Onto Innovation Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

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

[Michael Sheaffer:]

Thank you, Sara, and good afternoon, everyone. Onto Innovation issued its 2020 fourth quarter and full year financial results this afternoon shortly after the market closed. If you have not received a copy of the release, please refer to the company's website at www.ontoinnovation.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.

[Michael Plisinski:]

Thanks, Mike. Good afternoon, everyone, and a happy healthy New Year to each of you and your families. With 2020 successfully behind us the Onto Innovation team is looking forward to a new year fueled by strong markets and our strengthening customer partnerships. We are proud to already have five of our six new products announced in 2020 accepted by top tier semiconductor manufacturers, clearing the way for further adoption in 2021. In addition, we added new markets such as high-end image sensors plainer film metrology and heterogeneous packaging. In total, we estimate that by the end of 2020, we expanded our available markets by over $500 million. Our successful integration of Rudolph and Nanometrics, strong financial foundation already achieving the gross and operating margins outlined in our long-term operating model. This foundation enables growth from both organic and inorganic investments such as our recent acquisition of Inspectrology, a leader in overlay metrology for the expanding compound semiconductor market.

[Steven Roth:]

Thanks, Mike, and good afternoon, everyone. Before I begin my remarks, Mike mentioned that we recently closed the Inspectrology acquisition. That occurred at the end of December, however, after our close of our fiscal year, and therefore that acquisition had no effect on the results that we will be discussing today. So, let's begin, our fourth quarter revenue was $155.1 million, slightly above the high end of our previous guidance up 23% from the third quarter of $126.5 million. As we discussed on our last conference call, we expected to see strong recovery in our advanced node business which increased over 100% in the quarter, driven by memory and logic. The fourth quarter revenue would have been approximately $4 million higher, however, a few tools that we had to shift to a Chinese customer were halted because the customer is placed on the entities list by the US government in late December. We've applied for a license to ship those tools and the high end of our Q1 guidance assumes that the licenses will be approved in time for shipping in the quarter. Breaking down revenue by market, 42% of sales were in our advanced packaging specialty device market. The strength related to the 5G RF market. Advanced nodes was 37% of revenue in the quarter and software and services represented the remaining 21%. Turning to gross margin, our gross margin continued to stay strong at 54%, consistent with the third quarter. Fourth quarter margin was impacted by product mix, including the sale of our target system, which typically has a lower margin profile. We expect to see continued improving margins as our new product provide enhanced value to our customers and our supply chain synergies continue to impact our product cost. As we look forward to Q1, we expect increasing revenues in our key markets and currently anticipate margins to be in the range of 54% to 55%.

[Michael Plisinski:]

Thank you, Steve. We see several secular trends contributing to another year of strength for the semiconductor equipment industry. The continued proliferation of billions of connected devices and the massive amounts of data they send every second to the cloud is driving demand for the most advanced memory and logic devices to support new applications and artificial intelligence, and high performance compute. The transition to 5G, which is only just beginning will drive an estimated 250% growth in 5G-enabled handsets in 2021 further increasing demand for advanced logic memory in the numerous specialty devices that go into those handsets. Advanced packaging is playing a more pivotal role in the roadmaps of many device manufacturers as they drive smaller geometries and heterogeneous packaging to deliver products with higher performance and lower power consumption. We expect to play a prominent role in the transition to heterogeneous packaging by leveraging our JetStep lithography, Firefly inspection and Discover software suite to overcome challenges from shrinking geometries across larger packages. We expect to start shipping those -- these new solutions to customers beginning in the second quarter. Another important secular trend is the transition to electric vehicles, driven by consumers and supported by various government initiatives. The EU has announced a plan to ban new fossil fuel car sales by 2030. California, Japan and others have announced their plans to ban the sale of new combustion engine vehicles by 2035. This transition to electric vehicles is accelerating demand for power control, smart vehicle sensors and other systems to optimize drivetrains battery life and charging. Many of these critical devices are produced using compound semiconductor processes such as gallium nitride and silicon carbide. Inspectrology is a leading supplier of overlay metrology specific to these unique processes. By augmenting their overlay metrology with our Discover run-to-run software defect inspection and process analysis software, we will provide a unique integrated solution to help customers meet aggressive ramp and yield targets. In addition to growth in the secular markets we serve, we are strengthening our customer relationships. For example, we recently completed two record level volume purchase agreements, each representing over $100 million in target revenue for 2021.

[Operator:]

And we'll go ahead and take our first question now from Craig Ellis with B. Riley.

[Craig Ellis:]

Mike and Steve, congratulations on the products and SAM expansion successes and entering into the target financial model range. Mike, I wanted to start just by following up on a couple of the points you made. The first one is regarding the two $100 million volume purchase agreements. I don't remember you commenting on such an item before, so can you put some context around that? And you mentioned that those may or may not be for revenues in the current year, any further color on their ability to either fall into this year or may be spread over a multi-year period would be helpful.

[Michael Plisinski:]

Sure. So, as we've grown as we merged and brought together the two companies, both companies were serving these large IDMs. And we had back-end, lot of strength from the Rudolph side from the back-end, from the Nanometric side from front end, when our customers are looking at the total spend together, they're looking at putting together a more comprehensive plan. So, giving us more visibility, letting us understand where their expansion plans are coming across both the front end and back-end and making sure that we have the Visibility to ramp along with them. So, the volume purchase agreements are meant to give that indication, and in some cases, they're more formal than others. All of it is meant to define a year. So, this isn't over multiple years, I think, that was part of your question. It's all for this year. So, it's an indication of what they see -- what they expect to spend this year across our products.

[Craig Ellis:]

That sounds very constructive. And would you expect to enter into more of these types of agreements with other IDMs or is this really something that is unique to these two customers and we wouldn't expect this to occur with others.

[Michael Plisinski:]

No, I think, we would see this as we continue to grow our position and integrate more deeply into customers' roadmaps. So, I think, this would be a more common occurrence .

[Craig Ellis:]

Okay. And then, the -- got it. And then, the second question was related to the color on the first half of '21. So, congratulations on the 20% year-on-year growth that you see. The question is this, can you just comment on the visibility that you have, as you look out across the full year, Mike. To what extent does that exist or might be greater in some parts of the business than others and we have had some companies indicate that they would expect industry spending to be a little bit more front-half weighted than steady or back-end weighted linearity. And any sense from your end in terms of what that full year contour might look like for Onto?

[Michael Plisinski:]

I think, some of our customers in the front end will be more front end first half weighted, although when I look through the list. There was a mix, and a number of them are balanced. So, I think, there'll be maybe a slight bias to the first half, but remember half our businesses is volume driven business, which really sees the pickup in the Q2 and Q3 time frame. So, and in addition to that we see the. The new products that we've announced and gotten acceptance on. We would expect more of impact from that revenue in the second half. So, all things considered, I would say that we would expect first half, second half to be relatively -- on the conservative basis, relatively the same for us.

[Craig Ellis:]

Got you.

[Michael Plisinski:]

Even if there is a slight bias towards the first half spending from some of our customers. I think, with the new products and the traction we're gaining in some other areas that we would offset that.

[Craig Ellis:]

Yeah. Very helpful. Thank you. And then finally, Steve, 54% gross margin, second consecutive quarter, and first quarter guidance built on that. So, congratulations, can you comment on the extent to which we have any lingering COVID costs or other costs that are in gross margins that you're working on. And then maybe related to COGS just express your comfort with supply sufficiency for the type of demand environment. Mike has talked about, whether we should expect there would be any incremental costs down the road for expedites or other things that would be more common in a tight environment like we seem to be seeing out there.

[Steven Roth:]

Yeah. I think, we talked about in the past, the COVID side, while there is some incremental costs for cleaning and stuff like that in the factory, just they are minimal comparatively, I mean, we're saving probably on the travel side obviously and we're referring some about on this kind of the cleaning and our protocols that we're putting is that kind of thing that was somewhat of an offset. So, I wouldn't -- I don't think there is anything you have to worry about from the COVID side impact. Supply chain, I think, always the risk is, if the COVID affect some of our other Asian suppliers and things like that. If someone gets one of those factories gets hit or something like that. So far we've been able to manage through that. We have had some impact at a supplier, I think, we've talked about in the past, but we've been able to work through that. So, something that's clearly on our radar screen, something that we're obviously all concerned about, because that's where a COVID effect could really hurt, not just us but some others in the industry depending on which vendor that is. But right now we're able to manage through it.

[Craig Ellis:]

Thank you very much, Steven. Guys, congratulations on the strong start to calendar '21.

[Steven Roth:]

Thanks, Criag.

[Operator:]

We'll take our next question from Quinn Bolton with Needham & Company.

[Quinn Bolton:]

Hey, guys. I'll also offer my congratulations on the nice finish to 2020 and the strong '21 outlook. I guess, maybe just starting with that '21 outlook, Mike, it looks like many in the industry are calling for WFE to be up about 15% this year. When I take your commentary about the first half of '21 for Onto growing 20% year-on-year, you'd get to about a $330 million first half and your comments about a balanced first half-second half that imply you're going to do about $660 million this year. That says Europe maybe 19% year-on-year. So, outperforming WFE pretty nicely. Is that mostly through share gains and some of the new products you talked about gaining customer adoption. Is that kind of a good way to be thinking about how you can outgrow WFE this year?

[Michael Plisinski:]

Yeah, it's around the expansion within the markets we were serving, but also expanding our served markets. So, we talked about heterogeneous packaging and the transition towards panel packaging that that's going to going to drive. And of course, we would expect to be shipping steppers to support that in the second half. So, that's an upside. And so there is a series of things as you may have picked up, we released a lot of new products. Those products are gaining traction and some are -- and gaining traction through share gains in existing markets, others through opening up new applications in new markets.

[Quinn Bolton:]

This is sort of related question, you mentioned the impulse win at top 3 DRAM manufacturer for their next generation node. Is there any way you can sort of quantify how big that opportunity is, I mean, it's only three DRAM guys, they're all pretty large. So, just trying to sort of think about what that could mean for Onto that win.

[Michael Plisinski:]

Well, the way we quantified it was, it's over half the share. So, it also depends on how big the customer's ramp is. But, and that's why I'm hesitating because they are still working on that ramp plan, but it's -- from an integrated perspective it's very significant, let's put it that way. So, from a -- if that's an overall $100 million, $125 million, $150 million market. It's a meaningful move and share gain for us.

[Quinn Bolton:]

Great. Thank you. And then just for Steve, given the outlook for panel lithography systems to start shipping in the second half of the calendar year, I know those systems carry lower gross margins, how much of a headwind would that be to gross margin in second half or do you think some of the other, the Iris, the Aspect tools can offset some of the higher shipments of lithography in the second half.

[Steven Roth:]

Yeah, I think that's a good way to look at it, I mean, lithography systems obviously high ASP and lower volume, so it's not like we're seeing a ramp up of lots of units. But we are -- obviously we've talked about the backlog we have in lithography for this year already for this year. So, yeah, again, I think having one or two lithography tools going to quarter can easily be offset by some of the newer products we've got. I've talked about the value added on some of these new metrology products that we've added. So, I don't think you're going to see a real big -- you won't see that headwind, I don't think, in the numbers.

[Quinn Bolton:]

Great. Thank you.

[Operator:]

We'll take our next question from Patrick Ho with Stifel.

[Patrick Ho:]

Thank you very much and belated Happy New Year. Congrats on the really nice finish to the year. Mike, maybe first off a little more color on the DRAM metrology when you talked about in the prepared remarks. One, can you give us what type of applications those wins were for? And secondly, we see the process control intensity increased for both NAND and logic over the last several years. Are you seeing that now more an OCD metrology for the DRAM side as well.

[Michael Plisinski:]

So, on your first question, it's for integrated metrology applications, which are primarily CMP, but we're working with several customers to expand based on the stability and the speed at which we're making these measurements. They are looking at other process steps were integrated hasn't been traditionally used but they see potential benefit based on the quality of the measurements that we're able to provide. But for this win, it was CMP. To your second question, what was the second question? Sorry, I missed your second question.

[Patrick Ho:]

Process control intensity in DRAM, do you see that merging an OCD metrology and the impact for you?

[Michael Plisinski:]

Yeah. We definitely see process control intensity increasing first in logic, we mentioned that before, and we're seeing that consistently growing as the nodes are shrinking. In DRAM, I'd say, it's a little bit less, certainly less ramping meaning less accelerating intensity increasing, but we do see as the customers are migrating down that they are increasing the number of tools they need, but not at the same rate as the logic.

[Patrick Ho:]

Great. Maybe as my follow-up question for Steve, in terms of working capital management, given that you're seeing more and more systems ship out especially in the near term, you'd work the working capital part pretty well. One, what have you improved upon particularly since the merger given that their diverse products in that combination. And secondly, from the inventory part, how are you managing that right now given some of the supply constraints in the whole ecosystem, as well as your ability to meet increasing customer demand.

[Steven Roth:]

Yeah. So, I think, there is, you probably hit on both area, the two areas that we obviously focused on a lot since the merger is in the AR and the inventory. And I think putting the companies go into integration and kind of coming with the common process for accelerating acceptances, everyone else ships and we get 80%, 90% upon shipment type of scenario, but there's always cleaning up those acceptances and I think the team has done a very good job of doing that this year. So, I think, our DSOs have -- it's been trailing down pretty much quarter over quarter last couple of years or last couple of quarters. So, that's been an improving area from the working capital perspective. On the inventory side, it's two stories, right. We've got obviously the litho inventory we're purchasing for the -- some of the products we're putting in and coming out with. But at the same time, you're right, as I mentioned on the -- to Craig, a minute ago, we're obviously constantly looking at the supply chain, the impact of COVID that can have on the plant, and obviously we're doing our forecasting where we think the -- based on the comments that Mike made about the first half of the year. So, right now, we're obviously looking at it, we're making sure that we're ahead of the curve as best we can, and we haven't seen anything that really has impacted us yet.

[Patrick Ho:]

Great. Thank you very much.

[Operator:]

We'll take our next question from Tom Diffely with D.A. Davidson.

[Thomas Diffely:]

Yes. Good afternoon. Thanks for the question. I guess, I'll start with Steve, I guess, first on the margin side, when you look at the new $100 million volume purchase agreements, do those include volume discounts that might impact the margin structure?

[Steven Roth:]

Yeah. You could imagine, if we're doing that there obviously a big the package deal, but because of the portfolio of products, Mike talked about, it's not just a one-product $100 million. How do we do, it's a mix of all of our products in a lot of these cases both front end and back end. So, overall, the margins are actually pretty strong. And yeah, like I had mentioned I don't anticipate, you seeing any major impact on our margins this year as obviously revenue growth, I think, we're going to continue as I mentioned in my comments, as we continue to drive revenues. I think you're going to see continued improvement in gross margin, and obviously, they are pretty strong down the operating model for us.

[Thomas Diffely:]

Okay. And when you look at your long-term model. You're going from the $600 million to $800 odd range, there is about 500 basis point improvement in the operating margin as most of that just driven by increased revenue, are there any programs or projects you have to do to achieve those new operating margins.

[Steven Roth:]

Well, I would say to you, I don't think there need to be much to hit that model. I think as we drive the revenues will get there, but I also don't want to say I'm complacent with the model we have because as we've talked. From synergy standpoint, putting the companies together there are some longer-term engineering programs that are two, three years in the making is getting to common platforms, things like that. Those will work their way into that model or into our operating results as we proceed up that model. Revenue growth.

[Thomas Diffely:]

Okay. And then finally for Mike, when you look at the potentially $70 billion of WFE spending this year and you look at the business you have in the second half on the lithography side, are you going to need another slugger tools in 2022 to handle the big with the fab equipment spending this year or is that kind of buildup in correlation to or in conjunction with the spending this year?

[Michael Plisinski:]

Specific to the lithography you're asking?

[Thomas Diffely:]

Yeah. Just kind of the front end versus back end and the timing of the two segments.

[Michael Plisinski:]

Yeah, no, we would expect several years of growth on the lithography side to keep up with the demand. Based on the multi-year range and multi-year discussions that we're having with our customers, this is a transition that's going to be happening for well, like I said, for several years and it's at least what they're sharing with us the expectations are for fairly decent growth over those next several years.

[Thomas Diffely:]

Okay. That's great news. Thank you.

[Michael Plisinski:]

Welcome

[Operator:]

We'll take our next question from David Duley with Steelhead Securities.

[David Duley:]

Yeah. Thanks for taking my question. I have a couple, could you just highlight, I think, you -- in your prepared remarks there, Mike, you're talking about the increase in TAM or SAM from your new tools, could you just basically elaborate on that give us the total again and how it breaks out amongst the five year tools

[Michael Plisinski:]

So, there is a slide in our investor deck that also will break this out. So, it will be little more clear there, but just for a quick summary. The biggest piece is the opening of the optical metrology the plainer film metrology, which is roughly half the optical metrology market of $800 million to $900 million market. So, roughly, half of that is as planar films. And so the Iris platform opens that up. The Aspect or the IMPULSE that -- let's stick in the optical metrology market the IMPULSE is really around share gains within the existing integrated metrology market where we haven't really participated. We haven't had a new product in six years, that's about $150 million market and we like the traction that we're seeing, as I mentioned, pretty strong growth in the fourth quarter driven by 3D NAND customers and then adding another DRAM customers. So that's nice growth there. Then on the continuing the SAM expansion as the heterogeneous die or the panel level packaging, which including the inspection, software and lithography. We estimate can be over $100 million annually. And then the Aspect in the elements there on the compositional and 3D NAND side there are more expansions within our existing OCD space. So, we didn't count those into the expansion opportunity. And then I think that covered most of it. From the new products perspective, of course, Inspectrology we see that opening up with the electrification of vehicles. We see that opening up an area for compound semi where we play with just the inspection tools and some of the software today by pulling that altogether through the see the overlay metrology, which is quite unique and challenging for those compound semi devices. That's an estimated, I think, we said $80 million expansion for the SAM as well.

[David Duley:]

Great. And so, it sounds like you're funding business we will grow a little bit quicker than the overall wafer fab equipment business. I'm curious about the back end business, it's always a little bit harder to gauge, but as far as your inspection business goes. If we -- let's say, 7% to 8% unit volume growth this year in non-memory units. What would you expect the inspection business growth rate to be?

[Michael Plisinski:]

We are still expecting inspection to be double-digit growth this year. And another SAM expansion, I forgot to mention, which is an important one that we're excited about, not just for this year but following years as CMOS image sensors. So, we estimated that to be about an $80 million market, which we don't currently play in. But over the last two quarters, we've added two of the top three manufacturers of CMOS image sensors for their high-end, front-end applications, and we expect to expand to some of their simpler, but higher volume applications as well.

[David Duley:]

And do you think you guys know what the backlog was?

[Michael Plisinski:]

We didn't disclose the backlog, but it's, well again first year out of the companies combined. So, but it's over $100 million.

[David Duley:]

Okay. And just a little bit more elaboration on the thin film tool that obviously being the biggest new TAM expansion and I think you've already won some business and that might be wrapped up in the volume purchase agreement. But if you could elaborate on what you kind of, would expect, let's say, in what I guess this year that's wrapping up next year the big volume year, what would be -- what would you target for the successful kind of run rate for that business let's say in 2022?

[Michael Plisinski:]

I would say, $80 million, and my team has probably fallen off their chairs, that's only 20% of the market. And if we are successful in some of the penetrations that we're planning this year, some of the repeat business that we're delivering against already. Yeah, I don't think that that's an unreasonable expectation for 2022. I also see the roadmap and some of the additional work we're doing on the platform that will make it even more valuable to our customers and another unique capability, we're providing the customers is the upgrade ability. So these systems are part of a platform strategy that gives the customers the best price performance for the optical metrology needs. And that means these systems will be upgradable to follow OCD. If as their needs expand and their needs change. So, the capital usage of these tools is more flexible than competitive solutions. So, I think, that's going to have additional value as well and help drive .

[David Duley:]

Thank you very much

[Michael Plisinski:]

You're welcome.

[Operator:]

And we'll take our next question from Mark Miller with Benchmark Company.

[Mark Miller:]

Again, congratulations on your quarter. Happy New Year. Just was wondering you have a large tax benefit last quarter, and 2021, you're going to be going to a tax expense, is that correct for all the quarters?

[Michael Plisinski:]

Yeah, I mean, we had we had, I think I mentioned in my prepared remarks, we closed out that an IRS audit that's been going on for a number of years and as well as with different carrybacks that drove down the principal driver of the rate down. Historically, kind of the rates would have been somewhere in that 17% range. So, yeah, I think, for 2020, again, non-GAAP we'll be back into those that both GAAP and non-GAAP will be in that 17% -- 16%, 17% range.

[Mark Miller:]

Can you kind of give us an estimate in terms of percent of business per chips, DRAM and logic, what's your dominant or they similar as one more dominant, the other from in terms of the chip-related .

[Michael Plisinski:]

There are pretty balanced. If you look at memory and logic, they're pretty balanced between the two broad categories, breaking down DRAM and NAND, then it varies quarter-to-quarter, but in general, I would say the NAND is a little stronger than DRAM for us.

[Mark Miller:]

And it's going to be somewhat softer this quarter, is that correct? NAND?

[Michael Plisinski:]

Yes, somewhat softer this quarter. Yeah.

[Steven Roth:]

Yeah.

[Mark Miller:]

Okay. Thank you very much.

[Michael Plisinski:]

Still stronger than the first quarter of 2020, so I'll note.

[Mark Miller:]

Thank you.

[Michael Plisinski:]

You're welcome, Mark.

[Operator:]

There appears to be no further questions at this time.

[End of Q&A:]

[Michael Plisinski:]

Mike, you're on mute.

[Michael Sheaffer:]

Thank you. We'd like to thank everyone for participating in the call today and for your interest in Onto Innovation. Everybody, stay healthy and safe. That concludes our remarks for the call. Sarah, please wrap it up.

[Operator:]

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