Good day and welcome to Onto Innovation Third Quarter Earnings Release. Today's conference is being recorded. At this time, I would like to turn the call over to your Mr. Michael Sheaffer. Please go ahead, sir..

If you have not received a copy of the release, please refer to the company's website at ontoinnovation.com where a copy of the release is posted. Joining us on the call today is the Chief Executive Officer of Onto Innovation, Michael Plisinski; and the Chief Financial Officer of Onto Innovation, Steve Roth.

As is always the case, I need to remind you of the Safe Harbor regulations.

Any matters today that are not historical facts, particularly comments regarding the company's future plans, objectives, forecast and expected performance consists of forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995, such as summits whether expressed or implied, are being made based on currently available information and the company's best judgment at this time.

Within these a wide range of assumptions that the company believes to be reasonable, however, it must be recognized that the statements are subject to a range of uncertainties that can cause actual results to vary materially. Thus, the company cautions that these statements are no guarantees of future performance.

Risk factors that may impact Rudolph's results are described in the company's latest Form 10-K, as well as other periodic filings for the SEC rules. Rudolph Technologies and Nanometrics does not update forward-looking statements and expressively disclaims any obligation to do so.

Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. And now I will turn the call over to Mike Plisinski. Mike, please go ahead..

Thank you, Mike. And good afternoon, everyone. It's our pleasure to introduce Onto Innovation to all of you today. Before I begin, I want to congratulate the entire Onto Innovation team for the outstanding teamwork which ultimately resulted in a smooth and successful launch of this exciting new company.

That teamwork is strengthening, as we collectively identify opportunities to unlock operational efficiencies, and explore the potential for additional value creation by leveraging our complimentary technologies across broader serve markets.

This is an exciting time for the emergence of Onto Innovation, with semiconductor content expanding into wider array of consumer devices. These devices vary in complexity from the latest 5G enabled smart products and IoT devices to advanced computing and storage to support growing applications and artificial intelligence and autonomous driving.

These product innovations are made possible by advances in logic and memory architecture and also in the complex integration of additional functionality such as wireless communication, environmental sensing and vision.

Onto Innovation process control solutions are positioned across this entire value chain from silicon wafer manufacturing through to package devices.

We see Onto Innovation's greater scale and broader insight into the value chain as an advantage for customers seeking strong partners to help overcome the challenges of a more complex and distributed manufacturing process.

Now turning to our results in commentary, we will cover the third quarter from the Nanometrics and Rudolph perspectives separately in order to make it easier to bridge the progression from our individual second quarter earnings releases in July.

As a reminder, at that time, we're in a quiet period, and neither company was able to conduct earnings calls to provide forward-looking guidance for the third quarter.

Following the summarized financial results from each company, we will provide fourth quarter guidance for Onto Innovation along with an explanation of how the closing in October impacts the financial statements for the fourth quarter. So let's begin with Nanometrics and the results for the third quarter.

As outlined in earnings release, revenue increased 8% over the prior quarter to 73 million. Spending from logic and foundry customers grew in the third quarter and as a result, our product revenues from foundry logic and other devices were up 47% from the second quarter.

This growth was primarily driven by repeat orders of our Atlas optical metrology platform by customers adding capacity for their advanced nodes at 10 nanometers and below. NAND's product revenues grew as well with customers adding Atlas systems to provide more precise control of critical dimensions such as high aspect ratio channel holes.

Overall memory was flat quarter-over-quarter with strengthen NAND offsetting the weaker DRAM environment. Also in the third quarter, our integrated metrology tool IMPULSE EUV was selected by a leading memory customer for 3D-NAND CMP applications.

This by off was after an extensive evaluation of systems to support their demanding requirements for across the wafer and wait for the wafer process control. We expect production orders to begin later in 2020.

Overall for the first nine months of 2019, foundry/logic and other device revenues have increased 139% year-over-year outperforming the overall industry, while our memory revenue has declined 46%, which is consistent with the overall industry decline in Memory WFE. I'll now ask Steve Roth, Onto Innovation CFO to cover the financial highlights..

Thanks, Mike. Before I begin my prepared remarks, I want to remind everyone as usual the financial result discussed here will be provided on a non-GAAP basis and will be presented as each company has historically accounted for non-GAAP items.

Later in my remarks, I will let you know how the new merged company will present our financial information going forward. So, let's begin. As Mike mentioned, Nanometrics' third quarter revenues were 73.1 million, an 8% increase from the second quarter and 5% lower than the third quarter of 2018.

Product revenues were 60.1 million, an increase of 14% from the prior quarter. And service revenues which comprise 18% of revenues was 13 million, a decrease of 14% from the prior quarter. By end-market, product sales for the NAND segment were 41% and DRAM sales were 19% resulting in the memory business being essentially flat with the second quarter.

In addition, total foundry/logic and other devices increased quarter-over-quarter to contribute 40% of revenue compared to 31% in the second quarter. Nanometrics had five customers in the third quarter, representing 10% or greater sales. They were Samsung, Intel, SK Hynix, Toshiba and TSMC.

Third quarter gross margin was 53.5% and was flat with the previous quarter. Product was margins increased 143 basis points from the second quarter to 55.5%. Over that increase was offset by lower service margins, mainly due to lower service contracts in the quarter.

Operating expenses were 29.9 million flat with the prior quarter with slight decreases in R&D offset by similar increases in sales and marketing. And income for the third quarter was 7.4 million or $0.30 per share, compared to 5.3 million or $0.21 per share and the 2019 second quarter.

Naturally, the balance sheet, cash and investments decreased to 144.1 million. The decreases was primarily driven by cash used to pay for merger related expenses. Year-to-date capital expenditures were 9.9 million.

Those expenditures completed most of the previously announced upgrades to the manufacturing and information technology infrastructure, and global office space. Now, I'd like to turn the call back over to Mike.

Mike?.

Thank you, Steve. Now turning to our historical root of business, revenue came in at 62.9 million, representing a 2.4% increase over the second quarter. Our macro inspection business grew 20% over the second quarter, partially driven by strong sales of NovusEdge systems.

As a reminder, NovusEdge systems are being adopted by leading silicon wafer manufacturers to meet the evolving process control requirements for wafers targeted for EUV applications.

In addition, Dragonfly G2 continues to gain traction in a number of segments including an additional top five memory manufacturer that will use 3D stack packaging for their advanced memory product. This type of package users through silicon via or TSVS to gain speed and reduce power losses between the stack DRAM chips.

In addition to 2D inspection, the demand for high fidelity 3D measurements has been growing with the adoption of copper pillar and micro bumps and advanced logic and memory devices. As a result, over the last three years, the adoption of our 3D metrology sensors increased with a CAGR of over 20% including our current forecast through 2019.

We have taken orders to support both 3D and 2D applications from this memory customer and expect additional orders in 2020. Our metrology business in the third quarter was down approximately 40% from the second quarter, again primarily due to declining CapEx spending from memory customers.

Despite the decrease in volume, we qualified medical said two additional NAND's manufacturers for improved edge control of the hard mass clear. We added our sixth panel customer for our JetStep lithography tool in the third quarter.

This tool be used for process development of next generation packaging technology of a Novel 2.5-D and a multi-dye application.

As we've stated previously, the growing demand for heterogeneous packages as well served by the larger panel format, though production ramp has been slower than expected, we continue to see investments in R&D in pilot lines from a growing number of customers.

This positive development was offset by a number of lithography opportunities impacted by the prolonged trade dispute between China and the United States. I will now turn it back to Steve Roth to briefly cover the financial highlights..

Thanks, Mike. Here are the details behind the third quarter results of Rudolph Technologies. As Mike mentioned, third quarter revenue was 62 9 million, up slightly from 61.5 million in the 2019 second quarter. Increases in our inspection and lithography businesses were partially also by lower metrology and software.

Moving to gross margin, our gross margin decreased the 50% in the quarter from 52% in the second quarter. Software represented 8% of total sales compared to 12% in the previous quarter, and that coupled with the lower metrology sales and adjusted lithography system combined to pressure in margins in the quarter.

Looking at the details of Rudolph's operating expenses, which are on a non-GAAP basis exclude the merger related expenses, we continue to maintain tight control over our spending. Third quarter operating expenses were 21.9 million, down slightly from 22 million in the second quarter.

Slight decreases in R&D project costs were offset by minor increases in SG&A. Net income for the third quarter was 9.8 million or $0.31 per share compared to 9 million or $0.29 per share in the second quarter. The increase in net income was primarily driven by higher foreign exchange gains and slightly lower revised tax rate for the year.

Now turning to the balance sheet, cash and marketable securities increased 13.3 million to 193 million in the quarter and our free cash flow for the quarter was 13.6 million.

While we expect the new company to be a significant free cash flow generator, fourth quarter cash flow will be negative due to the payment of the majority of the merger expenses in the quarter. Cash receivable increased slightly to 63.3 million and our inventory declined to 104 million. That wraps up my comments on Rudolph for the third quarter.

So now before I turn the call back over to Mike, I would like to take a couple of minutes to discuss some important financial changes that we will be making as we move forward as Onto Innovation. As we have discussed, the combination of Rudolph and Nanometrics is a merger of equals.

And for the merger agreement, Nanometrics is the legal acquire in the transaction. However, from a financial accounting perspective, Rudolph is the accounting acquire. And that means Rudolph’s financial results will be the surviving entity to be used from a historical comparative basis.

We also need to conform our financial presentation basis of as the two companies different in certain areas. As such, here are a couple of changes we will be implementing. We have aligned our reporting formats as it relates to the highlights included in cost of goods sold.

Certain costs Rudolph previous record in operating expenses will be moved above the gross margin line. And some of the Nanometrics costs that were in the gross margin line will be moved to operating expenses.

The net result of these changes will decrease the overall gross margin by approximately 1% on a combined basis, compared to what you might expect if you just add the two historical results of the companies together.

In addition, we will no longer adjust our non-GAAP results to remove Rudolph's stock compensation expense to be consistent with Nanometrics' presentation format. The impact will result in a decrease in non-GAAP operating income of approximately 6 million to 7 million annually in the new company compared to historical results.

GAAP operating income, of course will remain unchanged. These changes will affect the quarters moving forward. Another important factor relates to the timing of the close of the merger and the effect on Q4 guidance.

Since the merger closed during the quarter on October 25, our fourth quarter financial results will be comprised of a full quarter of Rudolph's operations, but only the activity of Nanometrics from the closing date to the end of the year.

This results in approximately 14 million in revenue and 10 million of operating expenses not included in the Q4 guidance that Mike will provide in a couple of minutes. In addition, while the total shares outstanding post-merger, will be approximately 15 million shares.

The weighted average shares us in the calculation of the fourth quarter earnings per share will be approximately 43.5 million shares to the exclusion of the fourth quarter Nanometrics' shares prior to the closing. With that, I'll turn the call back over to Mike for comments on the next quarter.

Mike?.

Thank you again, Steve. As you may have already seen from our earnings release, we expect fourth quarter revenue for Onto Innovation in the range of 117 million plus or minus 5%. This excludes the 14 million in October revenue from Nanometrics, which Steve discussed a moment ago.

At the midpoint, the pro forma combined revenue declined year-over-year for Onto Innovation in 2019 is approximately 12%. Showing solid performance relative to forecasted WFE.

When we last provided forward-looking outlook on our respective first quarter earnings calls, our expectations were higher, but since then, the memory spending environment further worsened rather than improving as expected. And as previously mentioned, lithography opportunities were negatively impacted by the prolonged trade dispute with China.

In this revenue range, we expect gross margin to fall between 51% and 53%, impacted by the 1% change Steve discussed in product mix. Operating expenses are projected in the range of 42 million to 43 million, which excludes approximately 10 million in pre-merger fourth quarter expenses.

Those expected revenues and expenses would then produce non-GAAP net income per diluted share to be in the range of $0.32 to $0.42. We are confident in our ability to move the gross and operating margins into our model as we are focused on unlocking the synergies this combination provides.

Similar to what has been reported by our peers and customers, we see the fourth quarter driven by increasing spending from foundry/logic investments, particularly at the advanced nodes. We're betting, benefiting from this in two ways.

The first is from the growing adoption of our Atlas III+ metrology tool used for advanced optical critical dimension measurements. The second way we are benefiting is supplying process control solutions upstream to the leading suppliers of this advanced silicon.

In fact, Onto Innovation has two product lines qualified by multiple top wafer manufacturers, the NovaSeq Inspection System and the QS Series FTIR Metrology System for composition monitoring of substrate and Fe processes.

This combination provides a more comprehensive process control suite for the most advanced silicon wafers targeting EUV process nodes. The recent announcement from an ASML highlighting strong growth in EUV stepper backlog underscores the optimism we have for demand of our solutions not only in the fourth quarter, but also as we look ahead to 2020.

It's interesting to note the growing adoption of 5G technology in handhelds is contributing to the increasing demand for sub-10-nanometer process technology. This is underscored by the recent statements from TSMC, "Since the middle of this year, we have been seeing an acceleration in the worldwide 5G development.

This will speed up the introduction and deployment of 5G network for smartphones in several major markets around the world, which leads to the increase of our CapEx for this year.

Meanwhile, we expect the silicon content of 5G smartphones will be substantially higher than that of 4G smartphones, power, efficiency, speed and ability to cooperate, additional functionality are critically important to 5G smartphones, which require TSMC's leading-edge N10 and N5 technology".

The full transformation to 5G will take a number of years, but in addition to increasing demand for advanced logic, it is also driving new packaging requirements in the form of Heterogeneous 2.5-D packages, Novel antenna and package designs and advanced silicon carbide-based power devices.

Likewise, we see packaging activities by Tier 1 IDM and Foundry customers continuing to accelerate, as they seek to add competitive differentiation through new packaging technologies, illustrating this to TSMC Cisco OS and info development, with the projected $3 billion in revenue for 2019, and Intel’s continued development of email bit info gross packaging technologies into 2020.

In support of these investments, we expect another double digit increase in inspection revenue for the fourth quarter, which would represent 50% increase compared to the fourth quarter of 2018. We believe this increase reflects the growing optimism for 5G enabled devices and the growing demand for more precise process control solutions.

We see a continued decline in spending on DRAM memory in the fourth quarter, offsetting the growth in foundry, logic and events packaging and resulting in low single-digit decline at the midpoint of our guidance on a pro forma basis.

While the exacerbated weakness in DRAM this year has impacted our expected growth in the second half of 2019, a potential rebound in DRAM in 2020 would also contribute to our optimism as we look ahead to next year.

In summary, Onto Innovation has opportunities across the semiconductor value chain spanning wafer manufacturing, leading edge memory, logic and specialty devices, as well as advanced packaging which enables all of this technology to come together and smaller high performance form factors.

We take pride in recognizing our innovations across this value chain or helping our customers to release new and innovative products that are changing the world. I want to conclude by conveying how excited I am to be a part of the Onto Innovation team.

This team is made up of an amazing collection of passionate and talented individuals that are eager to solve new challenges and maximize the opportunities ahead of us to the benefit of our customers, our shareholders, and ultimately our Onto Innovation team. And with that, we will open the line for your questions.

Aaron?.

Thank you, sir. [Operator Instructions] And we’ll go first to Quinn Bolton with Needham..

Hey guys, congratulations on the combination and nice job on the results so far. I wanted to start with some of the accounting treatments. I guess, if I’ve looked at the revenue on a standalone basis for Nanometrics and Rudolph in the third quarter, you would have combined about $136 million.

Your guidance for the fourth quarter, inclusively your 117 midpoint plus 14 from NANO gets hit $131 million. So, on a sort of pro forma full quarter to full quarter comparison revenues are down.

Is that all sort of driven by the decline in DRAM or are there some revenues that will not be able to be recognized as a result of the purchase accounting treatment of that transaction?.

Hi, Quinn, this is Steve Roth. So, yeah, factored into the last revenue number of $14 million is some revenue, deferred revenue that is lost in purchase accounting, so that is factored into the numbers. So, your comparison of $136 million pro forma to $131 million is the accurate math..

Okay, okay. Understood. And then just looking into the Nanometrics, non-GAAP results, they were running about $30 million in the September quarter that includes some level of stock-based compensation since the company will not be backing up stock-based comp going forward.

Has there been any change as a result of the combination to the historical stock-based compensation of about $3 million that the Nanometrics had included in their OpEx?.

No, I mean, that the number – there’s no change because of the merger and the expense hit that would normally hit on a quarterly basis on the Nanometric side.

Obviously, as we work through integrations, there’ll be some synergies and things that might impact stock-based compensation as you can imagine on, especially on the kind of the higher level corporate overhead level.

So yeah, so those number will change and will be giving more guidance as those start to materialize going forward, but basically the basis of which they’ve been Nanometrics do their stock-based compensation remains unchanged..

Okay, yeah and you can give us a service package comp number for the fourth quarter?.

So, ours – actually, for our side is that the annual basis between six and seven, that would compete and then for us. For the route outside is about $1.3 million that was in our historical results. And what was the – okay, we have to get you that number Quinn, because I don’t have it right in front of me.

We don’t really break it out, it’s just in the numbers. It’s already out of the –.

Okay. I’ll jump back in the queue. Thank you..

[Operator Instructions] We’re going next to Tom Diffely with D.A. Davidson..

Yes, good afternoon. Another question along the lines of the Nanometrics business level. So, before you went quiet a couple quarters ago, the thought was that business would grow 25%, 30% to half-over-half, and obviously it’s a level right now that’s after or not below that.

So, I just wanted to clarify is, is the difference between what we heard back then in today truly just the DRAM side or has the logic foundry portion, which was supposed to be the quite ramp kind of a bit as well?.

Hi, Tom.

No, it’s truly the DRAM side has come down quite significantly from where the expectations were when those guidance numbers were provided on the logic foundry and other side there – when we look at the trailing nine months, it’s up 100 and something percent, 130 something percent, and we expect it to be up again in Q4, but not enough to offset the continuing decline in the DRAM..

Okay.

And those are the 10, 7 Nanometer, and 5 Nanometer lines, those are multi-quarter build outs?.

Yes, yeah, we saw some ramping in Q3, we see continued ramping in Q4, and we don’t have from numbers for Q1, but a lot of these are continuing into 2020..

Okay.

And then Steve, on the fourth quarter model, are the expenses from the NANO portion in the first year pre-close, are those also excluded from the numbers?.

Yeah, so that was $10 million that we talked about in the prepared remarks. So, and the guidance that Mike gave on the OpEx expenses, there’s $10 million of call October OpEx expenses, not in that number..

Okay. And then, sound like the services business on the NANO side was down a bit.

Is that just because of – what’s going on with the acquisition or was there more to it than that?.

I think it was primarily related to fewer upgrades. They had a big surge and upgrades in the third quarter mix of software and hardware upgrades and that came down a little bit in the – in this quarter, in third quarter. Sorry..

Okay. And then, you Mike, on your comments you talked about complimentary product lines between the two companies.

Maybe it’s a little more color on that – these products that from conference point of view at some point to work together, or are these just complementary in fact that they don’t overlap?.

We’re exploring that. So, they’re certainly in the same parts of the line.

So, we’re looking at our Metafore’s technology and some of the Atlas products are in the same parts of the lines and there could be opportunities to provide additional data streams to provide more insight for customers on critical challenges, and in the way from way from manufacturers, those technologies, it’s the same, they’re in the same parts of the line and we’re just now starting to open up discussions about what does this mean? Can we wrap software around these two data streams and provide additional insight and potential equipment control solutions to further improve yields and time to ramp for these customers?.

Okay. Good.

And then finally, when you look at the nice exposure that NANO has specially on the memory center that should say that the NAND side, are you starting to see some early signs of potential recovery like we heard from few others? A little bit of hope on the NAND side, even though the DRAM side of the market is still pretty weak?.

So we saw, I think it’s a matter of timing, we did see a pretty strong growth in NAND in the third quarter, and that was largely to support installations of number process equipment. So, obviously, you need the metrology systems in place first to qualify and ramp up the process equipment.

So, we saw some of that – from talking to the team, we do see continued investment in NAND growing into the 2020, but for this quarter where we have more insight NAND is down and DRAM is also down..

Okay. Alright. Well, thanks for your time today..

Yeah. Thanks, Tom..

We will go next to Patrick Ho with Stifel..

Thank you very much and congratulations, Mike, to you and your team to getting this deal closed and going forward. And Steve, thank you for a lot of these clarification. And I’m sure you’ve aged a few years with all the number crunching you’ve had to do over the past several weeks.

This might – this question may be a little bit unfair given that it’s still early in the combination of the two companies.

But given a lot of the complimentary solutions that both Nanometrics and we – offers to say memory customers and put together with some of the larger memory suppliers, where you’re seeing both next generation front-end changes in the manufacturing as well as advanced packaging.

Have any of your customers already come to you and ask you about, hey, can you help us in some of these now that you’re one company, and how do you address some of those potential projects on a going forward basis?.

That’s a great question, Patrick. So, the short answer is no, we haven’t had that insight or direct questions from customers, but it’s only been less than two weeks since we are even allowed to start sharing technology and product roadmaps and that kind of thing. So, I think it’s premature for to expect customers to be thinking along those lines.

That said, in the initial discussions we’ve had, I think we’ve been pleasantly surprised to find out capabilities of systems that we didn’t understand and various problems each team was solving with customers that are combination may help accelerate the solution.

So, we’re still early in that exploratory phase, but we’re encouraged by what we’re seeing already, and including the impact software can have on tying these data streams together from the different metrology systems.

We’re going on a pretty extensive road show in next month, where we’ll be meeting with the leading customers, executives from all of our customers, top customers, and that’s where I expect we’ll have some more detailed discussions around exactly that..

Great. That’s really helpful. And maybe as my follow-up question in terms of how we should look at OpEx in particularly R&D on a going forward basis, again, it’s early in the consolidation of the two companies. Given that a lot of projects are probably being evaluated as we speak.

Maybe Steve, how do we look at R&D, maybe on a kind of qualitative or big picture basis as we go into 2020?.

So, obviously, you’re right. We just started that process from the integration perspective. I mean, our R&D, we’ve had pretty robust R&D programs and the OpEx. So, I mean, we’ve identified a number of synergies as part of our integration planning. I think you would start with the base numbers you have probably for both companies.

I don’t see any historic any big change right off the bat from there, but then we’ll work in synergies.

Clearly, as Mike said, looking at products and platforms and things that are overlap we’re going to come out will probably give you more guidance going forward as we lay out that synergy plan, but I wouldn’t expect any significant change in the overall, like if you see the guidance that Mike gave for Q4, that’s somewhat the run rate of the two companies and we’ll be taking obviously synergies off of that number, but there’s clearly synergies in that area..

I would expect Patrick that will be able to provide more clarity to that in the January and April calls..

Great. Thanks a lot, guys..

[Operator Instructions] We take our next question from Craig Ellis with B. Riley FBR..

Yeah, thanks for taking the question. I’ll just ask a follow-up to Patrick’s question to make sure I’m looking at things correctly, in terms of that information you can provide. I think the cost synergies target previously was $20 million.

Guys, can you provide any color on how much of that is pure OpEx versus anything that you would get in COGS and just rough timing on in terms of where, where and when that can be realized..

Yeah, Craig, I would say that of the $20 million, it was probably something like 25% in the COGS line and 75% in OpEx..

I mean, it’s on a rough basis. So, that’s kind of how you could expect to start seeing come out of the OpEx line of the $20 million..

Yeah. I mean the timing. I would say, that’s something we were just now starting to dig into and put together plans on what exactly we’re going to do to achieve the synergy targets and look at the timing for those plans.

And that’s what I was referring to Patrick about in January and May, April and May earnings calls will be able to provide more guidance to that. I will say there is a priority to adjust and bring in some of those synergies a little sooner rather than later..

Okay. That’s helpful.

And then Mike, just a clarification on some of your fourth quarter commentary, and helpful to get the insights on inspection and advanced packaging and DRAM, I don’t think I caught anything on NAND, it is the expectation that given the strong third quarter that’s down sequentially, or how do you expect the NAND business to play on 4Q?.

NAND in the fourth quarter is also down and so, DRAM and NAND are both down again, we had a pretty strong third quarter set of orders for NAND. And we don’t expect that to continue. So, that’s down in the fourth quarter, but offsetting that is very strong orders from logic foundry up almost 50% between the two..

And from what your teams are seeing out in the field.

What’s your sense for this? For how long this boundary launch logic strength can last? You have visibility into the first quarter of next year would extend beyond that, just any further color on the momentum in that part of the business would be helpful?.

Yeah, it’s probably a little early to say, but from what we’re – what we see in most of these expansions will probably continuing – continue into the first quarter. The question is, will DRAM will some of the memory business recover as well? And that’s what we’d be looking forward to really start to see some significant growth in the numbers..

Okay. And then, my last question is going to be a high level question for you, Mike. So obviously, this call has a lot to do with the specifics of bringing the companies together and congratulations on getting that job done and getting us started.

The question really is about calendar 2020 and I’m wondering if you can just reflect a little bit on the things that you’re excited about as you look at the combined portfolios, the opportunities that you see that exists for the company, the new company next year.

What are some of the things that investors should look for as milestones as on to unleashes innovation and tries to realize significant growth in the market? Thank you..

Sure. Thanks, Craig.

Well, I think we’re most excited about the inflection that 5G is bringing, so as 5G starts to drive both the advanced logic and the – in support of the growing smartphones, growing number of smartphones that will also pull in and create some potential driving growth for the NAND and all the specialty devices that we’ve been working on penetrating over several years now.

So, we’re pretty excited about that inflection of what it means for a number of areas were Onto Innovation place. So, obviously, milestone wise, you’d look for continued growth in those areas.

We’re also excited about the wafer manufacturing, the position that we have now as Onto Innovation with multiple products supporting these advanced wafer process control for wafers for EUV that’s been a significant growth driver, and it looks like a significant growth driver moving forward.

And then, I think from a sort of financial perspective, big milestone is to see, and we haven’t laid this out for you yet, but our will is to see us start to hit and deliver on the synergies that we forecasted. And again, we want to do that sooner rather than later..

Thanks, guys. Good luck..

All right..

We go next to David Dooley with Steelhead Securities..

Thanks for taking my question. Just a couple of clarifications. I think as people are fleshed out your guidance is down sequentially on a combined basis. Could you just talk about you mentioned memory DRAM, I guess? But there was also something about advanced packaging.

Could you just elaborate exactly why revenue is down sequentially?.

Thanks for taking my question. Just a couple of clarifications. I think as people are fleshed out your guidance is down sequentially on a combined basis. Could you just talk about you mentioned memory DRAM, I guess? But there was also something about advanced packaging.

Could you just elaborate exactly why revenue is down sequentially?.

Okay. So it’s primarily memory. So, it’s primarily DRAM that’s been drove down some Atlas potential, which was offset by the meaningful growth on the logic foundry side. And then on the MetaPULSE, which is also pretty heavily tied to memory. Obviously, that’s down. I think, I said 40 something percent in the prepared remarks.

And that’s really the $3 million, $4 million that we’re talking about being down quarter-over-quarter. As far as advanced packaging, actually, I believe we were implying that’s going to grow. We expect after a 20% or so growth in the third quarter from Q2 to Q3.

We expect still a double digit growth in our inspection business moving into the fourth quarter..

And could you talk – elaborate a little bit more about the lithography business.

I guess you referenced a couple of shipments that are going to happen or what just elaborate on – with that what was going on there?.

Yeah, so we had a number of accounts that we’re expecting to close at least several to three in China, which did not happen for a variety of reasons related to the trade dispute. So, that was one negative side. The other is, no we shift the panel tool in the third quarter.

So, that was the positive, we expected another customer is similar to take a panel tool and that also did not happen that looks like a push out into 2020.

So, most of it is push outs or delays related to the China situation, but overall, the advanced packaging research and the lithography is positioned in that research for the next generation of packages remains pretty strong and we remain encouraged by our position there..

Okay. A clarification question. You gave gross margin guidance for Q4 for the buying company and I just missed that.

Could you repeat what the Q4 gross margin is?.

Sure. It was 51% to 53%..

Right. And that got impacted by the change that we’re confirming the presentations by about 1%, based when versus whereas two companies together, what you might think it would be..

Okay.

That just shifted the cost around between operating expenses and gross margins, but that doesn’t – there’s no change in stock comp because you didn’t have a lot of stock comp on the retail side and the cost of goods sold number just like 200,000 or 300,000, right?.

Yeah, correct..

All right. Okay. Thanks. Thanks for that clarification. Now, a couple of things are going forward.

Will you be providing a revenue breakout on a quarterly basis amongst metrology inspection, lithography and software? Or how will you be presenting the numbers to us as far as the breakouts of revenue?.

We’re having discussions on that now, and we’ll have that laid out for you and Jan – in the January call. January, February whenever the next earnings call is..

Okay. And then final question for me is, you mentioned cash flow would be negative in the fourth quarter driven by M&A expenses or merger expenses.

Could you just articulate how much those are and without those with the cash flow, what cash flow from operations might be?.

Yeah, so if you – so you’re talking about $20 – over 20 million, you will get the guidance in the press release, you can see the impact on per share perspective that we put in there. But you’re talking about $20 million or so, $25 million to $28 million I think is the total, but it’s not all cash in the quarter.

So yeah, so about $20 million in cash flow probably impact on the quarter in those numbers..

Okay.

And then, you said cash flow will be negative, what could you give an exact number, so we can just bet basically back into a cash flow from operations might be without the one-time event?.

I think so combined basis. No, we have – we would that’s what we think – we would just be a couple million cash flow positive; I think at the end of the quarter without that in there, we’re going from a combined, hold on a second. I guess 13 and….

Yeah, you guys… will get to that –.

It’s $27 million, obviously of cash out the door and I got to see what the cash the pro forma would be on without that..

Would you be providing pro forma numbers on a historical basis?.

That’s a little more difficult, obviously with the – because the purchase account is going to change the numbers going forward, but – we’ll be able to be honest. Yeah, we won’t be – we can’t put him in the documents per se, but you can add the two companies together.

I mean, obviously from historical basis, but there’ll be accounting differences that won’t allow us to do comparatives..

Okay. Thank you..

Thanks, David..

We’ll take a follow-up from Quinn Bolton with Needham..

Hi, Steve, on the gross margin, understand the reclassification hit by about 100 basis points. As we look at to the long-term model that you gave with margins of 55 to 56.

With that 55 to 56 inclusive of those changes, or do we need to think about that 55 to 56 coming down by 100 basis points due to the reclassification?.

Yeah, I would take the – I would take the 100 basis points off that, so I think that top things probably fine, but I would think it would probably 54 to 56, Quinn..

Okay, great. And then just on the business side, I think you’d mentioned a win on the integrated metrology side and wasn’t sure if he said that that was part of the current strength, we seen in the NAND business, or whether that was business that you expected to ship either in Q4 or sometime into 2020..

That was business that will be – that has been pushed out to 2020..

Thank you..

You’re welcome..

Ladies and gentlemen, that will conclude our Q&A session. I’d like to turn the call back to Michael Sheaffer for any additional and closing remarks..

Thank you, Aaron. Well we’d like to thank everyone for participating on the call today, and for your interest in onto innovation. We are clearly excited about beginning this new era with the company and look forward to future calls. That concludes our remarks for today. Please wrap it up, Aaron..

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. You may now disconnect..