of growth in 2025. And that concludes our prepared remarks. Lisa, please open the call for questions from our covering analysts.

Operator

Thank you. And our first question comes from Brian Chin with Stifel.

Speaker 4

Hi there.

Speaker 5

Thanks for letting us ask a few questions. And also 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. Anyways, back on script here. The So TSMC effectively ran out of space to expand its COAS 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?

Speaker 5

And when you combine that with the visibility you have on gate all around expansion, how confident are you that ONTU revenue will show further improvement from existing levels moving into first quarter or first half of next year?

Speaker 2

Good question. We're I'd say highly confident. We're confident in revenues growing from here as we move into the first half of next year. 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 HPM growth. So we see both.

Speaker 2

And as far as the TSMC or sorry, the yes, what you mentioned TSMC, the cost 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 4th quarter to see a fairly significant increase, while the HBM maybe is a little more muted in the Q4 from an AI packaging perspective. So they're already starting to find space to add capacity and we expect that to be remain fairly strong in the first half.

Speaker 5

Okay, got it. And that's helpful. And so maybe a little bit earlier customer readiness from that standpoint to take equipment, it sounds like. And then in terms of that $10,000,000 lithography delay, was that customer driven? Any other sort of color behind that?

Speaker 5

And when has that been rescheduled to?

Speaker 2

We're not clear on the reschedule. So that's still being discussed. But yes, it was customer driven based on their needs. The tools are ready to go.

Speaker 5

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 at TSMC as that customer shifts from pilot to high volume production. They also expressed a lot of confidence based on the higher process control intensity that they would outgrow WFE in 2025.

Speaker 5

And so when you look at that, again, that high process control intensity both for gate all around expansions as well as COOS, advanced packaging maybe HBM. I guess how much confidence do you have in On2's ability to outgrow WFE again in 2025 like you did in 2024?

Speaker 2

Well, it depends on what you're expecting WF to be. But if it's in this 5% to 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 Q and A, logic or AI packaging, based on the complexity of the process as well as the needs for much better yields. These are very expensive devices and any yield issue across any of the products is going to drive a pretty expensive loss. So yes, there's a lot of process control intensity.

Speaker 2

And yes, 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 in any other tool. So there's a lot of learning that's going on through our collaborations with the customers.

Speaker 5

Thanks. I appreciate the opportunity for any follow ups. Thanks.

Operator

And our next question comes from Vedva T. Sirota. Please go ahead.

Speaker 6

Hi. Thanks for taking my question. So the first thing I wanted to ask about is last quarter you had talked about volume purchase agreements for gate all around nodes, I think they were roughly $120,000,000 Can you give us an idea or a sense of how that splits out between customers given that some of the leading edge customers are now facing issues with their gate all around transition. So has your visibility on those VPs changed? Is there any conversation changes where you may not get that whole €120,000,000

Speaker 2

Not to any major degree, no. In fact, we continue to work off some of that VPA. There's still quite a bit left for 2025 and our backlog continues to strengthen and look relatively good 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 6

Is it primarily because of the leading foundry customer being strong? Is that a way to think about it?

Speaker 2

That's one, but we did mention that the number we talked about were 2 customers and both look still strong.

Speaker 6

Okay. Understood. So now maybe on changing tracks on the HPM kind of a ramp, What's the visibility you have on the HPM capacity additions? Like one of the things Teradyne pointed out on their call is they're seeing HPM capacity additions could be muted next year as in the growth for Teradyne's HPM revenues could be muted next year. What is your sense or visibility into how that HBM piece of the business goes into or the trajectory of that business into 2025?

Speaker 2

Well, I also mentioned that in my remarks around we're seeing a quite an increase, a doubling in capacity from the 2.5 D logic side. And last quarter, we talked about 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 GPU for the new latest devices. That said, we also see, let's say, we're not seeing movement on HBM expansion yet.

Speaker 2

And so I echo that and that's what I mentioned in the prepared remarks is that it's not clear yet, but we would expect that some kind of expansion would have to follow to support all of that new 2.5D logic that's coming on board. My guess is there could be 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 I don't know, but we are seeing that muted behavior from HBM right now.

Speaker 6

Got it. That's fair. And then the last one I had was on the power semiconductors, could you help us understand sort of the size of that revenue opportunity for you? And given that we're 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 we're seeing CapEx cuts across the board?

Speaker 2

Yes. I mentioned it the last couple of quarters. It's all about driving yields and sort of creates a impact on yields and sort of creates a requirement for additional process control or better process control capabilities. 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.

Speaker 2

So customers tend to want to if they want to increase output or prepare for increased output, they can focus on yield instead of adding just capacity and throwing away. So that makes them more profitable when they do actually ramp.

Speaker 6

So how should we think about the opportunity for you as in kind of the size of the business or any color there would be helpful?

Speaker 2

Well, we don't break it all down there, but it's becoming one of our top markets behind AI packaging in the specialty and advanced packaging market. So I think it is number 2 in that space.

Speaker 6

Thank you. I'll get back in the queue.

Operator

And we'll move to our next question from Edward Yang with Oppenheimer.

Speaker 7

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.

Speaker 7

You're expecting continued growth there and outpacing WFE. But obviously this year you're looking for revenue to grow 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 will you can you size up again? Are there any reasons why growth should meaningfully accelerate or decelerate from your 2024 run rate?

Speaker 2

I would say since I said we'd grow, there'd be a meaningful acceleration and that would be an advanced nodes for sure. That's been 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 in DRAM, additional DRAM capacity and growth there, driving our advanced nodes. So we see that staying growing quite nicely. The AI packaging for sure gate all around and the process control intensity and volume increases there is creating opportunities. We'll see what happens with the HBM, does it stay muted or not?

Speaker 2

If not, I think there'll be some significant growth there. I don't see how it could stay as it is if the COOS essentially doubles. So we'll see, but that's that. And then 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.

Speaker 2

So this would be a floor for us. And so that will be another growth driver for us as we look at 2025.

Speaker 7

And just to clarify, when you say accelerate, I mean, do you mean accelerate off of a 20% revenue growth rate?

Speaker 2

Yes, good point. No, I'm not trying to imply we'd grow above 20%. No. So I should have used the word not accelerate. And

Speaker 7

one of your larger foundry customers signed an advanced packaging deal with an OSAT in Arizona earlier this month. Does this have any relevance to your order book? And 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 2

Things are loosening up. So there's new capacity coming up. But even signing that deal, there's timelines to transfer and to qualify and to bring in tools, etcetera, which some of it's in process. So but there's not an immediate like a launch, right? So yes, it's all part of the breaking of the current bottlenecks in the COOS capacity.

Speaker 2

There's also actions being taken by that large customer as well internally. And there's been discussions about the Intellix purchase. And in my prepared remarks, I did mention Q4, we see a nice big uptick from the gate all around sorry, for the 2.5D logic packaging, and we expect that to maintain pretty healthy in the first half.

Speaker 7

And just a final question maybe from Mark. I saw the SG and A ticked up a little bit sequentially and is that a good run rate going forward or was there any extra spending in there that impacted the quarter?

Speaker 4

Yes. I mean, I would think our

Speaker 3

goal is to hold total OpEx 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 we can our goal is to stay at those levels for Q4 or better.

Speaker 4

Thank you.

Speaker 7

Thanks.

Operator

And we'll move to our next question from Meyer Popuri from B. Riley Securities.

Speaker 8

Yes. Hi there. I'm actually on for Craig Ellis. But you mentioned packaging pickup in the Q4. Is that kind of related to the increased complexity needs as we move into this RDL based packaging?

Speaker 8

Or is it more to do with just general volume increases? And if it's to do with this, LDL based packaging increase, is that a trend that we can expect to continue as RDL picks up over the incumbent?

Speaker 2

I think the complexity increases is from 2 things a couple of things. 1 is, yes, they're introducing some new processes that they've talked about. But 2 is yields haven't been 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.

Speaker 2

So how can we see help them see what is impacting yield so then they can make the adjustments and fix it. And that dynamic is also in play and that's where I mentioned the incredible breadth of capability we have on the Dragonfly platform 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 opportunities to improve.

Speaker 8

Okay. Yes, right. No, that's a great answer. So I have a question on the flies, the Dragonfly and the Firefly. Obviously, they're really capable tools in 2 d metrology, but you've also pointed out before how they're incredibly capable in the 3 d inspection space.

Speaker 8

Do you see that kind of picking up share? I know you mentioned one memory customer who wanted it for these 3 d inspection processes. Do you see that 3 d inspection aspect to these tools picking up?

Speaker 2

So there's localized 3 d capability, which is very powerful and we use that for high aspect ratio 3 d, very high precision metrology. That is part of the 2 d applications. What I was talking about was 3 d bump metrology and that's early that's still early stages. So it's too soon to predict how big or how much that could be. It depends on adoption rate and how well we do in production.

Speaker 2

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, prove it in production and then hopefully we start to see revenue. And that's probably 3 to 6 to 9 month on the outside type process.

Speaker 8

All right, got you. That's yes, I hope that goes well. And then about those volume purchases that we

Speaker 2

announced And we sorry, we do I was going to say we do expect to ship additional tools in the Q4 to additional customers for evaluation.

Speaker 8

And that's evaluation on 3 d?

Speaker 4

Yes.

Speaker 8

Okay, great. And again, about those volume purchase agreements, so we were talking about last quarter, I forgot exactly who asked this question, but there was some talk about how these might convert into kind of larger agreements in the future. Is there any progress there in terms of kind of converting these initial agreements into perhaps larger partnerships going forward?

Speaker 2

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 I think it will 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 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 8

Okay. Thanks so much. Yes, that's all I have. Thanks for talking to me.

Speaker 2

My pleasure.

Operator

And our next question comes from Charles Shi with Needham.

Speaker 4

Hey. 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.

Speaker 4

Hopefully, this doesn't count as a question.

Speaker 3

No, thanks. Yes. So I mean, I'll just start out Charles, I'll just start out at inventory. So inventory ended the quarter at $308,000,000 down $12,000,000 versus Q2 and achieving 5 quarters of central decline sequential decline. We expect further inventory reduction of another $8,000,000 to $10,000,000 for the Q4 as we project to be below $300,000,000 as we exit 24, which will be a $50,000,000 reduction from our peak of 2023 inventory levels.

Speaker 3

As we look at the Q4, we currently expect revenue for the Q4 to be between $253,000,000 $267,000,000 dollars We expect gross margins will be 54% to 55%. With our inventory still above our target level, this is delaying our ability to cut in the supply chain cost reductions as we continue to prioritize the burn down of existing component levels. For operating expenses, we expect to be between $66,000,000 to $68,000,000 as we look to hold OpEx flat or better versus Q3 as we optimize R and D to minimize the cost impact of the tuck ins we announced earlier. For the Q4, we expect our effective tax rate to be between 15% to 16%. We expect our diluted share count for the Q4 to be approximately 49,800,000 shares.

Speaker 3

Based upon these assumptions, we anticipate our

Speaker 4

Yes, yes, thanks.

Speaker 2

So, I'm trying to

Speaker 4

Yes, thanks. So, I'm trying to connect the dots here, Mike. Over the last quarter, let's say, 3 months, 2 out of the, let's say, 4 leading edge customers you have, have had a pretty tough news coverage, their struggles and the potential pressure on CapEx. But we know that your leasehold, which unfortunately has been quite often a downside contributor to your quarterly earnings for the past 1 year, 1.5, Has a lot of sales tied into those 2 customers? Am I connecting the dots right here because I would be thinking maybe some of the push out or maybe it looks sounds like it's more like I mean it's delayed to unknown date.

Speaker 4

It's really tied to these 2 customers. So is that anything to do with the CapEx cut that they could be going through?

Speaker 2

So I don't know which 2 customers particularly you have in mind, it doesn't matter too much. I think if you look at the substrate market where this where the lithography tool plays, there was massive, let's say, bottlenecks that several of the enterprise server customers, manufacturers complained about publicly that they were supply constrained by lack of substrates. And so there was a really, really aggressive expansion 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 NVIDIA's the AI is the big engine now and that's on the wafer basis.

Speaker 2

So 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. You can see that reflected in the end 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. So I'm not sure if that answers your question, but I'm not sure what you're trying to get at.

Speaker 4

Yes. 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.

Speaker 4

That was what I'm trying to figure out.

Speaker 2

Yes. I think it's more

Speaker 4

yes. Go ahead. Yes. 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, roughly 10% below the first half level, combining 2.5D and HBM.

Speaker 4

And based on what you said, it sounds like in Q3, HBM was okay, 2.5D was down a bit, Q4, 2.5D coming back up, but HBM 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?

Speaker 2

Yes, that's a good question. It was in my prepared remarks, which of course no one seemed to have heard. But it was I did say that it's cut in half. So things have if I had said that 5% to 10%, it's about half of that now as far as the down goes. It's about half of the decline that we originally projected.

Speaker 4

Okay. Okay. Okay. It's roughly 5% down compared with the first half level. And the first half twenty twenty five, because allow me to finish this question.

Speaker 4

You kind of said that you expect that they will be higher than second half twenty twenty four level. Based on the order intake, based on the customer indications, do you still feel like that's about the right like first half twenty twenty five higher than second half twenty twenty four, but still have to wait and see if you can exceed the first half twenty twenty four level?

Speaker 2

This is for AI Packaging specifically?

Speaker 4

AI Packaging, yes.

Speaker 2

Yes. 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. As we mentioned, we see that muted right now, though when we look at the expansion on the 2.5D Logic side, it's hard not to expect expansion on HBM to keep up.

Speaker 4

Got it. Thanks, Mike.

Speaker 2

You're welcome, Charles.

Operator

And our next question comes from Mark Miller with The Benchmark Company.

Speaker 9

Congrats on your another good quarter. I was just wondering, can you give us a feeling for what you're expecting in China and Korea next year?

Speaker 2

Korea, we can say I mentioned DRAM and the DRAM growth. So you could guess that Korea would participate in that. China, we expect I mean, we're already relatively de risked in China. So we're around the 10% to 15% range. And I would expect to be in that same range maybe yes, I would expect to be in that same range.

Speaker 9

So 10% to 15% of sales from China next year?

Speaker 4

Yes. Thank you. You're welcome.

Operator

And our next question comes from David Duley with Steelhead Securities.

Speaker 9

Yes. Thanks for taking my question. My first question is on the NAND market. Your big Korean HBM customer also plays in that market. I think they're talking about their SSD business being up 20% sequentially and 4 30% year over year.

Speaker 9

Lam is talking about a big upgrade cycle to move up in the number of layers. So we're not seeing wafer new wafer starts added, but we're seeing a big upgrade cycle. And I was just wondering how you might participate in that?

Speaker 2

We see NAND growing for us in 2025. 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 2 quarters ago, it's really the high level, high stack NAND to support AI devices and AI server farms, the high speed data.

Speaker 2

So that's essentially what we see. As far as the high stack and then the more layers mean a lot more of our process control, not as much. So the capital intensity will 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 massive increases in, let's say, our OCD metrology as a result.

Speaker 9

Okay. And my second question is kind of around the high bandwidth memory market. I realize your customers aren't giving you a lot of visibility, I guess, into when they might expand the capacity. But when you think about I think you've highlighted this, 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.

Speaker 9

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 end market given all the unit volume growth and more customers coming online. And is there anyway, just maybe you could elaborate a little bit more.

Speaker 2

What makes me positive is orders. So I see all the activity and I like our position and we're trying to expand our position with the work we're doing on the 3 d metrology. So going after more, let's say, wallet share. But we're not seeing the orders yet. And as I mentioned, I think earlier that there's some conservatism with these customers.

Speaker 2

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 that's just a guess, but yes, 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 9

And you keep highlighting how all the 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 2

Well, if the markets were at perfect equilibrium and we're going to double the 2.5D Logix side and we're saying that for each 2.5D Logix, the amount of HBM around it is going to increase, let's say, a factor of 2, like the number you use. That's a 4x increase in D or HBM that would be required. That's just if everything was in equilibrium. So now you have to say, okay, well, some capacity was added, not everybody got cut into, let's say, the NVIDIA supply chain early on. So who's going to win?

Speaker 2

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.

Speaker 9

Yes. Okay. And two final questions. What are your lead times for your HBM 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.

Speaker 9

If you listen to ASC, they're ramping up as fast as they can, as TSMC's partner to expand co ops. And there's another question earlier about Amcor, but that's a couple of years out, I would think. Do you benefit from capacity expansions at the Taiwanese OSATs the same degree that you would benefit from capacity expansions at TSMC for 2.5 de packaging?

Speaker 2

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.

Speaker 2

Obviously, not to the same degree right now as the leader that you mentioned, but they're also nowhere near I mean, they're not even ramping yet, right? They're just starting to ramp. 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.

Speaker 2

So my guess is we'd see at least an equivalent process control intensity.

Speaker 4

Okay. Thank you. Oh, and the lead time?

Speaker 2

Lead time. Well, I was not going to answer that anyway, but I would say we're looking at 3 months or so. It's definitely increasing. The volume has gone way up. But as we've always mentioned, we build to a forecast to the extent we have a good forecast data.

Speaker 2

We can adjust lead times. But things are ticking out a little bit because of the such strong demand we have right now.

Speaker 9

So with that kind of short lead time, obviously, if a customer came in and want a bunch of tools, you have the capacity to meet that order?

Speaker 2

Yes, we work hard to make sure we do. I mean, no one expected us to have to double the capacity output for Dragonflies this year and yet that's essentially what we've done. So yes, the teams are outstanding at getting creative, reducing cycle times, leveraging our supply chain partners and making sure we serve our customers.

Speaker 3

And as we've commented before, we have the capacity within our manufacturing to do that.

Speaker 9

Excellent. You guys, we appreciate the excellent execution.

Speaker 2

Thanks, David. Thank you.

Operator

And we'll take our last question in queue from Brian Chin with Stifel.

Speaker 4

Hi there.

Speaker 5

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 Q4 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 no bother. I just wanted to throw that out there.

Speaker 2

Sure. I can yes, Brian, we're just aligning to where on the his prepared remarks was cut to be picked up. Give us one. Yes. So essentially, I had said that demand for process control and AI packaging, gate all around power semiconductors remains quite strong.

Speaker 2

Specifically with AI Packaging, we see improvements over our prior second half twenty twenty four 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 $10,000,000 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.

Speaker 2

Though not yet certain, we would expect to see orders with supporting HBM memory to also improve to support this growth in logic, again, something we discussed. And I mentioned that the growth in high bandwidth memory has taken a meaningful amount of capacity away from standard DRAM as HBM requires roughly 3 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, which we expect to see or benefit from more meaningfully in the first half of twenty twenty five. Yes, I think that's the essential message. I tried to bring that all in when I answered some of the questions.

Speaker 5

Okay. Yes, yes, I think we're 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 customers' intake and demand and shipment timing, but to the extent that you kind of can have some I guess, modulation here where kind of one customer is bigger, another customer maybe subsides for a quarter or 2 or whatever the case is.

Speaker 5

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 COOS is strong, do you have that ability to flex upwards in terms of higher output in manufacturing?

Speaker 2

Yes, we absolutely do. I mean, we're not even running full second shifts, let alone 3rd shift. So that alone, if we made no other improvements would allow us to significantly increase capacity. So we absolutely do. There's other things we're working on.

Speaker 2

I mentioned working with supply chain partners. So we're moving some of the less skilled or more some of the sub assemblies to partners, where we can take that off and free up the floor and free up our higher trained technical people, so to focus on the more difficult integration. So yes, we definitely have the ability to serve the customers and their needs as they grow.

Speaker 5

Yes. And maybe just to clarify one comment you made. 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?

Speaker 2

Well, we don't I don't have it exactly in front of me. I just mentioned the backlog has strengthened. So 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 is that being worked down?

Speaker 2

And in fact, we continue to grow our backlog even as we work through that BPA. 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.

Speaker 5

And I imagine even the fact you have that VPA 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?

Speaker 2

Yes, for sure. I didn't say it would go to 0. HBM is still going to be there. I just think it could be even stronger based on the demand supply models we have between the 2.5 D logic and the HBM.

Speaker 7

So

Speaker 4

hopefully there's some upside we can talk about in future quarters.

Speaker 5

Appreciate that. Thank you.

Operator

And ladies and gentlemen, this concludes today's Q and A session. I'd like now to turn the call back to Sidney Ho for any additional or closing remarks.

Speaker 1

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 continued interest in Onsu Innovation.

Speaker 1

Lisa, please conclude the call.

Operator

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

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Key Takeaways

  • Onto Innovation delivered a record Q3 with $252 million in revenue, a 54.5% gross margin, 28% operating margin, and a record $67 million in cash from operations.
  • AI-focused advanced packaging led the inspection business, with high-bandwidth memory growth offsetting logic packaging declines and driving expectations for further volume gains and increased process control intensity.
  • Power semiconductor customers set a new quarterly record, prioritizing yield improvements amid larger wafer transitions—an emphasis projected to sustain revenue at current levels into next year.
  • Two strategic tuck-ins—Lumina Instruments’ laser-based inspection technologies and Kulicke & Soffa’s lithography business—are expected to expand the SAM by $250 million, generate up to $100 million in annual revenue within three years, and be accretive within 12 months.
  • For Q4, the company guides revenue of $253–267 million, 54–55% gross margin, $66–68 million in operating expenses, and plans to reduce inventory below $300 million by year end despite a $10 million lithography push-out.
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Earnings Conference Call
Onto Innovation Q3 2024
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