Onto Innovation Inc

NYSE:ONTO

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, this 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 release.

Let me turn the call over to our CEO, Mike 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 the 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'll continue our focus on driving gross and operating margin improvements throughout 2025. .

Now, let's review the fourth quarter business highlights, starting with our specialty devices 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 2.5 delogic packaging. As expected, orders from HBM declined after a record third quarter. However, as HBM order allocations from end markets are becoming clearer between the 3 main suppliers, we are seeing a pickup in demand to support the growth of 2.5D logic packaging. For the full year, inspection revenue 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 in advanced packaging processes, 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 2 leading panel manufacturers for applications in glass and advanced IC substrates. These leaders selected firefight 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 installed 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 StepFAST 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 of 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 Irish 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 5 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 volumes.

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 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 continue 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 the 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 and looking at the quarterly revenue by markets. Our biggest market remains specialty devices and advanced packaging, which increased 5% from Q3 with a 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 55% gross margin for the fourth quarter at the high end of our guidance range of 54% to 55%, while achieving 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 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 2 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 6 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, and 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 3 secular end markets driving our business over the next 2 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 5 years. Similarly, NVIDIA described the demand for its black well processes as staggering -- more recently, the U.S. government announced a $500 billion Stargate project over the next 4 years to build new AI infrastructure in the U.S. new and more efficient AI models like Deep Sea could proliferate the use of AI and 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 is 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 U.S. 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 demand 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.

[Operator Instructions] And we will take our first question from Matthew Prisco with Cantor Fitzgerald.

I guess we'll start 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 '24 based on the industry capacity adds. How do you think about growth potential for Onto off that higher level in 2025?

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 HBM capacity required to support the COOs growth, we weren't seeing the level of expansions we expected. We sort of surmised that this was because we're and our customers were waiting for allocations from the -- essentially the big driver, NVIDIA as that's become clear, we are starting to see those customers expand and start to place orders and work with us on timing of shipments, et cetera, for the mid to second half year. I think 1 of the important points here though, to try and understand the HBM demand is how much capacity was added in 2024.

We estimate about 30 thus 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 that path being added, which implies the market is doubling in order to meet the demand of the COOs. And we see actually our tax rates at the same level or even increasing as we see more adoption of our front-end metrology equipment in this market.

Helpful. And then for the follow-up, maybe you can help us think through the moving parts for advanced node into 2025. Given that date 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 [indiscernible]

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

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

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 3 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. We've -- based on the position we've articulated in our prepared remarks and 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 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.

Yes. Thanks, Craig, for the question on gross margins. I mean, certainly, our goal is as we in 2024 quarter-over-quarter improvement. Certainly, the mix of advanced nodes is going to 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. .

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

Can you hear me?

Yes.

So Mike, we're at the beginning of the year, obviously, you talked about a few moving parts, which we all around DRAM something new I heard from you this time was Ned didn't hear about a month ago about NAND. AI packaging, HBM what current visibility, I mean, if I look at everything all together for the 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 your overall business -- I mean, give us as much color as possible or which outer quarters.

Yes. Well, as you know, there's a lot of moving parts. And the other quarters are going to be the least visible for us. And that's traditional semiconductor business. So 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 will lead the growth. And then 3D NAND is also growing pretty nicely from -- again, from a bottom, but pretty healthy compared to prior years through -- except for 2022.

So that's directional. On the AI packaging, 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 that's going to do to the markets. And so I think that's 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 applications in there, new applications for our sensors like the subsurface defect inspection capability adds to our, let's say, opportunities to continue to outperform the overall market as we look ahead to 2025.

Maybe a quick followup. Mike, you paid some of your own internal market numbers I think you said the 230,000 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 , but what's your expectation for '25 how much capacity you think will be needed based on your current view on how much order or how much airline you're seeing right now?

Yes. So if you take the 230 million and you say about half wasn't leveraged or used then that implies 115,000, roughly 115,000 wafer starts were required to match last year's co-op capacity roughly. If you're doubling that, then you're doubling the other. And so you're essentially seeing -- we're essentially seeing the 115,000-or-more wafer starts being added in 2025, which matches the demand profile that we would expect.

Your next question comes from the line of Edward Yang with Oppenheimer & Company.

And congrats on the AI packaging revenue growth, the 180% over 2023. Was that above your target? I thought in your January presentation, you had something along lines of 160%.

It might have been the -- I don't recall specifically. Yes. So I might have said over 160% and then we ended up at 180%. .

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

Yes, 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 -- that's all going to be probably maybe some a little bit in Q2, but mostly in the second half. .

Your next question comes from Brian Chin with Stifel.

Thanks for making to ask a few questions. So we get questions a lot about whether process control intensity for HBM will decline. It's been pretty high to these early phases. I do understand that thinking, but I think what we hear, however, is that yields are getting more challenging when you stack 12 die or you move to HBM 4. So are you actually seeing process control intensity really sustaining or maybe even increasing some of the SAM expansion, is that also some of what 12 high die HBM, is that part of what maybe is driving some of the upward thinking the HBM demand profile into midyear, second half? .

Yes, I think you're exactly right. I do believe that process control intensity is increasing, and I think it's going to continue to increase, not just because as you're stacking the risk of yield loss for the final layer is going to cost significantly more, but also the complexity of shrinking the interconnects and more dense interconnects, means the interfaces between the interconnects is more critical. And that's going to be a very -- a new set of new challenges for process control that some of our Echo Scan and some of our new products with 3DI are designed to address.

Okay. Great. And then maybe I think when I add all your January investor slide deck, it kind of the eyeballing, it suggests maybe you have around 60% share of existing AI packaging, Sam. And then on top of that, you're adding $300 million incremental Sam, some of those new products like 3D, as 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?

Our intention is, of course, to grow our share. So not just maintain. And of course, our competitors intend to take. So that -- 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 EchoScan,the we don't really see an alternative. If you want to measure voids, 1 micron below in atmosphere or without having the risk of additional yield loss due to Immersion immersing these samples. We think this is 1 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 depending on where the bump technology goes, as they get smaller and denser the strength of our 3DI technology becomes greater and we think that then we should have a greater share, greater entitlement.

Your next question comes from Vedvati Shrotre with Evercore.

The first one I had, you provided a good amount of color on the HBM ramps. 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, then how should I think about the linearity to your revenue growth from the 2.5D integration point of view?

Yes. I don't have -- so generally speaking, I'll just answer generally speaking. If someone's going to double capacity, they're going to bring in more of the process control, it will 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 co loss, as you described it, 2.5D lodge packaging and I think that's what we're seeing in our forecast as well.

The reason I'm hesitated is because we're also seeing new opportunities. So there's new applications where we're working on we're working on with customers that are being qualified that could change that trajectory as we -- as those applications come online, right? They're new. So they haven't been in process and previous ramps, which goes to Brian's increasing capital intensity we're seeing it across the board and increase our process control capital intensity.

Got it. And just to follow up on that. Does your offering changed drastically with like the CoWoS-L versus CoWoS-S kind of 9? How does that impact your intensity?

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

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

I was wondering if you might be able to help us understand a couple of things. First, as far as the new product contribution in 2025, what can we expect, I think, from the void detection, the 3D bumps, there might be a couple of 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. .

Okay. So what I mentioned earlier is that new product adoption, we add incremental revenues. Previously, I 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 EchoScan, we'd hope to close that in the calendar year. We'd hope to close maybe 1 other one. 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 and most likely 2026.

So I think that's where we really see the benefit from the new products. Going to litho, the -- 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 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 6 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 in delivery and early '26. And then we're talking to several customers about tools and qualifications later in this year and into early '26.

So the panel market it's 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.

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 Research had a very increase in shipments. I'm just wondering what you're thinking about NAND this year.

Yes. I'd say it was a bit of a surprise. We've seen some increases, but they were very, very small. So as a percentage basis, but the base was so small. But now it's becoming a more meaningful part of 2025. largely, we're seeing the at least 2 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 into 2025? Sequentially, it was a large increase.

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

Our customers are driving a much higher pace of innovation requirement from us. As I mentioned, the process control intensity and 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 yes, I don't think that there's going to be a significant increase in 2025, but of course, there's incremental increase.

That 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.

This concludes today's call. Thank you for your participation. You may now disconnect.