ONTO - NYSE

Good day, and welcome to the Onto Innovation Fourth Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sidney Ho, Investor Relations. Please go ahead.

Thank you, Rachel, and good afternoon, everyone. Onto Innovation issued its 2024 fourth quarter and full year financial results this afternoon, shortly after the market closed. If you did not receive a copy of the release, please refer to the company's website where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer, and Mark Slicer, Chief Financial Officer. I'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. 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. Let me turn the call over to our CEO, Michael Plisinski. Mike?

Thank you, Sidney. Good afternoon, everyone, and thank you for joining us on our call today. We capped off 2024 with our sixth consecutive quarter of growth and a new quarterly revenue record of $264 million. Growth from the specialty and advanced packaging markets was strong throughout the year and also culminated in a record fourth quarter led by strong AI packaging demand. Financially, gross margins improved every quarter in the year to end at nearly 55% in the fourth quarter. We will continue our focus on driving gross and operating margin improvement throughout 2025. Now let's review the fourth quarter business highlights starting with our specialty device and advanced packaging markets, which grew a healthy 30% for the calendar year. Our largest market overall in the quarter was AI Packaging led by strong growth in shipments to support 2.5D Logic packaging. As expected, orders from HBM declined after a record third quarter. However, as HBM order allocations from end markets are becoming clearer, we are seeing a pickup in demand to support the growth of 2.5D Logic packaging. For the full year, inspection tool revenue for AI packaging more than doubled and was split nearly equally between 2.5D Logic and HBM. To support the growing complexity and advanced packaging process, customers are adopting more of our front-end metrology tools to improve control in both 2.5D Logic and HBM processes. For the year, our metrology revenue in advanced packaging exceeded $50 million, more than triple that of 2023. And we expect additional growth into the new year. In addition to AI packaging, interest is growing in the panel market, particularly for the use of glass panels for enterprise server and AI applications. We're pleased that in the quarter, Firefly was adopted at two leading panel manufacturers for applications in glass and advanced IC substrates. These leaders selected Firefly technology for the ability of our integrated multi-sensor technology to solve a variety of application challenges, beyond high-resolution defect inspection, ultimately reducing or eliminating manual processes. In addition, the new customers expand our panel install base as they are not currently JetStep X500 lithography customers. This is creating potential opportunities for future cross-selling and the adoption of integrated solutions like StepVest used in panel-level fan-out applications. Also in the quarter, revenue from power devices set another record and was the second largest market in the fourth quarter behind 2.5D packaging. For the year, power revenue grew 10% despite soft end market demand delaying several customer expansions. During the year, we believe our customers focused on driving yield improvements, and we were pleased our portfolio solutions and applications experience could contribute to that effort. Switching gears to our advanced nodes markets, we saw our fourth consecutive quarter of growth. Momentum we expect will strengthen more significantly in 2025. In the quarter, logic and memory both grew and as expected, gate all-around revenue was the largest increase nearly doubling over the prior quarter. In addition to growth for our Atlas OCD tools, demand for our Iris film metrology also increased with successful qualifications in memory, logic, and packaging, reaching nearly $100 million in revenue for the year. We expect demand for our Iris films to grow further in the new year as we expand both customers and markets served. Concluding our highlights for the fourth quarter, we've recently launched several new products aimed at strengthening and expanding our opportunities in advanced packaging, advanced nodes, and power semiconductors. These products are in the process of being proven out at several top five semiconductor manufacturers and leading power manufacturers. We expect incremental revenues from these new products starting later this year and more meaningful revenue in 2026 when these products ramp into higher volume. Now, I'll turn the call over to Mark to review our financial highlights and provide first quarter guidance.

Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we had another strong performance by the Onto Innovation team wrapping up 2024, exceeding the midpoint for revenue and exceeding the high end of our EPS guidance for Q4. Fourth quarter revenue of $264 million increased 5% versus the third quarter and up 21% versus the prior year, with fourth quarter EPS increasing 13% sequentially to $1.51, up 42% versus the prior year. Specialty devices and advanced packaging continued to be the growth driver during 2024, as well as strengthening of advanced nodes exiting Q4 with sequential quarter-over-quarter growth throughout the year. Before going into further details on our Q4 performance and our outlook for Q1, I'd first like to quickly highlight the full year financial performance by the team in 2024. We achieved 21% revenue growth, 37% operating income growth, cash from operations, and EPS both achieved 43% growth, twice the rate of our earnings growth for 2024. Now shifting back to Q4, looking at the quarterly revenue by markets, our biggest market remains specialty devices and advanced packaging, which increased 5% from Q3 with record quarterly revenue of $170 million and represents 64% of revenue. Advanced nodes, which had revenue of $48 million, increased 12% over Q3 and represents 18% of revenue. Software and services with revenue of $46 million decreased by 4% compared to Q3, representing 18% of revenue. As Mike stated, we achieved a 55% gross margin for the fourth quarter, the high end of our guidance range of 54% to 55%, while achieving a 300 basis point improvement since the beginning of the year. As reflected in our GAAP gross margin, during the quarter, we incurred merger and acquisition-related expenses and restructuring charges relating to the exit and impairment of certain assets as a result of the acquisitions we announced in October. Fourth quarter operating expenses were $68 million at the high end of our guidance range as we continue to accelerate R&D investments within the quarter. Our operating income of $75 million was 29% of revenue for the fourth quarter, compared to 28% for Q3. We achieved quarter-over-quarter operating margin improvement throughout 2024, totaling approximately a 300 basis point improvement since the start of the year. Our net income performance improved 200 basis points to 28% of revenue for Q4, supported from favorable investment income and tax rate within the quarter. Now moving to the balance sheet, we ended the fourth quarter with cash and short-term investments of $852 million. Cash remained relatively flat to Q3 as we executed $25 million of share buybacks at an average price of $159 per share, under our existing $200 million authorization. In addition, we finalized and closed the two previously announced acquisitions. We achieved operating cash flow of $56 million or 21% of revenue, down from previous record levels for Q2 and Q3, primarily due to the timing of shipments in the quarter. Inventory ended the quarter at $287 million, down $21 million versus Q3 and achieving six quarters of consecutive decline in exiting 2024 below $300 million as projected. We expect to stay relatively flat for the first quarter and expect to maintain inventory levels at 1.7 to 1.8 turns in line with external benchmarks. Now turning to our outlook for the first quarter. We currently expect revenue for the first quarter to be between $260 million and $274 million. We expect gross margins will be 54% to 56%. For operating expenses, we expect to be between $69 million to $72 million. For the full year, we expect our effective tax rate to be between 14% to 16%. We expect our diluted share count for the first quarter to be approximately 49.8 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings for the first quarter to be between $1.40 and $1.54 per share. And with that, I will turn it back to Mike for additional insights into Q1 and further commentary on 2025. Mike?

Thank you, Mark. Specific to our outlook for the first quarter, we see strong growth in advanced nodes from both logic and memory. We expect DRAM to see the most significant growth in the first quarter, partially in support of the $69 million VPA we announced last month. We expect gate all-around demand to grow as well, even after a very strong fourth quarter. We also see NAND orders increasing to support expansion and demand for high stack 3D NAND. As mentioned earlier, in packaging, we see orders picking up for HBM as our customers' end market demand becomes clear and they ramp to support the growth in 2.5D Logic. We expect these additional tools to be required mid-2025. For power, we expect the first quarter to see a seasonal dip followed by growth in each of the subsequent quarters, similar to the pattern we saw in 2024. For the year, we expect total power revenue to exceed the record year in 2024. Overall, we continue to see three secular end markets driving our business over the next two years. First, the demand for AI continues to grow at a very high pace. Recently, TSMC forecasted that its revenue growth from AI accelerators will grow at a mid-40% CAGR in the next five years. Similarly, NVIDIA described the demand for its Blackwell processors as staggering. More recently, the US government announced a $500 billion Stargate project over the next four years to build new AI infrastructure. New and more efficient AI models like deep sea could proliferate the use of AI in edge devices, which could be a catalyst for mobile refresh, increasing demand for advanced packaging, logic and memory, and specialty devices. Overall, we expect AI to be a multiyear growth driver for us. The second secular driver is for gate all-around DDR5 memory and high stack 3D NAND. This is increasing since these technologies contribute to more powerful and energy-efficient system designs to support performance and energy-starved AI and enterprise server applications. Which leads us to our third secular driver, the electrification of everything. In addition to electric vehicles, smart grids, and infrastructure, there's an urgent need to reduce power consumption for all the AI infrastructure that is expected to be built out over the coming years. According to studies by various government agencies and consulting firms, power consumption by data centers is expected to increase from 4% of US electricity generation today to 7% to 12% by 2030. New technologies such as gallium nitride-based power semiconductors are being adopted because of the benefits in power efficiency, density, and size when compared to silicon. In conclusion, we believe our products today are well-positioned to support the demands from our leading customers who, through their process innovations, are enabling these new markets. We expect our recently announced products will extend our ability to serve our customers as they invest in the new innovations required for the future. And that concludes our prepared remarks. Rachel, please open the call for questions from our covering analysts.

Thank you. If you are dialed in via the telephone and would like to ask a question, to allow your signal to reach our equipment, please limit yourself to one question and one follow-up in order to give as many analysts as possible an opportunity. You may rejoin the queue with additional questions. Please press star one. And we will take our first question from Matthew Prisco with Cantor Fitzgerald.

Hey, guys. Thanks for taking the question. I guess we'll start it off with HBM given the pickup in demand you're seeing there. Any more color you can on that front? And then just maybe given the robust growth in 2024 based on the industry capacity adds, how are you thinking about growth potential for Onto off that higher level in 2025?

Thanks. So on the HBM front, I think it's playing out largely as we described in the last quarter. If we look at the amount of capacity, we're HBM capacity required to support the COAS growth, we weren't seeing the level of expansions we expected. We sort of surmised that this was because our customers were waiting for allocations from the essentially, the big driver Nvidia. As that's become clear, we're starting to see those customers expand and start to place orders and work with us on timing of shipments, etcetera, for the mid to second half year. I think one of the important points here though to try and understand the HBM demand is how much capacity was added in 2024? We estimate about 230,000 wafer starts per month was added in 2024, roughly half of that was required by the market. So what we're seeing right now is a little over, you know, that task being added, which implies the market is doubling in order to meet the demand of the COAS. And we see actually our attach rates at the same level or even increasing as we see more adoption of our front-end metrology equipment in this market. Helpful. Thank you. And then for the follow-up, maybe you can help us think through the moving parts for advanced node into 2025. Given that gate all-around strength, the DRAM growth, and early signs of life in NAND, would it be realistic to kind of return back to those prior peak levels you saw x, y, and z?

We're approaching it. So we're I don't think we're quite gonna get to the prior peak levels, but we're definitely getting within a shooting range.

Thank you. Your next question comes from Craig Ellis with B. Riley Securities.

Yeah. Thanks for taking the question and my congratulations to you and the team on the robust execution in 2024. I wanted to start with a high-level question. So the business starts the year with strength, really in all three businesses and some digestion in specialty, but then sequential growth. As you look at that and as you factor in the benefit from new products and you mentioned that may be more second-half weighted, how do you think Onto will stack up versus what some larger companies are saying might be 5% year-on-year industry growth?

Well, first, the new products will have kind of an incremental effect on this year and a much larger effect on next year. So taking those to the side, I think those are kind of exciting drivers for our future. Based on the position we've articulated in our prepared remarks, in the growth in the secular growth drivers we're aligned with, we would expect to continue to outperform the WFE numbers that have been talked about. Certainly, above 5%. Well above 5%.

Well, above okay. I'll get out the decoder ring and see if that's 300 or 500 basis points or better. And any color there, welcome. Mark, I'll follow-up with a question from you. So I really like the implications of what Mike said earlier about advanced nodes continuing to rise and becoming a more material part of revenue because that's key to continued gross margin expansion. I think through the year last year, we were up about 100 basis points. Not looking for specific guidance, but as you look through calendar 25 and the potential mix of business, and your ongoing cost reduction efforts, can you give us any color on how much gross margin expansion is possible? And any key puts and takes would be helpful. Thank you.

Yeah. No. Thanks, Craig, for the question on gross margins. Certainly, our goal is, as we did in 2024, quarter-over-quarter improvement. Certainly, the mix of advanced nodes is gonna help propel that and accelerate that. Our goal is to continue to take 55% as the baseline and move that forward throughout the year. I think the mix helps, as I said, but also the effort of the team to continue to work with the suppliers and execute efficiencies within our plant network. So all that together, we should, as Mike said in his remarks, and I said we should see improvement. I won't give specific ranges, but as we said, quarter-over-quarter improvement, 50 basis points or more is the goal.

Thank you. Your next question comes from the line of Charles Shi with Needham.

Hey. Good evening. Can you hear me?

Yes.

Great. So, Mike, we're at the beginning of the year. Obviously, you talked about a few moving parts. Which we paid all around something new I heard from you this time was the end. Didn't hear from months ago about Nian. AI packaging, HBM, what's your current visibility? I mean, you fly look at everything altogether for your overall business, through the rest of the year. What's the visibility right now? And based on the order, based on the pipeline, what's your expectation for the growth let's say, the profile of the year for the overall business?

I mean, there's a lot of moving parts. In the outer quarters, are gonna be the least visible for us, and that's traditional semiconductor business so that nothing's changed there. I would say, directionally, what we're seeing is continued investments in those areas that I mentioned. So certainly the advanced nodes and frankly it is fairly healthy across the board. So gate all-around, DRAM, especially, think that'll lead to growth. And then 3D NAND is also growing pretty nicely from again, from a bottom, but pretty healthy. Compared to prior years through and except for 2022. So that's directional. On the AI packaging, there's quite a bit going on there. You see lots of gyrations. There's concerns or, let's say, questions around tariffs and chip tariffs and what's that gonna do to the markets. And so I think that's a handicap that I'm not willing to place bets on. But the general trend, the general demand the share we have, and the expanding position we have, with growing our metrology application in there, new applications for our sensors like the subsurface defect inspection capability. All that adds to our opportunities to continue to outperform the overall market as we look ahead to 2025.

Thanks. So maybe a quick follow-up Mike, you gave some of your own internal market research numbers. Eight HBM, I think you said 230k capacity. For HBM was added in 2024, and half was required by the market, I believe you said something a little bit more forward-looking about 25. Maybe you did not. But what's your expectation for 25? How much wafer capacity you think will be needed based on your current view on how much order or how much you know, pipeline you're seeing right now.

Yeah. So if you take the 230 and you say if about half wasn't leveraged or used, then that implies 115k thousand wafer starts were required to match last year's capacity, roughly. If you're doubling that, then you're doubling the other, and so you're essentially seeing we're essentially seeing the 115 or more thousand wafer starts being added in 2025. Which matches the demand profile that we would expect.

Thank you. Your next question comes from the line of Edward Yang with Oppenheimer and Company.

Hi. A hundred eighty percent over 2023. Was that above your target? I thought in your January presentation, you had something along lines of a hundred sixty percent.

It might have been the I don't recall specifically. Yeah. So I might have said over a hundred and sixty percent and then we ended up at a hundred eighty percent.

Okay. And can you size the magnitude of the revenue pickup? You see in demand for the incremental HBM, doesn't seem like it's in the first quarter guidance you mentioned. It's more mid to second half 25.

Yep. That's correct. And I think that's still being worked out, meaning, I think there's some upside to what we're seeing. The customers are talking to us about their needs both for inspection and some growing metrology needs. We're also looking at some of the 3D potential for 3D as well. So that's all gonna be probably maybe so little bit in Q2, but mostly in the second half.

Thank you. Your next question comes from Brian Chin with Stifel.

Hi there. Thanks. For letting us ask a few questions. So we get questions a lot about whether process control intensity for HBM will decline. It's been pretty high. These are early phases. I do understand that thinking, but I think what we hear, however, is that yields are getting more challenging when you stack twelve die or you move to HBM four. So are you actually seeing process control intensity really sustaining or maybe even increasing some of this expand SAM expansion. Is that also some of what Yeah. It's Twelve high die. HBM four. Is that part of what maybe is driving some of the upward thinking on the HBM demand profile into mid-year second half?

Yeah. I think you're exactly right. I do believe that process control intensity is increasing. And I think it's gonna continue to increase. Not just because as you're stacking, the risk of yield loss for, you know, the final layer is gonna cost significantly more. But also the complexity of shrinking and shrinking the interconnects and more dense interconnects means the interfaces between the interconnects is more critical, and that's gonna be a new set of new challenges for process control that some of our EkoScan and some of our new products, the 3D I, are designed to address.

Okay. Great. And then maybe I think when I eyeballed your January investor slide deck, it kind of just eyeballing it. It suggests maybe you have around 60% share of existing AI packaging, Sam. On top of that, you're adding $300 million incremental, Sam, with some of those new products like 3D I's, if you just mentioned. I guess, what are you targeting for that in terms of share? For that new $300 million of incremental Sam through 2026. And do you also think you'll retain kind of that 60% share on the existing SAM?

You know, our intention is, of course, to grow our share. So not just maintain. And, of course, our competitors intend to take. So that's the nature of the beast. On the incremental Sam and I think if anything, the competition is creating an opportunity for us to accelerate some of our road maps and really get some new products released sooner to market than we had anticipated, which is also exciting for the team. And happening now. But on the incremental, Sam, that's a good question. In the case of EkoScan, there you know, we don't really see an all one micron below, in atmosphere without having the risk of additional yield loss due to immersion, you know, immersing these samples, we think this is one of the only technologies. So we would be targeting a very high percentage share of that SAM. On the 3D Bump, that's a different question. There's a very embedded competitor there, strong incumbent. Then we'll see. So any incremental share gain there, could be viewed positively. And you know, depending on where the bump technology goes as they get smaller and denser, the strength of our 3D I technology becomes greater and we think that then we should have a greater share. Greater entitlement.

Thank you. Your next question comes from Vedvati Shrotre with Evercore.

Hi. Thanks for taking my question. The first one I had, you provided a good amount of color on the HPM ramp. One of the things that came from TSMC earnings was the big increase in CapEx, and it's mostly driven by a big increase in the spending towards the advanced packaging pieces of the advanced packaging capacity expansion. So if I think about TSMC's advanced packaging, CapEx spend doubling, into 2025. And how should I think about the linearity to your revenue growth from the 2.5T integration point of view?

Yeah. I don't have you know, they so generally speaking, I'll just answer generally speaking. If someone's going to double capacity, they're gonna bring in more of the process control. It'll be more front-loaded. In order to use the process control to qualify the equipment as it's coming online and then monitor the processes as well. So that's just the general nature of the process control. I would expect that to be the same for the COAS as you described it. The 2.5T logic packaging. And I think that's what we're seeing in our forecast as well. The reason I hesitate is because we're also seeing new opportunities. So there's new applications we're working on with customers that are being qualified that could change that trajectory as those applications come online. Right? They're new, so they haven't been in process in previous ramps. Which goes to Brian's increasing capital intensity. We're seeing it across the board. An increase in process control capital intensity.

Got it. And just to follow-up on that, does your offering change drastically with, like, the COAS versus COAS? How does that impact your intensity?

Not too much. We don't see any significant differences.

Thank you. Your next question comes from David Duley with Steelhead Securities.

Good afternoon. Thanks for taking my question. I was wondering if you might be able to help us understand a couple things. First, as far as the new product contribution in 2025, what can we expect, I think, from the void detection, the 3D bump? There might be a couple other ones. Maybe just help us understand what the contribution might be in calendar 2025. And then could you just elaborate a little bit more on the lithography business and you talked about glass panel adoption. I was just wondering if you could give us some more details there. Thank you.

Okay. So what I mentioned earlier is that new product adoption, we've had incremental revenues. Previously, I'd talked about the prima scan being, at least $20 million in revenue for 2025, we'd expect some incremental additional revenue, if we shipped an EkoScan, we'd hope to close that in the calendar year. We don't to close maybe one other one. So you're talking about incremental tool orders, so not huge in the grand scheme of things. But those qualifications mean successful application and tool of record positions established for the next ramps, which would be expected in most likely 2026. So think that's you know, that's where we'd really see the benefit from the new products. Going to Litho, what we're seeing is a fairly significant increase in the application studies coming out of our PACE lab. So the work we're doing with our new HRP Stepper that's being qualified or, let's say, running demos down in the PACE lab, we also have a customer that has a hybrid tool. I believe we shipped it six months ago. That's been running really well, and they're starting to qualify customers. And hopefully, we'll start to see some ramp additional orders from them, but most likely for ramping and delivery in early 2026. And then we're talking to several customers about tools and qualifications later in this year and into early 2026. So the panel market is still I'd say, in its infancy, but definitely growing. And we're seeing more and more customers engaged in defining their road maps to include glass or panel processing.

Thank you. We will take our next question from Mark Miller with Benchmark Company.

Congrats on another great quarter. You mentioned that you were seeing some increase in the NAND. Was that a surprise? And what are expectations for NAND? I know, Ma'am, research had a very strong increase in their NAND shipments. I just wonder what you're thinking about NAND this year.

Yeah. I'd say it was a bit of a surprise. We'd seen some increases, but they were very, very small. As a percentage basis but, you know, the base was so small. But now it's becoming a more meaningful part of 2025. Largely, we're seeing at least two primary customers ramping to support high stack 3D NAND applications, and that's driving a lot of the upside we see in the 3D NAND market.

Okay. You saw a large increase in R&D expenses. Will that continue in 2025? Sequentially, it was a large increase.

Yeah. I mean, we're continuing to look at the portfolio. And as Mike said, you know, we do have the new products launching, but there's certainly expenses in certain other areas where we'll continue to place dollars to continue to drive the portfolio road maps with the customers.

Yeah. Customers are driving a much higher pace of innovation requirement from us. As I mentioned, the process control intensity in the applications challenges they're having are requiring us to pull in road maps for inspection, for even for lithography, for metrology as well. So, yeah, I don't think that there's gonna be a significant increase in 2025, but, of course, there is incremental increase.

Thank you.

This does conclude today's question and answer session. I would now like to turn the call back to Sidney Ho for any additional or closing remarks.

Thank you. We will be participating in a number of investor conferences throughout the 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 Onto Innovation. Rachel, please conclude the call.