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

Thank you, Jennie, and good afternoon, everyone. Onto Innovation issued its 2022 fourth quarter and full year financial results this afternoon shortly after the market closed. If you haven't received 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 the management on this call will contain forward-looking statements within the meaning of the federal securities laws. Such 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. And 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?

Thank you, Mike. Good afternoon, everyone, and thank you for joining our call today. With our strong finish in the fourth quarter, Onto Innovation has achieved an exciting milestone crossing $1 billion in revenue this year. Throughout the year, we saw consistently strong demand for our systems with revenue growing 32%, well exceeding market estimates of 9% growth for wafer fab equipment in 2022. Even more exciting, earnings for the year grew 43%, while we increased investments in R&D, manufacturing capacity and established new training centers closer to our customers in Asia. Beyond the strong financial performance, we expanded our position in several areas of future growth. Starting with advanced nodes, Atlas Optical Metrology has been qualified by all three of the market leaders developing gate-all-around transistors. This increases our logic opportunity by over 20% versus prior nodes. In NAND, we extended our already strong position with Atlas OCD by qualifying our aspect IR metrology at four of the top three 3D NAND producers for measuring critical parameters of NAND with over 230 layers. Moving across the value chain to specialty devices and advanced packaging, our latest inspection products have proven themselves capable in sub-micron applications in both front end and advanced packaging. This year, we had over 15 customers replace the incumbent competitor's tools with the Dragonfly G3 for submicron inspection. We estimate this to be one of the fastest growing segments in our macro inspection market. Finally, in panel packaging, we finished the year with roughly $40 million in revenue and expect to double that in 2023. We estimate this market to be roughly $280 million with Yoel projecting a CAGR of 12% through 2026. This high level of performance across the value chain would not have been possible without the passion and talent of our entire global team and their unrelenting commitment to our customers' success. Based on these results, we see even greater years ahead for our Onto Innovation team as these technologies migrate into production. Now, turning to our fourth quarter, we capped off this record year with revenue of $253 million above our midpoint of guidance. However, earnings of $1.57 per share were well above the high end of guidance aided by favorable tax and investment income, which Mark will speak to shortly. In the fourth quarter, revenue from our specialty and advanced packaging customers grew 22% sequentially, setting a new revenue record. As expected, leading that growth was our power and compound semi markets, which grew 54% over the third quarter. Several of these customers selected Onto Innovation specifically for connected solutions, integrating software and systems to improve yield. For example, aligning patterns layer to layers is particularly challenging in compound semiconductor applications due to the use of thick transparent materials. By employing Discover Run to run software to analyze our overlay data and other process data, we're able to automatically provide more precise corrections to the lithography systems. This improves layer-to-layer accuracy by over 50%, translating to several million in additional yield per year. In the quarter, our inspection sensitivity and compelling cost of ownership resulted in several notable wins in hybrid bonding for future 3D chip stacking applications. In addition, Dragonfly G3 inspection was selected to provide process control to a supplier of many LEDs for the next generation displays of a leading smartphone manufacturer. The mini LED market is still small, but we expect additional orders in 2023 from this customer as well as others ramping to support growth estimates of 22% annually through 2028. Turning to the advanced nodes, after a record third quarter, revenue declined 23%, impacted by both the US restrictions announced last October and market declines in memory, especially NAND. However, looking deeper, we see nearly half of our advanced nodes revenue in the quarter was in support of R&D and pilot line production of next generation nodes. As mentioned earlier, this included the sign off and repeat order for Atlas Metrology at our third customer investing in gate-all-around technology. We also successfully completed an aspect metrology evaluation at our fourth leading NAND manufacturer. The aspect IR metrology is the only inline solution for characterizing lateral recesses, which are critical to maintaining the correct electrical parameters for NAND. Prior to aspect metrology, customers would resort to far slower sampling measurements using offline x-ray systems. Finally, in the fourth quarter, we won the tool of record position for Iris Films at another top five semiconductor manufacturer. Since its market release two years ago, Iris Metrology has now been qualified at three of the top five semiconductor manufacturers, as well as several new power device customers. So even while factory expansion slows, our customers are fully engaged with us to develop and deliver the solutions they require to successfully migrate their new technologies into full production. Before I go into our outlook for the first quarter and give some color on the year, I'll turn the call over to Mark for the financial highlights. Mark?

Thanks Mike, and good afternoon everyone. As Mike highlighted, we had another strong quarter with fourth quarter revenues of $253 million up 12% over the same period last year, and $3 million above the midpoint of our fourth quarter guidance range. This strong fourth quarter finish helped us achieve the significant milestone of surpassing $1 billion in revenue in 2022. This is an incredible achievement for a team that just came together three years ago and started at a base of just under $600 million in annual combined revenue. We also achieved several other financial records setting company highs in full year operating income of $302 million in net income of $275 million, contributing to our strong financial performance for the year. Now I'll move on to quarterly revenue by market. Advanced nodes revenue of $85.3 million grew 16% year over year and represents 34% of revenue. Specialty device and advanced packaging achieved $125.4 million in revenue, grew 15% year over year and represents 49% of revenue. Software and services revenue of $42.6 million was slightly down 1% year over year and represents 17% of revenue. We achieved 54% gross margins for the fourth quarter in line with our previous guidance range. We continue to experience inflationary pressures on raw materials and labor. Fourth quarter operating expenses were $61 million at the midpoint of our previous guidance and flat to the previous quarter. Our operating expenses slightly declined as a percent of revenue year over year and were flat to the prior quarter. Our mix within operating expenses shifted with more investment into R&D during 2022 to support the strategic programs Mike highlighted earlier in his opening comments, which will help propel our growth during the next phase of expansion. Our operating income of $76 million, which increased 10% year over year, was 30% of revenue for the fourth quarter. A record level net income in the fourth quarter was $78 million, or $1.57 per share, up 28% over the same period last year, and $0.17 above the high end of our previous guidance range of $1.25 per share to $1.40 per share. During the quarter, we had several one-time discreet tax items that positively impacted our full-year effective tax rate, bringing it down to 10.4% as compared to our previous guidance range of 12% to 13%. Excluding the impact of these one-time tax benefits, we would still have exceeded the high end of our guidance range by approximately $0.01. Now moving to the balance sheet, our cash and short-term investments were $548 million with operating cash flow of $137 million for the year down from 2021 levels, driven primarily by the increase in inventory within the year as we manage through supply chain issues, increased safety stock levels, and ordered long lead time items. Inventory at the end of the year was $324 million as we continue to receive key components within the quarter to support the growth in our lithography business and to service our expanded installed base. One of our top priorities for 2023 is to optimize our levels of inventory and return to the mid $200 million range in 2023. As a result, we expect inventories to start declining in the first half of '23 and throughout the year. This will contribute to our free cash flow returning to historic performance levels of over 20%. Accounts receivable increased to $241 million in the quarter and our day sales outstanding increased three days to 87 days, primarily due to the timing of revenue and receipts within the quarter. As commented on during previous quarters, we continually assess our capital allocation strategy, which includes the balance between internal investments, M&A, and share repurchases. During the quarter, we repurchased an additional 846,000 shares of common stock, bringing our year-to-date total share repurchases to just over one million shares resulting in a return of capital to shareholders of $65.2 million. The share purchases were executed under the existing $100 million authorization. Now turning to our outlook for Q1, we currently expect revenue for the first quarter to be $200 million, plus or minus three percentage points. We expect gross margins will be between 51% to 53% as we pivot from and manage through our manufacturing cross profile in place supporting our record throughout the year. For operating expenses, we expect to be between $53 million to $55 million. For the full year '23, we expect our effective tax rate to be between 14% to 16%. We expect our diluted share count for Q1 to be approximately 49.2 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings to be between $0.80 per share to $0.95 per share. As we entered 2023, we have already started to execute plans to reduce annual spending in the range of $25 million to $30 million, which includes driving further operational efficiencies at our manufacturing sites, staff reductions, and reduced discretionary spending such as travel and outside services, while offsetting our annual employee compensation increases. With these efforts, we expect to move back into our long-term operating model when industry growth returns. And with that, I will turn it back to Mike for additional insights into 2023. Mike?

Thank you, Mark. As Mark just mentioned, we expect a slow start to 2023. For the first quarter, we see specialty and advanced packaging declining by mid to upper teens, impacted by both the broader market slowdowns and the effects of seasonality. We expect advanced nodes revenue to decline by an estimated 30%, primarily due to sharp reductions in memory spending and restrictions in China. Looking beyond the quarter, we see customers reducing wafer starts or delaying expansion plans in response to the current oversupply of chip inventories. Advanced logic investments continue, but higher volumes are not expected until 2024 with slowing smartphone sales driving down utilization of lines and advanced packaging. Overall, wafer fab equipment spending estimates are down 20% for 2023. However, analysts at Stifel and Morgan Stanley are forecasting equipment spending to be down an estimated 30% after excluding front-end and lithography spending. Despite this weakening environment, we remain confident in our thesis for outperformance, which includes backlog to support our lithography business doubling in revenue this year, Novis Edge inspection increasing 50% to support EU wafer manufacturing, and we expect revenue from our power and compound semiconductor customers to grow this year. In total, we see at least $70 million in incremental revenue from these markets, giving us a range of market outperformance that is down about 18% to 22% year over year. In response to the industry slowdown, we've taken steps this quarter to reduce our overall expenses by about 11%, which includes both operating and manufacturing expenses. The majority of these reductions were in variable costs with minimal impact to our full-time employees. The adjustments will allow us to maintain a healthy financial model while continuing to invest in the R&D programs critical to our customers. We'll also take advantage of this time to focus on supply chain initiatives that will strengthen our margins and again, move us closer to our long-term operating model when growth returns to our markets. So though the timing for that return to growth is not clear, the longer-term estimates for chip growth have not diminished and are currently estimated to be $1 trillion by 2030, nearly double the current demand. In addition to strong unit growth, the complexity of the devices is increasing, thus requiring additional process control innovations at a higher capital intensity to maintain viable yields. This is a great environment for Onto Innovation to continue to expand our customer partnerships across the semiconductor value chain and contribute to the introduction of the exciting new devices that will enable a smarter, greener, and more connected future. And with that, we'll open the call for your questions. Operator?

And we will go to our first question from Brian Chin with Stifel.

Hi there. Good evening. Thanks for letting us ask a few questions and Mike, maybe just to clarify, I think what I heard in the remarks, but the way you're kind of aligning the year at this point, do you see revenues down, was it 18% to 22% year over year? And I guess that would let me, okay, so to clarify that, and I guess do you see maybe revenue tapering off a little bit further into 2Q and then maybe stabilizing there and kind of flattening out for the year? Is that sort of the contour that you're anticipating or is there sort of a different pattern?

We see a lot of movement right now. That's what we believe. We think we're going to stabilize Q1, Q2 and start to see some improvements. But again, there's been a lot of movements both in and out. We've seen movements into Q2, we've seen movements out, but right now, we're expecting that to be flattish, maybe slightly up from Q1.

Flattish is slightly up. Okay. How about gross margins relative to margins, relative to some of the cost reduction efforts that you talked about? I think the $25 million to $30 million for the year. Are they focused, sort of balanced between OpEx and above the line, or how should we sort of maybe dial that into our models?

Yeah. Brian, this is Mark. Yeah, no, I think, I would say it's probably 60-40. There's definitely more down in the OpEx because I think there's a little bit more discretionary in that level related to traveling and other third-party services and things like that. We are looking at all areas of gross margin as well, driving efficiencies there. We've had some benefit from freight reductions and things like that, so that will flow through margin.

Okay. Got it. That, that's helpful. And then I guess tied to the gross margin guide for Q1 obviously there's some volume impact there, but how much is Nix coming into play there? It sounds like the panel lithography business should still be incrementally strong this year. So how much is maybe Nix related to in that gross margin guide?

Yeah, certainly there's some amount of mix in there, but I think the bulk of it is being able to make the adjustments relative to the change in volumes, the adjustments to manufacturing costs and capacity relative to the change in volumes. So that's the bulk of it. There is some impact of a relatively strong lithography quarter, so it's nearly 50% greater than the prior quarter. But we do expect margins to start to move back into our level even as early as Q2 and moving into the second half of the year. As well as, as a reminder, we did say we're going to have incremental improvements throughout the year on the lithography tool margins and end 2023 with those margins at target.

Okay, great. All right. Thanks, appreciate that.

And we will go next to Craig Ellis with B. Riley Securities.

Yeah, thanks for taking the question and congratulations on all the financial records in calendar 22, guys. Nice to see. I wanted to start just by digging a little bit deeper into the cost savings. So nice to see that you're protecting margins. The question is for the savings that look like about $16 million in OpEx and $11 million in COGS. How much of that is included in the guidance that you've given for the first quarter and then with some incremental benefit through the year? How should we think about the linearity of what's left beyond what you realize in one Q?

Yeah, Craig, it's Mark. Yeah, no, certainly a portion of those savings are in our guide for Q1. We've certainly tried to start executing even at the end of Q4 to have those reductions be impactful to our Q1 guide and our results. There's certainly a lot of work we still need to do and we plan to do. As we said, as Mike just made note that the improvement around margin that'll occur in Q2 and beyond. We will see obviously historically Q2 does pop up from an operating standpoint with the annualization of our merit and other stock-based comp items. But again, we're doing our best and we've got plans in place and we've done we started to execute to offset those as much as we can. So I think you'll see, I would say it's probably proportional throughout the year. And you know, we're gonna continue to look for areas to drive the efficiencies up.

Okay. Proportional through the year, but with COGS really starting in Q2 rather than Q1, is that right?

Yeah, I would say there are some elements in Q1, but I think you'll see the majority of that. You're right, probably in Q2 and beyond because I think it's the pivot from Q4 into Q1 and just looking through the kind of the overall absorption and volume issues.

Got it. Mike, could you share your perspective on the industry overall and where the company stands? It seems that the excess growth relative to the industry is quite similar to what we observed three months ago. If we exclude litho from WFP, we're approximately minus 28, and your midpoints indicate minus 20. So, that aligns with the 750 basis points you were anticipating earlier. Is that the correct interpretation? Additionally, it appears that litho has improved slightly compared to our previous expectations. I was forecasting 60 this year, but I believe you mentioned 80. Please help me understand the macro situation and then return to the specifics regarding panel litho.

Since our last call in November, we have observed a broader pullback in the market, particularly in advanced nodes and to some extent in logic. The most significant declines have been in DRAM and NAND memory, as well as in the packaging sector. Initially, we projected a 20% decline in the market, but we are now anticipating a 30% downturn, excluding front-end lithography. This seems to be where the market is stabilizing. We have several areas of booked performance, with litho being one, and we've secured bookings totaling $80 million, along with promising orders for Novis Edge. Additionally, there are multiple orders from compound semiconductor manufacturers who have purchased complete sets of tools, which is encouraging. Our broad portfolio and connected solutions, especially in software, are resonating well in the compound semiconductor market. Consequently, we are seeing an increase in bookings, particularly from power customers, which reinforces our confidence in our performance outlook for 2023.

Yeah, just on that last point, Mike, I think if I think back over the last 18 months, we first started seeing customers buying full suites of tools, and I think I remember seeing that in DRAM and NAND and so now you're seeing it as well in compound semi. So it seems like the solutions that you're offering are really resonating and any thoughts on what the demand profile looks like, more intermediate term beyond just 2023? How do you look at the growth potential compound semi on a multi-year basis?

Oh, we think on a multi-year basis, we think our position in Compound Semi is just in the early stages of building out. We've always had a very strong software focus there and we have a good software position. But as far as the inspection and metrology, that hasn't been as big a focus as we, as we looked at other areas. And now what we're finding out is there's a number of high-value problems that, for instance, our submicron resolution for the inspection, many of those 15 customers were tied to several of the 15 customers those 15 customers were tied to power applications. And then the metrology, where it wasn't really promoted to those customers we're finding some real opportunities as far as the size. What you asked for, we haven't really looked at 2024. It obviously depends on their continued growth there. The numbers we see is double-digit continued growth, annual growth rates, at least for the next few years. So with that, we expect to grow better than that. Better than double-dig? Well, I mean, if it's, if it's 10%, maybe we're going to grow another 50% better to 15% or 20% based on the fact that we're introducing new products into a broader portfolio or suite that seems to resonate with the customers and it's solving real, real problems for them.

Yeah. We've been picking up data points that the yields are certainly tough in certain areas of compound semi, so your solutions would be quite appropriate. Lastly, I, I think you mentioned that there were three specific initiatives, thin films, Novis Edge, and Panel that could add an incremental $70 million of revenue. Looks like panel would be about half of that. Did the other two shake out about 50% each or how do we think about the relative contribution of the three?

Thin films present additional potential for growth. We talked a lot about this, and much of it is connected to some of the front-end aspects. We mentioned Novis Edge and the compound semiconductor power devices, which include a range of products. The power market is expected to drive solid growth. Regarding the breakdown of the other $30 million, I would estimate it to be evenly split, which means around $15 million for each initiative.

And we will go next to Quinn Bolton with Needham & Company.

Just wanted to maybe follow up on the compound and power market. I think last quarter, you said it was the second largest segment. I apologize if I missed what you said it was this quarter, but wondering if you could just sort of give us a size, how big is that business for you now on an annualized basis.

Quinn, we don't break it out, but it's definitely becoming a more significant part of the business. It remains one of the largest segments in the fourth quarter. It grew a lot, but we also had a lot of foundry logic spend as we mentioned, DRAM tanked, the foundry logic stayed okay. So it's still relatively second in the categories, which is high. And like I mentioned, it grew 54% quarter-to-quarter. So does it continue that way? No, I don't think so. It's a lot of small numbers right now, but does it continue double digits. I think that's reasonable.

Got it. Got it. Okay. And then just thinking about the year, you guided to $200 million at the midpoint for the March quarter. If I just look at your down 20% outlook for 2023, for the $1 billion base, it kind of feels like you're going to run-rate at about $200 million for each of the four quarters. And so I just wanted to make sure that I'm thinking about the linearity. It sounded like in response to an earlier question, Mike, you thought maybe there was a little bit of chance for growth in Q2. And I think previously, you were looking for a slightly stronger second half. So just trying to get the shape of the right in terms of your current expectations.

Yes, Quinn, I think that's about right. Obviously, things changed a lot since last November when we first provided guidance. We're just trying to reflect what we believe is a lower-end scenario. Hopefully, as we gain better visibility and observe more activity, like packaging, we'll see what the smartphone refresh cycle looks like and the impact of the 5G transition. Once we move past this inflationary period and recessionary mindset, we will assess the effects on inventories and potential expansions. For now, that represents our baseline case.

Got it. Okay. And then I guess for Mark, it sounds like with the cost reduction actions you can get back towards a 54% gross margin in Q2 and if not Q2, certainly by the second half of the year, but that's on kind of flattish revenue. As I look into '24, '25 to the extent revenue gets back to the $250 million or higher quarterly level, it feels like there'll be some pretty good absorption benefits to gross margin. So I guess I wanted to ask you, getting to 55% or 56% feel like you can get there pretty easily. Just on an absorption basis. And so, I wonder, are there some cost offsets that maybe come back as revenue starts to grow that would pressure margins? Or do you think that getting to 55%, 56% or maybe even higher as revenue recovers is now possible with some of these cost reduction actions you've taken?

Yes, Quinn, you are absolutely correct. Our goal is to implement these reductions this year to enhance profitability and maintain a higher margin while managing operating expenses. For 2024 and beyond, we aim to quickly return to our long-term operating model and benefit from the operational efficiencies we are working on in 2023.

Yes, Quinn, it's somewhat amusing to say, but we shouldn't waste a good downturn. We mentioned that we will continue to invest in supply chain initiatives and explore the second-level synergies we discussed after the merger that we didn't have the opportunity to pursue due to rapid growth. Now, we have a chance to focus on those, and we have ambitious plans to complete some of them this year, which will be beneficial in 2024. We aim to strengthen our foundation for 2024.

Great. And my last question was just really, I guess, a clarification on the lithography margins. Mike, I think you said that you now expect to get to kind of target levels by the end of 2023. I thought previously you thought some of those margin improvements might not happen until '24 because of the time to increase manufacturing and just time to reduce component costs. And so I'm wondering, have you been able to pull in some of that margin benefit or perhaps improve pricing that's leading to better margins? Or did I misinterpret your comments around lithography margins?

Yes. I think it's a little bit of both. We've been very aggressively pursuing the margin situation, both from a cost side as well as a little bit on the pricing side. But we're also seeing some of our advances, we're able to show some of the new advanced technology we're beginning to release where we're seeing the ability to charge for the value of that, where two years ago, when we booked a lot of these orders, we were still selling PowerPoint presentations and demo lab equipment. So they didn't really get to see. Now we've proven, we're understood how our capability is clear, and we're able to charge more of the value for the new capabilities we're bringing in, whether it's overlay upgrades or illumination and throughput upgrades and things like this.

And we'll go next to Hans Chung with D.A. Davidson.

So first, I want to follow up on the industry commentary. I was wondering what's your thoughts on the memory downturn, like given your conversation with the customer, when do you think the memory spending could resume?

I would say at the earliest, it's the end of 2023 and possibly into 2024. However, this timeline refers to production, and there could be some spending in R&D. We might see increased spending in some of the high stack 3D NAND lines, which are still in their early stages. Customers may want to be more aggressive with their new products when they go to market, and hopefully, this will help offset some of the ASP erosion, similar to what we see in DRAM. This will be a critical point for our customers to consider. Currently, they are mainly focused on monitoring inventory levels, tracking ASPs, and navigating through the supply chains.

Got it. Okay. In your prepared remarks, you mentioned the selection being made by the manufacturer for the gate-all-around transistor. Does that mean you have complete market share? Also, is there any competition in that area?

There is competition, so we don't hold a 100% share, but that's what we are striving for. Depending on the specific customer, our share position varies. Generally, we aim to achieve over 50% market share, which we have with the majority of our customers. If I take the average across all three, it would exceed 50% market share. These decisions are not finalized yet, so we keep pushing to enhance our systems. We are also examining the gate-all-around transistor, which is challenging to measure, but we are expanding our focus to the back end of line metalization layers that are easier to assess. With our platform, which is optimized for price performance, we are well positioned for these applications as well.

I see. And is that share similar or higher compared to the previous nodes?

It's definitely higher. In my remarks, I mentioned that based on this, we would expect at least a 20% improvement in revenue based on the dynamics of higher capital intensity and higher share versus prior nodes. Yes.

Got it. Okay. I was wondering about mini LED. It seems smaller right now, but it could have potential. How would you describe the size of the opportunity for mini LED?

I chuckle because I have got several display customers, and they have different opinions on the mini LED. So I want to be a little bit careful. I think there's certain applications where the mini LEDs are being looked at and certainly very aggressively by one of the large smartphone manufacturers. Whether or not that proliferates and becomes the new display type, replacing AMOLED displays, I'm not sure yet. There are certainly different opinions from the experts in the display manufacturing.

Okay. Got it. And then lastly, just I'm wondering if you have any update on the capital allocation strategy. Just especially in just given like you have a very healthy balance sheet. And would you kind of see more share buyback? Or would you kind of prioritize for M&A and so on?

Yes. No, definitely. As we look at the capital allocation, I mean, if the opportunity presents itself based on our set criteria for buybacks, we will execute that in the quarter and continue to do that within the approved limits. And we're also, of course, looking for M&A opportunities and being as aggressive as we can there. It's a great time right now. So we'll continue to search that as well.

And we'll go next to David Duley with Steelhead Securities.

Yes. One of the things, I think, in your press release, you're talking about how your Dragonfly system is qualified, I think, to do some hybrid bonding applications. Could you just talk a little bit about what's going on in that particular product line in that area?

Yes. So it turns out one of the critical issues with hybrid bonding is the surface roughness of these pads. And when you're pushing them together, any kind of deformity particle or issue with the roughness, you have a bad adhesion. And of course, it just takes one of the thousands or millions of interconnects per die, depending on what we're talking about here, to then now destroy two packages that you've just tried to connect. So the ability for the Dragonfly G3 to not only have the sensitivity to detect the defects but also leveraging the ADC to eliminate all the nuisance defects so the customers can really focus on the true yield-killing defect, that's a big advantage. In addition, you may recall that Clearfind has always been a source of a reliability like improved reliability, where RESIST residue, which can't be seen through normal optical techniques can also be on these pads, and you can have a good bond. You can have an electrical test okay, but because of the RESIST residue, that born through heating and cooling and from cars and taking your phone out, walking around in the weather, you have a break. It ends up being electrical failure. So that is another big advantage for the Dragonfly G3.

Now has this die-to-die attachment or die-to-substrate when you talk to pads, so that's tied to substrate or?

We're seeing applications for both. So we're involved in both die-to-die and die-to-substrate.

Okay. And regarding your compound semiconductor business, is the recent increase in growth rate, you talked about power. I was just wondering, is there a significant contribution from silicon carbide at this point? Or is that a focus? Or can you help us understand what your exposure is there?

Yes. We definitely have seen more interest in growing interest from silicon carbide. It's still a small part of the overall power, but it's certainly a fast-growing area and an area that people are investing a lot in, and they have a lot of yield issues. So we're engaged there. But I'd say from the growth we saw in the last quarter, it was, I'd say, less than half, maybe 1/3, maybe a little less than 1/3 of silicon carbide and the rest GaN and some other compound semi applications.

Final question for me is regarding the additional qualifications you mentioned for the Iris tool, which wasn’t included in the list of products expected to grow year-over-year. I'm assuming this is due to the memory sector, but could you provide more detail? A quarter ago, that product was anticipated to grow year-over-year, and now it's been removed from that list. Is this the area where you are seeing the most reductions to align with your new guidance for next year?

The Iris is expected to experience growth, although not as significantly as some other products. This growth is modest, especially considering that several customers are making considerable cuts to their expenses. The memory sector is projected to decline by 50% in wafer capital equipment, while logic may see a decrease of around 10% to 15%. Nonetheless, the Iris platform, buoyed by its initial adoption and the influx of new customers, including some power customers, will grow incrementally. It won't be substantial at this moment. The advantage lies in the fact that we are establishing a strong foundation with key customers, which should lead to notable growth in Iris when market expansions occur next year, or possibly even sooner.

And we will go next to Mark Miller with Benchmark.

Let me congratulate you on a very good year in 2022. Could you estimate what percentage of the projected sales decline is related to the new U.S. restrictions?

Is at least it was about 8% to 10%.

8% to 10%, okay, of the decline.

Yes. And that was mostly booked. So that was a big hit.

There has been significant funding from the U.S., Europe, and Japan, along with the announcement of several new fabs that are in development, but you seem to lack optimism. Do you believe that these opportunities will start translating into orders for you, or are they more likely to materialize in 2024?

We're seeing some orders coming in now. While they may not be significant financial contributions, we are observing orders related to the TSMC fab in Arizona. Incremental orders are happening, but I don’t expect to see any substantial volume of orders until 2024, including those from the Samsung Taylor fab and the Intel fab in Ohio.

Thank you. We'd like to thank everybody for joining us today. A replay of the call will be available on our website about 7:30 Eastern Time this evening. I would like to thank you for your continued interest in Onto Innovation. Jenny, please conclude the call. Thank you.

And again, this concludes today's call. Thank you for your participation. You may now disconnect.