Onto Innovation Inc. (NYSE:ONTO) Q1 2024 Earnings Call Transcript May 9, 2024
Onto Innovation Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 Mike Sheaffer, Investor Relations. Please go ahead.
Mike Sheaffer : Thank you, Rachel, and good afternoon, everyone. Onto Innovation issued its 2024 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 would 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. I will now go ahead and turn the call over to our CEO, Mike Plisinski. Mike?
Michael Plisinski : Thanks, Mike. Good afternoon, everyone, and thank you for joining our earnings call this afternoon. Strong and anticipated demand for high bandwidth memory and logic packaging for AI devices resulted in first-quarter revenue at the very high end of our guidance range, 15% over the same period a year ago. Margins came in within guidance, and as Mark will soon outline, we expect to increase gross margin next quarter and improve further in the second half of the year. Before Mark begins, we’ll now review the first quarter highlights, starting with the specialty and advanced packaging customers where we delivered our third consecutive quarterly revenue record, a solid 64% increase over the same period a year ago.
In the first quarter, revenue for our Dragonfly systems jumped 30% over the prior quarter, almost exclusively to support packaging capacity growth for AI devices. In addition to volume, we also project demand to increase, to address new and emerging critical defects. For example, wafers that are being stacked for high bandwidth memory are used in 2.5 logic packaging may be as thin as 50 to 100 microns. These ultra-thin wafers are then prone to the formation of small embedded micro cracks, which may propagate through the silicon, making it more susceptible to breakage. Responding to our customer’s needs our Dragonfly platform has been enhanced with a new sensor to detect these subsurface defects at production-capable speeds with orders from several customers and shipments starting in the second quarter.
After a record year in 2023, revenue from power device manufacturers declined in the first quarter, but we continue to add new customers and expand our footprint at existing customers. We expect to see growth return in the second quarter and carrying through to the second half of the year. Much of this demand is to improve yield to increase the factory output without increasing the number of wafer stacks. Now turning to our advanced nodes business, revenue did incrementally improve as expected but remains at quite low levels. Orders to support advanced logic devices represented the largest growth and was roughly half of the revenue from the advanced nodes customers in the quarter and included both Atlas OCD and Iris planer films. Now I’ll turn the call over to Mark to review our financial highlights and the second-quarter guidance.
Mark Slicer: Thanks, Mike, and good afternoon, everyone. Before I get into the details, as Mike highlighted, we achieved first-quarter revenue and EPS at the high end of our guidance and we generated strong operating cash flow of 57 million, representing 25% of revenue. First-quarter revenue of 229 million was up 5% versus the fourth quarter and up 15% versus the prior year. First quarter, EPS increased 11% sequentially to a $1.18 and up 28% versus the prior year. Both revenue and EPS at the high end of our guidance ranges is due to the continued strength of our Dragonfly system to support the demand for advanced packaging of AI compute devices. Looking at the quarterly revenue by markets, advanced nodes which had revenue of 27 million, increased 45% over Q4 and represents 12% of revenue.
Specialty device and advanced packaging with quarterly revenue of 158 million up slightly over Q4 represents 69% of revenue. Software and services with revenue of 44 million, increased 4% over Q4 while representing 19% of revenue. We achieved 52% gross margin for the first quarter in line with our guidance range of 51% to 53%. First quarter operating expenses were 62 million above our guidance range, as we made additional investments in applications engineering within the quarter, extending our product and technology differentiation in fast, emerging applications like ultra-thin wafer process control that Mike mentioned, as well as process tools and inspection for the litho panel packaging for the emerging glass panels. Our operating income of 57 million was 25% of revenue for the first quarter compared to 26% from the fourth quarter.
Our higher net income performance of 26% came from favorable investment income resulting from our increased cash balance while our operating income was impacted by the higher operating expenses within the quarter. Now moving to the balance sheet, we ended the fourth quarter with cash and short-term investments of 741 million, achieving operating cash flow of 57 million within the quarter, converting a 100% of our operating income into cash. Inventory ended the quarter at 330 million, up only 2 million versus Q4 while we continue to ramp Dragonfly production requiring us to procure longer lead time components. We do expect further reduction in inventory as we remain focused on inventory optimization to drive consistent operating cash flow performance levels, exceeding 20% of revenue.
Now turning to our outlook for the second quarter. We currently expect revenue for the second quarter to be between 230 million and 240 million. We expect gross margins will improve to 52% to 54% reflecting the improvements in the supply chain initiatives discussed in prior quarters. For operating expenses, we expect to be between 62 million and 64 million as our annual compensation elements occur within the second quarter each year, consistent with the prior year, we do expect a decline in operating expenses in the second half, as we move past these annual compensation events. For the full year ‘24, we expect our effective tax rate to be between 14% to 16%, which does not assume any impact for potential tax legislative changes that may occur during the year.
We expect our diluted share count for the second quarter to be approximately 49.9 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings for the second quarter to be between a $1.14 per share to $1.26 per share. Our focus in 2024 remains on our targeted programs for quarterly operating improvements. We have several planned productivity improvements that will take effect in the third and fourth quarters, and that we expect to provide continued margin improvement. In addition, we expect stronger metrology sales and an improving gross margin from our lithography systems as we work out the last of the very low-margin initial orders. And with that, I will turn it back to Mike for additional insights into Q1 and the remainder of 2024.
Mike?
Michael Plisinski : Thank you, Mark. For the second quarter, we project demand for AI compute will maintain the record levels of quarterly revenue for Dragonfly systems. As mentioned earlier, we expect power semiconductor revenue to grow in the second quarter returning to near-record levels by — led by strong IRSS metrology adoption for planar films applications. In the advanced nodes, we expect revenue to increase in both logic and NAND, while DRAM revenues remain soft. The newly projected NAND demand is driven by the need for enterprise solid-state drives and high-density AI servers. These enterprise drives have NAND stacks of over 200 layers where our Atlas and Aspect metrology have established tool-of-record positions at several of the top NAND suppliers.
Also, in the quarter, we are on track to ship our first jet step system to support lithography on glass panels. We believe glass panels will be critical to realize high volume and high-performance Chiplet architectures over the next two to three years. This new system will allow customers to maximize capital investment by supporting both panel production and glass substrate R&D. Through our pace lab, we’re demonstrating the process and process control solutions required for this technology. In addition, we have nearly 20 companies spanning across process chemistry, substrate, manufacturing, and process equipment, engaging in discussions on potential areas of research and development important to our manufacturing partners. This new era of AI is revealing many exciting opportunities for Onto Innovation in both packaging and advanced nodes.
Based on the traction we see with our products and the current demand drivers, our outlook for the year is improving and we maintain our expectation for the second half of the year will be incrementally higher, providing nice momentum going into what is widely believed to be a stronger year for capital equipment in 2025. And now we would like to open the call for your questions from our covering analysts. Rachel, please open the lines.
Operator: Thank you [Operator Instructions] Your first question comes from the line of Craig Ellis with B. Riley Securities.
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