Good day, everyone, and welcome to the Antu Innovation Second Quarter Earnings Release Conference. Today's call is being recorded. At this time, I'd like to turn the call over to Michael Schaeffer. Please go ahead.
Thank you, April, and good afternoon, everyone. On2 Innovation issued its 2021 Q2 financial results this afternoon and shortly after the market closed. If you have not received a copy of the release, Joining us on the call today are Michael Plisinski, Chief Executive Officer and Stephen Ross, Chief Financial Officer. As always, I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts, especially comments regarding the company's future plans, products, objectives, forecasts and performance consists of forward looking statements within the meaning of the Private Securities Litigation Reform Act.
These estimates, whether expressed or implied, are based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that these statements are subject to a range of uncertainties that can cause the actual results to vary materially. Thus, the company cautions that these statements are no guarantees of future performance. Risk factors that may impact Onto Innovation's results are currently described in Onto Innovation's Form 10 ks report for the year ended December 2020, as well as any other quarterly filings with the SEC.
ON2 Innovation does not update forward looking statements and expressly disclaims any obligation to do so. Today's discussion of our financial results will be presented on a non GAAP financial basis unless otherwise specified. As a reminder, A 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 Mike Plozinski. Mike?
Thank you, Mike. Good afternoon, and welcome to Onto Innovation's 2nd quarter conference call. Across the semiconductor value chain from silicon wafers to wafer markets where accelerating design shrinks are creating strong demand for more sophisticated and versatile inspection solutions. As a result, in the Q2, we reported record revenue of $193,000,000 well exceeding the high end of our guidance, Our segment is specialty devices and advanced packaging. End market demand for devices to support growing work from home and high performance compute applications Propelled revenue in this segment to increase by 45% over the Q1 and more than double the Q2 of 2020.
Leading this growth was demand for inspection technology, which increased 24% over the Q1 and 65% year over year. Our recently released Dragonfly G3 Systems improved sensitivity, speed and integrated ClearFind technology is expanding our position in the most demanding and sophisticated packaging markets, while also opening new markets such as high definition image sensors, where our growth continues ahead of expectations. For example, in the second quarter, we Received orders from a 4th new image sensor customer, while a top 3 image sensor customer doubled their existing installed base to support the ramp of their latest sensor technology. Another segment we see expanding our served markets is panel level packaging. We believe this market represents an important inflection point for the industry, particularly for high performance compute engines and large heterogeneous packages.
Our newest lithography tools deliver high resolution imaging across a very wide field of view, which is proving to be a key enabler next generation packaging technology for larger advanced packages. We have started shipping our backlog and have received an additional four orders shipment in first half of twenty twenty two. Our total lithography backlog is now over $30,000,000 and we expect to close 2021 with several more tool shipments and a fully booked production schedule for 2022. We're working closely with our customers and suppliers to determine additional capacity needs for 2023. Revenue to support both power and 5 gs applications increased over $24,000,000 in the second quarter.
This included demand for our inspection systems, new overlay metrology from our acquisition of Inspectrology and strong demand for metal film metrology. This also included the addition of 4 new RF Empower customers, which we expect will contribute to our projected stronger half of the year. Turning to the advanced nodes. In the Q2, we set a quarterly revenue record for our flagship Atlas OCD metrology platform. This record demand was primarily in support of expansions for leading edge DRAM and logic devices, where our greater sensitivity provides essential metrology for a growing number of critical dimensions at speeds required for volume manufacturing.
We expect demand for our Atlas OCD to continue to strengthen in the second half of the year, both to support additional investments in advanced logic and DRAM and an increase in the number of applications on our tools in support of higher yields. Even as demand for our core products hit record to support overall market growth, we're enabling future growth by expanding our position in new markets such as planar films and high aspect ratio metrology for 3 d NAND. We're also seeing revenue synergies in specialty markets as we introduce our metrology suite to these customers. For example, in the Q2, we received orders for our latest film system from 6 new customers in the specialty device markets. These orders will ship in the second half of twenty twenty one and including projected repeat orders from our first customer, we expect second half growth of our planar to be over 50% from the first half, providing nice momentum into 2022.
And finally, I wanted to also highlight our ongoing commitment to raising our corporate and social responsibilities by becoming an affiliate member of the Responsible Business Alliance. We're already actively committed to responsible environmental and social policies, but our membership in the responsible business alliance is another important step forward. By joining our fellow members of the RBA, we will serve as an example to our suppliers of how the RBA code of conduct can create a more successful industry climate and a better world. I will now turn the call over to Steve Roth, will cover the Q2 financial highlights before I provide some color on our Q3. Steve?
Thanks, Mike, and good afternoon, everyone. In my remarks this afternoon, I'll provide some details on our Q2 results, then follow that with what we're seeing for guidance for the Q3. As Mike mentioned, our 2nd quarter revenue was $193,400,000 up 43% over the same period last year and up 14% over last quarter. During the quarter, we received approval from the U. S.
Government to ship certain systems that we had in backlog since the end of 2020 to a customer in China. Those shipments totaled $13,100,000 in the quarter. Due to a delay in getting this approval, our customers ramp plans and their customers' orders shifted downward, We agreed to cancel a portion of the original order totaling about approximately $8,000,000 and redeploy those systems to other customers. We still have other systems awaiting government approval, which at the end of the second quarter totaled approximately $7,300,000 Breaking down the revenue by market, 48% of the sales were from our specialty device and advanced packaging market with strength coming from RF and power markets, which combined were up 200% over the Q1. The advanced node market represented 33% of sales in the quarter, down from Q1.
While we did see growth in memory, both DRAM and NAND, those increases were offset by a temporary pause from logic customers. Finally, software and services increased slightly in the quarter and represented 19% of revenue.
Our gross margin
Manufacturing costs and product mix helped offset supply chain cost increases in the quarter and drive the gross margin improvement. 2nd quarter operating expenses were $55,800,000 an increase from $49,200,000 in the Q1 of 2021. This unusual increase in operating expenses was mainly due to our variable compensation plans now forecasted to far exceed targets as well as and as such we had to true up our accruals including a catch up of the Q1 shortfall. In Stock based compensation expense was higher in the quarter due to annual employee grants and headcount increase to support growth we are seeing now and in the future. Even with the increase in operating expenses, our strong financial model resulted in an increase in operating margin to 26%, up from 25% in the Q1.
In fact, our operating margin has improved every full quarter since we completed the merger of Rudolph and Nanometrics, and we feel confident in achieving our long term operating model, which had a revenue level of $800,000,000 calls for gross margins of 55% to 56% and operating margins of 29% to 30%. Net income increased in the 2nd quarter and was $45,900,000 or $0.92 per share and above the high end of our guidance. In the 2021 Q1, we reported net income of $36,300,000 or $0.73 per share. Moving to the balance sheet, we ended the quarter with a cash position of $411,000,000 up $18,000,000 from Q1. Accounts receivable increased to $175,000,000 in the quarter due to an increase in revenues and the linearity of our shipments, which were heavily weighted to the back half of the quarter.
Our inventory turns improved in the quarter. However, overall inventory increased slightly and ended at 207,000,000 Now turning to Q3 guidance. We expect revenue to be in the range of $190,000,000 to 200,000,000 Earnings per share in this revenue range is anticipated to be between $0.85 $0.99 per diluted share. We also expect our gross margins to be between 54% and 56%. For operating expenses, the compensation plan true up I just discussed should have minimal impact on our quarterly expenses going forward, but we will continue to have active recruiting plans in place for the strong growth we are seeing.
Therefore, we anticipate operating to decline in the Q3 and be in the range of $52,000,000 to $54,000,000 And with that, I'll turn the call back to Mike for additional insight into Q3 Q3 and the remainder of 2021. Mike?
Thank you, Steve.
We entered the 3rd quarter with strong momentum across all of our markets and strategic initiatives, which include continuing to increase operational efficiencies to further strengthen our foundation for sustainable growth. We have a record backlog and visibility out to early 2022. So even with our strong results for 2nd quarter, we remain confident in the expectations set last quarter for continued growth in the second half with the 4th quarter stronger than the 3rd. Specifically for the Q3, we expect spending on logic to increase significantly in support of additional expansions by several logic suppliers in the second half of the year. We see continued strong demand from packaging and RF customers in the Q3 and expect a sharper increase in the 4th quarter as our expanding number of customers increase their investments in 5 gs to support new applications in infrastructure and transportation in addition to the current growth in mobile applications.
We expect memory overall to decline in the 3rd quarter with DRAM spending to pick up significantly in the 4th quarter to support investments from leading suppliers. With the continued growth we see for second half of the year, our supply chain team is increasing their focus on deliveries and supplier backlog from each of our supplier partners to minimize impact to our customers. As I mentioned earlier, our growth is not only driven by the surging demand for our products in existing markets, but also the progress we are making expanding into new markets such as the image sensors, planar films, panel packaging and high aspect ratio metrology. In total, these initiatives expand our served markets by over $350,000,000 creating additional revenue opportunities for 2022 and beyond. And with that, we'll open the line for questions from our covering analysts.
April, please go ahead.
Thank And we'll hear from Patrick Ho of Stifel.
Thank you very much and congratulations on the really nice quarter and outlook. Mike, maybe first in terms of the advanced packaging market, there's clearly a lot of growth opportunities, particularly at the most leading edge. You're seeing some of the top chipmakers talk about their opportunities in Advanced Packaging. Can you give a little bit of a highlight of, 1, those opportunities on a big picture basis? And 2, how they, I guess, come together in some of your volume purchase agreements that you've talked about in the past.
Are you
getting more of those because
So Patrick, you broke up a little bit, but I think I understand the just your question. So from an AP from a packaging perspective, The demands are increasing across a variety of different applications and the leading Manufacturers, the leading IDMs are certainly investing significantly more R and D dollars and capital dollars towards expanding advanced packaging technology and capacity. From a volume purchase agreement, you're right. These top IDMs where we're also gaining traction with our Metrology platforms on the front end, they're also seeing the opportunities on the back end and we're able to leverage The increased volume, the similar service organizations, during COVID, We cross trained a lot of our service and support organizations. So we now have significantly better coverage with a lot of overlap and capability, so they can see a benefit in service and uptime in the capabilities of Buying from Onto as a supplier and that gives us some benefit to offer customers as we look and negotiate Volume purchase agreements going into 2022.
For sure, that's
the case.
Great. That's helpful. And maybe as my follow-up question for Steve. First off, Steve, given your recent announcement, I want to again wish you the best of luck. It's been a pleasure all these years working with you.
And I think going forward, I'll be one less person to harass you. So thank you again.
Thanks, Patrick. Thanks for the words.
Going through the near term environment, given your results and outlook, You obviously manage the supply chain very well. The entire industry is going through constraints right now to varying degrees. Given your results and outlook, what have you been able to do differently from other equipment companies? With the full understanding, each equipment Very different. Their supply chains are different and the types of components there are in short supply are also different.
So If you could just give a little bit of color on what efforts you've done to mitigate the situation? Yes, it's
a good question. I mean, I think a lot of congratulations goes to our supply chain team. They've been doing a great job of just keeping a finger on the pulse of where we are seeing some of the component and assembly delays, but we've been able to manage through them for the most part. I think We're obviously seeing stuff on the logistics side and just getting material to us. So in some cases, I mentioned a little bit of Offsetting pressure on our gross margin, but that was really to cover expedited charges and things that we've been paying a little just to reduce transit time, sure we get our stuff in on time.
So doing that as well as obviously looking out a little further and making sure that we're making sure we have adequate stuff on the books for the growth that we're So I think we've been doing a fairly good job of managing it, not that we're not experiencing it, but I think we've been doing a good job of managing it overall.
Great. Thank you again.
Quinn Bolton of Needham and Company.
Hey, guys. Congratulations on the nice results. Steve, I'll say the same. Congrats and best wishes to you. I wanted to start with just sort of the visibility that you have into the 2nd half sounds like Q3 up over Q2, Q4 up again.
If you look at WFE, I think many analysts predict WFE up 30 plus percent maybe even into the mid-30s. And based on your visibility right now, wondering if you think overall product revenue at We'll sort of keep pace or perhaps even outperform that WFE level in 2021.
Yes. So Quinn, we believe that we'll be outpacing the WFE. If In the advanced nodes and we look at the different applications we see happening on the advanced packaging front and then combine that with the New market expansions that were only in the early stages of gaining traction. We look at all that combination and Some of the guidance we've given would indicate that we're fairly confident in the outperforming a 30% kind of WFE number.
Great. And second question, as you're going through the comments looking into Q3, Q4, it sounds like You saw memory picking up in the 4th quarter. It sounds like that's driven more by DRAM, but wondering if you had Any thoughts on the NAND outlook Q3, Q4?
For us, we see the NAND softening in the second half. So despite all the strength, that is probably the one market that we've seen that we see softening a bit going into the second half and it's roughly equal from what we can tell. Yes. Comes down and then stays at that reduced level.
Got it. Quarter over quarter.
Sorry, for Steve on the litho backlog up nicely again this quarter. As you start to ship those I know that carries those systems carry lower gross margins. Any concerns that Could pull you below the $55,000,000 to $56,000,000 level that it looks like you're going to be getting pretty close to on a Quarterly basis to that $200,000,000 quarterly run rate, probably either at the high end of guidance for Q3, but if not, then definitely Q4.
Yes. So that's a good question. For Q3, I'm not concerned. We just started shipping Systems are new systems, so we're going to have some rev rec, things that are going to delay probably when those tools get recognized. I don't anticipate the tools being recognized in Q3.
Q4, we got to see how the mix shapes up, but we could actually have A slot of tools, if they actually all were to get recognized in Q4 could have some pressure on the margin. The overall model anticipates litho with the lower margins built into it. So it just might be a question if they back up onto 1 quarter that might have a 1 quarter impact. But overall, the model does include litho with those lower than normal margins.
Got it. Great. Thank you very much.
And next we'll hear from Craig Ellis of B. Riley Securities.
Thanks for taking the questions and guys congratulations on the strong performance. Mike, I wanted to start off with you and go back to a In the press release and from your script, I think the SAM expansion opportunity that you scoped was scoped at $350,000,000 But In my notes, I have that at $260,000,000 So maybe my historic notes were incorrect, but I think what's happening is that TAM expansion opportunity is growing and that's really what the question centers on. As you are moving through Calendar 'twenty one and approaching calendar 'twenty two, do you actually see a larger SAM expansion opportunity in front of you than what you were seeing 6 to 9 months ago?
We do. We do in panel level packaging, which is one of the areas. We see a little bit more in the CMOS image sensor, but the biggest probably shift is also on the planar films. So that's another area where we're starting to see a little more demand, not just In the traditional markets, but also in the specialty device markets, we didn't appreciate Just how much opportunity there was there and as we started to leverage our broader channels, our broader sales channels, the opportunities Been very positive. The customers have been very receptive to the new products.
Got it. And then Steve, I'll do a follow-up with you. So if I were to annualize The current quarter's revenue guidance, I get something that is close to $800,000,000 not quite there, but close and the gross margin is very close to the target, but it looks like operating margin has a bigger gap target. So I'm just wondering if you can walk through some of the things that will be needed to close the operating margin gap from where we are now to target levels at 29.5?
Yes. So the only the thing that's throwing you off a little, Craig, is that the as I mentioned in my In prepared remarks, the comp plans, the variable comp plans are running well above 100%. And the model assumes they're at 100%. So there's a lot of catch up entry going on in the quarter. That's throwing that off a little bit.
But so that's why I say I'm If you were to back out that run rate, as a run rate, you'd actually be very close to the long term model.
Great. And then lastly, and I'll keep it there. And before I ask the last question of you, Steve, I just want to join the group in echoing Thank you for all the help over the years. You've been tremendously valuable, not just with Onto, but with the broader industry. And I greatly appreciate that and wish you well.
But as we look at the next milestone now that we're really at the midpoint gross margin target, Looking up to the next level, which is 56.5%, is it about an equal contribution between mix and Volume that get us there or what are the ingredients that take us to your 56.5% target from today's levels?
Yes, it's just keeping the standard
mix of metrology, inspection, obviously litho is built into that too. So it's really just keeping a somewhat growth across all the segments, even that Mike talked about where you see a lot of the growth. You keep that proportionally up, you start leveraging up into those numbers that you see in the next level of our long term operating model.
That's helpful. Thanks guys and good luck.
Next we'll hear from Tom Diffely of D. A. Davidson.
Yes, good afternoon and thanks for the question. First, Steve, very sorry to see you go. You've been the one constant in the 20 years I've been in this business and I'll Mr. Chats. So maybe starting with you, when you look at the supply challenges you've seen over the last few quarters, How would you characterize the transition of the more the move of them?
Are they getting better? Are things getting resolved? Is it getting worse? How do you view the Supply chain
issues? See, I'd say right now, we're kind of I don't see them getting worse right now. I think they've been on kind of a level. I think initially it was you saw it in the extended kind of logistics side of the shop at first where you saw freight Taking longer to get stuff here, especially we bring a lot of stuff in over through container ships. And so I think we initially saw that.
I I think it evolved a little bit. Obviously, if you hear it among other people to a lot more on the components and component side, maybe assembly than even our supplier This is where we're really seeing we're constantly with our suppliers trying to make sure they're testing where they're getting their stuff from because we're seeing a couple like, I'll call it, Tier 2 Now, issues that are causing our vendors to deliver to us on time. So I think that is probably what it's evolved to, but I would say it's kind of in At least over the last month or 2, it's kind of leveled out. I haven't seen it getting dramatically worse.
Okay. That's quite helpful. And then Mike, when you look at the long term drivers in your market and your Products serving those markets. What do you think the natural split between specialty and advanced nodes is for you?
Over time, I think we're going to continue to be Right around that fifty-fifty mark. Right now, we're sixty-forty where specialty and AP is a little bit stronger. But as the expansion of our new metrology suite continues, I'd expect that to balance out. No, we'll alternate quarter to quarter, but I would say that when we look out 4, 5 years and full adoption of these new products and additional new products, some new markets and expansions. I would guess that we're going to maintain this fifty-fifty kind of Split, maybe slightly tied to the advanced packaging specialty just because we have more products that play into that In a bigger way and that's growing fairly aggressively.
Okay. That's helpful. So would you say over the next year that would be perhaps the biggest drivers, just all the products you have that serve this Emerging foundry war that's going off the leading edge?
Not just that, but also the planer Films and some of the new market opportunities we're seeing for the aspect or the IRCD metrology for 3 d NAND, high aspect ratio metrology. I think we're opening up the doors to some markets we didn't participate in, in Advanced Nodes in the past. So I think that's going to drive some outsized growth For us in Advanced Nodes, well, at the same time, we have the growth on the Advanced Packaging and Specialty. Great.
All right.
Thanks for your time.
Yes. Happy.
Congratulations on strong results. And Steve, congratulations Your retirement and good luck to you on everything. I guess my first question involves, Can you just help me with what the TAM of the planar films business is of this new 350 that you're referring to?
So that it's about $200,000,000 of that. It's about half of the overall planar films. Remember, we split it into the really critical films, some ultra thin films and then Some more standard planar films. And right now, our products are better suited for the common films, It was about half of the overall planar films market.
Okay. And do you have a revenue target perhaps you could share with us for this product either this year or next year or help us frame how big of an opportunity it is for you In the near term.
Steve, how would you frame that?
So we've I
mean, we gave you some level of hints on Momentum, so we talked about it growing about 50% in the second half. We said an achievable goal would be 50 By the end of, I believe we said 2022. So you can see that as kind of the momentum. If you're thinking about, We started 0 at the beginning of the year or maybe a couple of million in the Q1 or end of the last year. Then you can see that trajectory can probably come up with a model.
So $50,000,000 would be the Over 2 year over 2022 2021 or that's what you might expect?
That would be that's what we said we would we could achieve When I was pressed a couple of quarters ago, that's what we could achieve as we look out 1 or 2 years. It was not cumulative. It's on an annual basis.
Okay,
great. And then as far as the advanced packaging inspection business, could you You gave us some great statistics about how much it was going to be up in the back half of the year. How much do you think it will when you look at That prediction, what will be the growth rate for all of 2021 for that business?
We didn't break it out, but it would be we grew, I believe, over 20% last And we'd be growing similar levels this year.
Okay. And then final question from me has to do with the Advanced Packaging Lithography Business. Congratulations on I think you mentioned you got 4 additional orders. The $30,000,000 backlog is a great achievement. Can you you mentioned your slots are full through 2022.
If your slots are full, then you kind of know if you execute what your revenue will be, maybe you could share, do you think you can ship all of this $30,000,000 backlog? Or what are how should we think about the revenue potential of this business over this year and next year? Thanks.
Yes. We'll provide that guidance as we get closer to it. But I didn't say just for a correction, I didn't say the slots were full. I said we expect to end the year with full slots for 2022. So are continuing to build the backlog.
Now that backlog includes shipments we plan for this year as well as Shipments expected or slots available for next year and we expect it with the engagements we have to close out The back the open slots for 2022 well ahead of the end of this year. So they're not closed yet.
Okay. And then I guess theoretically if you do close all your slots, How should we think about the relevant potential for the Advanced Lithography business either this year or next year or however you can help us frame it at this point?
Really good. I'd say, you can look at the $30,000,000 and consider that A pretty decent bottom estimate and then we should be above that if we do succeed in filling All of those slots.
And I guess the core reason that this business is all of a sudden taken off is you've got Multiple customers that have moved into actual production with your tools.
Well, we just shipped the first one. We have multiple customers planning to move into production. Yes.
Thank you. And again, congratulations on nice results. Thank you.
And there are no further questions at this time. I'll turn the call back over to Mike Schaeffer for any additional or closing comments.
Thank you, April. As a reminder, we will be participating in the B. Riley on August 18 and Needham Semi Cap and EDA Conference on August 24. We'd like to thank everyone for participating in the call today and for your interest ONTU Innovation. That concludes our remarks for the call, April.
Please wrap up the call.
Again, that does conclude today's conference. Thank you all for your participation. You may now disconnect.