Onto Innovation Inc

NYSE:ONTO

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the Rudolph Technologies Fourth Quarter Earnings Release Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Sheaffer, Senior Director of Investor Relations. Please go ahead, sir.

[Michael Sheaffer, executive]

Thank you, Brian, and good afternoon, everyone.

Rudolph issued its 2017 fourth quarter and year-end financial results this afternoon shortly after the close. If you've not received a copy of the release, please refer to the company's website at www.rudolphtech.com where a copy of the release is posted.

Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Steven Roth, Chief Financial Officer.

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, forecasts and expected performance, consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such estimates, whether expressed or implied, are being made based on currently available information and the company's best judgment at this time. Within these is 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 the 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 with the SEC. Rudolph Technologies does not update forward-looking statements and expressly 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.

I will now turn the call over to Mike Plisinski. Mike, please go ahead.

[Michael Plisinski, executive]

Thank you, Mike. Good afternoon, everyone, and thank you for joining us this afternoon.

We will start the call today with a few business highlights from the fourth quarter and then the full year, followed by Steve's review of the financial highlights. I'll finish by providing our outlook for 2018 and guidance for the first quarter and an update on our exploration of the AMOLED lithography market. At that point, we'll open the lines for your questions.

So let's begin. As you may have seen from our earnings release, we closed the fourth quarter with revenue of $60.1 million, which was at the midpoint of our guidance. Earnings for the fourth quarter came in above the high point of the guidance at $0.29 per share. Comparing these results with the fourth quarter of 2016, we achieved an 11% growth in revenue and a 42% growth in earnings, representing solid operating leverage for the quarter.

Also during the fourth quarter, we successfully demonstrated the proof-of-concept stepper for the next-generation mobile displays. This marks a major milestone as we enhanced our core lithography technology to position us for an emerging growth opportunity in high-resolution AMOLED displays. We will discuss our decision to move forward with this program later in the call.

I will now review a few additional highlights from the fourth quarter and the past year. Our new Firefly and Dragonfly systems, combined with our Discover and TrueADC software, continued to provide unique and valuable solutions to customers. For example, in the fourth quarter, our Firefly tool was purchased by another leading OSAT for the production ramp of a new line. This customer is leveraging our Clearfind technology to detect critical defects before the photo develop process. Catching defects at this step allows the customer to rework problematic wafers to actually improve the yield, not just report on the yield as other systems would. This exclusive value proposition is not limited to advanced packaging and, in the quarter, we also received orders from customers in RF and MEMS markets.

Our lithography team successfully delivered our fourth panel level fan-out tool to a top 5 semiconductor manufacturer in the quarter. This tool will be used for the development of next-generation panel-based advanced packaging technologies.

Also in the fourth quarter, we received orders for -- of over $17 million for metrology inspection and software from 2 new customers in China. One of these customers is leading in domestic development of 3D NAND and the other is manufacturing CMOS image sensors with on-chip camera functions serving the Chinese smartphone and mobility markets. Both customers seek to capitalize on the growing demand from domestic cellphone manufacturers such as Huawei and Xiaomi.

Regionally, China continues to be a strong focus for Rudolph. Revenue from China has more than doubled in the last 2 years. We seek sustained double-digit growth from this region and continued to invest in our well-established infrastructure to optimize customer support and maintain that growth.

So the fourth quarter capped a strong year in which the Rudolph team achieved $255 million in revenue and an increase of 10% and our third consecutive record year. In addition, our efforts to improve operational efficiencies resulted in a 24% improvement in earnings over 2016. Rudolph's free cash flow for the year improved by 23% aided by an improvement in our earnings and balance sheet management.

In addition to the strong financial performance, we also strengthened our foundation for balanced sustainable growth by adding new solutions and process control in lithography as well as expanding our customer base and strategic markets. For example, our revenue from advanced memory applications in both DRAM and 3D NAND grew by 80% year-over-year as customers in Korea increased capacity to meet growing global demand for advanced memory used in cloud computing and mobile applications. In addition, we expanded our customer base in memory with the previously announced new customer in China.

Likewise, in our specialty devices market, we added 8 new customers in 2017. These included new RF customers manufacturing BAW and SAW filters as well as more advanced lines for RF modules. In the MEMS market, we added customers fabricating image sensors and 3D sensors for mobile, IoT and automotive applications.

In summary, 2017 was another year of solid growth for Rudolph in which we continued to build a stronger future through new applications and expanding customers while maintaining a focus on strong financial discipline.

I will now turn the call over to Steve, who will cover the financials in more detail. Steve?

[Steven Roth, executive]

Thanks, Mike, and good afternoon, everyone.

In my remarks this afternoon, I will provide some details behind our Q4 and full year financial results and also provide some guidance on gross margin and operating expenses for the first quarter.

As Mike has already highlighted, the diversity of our product portfolio has enabled us to continue our track record of annual and quarterly year-over-year growth. This diversity allows us to participate in different market drivers as our customers make their investments and not to be so affected by a single market fluctuation in one particular market. We also believe our shareholders will benefit from the more predictable growth model our business represents as opposed to trying to invest in a particular capital equipment investment cycle.

Let's get into some details. Fourth quarter revenue was $60.1 million, down 10% from $66.9 million in the 2017 third quarter and up 11% from $54.1 million in 2016 fourth quarter. For the year, revenues -- 2017 revenues totaled $255.1 million, up 10% from $232.8 million in 2016.

During the quarter, we saw increased strength from our specialty devices market that was offset by a decline in both foundry and back-end OSAT business. The back-end decline highlights the seasonal trend that we have witnessed over the years where we see a slowdown in our mobility-driven business in the fourth quarter. However, what is different this year is the unusual clarity we currently have about the first half of 2018 as evidenced by our recent announcement of record fourth quarter orders.

Our process control sales declined 4% quarter-over-quarter, but accounted for 84% of sales. The decline was mainly driven by lower inspection sales, which were partially offset by slightly higher metrology sales in the quarter.

As Mike mentioned, we shipped one JetStep panel system that drove our lithography business to account for 8% of sales in the quarter.

And finally, our software group was down at 8% of sales mainly due to lower tool-centric and fabwide sales.

Breaking down system revenue by end market. On a percentage basis, sales to the specialty device market accounted for 30% of revenue and the majority of that coming from CIS and RF manufacturers; back-end OSATs was 20%; memory, 11%; logic, 8%; foundry was 7%; and the remaining was in all the other categories.

Moving to gross margin. Our gross margin increased in the quarter to 54%, up from 53% in the third quarter. The gross margin increase was driven by product mix, which also included the stronger metrology sales in the quarter. Also contributing to the improved margins was the effective operation -- operating efficiencies that we've implemented over the last 1.5 years in our manufacturing operations.

For the 2018 first quarter, we continue to see a favorable product mix in metrology sales and software sales returning to growth as we close on a number of fabwide opportunities that have had longer than expected sales cycles. In addition, as you will hear in a moment, the guidance range reflects the possibility of shipping the previously announced G45 display stepper for next-generation AMOLED displays in Q1. That system will utilize some older display inventory from our acquisition of Azores.

As a result, we are forecasting Q1 gross margins to be in the range of 53% to 58%. I'll caution that while we expect higher overall gross margins in 2018 over 2017, I would expect us to operate in a range of 52% to 54% based on product mix in subsequent quarters.

Looking at the details of operating expenses. Fourth quarter total operating expenses were $19.1 million, down from $19.6 million in the third quarter and below our previous guidance. R&D for Q4 was $10.5 million, flat with the third quarter. SG&A for Q4 was $8.7 million, down from $9.1 million in the third quarter. The decrease in SG&A was primarily due to lower marketing and consulting costs.

Looking ahead to 2018, we have 2 corporate-wide projects that will add to our operating expenses on a quarterly basis. The first, as Mike has already mentioned, is our decision to pursue the AMOLED display market. Our strategy for the AMOLED project will be to leverage third party partners to minimize the impact to our ongoing long-term cost structure. The second project is the implementation of a new ERP system, which we expect to work on the implementation on in 2018 and go live some time in the middle of 2019.

Based on these projects and normal R&D development programs, we anticipate our operating expenses to be in the range of $21 million to $22.5 million on a quarterly basis. It is important to note that even with this elevated level of operating expenses in 2018, we anticipate our operating margins will improve over 2017 as our new products expand into the marketplace and our software business resumes growth.

Now, I'd like to spend a moment on taxes. Currently, our effective tax rate from a non-GAAP perspective is approximately 32%. Like many companies, because of tax reform, we've had to revalue our deferred taxes at the new lower revised rates and make other adjustments in Q4. This resulted in a noncash charge to our GAAP financials in the fourth quarter of $9.5 million.

We are currently working through the impact of the legislation on 2018, but currently believe our effective tax rate will be somewhere between 19% and 22%. As a point of reference, using the midpoint of that range, we would have had an increase in our 2017 earnings of about $0.20 per share.

Net income for the fourth quarter was $9.4 million or $0.29 per share and above the high end of our guidance of $0.22 to $0.28 per share. That compares to $10.6 million or $0.33 per share on higher revenue in the 2017 third quarter. For the full year, net income was $38.9 million or $1.21 per share compared to $31.4 million or $0.99 per share in 2016.

Now, turning to the balance sheet. Our fourth quarter showed strong cash generation as we increased our cash balances $18 million and ended the quarter with cash and marketable securities of $177.4 million. We generated over $54 million in free cash flow for the year, which was a company record. Accounts receivable decreased slightly in the quarter to $65.3 million from $66.2 million in the third quarter. Inventory increased slightly to $67.5 million from $65.8 million in the third quarter, primarily due to an increase in lithography inventory.

Finally, to wrap up, capital expenditures were $2.8 million in the quarter and depreciation expense for Q4 was approximately $1.1 million.

Now, I'd like to turn the call back over to Mike for commentary on 2018 and the first quarter. Mike?

[Michael Plisinski, executive]

Thanks, Steve.

Given our record bookings, it should not be a surprise that we see another year of double-digit growth for 2018. As in 2017, we see that growth across multiple segments starting with memory where we see investments continuing from our customers in Korea and a new customer in China. In addition, we expect to add at least one new global memory customer in 2018.

The mobility and IoT markets continue to be the major drivers of growth in advanced packaging. Mobile phone suppliers continue to invest in new and innovative features and functionalities such as cameras, virtual reality and facial recognition to differentiate their products and to drive consumers to upgrade to new devices. These functions also find their way into additional devices for IoT, automotive, health and wearable applications, which further increases the growth opportunity for advanced packaging as the end markets continue to expand.

Wireless technology is also a key differentiator for new products with 5G expected to enable a large number of new applications in mobile and automotive applications, including the realization of full autonomous driving. In 2018, we see RF manufacturers increasing investments in early 5G chipsets, which could go into initial production as early as the second half of the year.

Overall, continued consumer confidence and strong global macroeconomic conditions encourage multiple segments to increase their investments in 2018. Given Rudolph's balanced portfolio of solutions and end markets, we feel well-positioned to benefit from those investments.

Now, specific to the first quarter of 2018, we expect our revenue to be in the range of $64 million to $74 million for the quarter. This range includes the previously discussed Gen 4.5 display stepper for process development of next-generation AMOLED displays. The tool is expected to ship at the end of March after completion of the customer's source inspection and training in Massachusetts. A wide range of the forecast is primarily due to the timing of this tool. In this range, we expect earnings to be between $0.32 per share to $0.50 per share.

Now, I'd like to provide a brief update on our AMOLED program. As I mentioned at the start of the call, we're excited to announce the successful completion of our proof-of-concept tool in the fourth quarter. This system demonstrates that we have the capability in our motion control architecture to adjust 2 stepper lenses independently in real time while maintaining our resolution and overlay targets. Based on our core stepper technology, this system retires a significant technical hurdle for the program.

Including the Gen 4.5 tool expected to ship in March, we have now established 2 leading Chinese AMOLED display manufacturers as R&D customers. Their purchases of our Gen 4.5 tool for R&D of next-generation AMOLED mobile displays is one indication of their interest in our technology as manufacturers prefer to develop a process in R&D that can be easily rolled out to high-volume manufacturing. In addition, we are engaged in technical exchanges with several other customers.

So based on these positive engagements across a range of customers, we've made the decision to move ahead with this potentially transformative initiative in the rapidly expanding AMOLED display market. Within this market, our initial focus is on the high-resolution backplanes necessary for precise control of the front surface pixels.

Geographically, we'll focus on the Chinese market and customers. We estimate our SAM for this market to be between $500 million to $600 million depending on the number of layers, average selling price and actual investments that occur.

I will now go over a brief time line of major milestones for the program. We have started to ramp our R&D team to focus on the design and build of the core technology required for the Gen 6 platform. We plan to deliver our first Gen 6 optical system on the Gen 4.5 platform in the second half of 2018. Because it will have the Gen 6 dual optics, this system will provide a platform for customers to further develop and model their Gen 6 processes and products while we continue to develop the full Gen 6 platform.

Our first full Gen 6 dual system is planned to be ready for an initial customer in early 2019. We then expect 9 to 12 months of process qualification and then volume manufacturing orders to follow into 2020.

We expect the typical AMOLED display line will order 4 to 6 systems depending on the number of critical layers and production volume, which would represent a revenue opportunity of approximately $40 million to $60 million per display line. We are working very closely with our customers to ensure our product and road maps intersect with their expansion plans. In addition, we're engaged at various levels with other customers that have announced plans and funding for mobile AMOLED display lines in the 2020 and 2021 time frame.

There will be an estimated $20 million impact to our cash in 2018 as we invest in the operations and commit to inventory purchases required to launch the business. This will increase further as we get closer to completion of the beta Gen 6 system and start to ramp up production in preparation for the initial production orders we'd like to achieve in 2020.

I want to emphasize that this is a long-term program and though we have worked diligently over the last 12 to 18 months to mitigate risk, we did not eliminate it. We have an aggressive but, we believe, achievable plan with well-defined milestones that it should be clear, we are developing a lithography tool that represents a completely new concept for the market. Because we are leveraging our core technology, aspects of this development will benefit our advanced packaging line of steppers. We believe the culmination of the technology developed will be compelling and help enable the broader adoption of high-resolution AMOLED displays. These displays will enable a variety of new products that are brighter, consume less power and have higher pixel densities. Eventually, we see this technology enabling high-resolution flexible displays as well. We are clearly excited about the transformational impact this can have for Rudolph, but there is risk and we look forward to providing additional updates to our stakeholders as we progress through this strategic program.

In conclusion, I want to emphasize the excitement we have for our core process control, advanced packaging lithography and software products. In 2018, we will be releasing a new advanced packaging stepper that will have a number of exciting performance improvements for both wafer and panel applications. We continue to profitably invest in the technology required to maintain our leadership across a broad range of end markets, including cloud computing, artificial intelligence, IoT, automotive and mobility. Our relentless focus on operational efficiencies is allowing us to invest in potentially transformative growth opportunities while maintaining our strong operating margins.

Thank you. And this concludes our prepared remarks. I know there's a lot of information to cover. We will now open the floor for your questions.

[Operator]

[Operator Instructions] And we'll now take our first question from Tom Diffely with D. A. Davidson.

[Thomas Diffely, analyst]

I guess, first on the AMOLED program. Is there some way to parse out what you believe the cost of development will be over the next couple of years? And you mentioned that you have some partnerships. I'm just curious how you plan to share that cost.

[Michael Plisinski, executive]

Yes. We are, of course, tracking the R&D costs for the program. We're developing all of our IP. We'll be focused in our R&D. We'll be focused on the development of the core modules and core technology. That will not be brought out to other third party suppliers for the purpose of protecting the IP. Some of the noncore modules, we're working with a couple of different, let's say, suppliers for those -- the development of those modules.

Specific to the R&D...

[Steven Roth, executive]

This is Steve, Tom. So you saw the guidance on the operating expenses. There's several million dollars in there that's related to this program. It's -- not all that increases. As I mentioned, there's other projects we got going on, just our normal R&D programs and the ERP implementation cost, but it's a several-million-dollar endeavor in the R&D line. Yes.

[Thomas Diffely, analyst]

Okay. So $21 million to $22.5 million already incorporates all of the spending?

[Michael Plisinski, executive]

Yes.

[Steven Roth, executive]

Yes, it does.

[Thomas Diffely, analyst]

Okay. Great. And then, you made a comment about unusual clarity into the first half of the back-end business. I'd like to get a little more color on that and how is it different than the normal time?

[Steven Roth, executive]

Well, I mean, I think we talked about the previously announced fourth quarter that we have bookings of over $100 million, which was a record for the company. I've been here at Rudolph a long time. I can tell you we never had that kind of booking orders going into the fourth quarter. That effectively gives us pretty good insight on what our first half of '18 is going to look like. So I think that's I'm what kind of referencing.

And it wasn't just back-end. It was very broad-based across most of our markets.

[Thomas Diffely, analyst]

Okay. I guess, what I'm getting at, are you seeing higher utilization rates in the field right now, unusually high demand from certain aspects of packaging new programs? Just a little more would be great.

[Michael Plisinski, executive]

Tom, I think the demand we're seeing is across the board. So I wouldn't pull out advanced packaging specifically. We are seeing more devices moving towards advanced packaging. We are seeing investments in R&D of next-generation advance packages from larger IDMs for their next-generation of packaging technologies. Obviously, that gives us some added visibility, which is helpful, but a lot of the visibility also comes from some of the front-end activity we have, not just memory, but also the RF, MEMS and logic and foundry customers.

[Thomas Diffely, analyst]

Okay. And then, last question on the margin side. It sounds like when you don't have a big lithography system in your order book, margins have gone up a few hundred basis points. Is that just the makeup of the types of tools in mix today? Or is that kind of how your core business has evolved over time?

[Steven Roth, executive]

No. I mean, I still think when you look at the AP lithography tools, there's definitely a margin pressure that we talked about over the last several years and that really hasn't gone away. I think what I wanted to allude to in the -- with this Gen 4.5 display tool is we had access to some older inventory from our acquisition of Azores. So you can imagine, some of that inventory was either written down or at lower value so we're getting to utilize some old stuff. That's why there's such a swing in the margin profile.

As I mentioned in my remarks, I think we'll be up year -- we'll definitely be up year-over-year in gross margin overall, but I think that 52% to 54% gross margin on a normal quarter without like a big litho tool like that is probably where you'd want to model us.

[Operator]

And we'll now take our next question from Patrick Ho with Stifel, Nicolaus.

[Patrick Ho, analyst]

Mike, maybe first off, in terms of the market environment, obviously the bookings outlook has given you some clarity into the first half of the year. Qualitatively, can you give us what markets you believe could be potential drivers for the company in the second half? Because you mentioned in the first half it appeared broad-based with memory, advanced packaging, specialty devices, are some of those going to continue into the second half of the year? Or do we get some seasonal aspects? Qualitatively, what are you looking at on the second half of the year?

[Michael Plisinski, executive]

For certain, we don't see any reason to -- we don't have any reason to believe we won't see the normal seasonal pattern that we've experienced the last several years. So I would expect the fourth quarter to be lower than the third. I'd expect the third quarter to be similar to the second quarter.

As far as drivers for the second half, I did mention some of the RF manufacturers that have, let's say, targeted some expansions in the second half of the year. Depending on if that really happens or not, that could help drive some business for us. By all accounts, we're starting to see movement in that from a number of different players. So we remain optimistic there. We also see some of the panel manufacturers looking to expand in the second half, going from the pilot production into more volume for the second half. That could obviously be a boon for us as well. That pulls in not just lithography, but also our Firefly inspection products and some software as well.

So I think the drivers will not be just one. As usual with Rudolph, we have a broad set of drivers that we can play to. And I don't see any change to that in the second half.

[Patrick Ho, analyst]

Great. That's helpful. And Steve, as a follow-up question regarding the AMOLED display opportunity, you talked about some of the uptick in the expense side of things. Well, given that obviously these display lithography tools have longer lead times, how do you see your investments on the cost of goods side where, again, there's some longer lead time items that you have to do? And how are you going to be able to manage that and keep gross margins growing on a year-over-year basis?

[Steven Roth, executive]

Right. So obviously, the -- if you look at the timing and work backwards, as Mike talked about, we'd be shipping tools in 2020. So you could end -- you could back off a year from that time frame to think that we would need obviously 9 months or so to build tools. And there's obviously a long cycle there. So you probably would see inventory -- more capital inventory investments starting in the beginning of 2019, maybe some that -- end of '18 as Mike kind of alluded there. They won't obviously hit the P&L, right? They'll all be sitting in inventory. So I think that's going to be more of a drain on cash than on the P&L impact.

I think I've talked about it at our Analyst Day that the model that we have built around this market is -- they're still -- they're more attractive than the AP market and -- but slightly below our corporate models of some of our other tools. So I don't think, overall, it's going to -- you won't see the impact from a P&L and a COGS perspective probably until the 2020 time frame.

[Patrick Ho, analyst]

Yes. And then, maybe I should just clarify. I'm talking more still about the kind of pilot lines or somewhat -- like you mentioned, the optics source that you'll be working on in 2018. I was wondering how those potentially affect both, I guess, your inventory as well as the COGS line for 2018 specifically or some of those developmental aspects that you're still doing.

[Steven Roth, executive]

Yes. And most of those costs will fall through the R&D line, Patrick, instead of the COGS line because until we start selling things, it won't be above the line. That's all being built into the couple million dollars number that I talked about so far for '18. And obviously, you can imagine those -- some of those costs will continue on into '19 as we continue developments, but that's going to be more, I think, on the operating expense line than on the COGS line.

[Operator]

And we'll now take our next question from Craig Ellis with B. Riley FBR.

[Craig Ellis, analyst]

First, just a clarification. Mike, when you were talking about 2018 and you referenced double-digit year-on-year growth, that was a Rudolph statement and not a broader industry statement, correct? And if so, then what are the things that are at the top of your list in terms of what gives you confidence in that level of growth for Rudolph this year?

[Michael Plisinski, executive]

That was a Rudolph statement and, I guess, the markets that I highlighted are the ones that give us the most confidence. So memory is starting off very strong. And the expansion of our metal metrology in the 3D NAND market, so the hard mask etch control is continuing and helping to open up doors into new memory manufacturers, which we believe we'll continue to add.

I also mentioned the strong advanced packaging. And we see continued evolving -- or expansion of advanced packaging in the market. We see investments in China, but we also see new applications being opened up by our new products. And the continued adoption of those new products and solutions we see driving some -- well, it's part of the backlog so it gives us some confidence in the solid 2018.

So those are the 2 biggest markets. I also mentioned RF expansion, the MEMS that's continuing to grow so -- though that's probably a little less clear, the early signs are very positive. What we're seeing now from customers starting to take more tools, where the last few years it's been somewhat muted. And multiple customers are taking tools right now.

[Craig Ellis, analyst]

Very good. And then, turning to the software comments. I think I heard the team say that you expected software to pick up from what was 8% of sales in the fourth quarter on fabwide activity. Can you talk about where software should normalize as a percent of sales? Do you see the business staying in the single digits? Or as we see some of these fabwide deals close, does it get back into the low double digits?

[Michael Plisinski, executive]

So I don't look at the software as a percentage of corporate sales because if we sell 5 more steppers, that doesn't mean software is going to magically grow another $400 million -- $4 million or so. So I look at it more from their own standpoint and how they're growing year-over-year and how they're growing quarter-to-quarter. And from that, I expect them to grow in the fairly solid double digits this year.

We're seeing some of the initiatives we've been working on over the last several years to close, some more large transformative opportunities starting to bear fruit. I think you'll hear about that throughout this year and it's why we guided to much stronger software sales. So I would expect them to get back to some of the high levels we've -- some of the peak levels we were at a year or 2 ago and I'd expect them to then go through that in subsequent years.

[Craig Ellis, analyst]

And then, the last question is for Steve. Steve, with regards to the operating expense range, up $21 million to $22.5 million, is the view there that it builds through the year as you progress further on the -- active-matrix OLED opportunity and as ERP work grows? Or would it have a different profile in 2018?

[Steven Roth, executive]

I actually don't think it builds. It probably is a little bit more first half-weighted because a lot of these things are all kicking off at the same time plus our normal R&D programs. And as you can see, even this fourth quarter, our R&D costs were flat with Q3. So if you look at the profile, I think they actually dipped in the second half of the year because we're ramping up and then getting new products out onto the market.

So yes, it won't -- I wouldn't expect starting a low number and rise up. I gave that range because I think the midpoint is kind of a healthy place to start. And depending on project completion size, they might be at the low end or the high end. And obviously, the OLED things in the ERP will build, those start, but they'll be constant throughout the year.

[Operator]

And we'll now take our next question from Farhan Ahmad with Crédit Suisse.

[Farhan Ahmad, analyst]

My first question is in regards to your lithography panel -- lithography system for OLED. Can you just talk about what generation -- what sizes of panel are you targeting? And is it a tool that would be competing with the existing technologies? Or is it specifically targeting a new market within OLED or a larger size -- a substrate size that is not currently being addressed? Can you talk about like how you are trying to differentiate from the existing large lithography providers in the market?

[Michael Plisinski, executive]

Yes. That's a great question, Farhan. So we're not targeting television. So we're not targeting very large displays, Gen 10 or something like this. We're targeting the high-resolution mobile display market, which is really limited right now to Gen 6, which is why that's our focus.

It's not -- we're not going after and trying to displace current and existing lines and tools. The market -- as you can see with cellphones and watches, the market is being driven to a finer and finer pitch or higher resolution displays and some of the existing -- many of the existing equipment can't print with that kind of resolution across those displays. That's the market, that's the opportunity that we see for Rudolph.

We've already demonstrated and proven our optical capability to print those devices at high resolution, actually a generation beyond what they need. Now, the question is can we build it with the right cost of ownership and the other additional capabilities that can drive a switch to us.

[Farhan Ahmad, analyst]

Got it. And then, I know you talked about the OpEx. I just want to confirm that as we are thinking about the OpEx trajectory for Rudolph, particularly given the lithography system that you're targeting for OLED, how should we think about OpEx ramping from here?

And obviously, you're guiding the March quarter to increase significantly in OpEx from the current run rate. How much of that increase in investment are we already planning in the March quarter? And how much further increase would be needed as you go through -- with the R&D project?

[Steven Roth, executive]

Farhan, this is Steve. So I mentioned and Mike mentioned in his prepared remarks that we've already started to work on the R&D in this project. I gave a guidance range of that $21 million to $22.5 million. I gave that guidance range for the whole year. So those numbers there -- that are in there are expected because we're ramping up to those costs and then there'll be there. They really won't come down in the -- during the year because this project will go on beyond the year. And so those are built into those. I think in those ranges, that $21 million to $22.5 million, if you stay in those ranges for all the quarters, you will be -- we'll be in those ranges.

[Michael Plisinski, executive]

It's important to realize...

[Farhan Ahmad, analyst]

Yes. Sorry, go ahead.

[Michael Plisinski, executive]

Yes. It's important to realize we are leveraging a lot of the core capabilities and technologies that we have. We're enhancing it and modernizing it and obviously developing around those core. So we're not going from scratch to build this tool. I think that's an important point when you're thinking about the OpEx and the R&D expenses.

[Farhan Ahmad, analyst]

Got it. And then, in your guidance for March quarter, can you talk -- you talked about the large panel system that is shipping in the quarter. Is there any other lithography system that's in there?

[Michael Plisinski, executive]

No.

[Steven Roth, executive]

Not for Q1, no.

[Operator]

[Operator Instructions] And we'll now take our next question from David Duley with Steelhead.

[David Duley, analyst]

I had a couple. Just in the advanced packaging lithography area, you mentioned -- could you just repeat what you had said about you shipped another JetStep to a top 5 IDM? Just repeat what you said again about that.

[Michael Plisinski, executive]

I believe I said it was another shipment to a top 5 semiconductor manufacturer.

[David Duley, analyst]

Okay. And how many does that make to the top 5?

[Michael Plisinski, executive]

It makes 2 to the top 5 and 2 others to leading OSATs.

[David Duley, analyst]

Okay. And how -- where -- or I'm assuming that these are kind of -- going to be targeted at fan-out types investments. Are there other new packaging technologies that can move -- that can use panel lithography?

[Michael Plisinski, executive]

There has been discussions around leveraging the panel format to reduce costs. So you could imagine, instead of processing, whatever, 1,000 die on the wafer, you could process 7,000, actually -- yes, 7,000 die on a large panel and reduce some costs there.

We haven't seen too many people and -- using traditional fan-in technology. However, we haven't seen a lot of traction on the pilot line side of that equation. It's really been about differentiated next-generation system-in packages or combining die to create a more powerful package or module. Usually, the driving factor is the size of that package, that final package which is fairly limited. If it's a large package, it's fairly limited on a wafer or round format. And that's been really the driving force.

[David Duley, analyst]

And so you have, I guess, an installed base of 4 customers that have panel-based lithography, perhaps it's more. How many would you expect to ramp into production during calendar '18 and/or calendar '19, however you'd like to characterize it?

[Michael Plisinski, executive]

We think 2 -- well, we know 2 are planning ramps in 2018 and the other 2 are planning ramps in 2019.

[David Duley, analyst]

Okay. And then, just how would that -- with the discussion about advanced packaging and certainly more people ramping up for you guys on the lithography side, how does that impact your inspection business? Clearly, there's a lot more investments going on. I was wondering if you might be able to characterize what you think the growth rate might be in inspection or just talk qualitatively how these customers ramping up would impact inspection as well.

[Michael Plisinski, executive]

Well, inspection is benefiting from the growth for sure. I don't -- do we have the percent growth? I mean, I don't have the specific percent growth we did in advanced packaging.

[Steven Roth, executive]

Year-over-year.

[Michael Plisinski, executive]

But from the growth in the industry, our #1 position, but then also our additional new product releases and the new applications that those products are opening up, we expect to accelerate our growth into 2018. And that is across not just fan-out, where we're particularly strong, but also for copper pillar applications. We're seeing applications in the memory space, as we mentioned, in the TSV, that sort of a middle-end process, so probably count that as front-end. But on the advanced packaging side, for sure, copper pillar bumping, the shrinking RDLs, those are all driving opportunities for our inspection that continue to grow.

[David Duley, analyst]

Okay. Final question for me. You talked about how you had a nice improvement in memory orders here recently driven by increased spending in a couple of key customers and, I guess, adding another customer. Do you expect -- how many more customers do you think you can add in 2018? And will it be a similar spectrum of applications at those customers?

[Michael Plisinski, executive]

They are the same spectrum of applications. And we've got a number of demos out there. I think we should -- or evaluations that are ongoing out there. Various, let's say, levels of progression through the evaluation process. I guided to closing at least one. So you can kind of say one or more.

[Operator]

And it appears there are no further questions in the queue at this time.

And I'd like to turn the conference back over to Mr. Mike Sheaffer for any additional or closing remarks.

[Michael Sheaffer, executive]

Thank you, Brian, and thank you all for your continued support of Rudolph. We look forward to updating you on our continuing activities and progress in 2018.

Brian, please go ahead and wrap up the call.

[Operator]

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.