ONTO (2025 - Q1)

Good day. And welcome to the Onto Innovation First 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. Please go ahead. Sidney H

Thank you, Rachel, and good afternoon, everyone. Onto Innovation issued its 2025 first quarter 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 federal securities law. 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 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, Sydney. Good afternoon, everyone, and thank you for joining us on our call today. Onto Innovation set another revenue record for the quarter, delivering $267 million in revenue. This growth was driven by expansions in both the advanced nodes and packaging to support growth of AI compute engines and increasing investments in cloud and enterprise servers, both seemingly undampened by market concerns over tariffs. However, the announced tariffs by the Trump administration are impacting Onto Innovation somewhat uniquely because nearly all of our products are manufactured in the United States. Naturally, this negatively impacts our incoming costs due to the Trump administration’s tariff policies, as well as the cost to export our tools from the potential of retaliatory tariffs imposed by other countries. In response, we’re accelerating existing strategic programs to improve business continuity and resiliency by installing manufacturing capability in Asia. Due to the incredible cooperation between our team and Asian manufacturing partners, we expect shipments to begin in the second half of 2025 and to have roughly half our product volume capable of being shipped out of these new facilities by early 2026. We expect to realize margin improvements from this effort in the second half of 2026. Once completed, we’ll be significantly more competitive while providing greater levels of certainty to our global customers. Now, let’s review our first quarter business highlights, starting with the advanced nodes. Our metrology business is benefiting from increased process control capital intensity of data all around and memory, as well as the performance and cost of ownership advantages that our optical metrology suite is delivering to our customers. This has led to record quarters for our newest products, Iris films Metrology and IMPULSE 5 Integrated Metrology, while Atlas OCD Metrology nearly surpassed the quarterly record set in Q1 of 2022 before we were impacted by U.S. trade policy with China. As we anticipated, revenue from our specialty device and advanced packaging markets declined from the record fourth quarter. Recently, a leader in 2.5D packaging for AI commented that the long-term outlook of AI has improved as new AI models are expected to lower barriers to entry and drive greater adoption of compute engines. Similarly, HBM device makers are preparing for higher memory content, as well as the transition to HBM4 next year. These expanding markets are also driving new tool requirements, including greater precision, sensitivity and throughput, in order to produce devices with higher yields and lower costs. In response to these new requirements, during the last two quarters, we doubled the performance of our inspection tools, but this did not address 100% of the new needs. So together with our customer, we began accelerating an existing program for a new inspection platform capable of providing significantly better sensitivity and higher performance. Wafer demos will start this quarter and we expect to ship evaluation units later this year. Though disappointing in the short-term, in the long-term, we believe this new technology may also open up opportunities in the front-end macro inspection market where we have not previously competed. Now, turning from 2D interconnects to 3D interconnects, we’re making steady progress moving through the rigorous process qualification of our 3Di technology. In the first quarter, 3Di bump metrology was selected by two more OSATs for applications where better throughput and repeatability was required. We also shipped additional evaluation units to two leading memory manufacturers in the quarter. Besides bump metrology, the other challenge in future 3D packaging is void detection for hybrid bonding applications. Our EchoScan System, which is a unique technology being developed for detection of yield-killing voids and bonding interconnects without the need to immerse samples in liquid, has demonstrated capability at a Tier 1 customer site on R&D test samples. We are now starting tests on production test samples where variation materials and multiple layers will further stress the technology. Currently, no other technology can find voids in these structures at this resolution, which we believe will be critical for yield control and HVM of hybrid bonding devices. Further along the adoption curve, we have delivered many of our subsurface defect inspection tools to reduce sources of yield loss from cracks and voids in packaging for 2.5D and emerging hybrid bonding applications. We’re also adding customers outside of packaging to support similar needs in MEMS and power applications. And now I’ll turn the call over to Mark to review our financial highlights and provide second quarter guidance.

Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we had another record performance by the Onto team kicking off the year with $267 million in revenue, achieving the midpoint for revenue and at the high end of our EPS guidance range for Q1. First quarter revenue increased 17% versus the prior year, with first quarter EPS increasing 28% versus the prior year. We achieved a record operating cash flow of $92 million due to the continued discipline in all elements of working capital management. Looking at the quarterly revenue by markets, advanced nodes, which had revenue of $93 million, increased 96% over Q4 and represents 35% of revenue. Specialty devices and advanced packaging decreased 24% from Q4 with quarterly revenue of $129 million and represents 48% of revenue. Software and services with revenue of $44 million decreased 5% compared to Q4, representing 17% of revenue. We achieved 55% gross margin for the first quarter in line with our guidance range of 54% to 56%, while improving slightly above 50 basis points over Q4. First quarter operating expenses were $70 million, just below the midpoint of our Q1 guidance range of $69 million to $72 million. Our operating income of $76 million was 29% of revenue for the first quarter. Now moving to the balance sheet, we ended the first quarter with cash and short-term investments of $851 million. Cash remained relatively flat to Q4 as we executed $75 million of shared buybacks within the quarter under our existing $200 million authorization. We achieved operating cash flow of $92 million, or 35% of revenue, and free cash flow of $84 million, or 31% of revenue, converting 100% of our operating income into cash. Inventory ended the quarter at $293 million, up $6 million versus Q4. This increase was primarily due to accelerating targeted inventory receipts within the quarter to minimize potential impact -- tariff impacts. We continue to expect inventory to stay relatively flat for the second quarter and expect to maintain inventory levels at 1.6 turns to 1.8 turns for 2025. Now turning to our outlook for the second quarter, we currently expect our revenue for the second quarter to be between $240 million and $260 million. We expect gross margins will be 54% to 56%, which includes our current assessment of up to 75 basis points of headwind due to inbound tariffs if we are unable to offset within the quarter. We are actively working to mitigate the tariffs through our supply chain activity or optimization of our strategy to locate manufacturing close to our customers. If successful, we will execute to the high end of our guidance range for gross margin in line with our stated objective of 50-basis-point improvement quarter-over-quarter. For operating expenses, we expect to be between $72 million to $75 million as our annual compensation elements occur within the second quarter each year. For the full year, we expect our effective tax rate to be between 14% to 16%. We expect our diluted share count for the second quarter to be approximately 49.3 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings for the second quarter to be between $1.21 per share to $1.35 per share.\ And with that, I will turn it back to Mike for additional insights into Q2 and further commentary on 2025. Mike?

Thank you, Mark. For the second quarter, we anticipate revenue from the advanced node customers to decline moderately due to customers’ timing of gate-all-around investments, which we expect to resume in the second half of the year. We expect NAND and DRAM spending to remain steady. This reflects our strong market position not only in OCD but also in films and integrated metrology. In fact, by the second quarter -- by the end of the second quarter, we expect revenue from each of these product families will have already exceeded the full year revenue from 2024. In the specialty device and advanced packaging markets, we believe revenue will decline slightly. And as we discussed earlier in AI packaging, our customers are under tremendous pressure to improve factory yield and cycle times, necessitating higher throughputs and more sensitive 2D inspections. We’ve significantly improved the productivity of our tools, but despite these improvements, some applications were not addressed by our platform. However, they will be targeted by our next generation platform, which as mentioned has the added benefit of potentially opening new opportunities in the front end. As our customers’ expansion plans and tool allocations have become clearer in the last quarter, we have some clarity into the second half of the year, which we lacked previously. For advanced nodes, we remain confident in broad-based expansions, although we anticipate a meaningful pause in Q3 from memory, making Q3 a low point for the year. We will take full advantage of this pause to allow our team to focus on the successful manufacturing ramp in Asia as previously described. We expect revenue growth to resume in the fourth quarter. Now looking beyond 2025, advances in AI and AI applications at the edge through lighter advanced models could lead to an entirely new wave of smarter, more integrated mobile devices and cloud applications, fundamentally changing how we interface with our environment. Investments in AI servers and cloud infrastructure, including new memory and gate-all-around transistors, will play a crucial role in this transformation. We expect our new product innovations for 2D inspection, 3D metrology and optical metrology will be critical to enabling these new devices. And that concludes our prepared remarks. Rachel, please open the call for questions from our covering analysts.

Thank you. [Operator Instructions] And we will take our first question from Craig Ellis with B. Riley Securities.

Yeah. Thanks for taking the question. Mike, I wanted to follow up and just go deeper into some of the comments that you have on high bandwidth memory. So I think three months ago you talked about the potential for there to be some digestion occurring in that area. Can you talk about how things have played out in the last three months? And then it seems like there’s a couple things happening. You talked about a product-related item and then where does that impact the business and how does that impact relative to the digestion you expected to occur? Thank you.

So for HBM, we haven’t seen any significant changes from our views shared in the last two calls, really. So we still see the investments that we expected continuing to happen, the product adoptions continuing to occur, including we’re trying to make progress with the adoption of the 3Di technology. And that was what we mentioned is shipping additional evaluation units to memory customers. The product gap that we were talking about in the call is primarily tied to 2.5D packaging. And that is, as we described, an area of sensitivity requirements that the customers needed. We worked very hard with them over the last several quarters to close gaps. We closed many but not all, and the next-generation platform should be able to close all.

Got it. And so the second and follow-up question is on the commentary for the second half of the year. So it sounds like you’re expecting advanced nodes to perform well and you’ve got a memory pause but broader growth after that. Can you talk more specifically about what you expect in advanced packaging and specialty in the second half of the year? Thank you.

Yeah. So for advanced packaging, you remember we had some very, very tough comps compared to last year. So we talked about, when gate-all-around is doubling for us, that was essentially flat. So -- and I don’t want to repeat all of the, because I know we covered it in the last few calls. HBM, we had a different story with the large investments from one of the memory manufacturers that didn’t get qualified, so that was another difficult comp. Now, so that’s still in play, but the additional variable that I spoke about in the past was the allocations of the tool slots. And so that has a negative impact on us in the short-term and that’s where we’re seeing some degradation in the AI packaging, primarily on the 2.5D side.

Thank you. And we will move to our next question from Brian Chin with Stifel.

Hi there. Good evening. Thanks for letting us ask a few questions. Maybe firstly, Mike, can you quantify the impact in Q2 and maybe even for the year in terms of the reciprocal tariffs and maybe the reluctance or the impact that’s having on shipments of some equipment from the U.S. into places like China? Can you maybe quantify that for Q2 and maybe even for the year? That’s my first question. Thanks.

So reciprocal tariffs, I assume you’re going to -- because Trump’s been referring to things as reciprocal tariffs, but I believe you mean true reciprocal tariffs where as a result of the U.S. tariffs, other countries are responding with tariffs in their own, assuming that’s the question. We’re not seeing any impact at this time. China had announced some of these tariffs but then made exceptions for some of the semiconductor equipment. We do think there’s a possibility for Europe, EU potentially to do something similar. So this -- so right now we’re not expecting any impact, but we’ll be better prepared for any kind of impact as we move this manufacturing strategic initiative we have forward and accelerate it.

Okay. Got it. Maybe I sort of misunderstood it during some of the prepared remarks. Second question, a really -- I mean, a very strong advanced nodes revenue print in Q1, bigger than I think even the second half combined in that business. Granted last year is still kind of a double trough year for you guys for the year, but can you go more into sort of what drove that big sequential uptick? Obviously there’s some strength and gale around 2-nanometer I’m sure, but talking about memory being a bit of a weaker spot in Q3, did something pull forward? Was there like an acceleration by customers? Maybe if you could just provide some more color around that.

I’m not sure if anything pulled forward necessarily, but we did see very strong investments in the first half. So part of our Q1 results and part of our Q1 guide is fairly strong, and that’s what we mentioned on the call, very strong memory. So memory stayed steady first half. Gate-all-around comes down a little bit in our guide from the second quarter -- for the second quarter, but that was as planned, and then comes back in the second half, where in the second -- in the third quarter we see memory coming down after significant ramps and that’s not an unusual pattern for memory.

Thank you. We will take our next question from Matthew Prisco with Cantor Fitzgerald.

Hey, guys. Thanks for taking the question. I’d like to start on the new 2.5D tool. Just kind of how do they think about the performance gains generation over generation, how this new tool is expected to stand up for us in the competition, and how we should think about that ramp and accelerating the design to actually getting that into fabs and running wafers?

Great question. Well, of course, we’re a little biased, but we think that this is a fundamentally ground-up new tool, and it’s been in the works for a while, so for years, as we saw these needs coming. But with the rapid acceleration starting in 2023 and then seeing the evolving requirements through 2024, we needed to pull this in, and that became very, very apparent late last year. So working with the customers, that’s what we’ve been doing. And obviously we don’t intend to build tools to be second place, so we believe it will compare very favorably. We understand there’s obviously, against this particular competitor, they have a wealth of technology in inspection, but we also have a wealth of technology in advanced packaging. And so we’re closing the gaps in some of our 2D inspection while we can still leverage our platform and understanding of how the packaging market behaves and from a cost and performance sensitivity point of view. So we expect this will go very well. I think you also asked about ability to deliver. We’ve already actually, so part of the variables that we were talking about is we had potentially upgrade proposals for existing platform. So we’ve already been testing some of the optics and optical capabilities. Now we’re putting it optics, so that’s already happened. The customers chose not to take upgrades. They wanted the full tool and they wanted us to pull that in for the performance advantages the full tool would give. We’re very confident in being able to deliver those tools in the second half for evaluation units and I would expect to be able to ramp fairly quickly after that.

That’s helpful. Thanks. And then I guess staying on new tools, your 3Di tool, the Iris G2 systems, we just kind of love any further color you can offer on early customer feedback and traction, kind of the expected adoption ramp there, all through 2025 and maybe into 2026? Thanks.

Yeah. So we still are engaged with several customers on the Iris G2. The -- we are seeing some challenges with, let’s say, long-term stability, so there are some areas that the R&D teams are working through, but overall the platform, the capability, the measurement performance, it all looks positive. Customers remain very engaged and so we’re just blasting through the normal challenges of developing and releasing a new product.

Thank you. We will take our next question from Charles Shi with Needham.

Hi. Hey. Good afternoon, Mike. Well, there’s a lot to unpack, but I want to ask you a clarification question first. When you say Q3 is low watermark, do you mean advanced net revenue or total revenue?

Total revenue. Good clarification.

Yeah. So if that were the case, when I think about the progression, right, the Q2 has a little bit dip, Q3 a little bit dip, Q4 coming back up. Feels like you probably have to walk away from your commitment to outperform WFE this year. Is that the case?

It depends on what WFE ends up being, but certainly we’re looking probably more like market perform, but again, it depends on what WFE ends up being.

Thank you. We will take our next question from David Duley with Steelhead Securities.

Yeah. Just for clarification, and I’m sorry, as far as the Q2 guidance is down sequentially, which pieces of the business are down sequentially in the Q2 guidance? And as a clarification, the 2.5D inspection tool, that’s your -- you’re basically referring to your CoWoS inspection tool, correct?

Yes. Correct. The guide size looking the -- from a guidance perspective, it’s primarily the advanced nodes is down a little bit. So down, I think we said, what did we say, meaningfully. And then we have the specialty and devices really impacted mostly by lithography. More or less flats, but then impacted potentially by lithography shipments.

Okay. And then as far as, I guess, let’s just ask that question. Could you give us an update on lithography and what you’re seeing? I know there’s a lot of movement going on in the CoWoS packaging space, and there’s a lot more volume there, both with TSMC and the OSATs. So maybe give us an update as to what you’re seeing. Thanks.

Yeah. We’re seeing a tremendous amount of interest in wide-field, high-resolution optics. Tremendous amount of interest in panel packaging and in glass. So for sure, the areas of research and of development and of the next-generation of packaging, the HRP, our HR stepper, seems well-positioned for, and we’re running quite a few demos, again, through our new PACE Application Center of Excellence. So, but that’s still in the R&D forms. It’s still forming. So we’re talking two years out for some of these applications to start hitting volume.

Thank you. [Operator Instructions] We will take our next question from Edward Yang with Oppenheimer.

Hi, Mike. Thanks for the time. Could we delve a little bit deeper into your comments about, again, 2.5D packaging? You said some applications were not addressed by a platform. Was that a case of -- was your equipment not performing up to spec or did the specs change?

That’s another good question. No. The equipment, obviously, it was performing up to spec and then we even essentially doubled its performance. But it still wasn’t enough to meet the new requirements. So the requirements from the customers were evolving quickly as they were ramping very quickly over the last 18 months. They were also working with their customers and seeing requirements change. So this was an acceleration of learning that, the team, we just fell a little short of with the existing platform.

Okay. And I think you mentioned that this might open up some front-end opportunities as well. So this sounds like it’s almost like a new platform and perhaps it’s a market share opportunity for you. Is there any risk on the other side that someone else might take this opportunity and take some share or I just want to understand better the puts and takes?

Oh! So the -- yes. So from the inspection side for 2.5D, there is an alternative that the customers selected. And I think that’s one of our very, very large competitors. The opportunity, though, is you’re exactly right. The opportunity now is that this new platform is significantly more capable than the macro inspection platform we had before. So there’s two positives, if you look beyond the short-term impact, the two positives are; one, the ASPs, there’s another level of ASP that we can charge now, because now we’re putting together a performance platform that is well into the submicron capability point of view. So this not only helps us close the gap with the existing packaging opportunities, but we also now have an opportunity to go after the front-end inspection markets where previously our platform wasn’t geared for, wasn’t designed for. And now we can go after that. So the size of that market is almost equivalent to the size of the packaging market. So for us it’s a significant new opportunity.

Thank you. We will take our next question from Blayne Curtis with Jefferies.

Hey. Good afternoon. Thanks for letting me ask a question. Maybe just to start, I just want to level set. There’s some big moving pieces here. For the March quarter and advanced nodes, I guess that was more growth than I was looking for. Can you talk about that, maybe the split between logic and memory? And I just want a little bit more clarity as to what drove the near doubling?

Well, I think it’s a couple of things. Of course, the customers expanded. So we saw DRAM, NAND, and logic expansion. But as we mentioned before, our entitlement in these markets has expanded as we’ve added not just OCD, which we’ve always had, but also then slotted in and got designed in on the Iris films and then also had some share gain opportunities with the integrated metrology. So the combination of which means that as customers, let’s say, add 100,000 wafer stocks or 10,000 wafer stocks, we’re just seeing more of that wallet share.

Got you. And then maybe kind of a second part related is, I think I’ve heard you previously talk about the outlook for that business. Maybe it could be $250 million or $300 million for the year. Obviously, you did $93 million in Q1. I’m just trying to ask maybe a couple of ways just to understand the size of this pause. So I don’t know if you want to kind of quantify how large that would be either in advanced nodes or overall or is that still the right range for that product or are you trending to the higher end of that range? I think I’ve heard you previously give.

Yeah. We would be definitely at the higher end of that range or barring any macroeconomic changes, what we see now, we would be at the higher end of that range.

Thank you. We will take our next question from Charles Shi with Needham.

Yeah. Thanks for taking my follow-up. I think my line kind of dropped before I can ask a question. So, Mike, compare -- let’s say compare with 90 days ago, right? I think 90 days ago the expectation back then was probably flat to up every quarter through the end of the year, but it looks like there’s a little bit of choppiness in the middle part of the year compared with the expectation 90 days ago. Based on what I’m hearing on the call, it looks like most of the downside relative to 90 days ago seems to be related to 2.5D. Everything else is kind of performing or trending in line with what you were expecting, well, despite some choppiness, let’s say, in memory, right? But is that the right way to look at where you are today versus 90 days ago and any additional thoughts on where the lower than expectation, the source of the disappointment may have come from? Thank you.

Yeah. No. That’s exactly the way to look at it and that’s the variables when 90 days ago when being pressed for trying to give guidance or an outlook, it was difficult because we had so many variables. We could have seen more increase. We could have seen less. We weren’t sure where the customer was going to go. We doubled the performance of the tool. Was that enough? We weren’t really sure at the time. Again, now it’s a little bit more clear. So that is essentially the only change to the forecast -- to the outlook.

Got it. Maybe it’s -- I think HBM side you already kind of guided this year probably going to be a lower year compared with the last year. So…

Correct.

… fair to say 2.5D is the same trend this year?

Yes. For us now, yes, but, yes.

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

Thanks, Rachel. We will be participating in a number of investor conferences throughout this 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 would like to thank you for your continued interest in Onto Innovation. Rachel, please conclude the call.

This does conclude today’s call. Thank you for your participation. You may now disconnect.