ONTO INNOVATION INC. Q3 FY2024 earnings call

• Overall, Onto Innovation executed well in Q3 with revenue at $252 million, a new quarterly record for inspection, and on pace to nearly double inspection revenue for the year. Gross margin was 54.5% and operating margin 28%, with record cash generation from operations at $67 million.
• Acquired Lumina Instruments and the lithography business from Kulicke and Soffa. Lumina's laser-based inspection technologies enhance inspection capabilities for various applications, and the lithography acquisition accelerates JetStep lithography road maps. Both tuck-ins are expected to be accretive to earnings within 12 months and generate up to $100 million in annual revenue in the next three years.
• In specialty device and advanced packaging markets, AI packaging revenue led inspection growth, with high-bandwidth memory growth offsetting a slight decline in 2.5D logic packaging. Expect increases in logic packaging volume and capital intensity for process control. Advanced packaging was a large market for metrology, and power devices revenue set a quarterly record with growth from metrology and inspection systems as customers focus on yield improvements.
• Announced new product launches like 3D bump metrology delivered to a leading memory manufacturer and void inspection for wafer bonding applications expected to ship this year.

Onto Innovation's third quarter revenue was $252 million. The specialty devices and advanced packaging segment was the biggest market, with revenue of $161 million, representing 64% of total revenue. The advanced nodes segment had revenue of $42 million, which was a 32% sequential increase and 17% of revenue. Software and services had revenue of $49 million, a 5% sequential increase and 19% of revenue. Revenue from power devices was the second largest market and set a quarterly record, driven by metrology and inspection process control systems as power semiconductor customers focus on yield improvements.

• Fourth quarter revenue expected between $253 million and $267 million.
• Gross margins expected to be 54% to 55%.
• Operating expenses expected to be between $66 million to $68 million, with goal to hold OpEx flat or better than Q3.
• Effective tax rate expected to be between 15% to 16%.
• Non-GAAP earnings per share for Q4 anticipated between $1.33 and $1.48.
• Expect inventory reduction of another $8 million to $10 million in Q4, with inventory ending Q3 at $308 million, down $12 million from Q2.

• JetStep lithography pushouts due to customers' capacity needs negatively impacted Q4 by over $10 million.
• Uncertainty in HBM capacity expansions as customers are conservative, leading to muted HBM growth expectations.
• Cyclical factors and potential CapEx cuts affecting leading-edge customers, though Onto Innovation's focus on yield improvements continues to drive revenue in power devices despite broader CapEx concerns.

Q: Brian Chin asks about timing of TSMC activity and Onto's revenue growth moving into next year.

A: Michael Plisinski is highly confident in revenue growth driven by gate all around, DRAM expansions, and HBM growth, expecting growth in the first half of next year.

Q: Vedvati Shrotre inquires about volume purchase agreements for gate all around nodes and HBM visibility.

A: Michael Plisinski states backlog remains strong and relatively good across the board, with HBM expansion muted due to customer conservatism.

Q: Edward Yang asks about packaging pickup in Q4 and SG&A ticking up.

A: Michael Plisinski talks about complexity and volume in packaging, and Mark Slicer mentions goal to hold OpEx in line or better in Q4 and drive offsets to tuck-in costs.

Q: Unidentified Analyst asks about packaging pickup related to RDL-based packaging.

A: Michael Plisinski explains it's related to complexity needs and yield improvement, with Dragonfly platform's capabilities providing new insights for yield opportunities.

Q: Charles Shi connects leading-edge customer news to Onto's earnings and AI packaging outlook.

A: Michael Plisinski discusses cyclical factors and AI packaging expectations, noting AI packaging decline is about half of initial projection and first half 2025 expected higher than second half 2024.

Q: Mark Miller asks about expectations in China and Korea next year.

A: Michael Plisinski states Korea is tied to DRAM growth and China is around 10% to 15% of sales.

Q: David Duley asks about NAND market participation and HBM growth outlook.

A: Michael Plisinski discusses NAND growth on a small base and HBM growth tied to 2.5D Logic expansion but with customer conservatism affecting order visibility.

Q: Brian Chin asks about manufacturing flexibility and backlog strength.

A: Michael Plisinski confirms Onto has the ability to flex upwards in manufacturing and backlog remains strong despite working through volume purchase agreements.