Good day, and welcome to the Onto Innovation Second Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sidney Ho. Please go ahead. Thank you, Justin, and good afternoon, everyone. Onto Innovation issued its 2024 second quarter financial results this afternoon, shortly after the market close. If you did not receive a copy of the release, please refer to the company's website where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer, and Mark Slicer, Chief Financial Officer. I'd like to remind you that the statements made by management on this call will contain forward-looking statements within the meaning of 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 discussions 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. Now, let me turn the call over to our CEO, Mike Plisinski. Mike?

Thank you, Sidney. Good afternoon, everyone, and thank you for joining our earnings call this afternoon. Our second quarter revenue exceeded the high-end of our guidance range, driven by better-than-expected demand for Dragonfly systems supporting advanced packaging for AI devices and Atlas and Iris systems for gate-all-around investments in the advanced nodes. Financially, we were pleased to see progress from our inventory management efforts resulting in a quarterly record generating $65 million in cash from operations. Margins also improved from the first quarter, and we expect it to improve again in the third quarter, which Mark will address shortly. We will now review the second quarter highlights, starting with our specialty device and advanced packaging markets, where we achieved a fourth consecutive quarterly revenue record driven by AI packaging, which accounted for over half of the revenue in these markets. Advanced packaging has proven to be a key enabler for this new era of AI, and NVIDIA recently commented that it expects AI demand to outstrip supply well into next year. We see the market attracting additional suppliers, each bringing unique requirements for wafer substrates as well as interconnect sizes and densities. By broadly addressing these needs, the highly versatile Dragonfly platform achieved another revenue record in the second quarter. In fact, based on our current visibility, we project our inspection business will grow by over 70% this year. And we continue to expand our capabilities. Last quarter, we released a new sensor to detect yields critical subsurface defects in ultra-thin wafers, and based on market response, we already expect over 80 systems to be delivered with this capability through the end of next year. More recently, we announced a new 3D bump metrology sensor to address the need for bump pipe measurements of denser and smaller interconnects used in future high-bandwidth memory and hybrid bonding applications where bump pipes and pitch will be less than half the size they are today. Our new sensor uses proprietary technology, which we believe allows us to meet these new challenges at higher throughputs than alternatives. Though still preliminary, initial customer feedback has been positive, and we expect to ship several systems for production evaluations over the next three months. In addition to new wafer-level packaging technologies, we see growing interest in panel packaging technologies to support chiplet architectures and larger package sizes. We engaged early with leaders in this market, and to date, we've shipped over 30 panel lithography systems to customers globally. In the quarter, we added a new customer to this list when we shipped our first fully automated JetStep X500 to support glass and substrate applications on a single tool. We believe the stability of glass will allow for smaller interconnects across larger package sizes, which is critical to many of our customers' packaging roadmaps. Finally, revenue from power customers grew significantly, nearly achieving a quarterly record set last year. We continue to expect demand for process control to remain strong throughout the rest of this year for the power semiconductor market. Now, turning to advanced nodes, spending is picking up, and we are seeing growth continuing through the second half of 2024 and into the next year. In the quarter, orders from logic customers represented nearly half of the revenue from advanced node customers. For gate-all-around applications, we are seeing an increase in adoption of our Iris films metrology in addition to our leading Atlas OCD metrology. Rounding out our optical metrology suite of Atlas, Iris, and Aspect is our integrated platform IMPULSE. In the second quarter, we closed volume agreements from two of the top four manufacturers, which we believe will represent greater than 60% combined share at these accounts. We've also successfully qualified multiple systems in logic for gate-all-around applications below 2-nanometer, where requirements for speed and stability are increasing. Now, I'll turn the call over to Mark to review our financial highlights and provide third-quarter guidance.

Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we exceeded second-quarter revenue and EPS guidance ranges while generating record operating cash flow of $65 million. Operating cash flow yield increased two percentage points to 27% of revenues, representing a doubling of operating cash during the same period last year. Second quarter revenue of $242 million was up 6% versus the first quarter and up 27% versus the prior year. Second quarter EPS increased 12% sequentially to $1.32 and up 67% versus the prior year. Both revenue and EPS exceeded our guidance ranges due to the better-than-expected demand for advanced packaging for AI devices, gate-all-around investments in advanced nodes, and stronger software and services within the quarter. Looking at the quarterly revenue by markets, our biggest market remains specialty device and advanced packaging, which grew 3% sequentially to a record quarterly revenue of $164 million and represents 68% of our revenue. Our biggest sequential increase was advanced nodes, which had revenue of $32 million, increased 21% over Q1, and represents 13% of revenue. Software and services with revenue of $46 million increased 6% over Q1, representing 19% of revenue. We achieved a 53% gross margin for the second quarter, in line with the midpoint of our guidance range of 52% to 54%, driving more than 100 basis point improvement over the first quarter. Second quarter operating expenses were $64 million, just at the high end of our guidance range. We continued to make additional investments in R&D within the quarter, extending our product capabilities and technology differentiation to expand our server markets for 3D metrology as well as future hybrid bonding metrology and inspection. Our operating income of $65 million was 27% of revenue for the second quarter compared to 25% for the first quarter, validating our ability to execute a leveraged operating model. Our net income performance, also 27% of revenue was supported by favorable investment income resulting from our increased cash balance. Now moving to the balance sheet. We ended the second quarter with cash and short-term investments of $786 million, achieving operating cash flow of $65 million and converting 100% of our operating income into cash. Inventory ended the quarter at $320 million, down $10 million versus Q1. The team made great progress optimizing our inventory levels even with the Dragonfly revenue growth and the expected increase in our advanced nodes business in the second half. We expect further inventory reduction of $10 million to $15 million for the third quarter. We plan to be below $300 million as we exit 2024, which will be a $50 million reduction from our 2023 inventory levels. Now turning to our outlook for the third quarter. We currently expect revenue for the third quarter to be between $245 million and $255 million as HBM chip leaders continue to invest in advanced packaging capacity and new capabilities, as Mike discussed. We expect gross margins will be 53% to 55%, reflecting the improvements in manufacturing and supply chain initiatives discussed in prior quarters. For operating expenses, we expect to be between $64 million to $66 million as we make additional investments in our R&D programs tied to customer roadmaps. For the third quarter, we expect our effective tax rate to be between 15% to 16% and 13% to 14% for the full year. We expect our diluted share count for the third quarter to be approximately 49.7 million shares. Based on these assumptions, we anticipate our non-GAAP earnings for the second quarter to be between $1.25 to $1.35 per share. Our focus for the second half of '24 remains on executing on our targeted programs, further quarter-over-quarter gross margin and operating margin improvements, and continuing the progress made in the first half of the year. In addition, further growth of the advanced nodes business, driven by increasing orders for memory and gate-all-around logic, should improve our margin profiles as we exit 2024. And with that, I will turn it back to Mike for additional insights into Q3 and the remainder of 2024.

Thank you, Mark. In the third quarter, we anticipate that revenue from our advanced node customers will increase by over 25%, with contributions from both memory and logic customers. Approximately half of our logic revenue will support films and OCD applications for the gate-all-around node. Looking ahead, we expect logic revenue to continue growing in the fourth quarter, with more than 70% directed toward gate-all-around applications. We foresee our specialty and advanced packaging customers maintaining record levels in the third quarter and growing in the fourth, potentially setting a new quarterly record for the company. This growth is primarily driven by demand for Dragonfly systems, alongside rising demand for our films, acoustic metrology systems, and packaging for both Logic and HBM applications. While we are still in the early stages of adoption for these systems, we anticipate generating over $50 million in package metrology system revenue by year-end. Overall, our outlook for the second half of the year has improved, and we now project second-half revenue to be 5% to 10% stronger than the first half of 2024. Although it is still early, we are encouraged by the prospects leading into 2025. Continued investments in gate-all-around capacity and announced capacity expansions from several high-bandwidth memory and logic packaging manufacturers, particularly for HBM, are expected to result in new capacity coming online in the first half of the year. This will support the increase of HBM content for NVIDIA's AI processors from 80 to 192 gigabytes and for AMD's AI processors from 192 gigabytes to 288 gigabytes. Additionally, we recently closed volume purchasing agreements with two customers valued at over $300 million during the quarter. These agreements encompass both AI packaging applications and gate-all-around investments through approximately 2025, indicating strong prospects not only for a solid finish to this year but also for a promising 2025. That concludes our prepared remarks. Justin, please open the call for questions from our covering analysts.

The first question will come from Brian Chin with Stifel.

Hi there, good afternoon. Nice results and outlook. And thanks for letting us ask a few questions. Mike, previously you thought that advanced packaging revenue could pause or dip in 3Q, but your outlook today is more positive. What improved? And is it more on the Foundry or HBM memory side?

Thanks, Brian. I think there was some confusion. What I said would pause would be specific to AI packaging, which is a specific set of really four customers, one logic and three memory. I did say that overall, we expected growth to continue sequentially through the next couple of quarters. Though we are seeing more revenue from those customers, there are still supply constraints that are limiting their ability to expand and to reach the levels of revenue that they were delivering or that we've been delivering to them in the first half. So we do still see a pause. I think it's definitely more constructive. Some of their announced expansions have been delayed. We've seen some customers actually get creative and push on some of their subcons to open up capacity and make room for a faster ramp where their greenfields are taking a little bit longer. That said, we are more bullish, but I think there was a lot of confusion around my definition of strictly AI packaging and just a handful of customers versus overall advanced packaging in our overall business for the specialty devices and advanced packaging markets.

Yeah, thanks for clarifying that. And then looking at the $300 million in DPAs that you're announcing, it's sort of a multi-part, but can you give us a rough idea of, one, how that $300 million maybe splits amongst those two customers? Is it kind of like evenly weighted or maybe biased to one or the other? And then second, within that, maybe how that roughly splits amongst gate-all-around and advanced packaging? And then if I guess so, if I may, lastly, kind of is that revenue recognition expected to be linear or kind of maybe more weighted to the last three quarters as opposed to the next three years?

I don't have the exact breakdown available, but from what I recall, the advanced packaging segment accounted for a significant portion of the $300 million. The precise distribution will depend on the timing of the expansions, but most of it is expected to be related to 2025, or next year.

Thanks. And maybe just last quick one.

It's mostly packaging. I don't have the breakdown quarter-to-quarter, but it's roughly 60% for packaging and about 40% for the gate-all-around.

Got it. Okay. That's really helpful. And just one last quick thing. What impact, if any, are you seeing this year in light of the reduced capacity expansion plans from advanced logic that was communicated last week? And how does this affect your thinking for gate-all-around revenue potential in 2025?

We have a more positive outlook now. We're observing solid adoption of our products in the gate-all-around logic segment. Customers are increasingly purchasing more, and we anticipate growth in the fourth quarter compared to the third, which is encouraging. Additionally, the volume purchase agreements indicate that customers are collaborating with us to ensure a steady supply ramp for next year, even before they reach their volume production targets, primarily in 2026. We expect this trend to continue improving. A pleasant surprise has been the growing adoption of the Iris planar films alongside our strong position with OCD, as we're expanding our market share for planar films in the Iris system.

Okay. Great. Thanks for the update.

And the next question will come from Vedvati Shrotre with Evercore.

Hi, thanks for taking my question. I guess the first one I had was, we had an IDM customer of yours kind of cut down CapEx spending for 2025. Can you just help us think through how the conversations have changed for you? Or if, like your expectations going forward from that particular customer?

Well, that remains to be seen. They are certainly announcing cuts to capital expenditures in general, but they are also reaffirming their commitment to reach their next generation nodes and to ramp up their latest generation processing nodes by 2026, I believe. It depends on how they reallocate the rest of their capital. It's still a significant amount. From our perspective, we are on the leading edge. Therefore, I expect their spending will lean more towards that cutting-edge area, which may not only avoid negative impacts but could even lead to a positive impact in terms of acceleration.

Got it. Understood. The next question I have is about the second half of the year, where you mentioned a pause in AI packaging spending, while total advanced packaging spending continues to grow. Could you help us understand what's driving the difference between the two? Are OSATs starting to spend again? Is that what’s really happening?

We definitely see OSAT starting to spend more. But if we take a look at our advanced packaging spend, that includes all of the high-performance computer to include the lithography, et cetera, et cetera. So it would be a significantly bigger number to try and help people understand specific advanced packaging or the AI and packaging spend. We limited it to just four customers that are playing and spending in that space. And I think they've been pretty clear where their capacity growth is going and what constraints they've had and what spending has been like for them. So I don't think there's anything new that we're highlighting.

Got it. And so, could you remind me again what kind of a decline or kind of pause you're seeing? Is it like 10%, 15% decline in your AI packaging revenues first half versus the second half or how would you characterize that?

Overall, it seems to be around 10%, remaining steady. However, there are significant variations among different customers; some are experiencing considerable growth, some are doubling their efforts, while others are reducing their spending. It really depends on the individual circumstances of each of those four customers. But in total, it's approximately 10% to 15%.

Got it. And then, one last one, if I may. On your gross margins, is the kind of 100 bps increase quarter-on-quarter? Is that primarily driven by your product mix changing with more advanced notes coming back?

Not all of it. I mean, certainly, the improvements we've been talking about are certainly paying dividends within our manufacturing and supply chain. So I think as we get into the second half of the year and see advanced nodes certainly improving, yes, that will help accelerate that gross margin improvement.

All right. Thank you.

I think it's also important to note the significant spend we have in AI packaging. We previously guided that over 50% of our advanced packaging specialty market represents around $88 million to $90 million. This indicates a substantial capacity that our customers have been absorbing. As mentioned in reports, there are currently capacity constraints, and customers are announcing new factories for both HBM and Logic CoWoS. It's essential to consider how much progress we have already made in this area.

Got it. Thank you.

And the next question will come from David Duley with Steelhead Securities.

Thank you for taking my question. I have a two-part technical inquiry. If CPU and GPU manufacturers start using rectangular glass substrates as many technical papers suggest, how will that affect Onto overall? Additionally, could you explain what your lithography tool would do on these substrates? Would you be applying the RDL layers, or what specific steps would you take if this scenario were to occur?

To address your first question, it means we will have new opportunities. The various process control technologies we're implementing with Dragonfly in packaging will likely transfer to the panel side through Firefly, which is the panel version of the Dragonfly tool. We expect to capitalize on all the inspection Clearfind opportunities and have identified metrology opportunities to boost Firefly business. Additionally, there are software opportunities available, as these customers come from a different part of the supply chain and can enhance their process control capabilities with our fab-wide software. Most importantly, there's the lithography component, where we will be printing the RDL lines. Currently, we handle up to 10 layers per side for Advanced IC substrates. For glass, we anticipate fewer layers due to the finer resolution, and we expect to work primarily on one side, although some customers are inquiring about both sides.

Okay. Following up on that, when you look at TSMC's roadmap, the substrates, regardless of their composition, are expected to become significantly larger. I'm curious about how moving to larger substrates might influence the lithography business. Additionally, if there is a shift to flat-panel substrates or more panel lithography solutions, would that alleviate the CoWoS bottleneck?

I believe that would represent a significant enhancement in economies of scale. It could potentially alleviate some of the issues associated with different substrates and the thermal challenges they present, such as varying heating and expansion rates. There would be a technical advantage, in addition to the economies of scale benefit, in transitioning to panel-based solutions. Regarding the steppers, the process is iterative. Thus, while we will need enough steppers to handle both the volume of chips and the number of layers, it remains an ongoing process. If they opt for eight layers, for example, this would increase the utilization of our tools and create more opportunities for us.

So, what I understand from your comments is that you have some tools that are closely suited to the size of TSMC's interposers or substrates going forward.

I definitely didn't say that, but we're aligned to the market needs. Let's put it that way.

All right. Thank you. I'll get back in the queue.

And the next question will come from the analyst with B. Riley Securities.

Hi, I'm actually on for Craig Ellis. But you've obviously had some really great quarters in advanced packaging, I think three really, really incredible quarters. And then this one was just great too. Kind of how do you see that ramp going? I know you said that next quarter is supposed to be even and then you go back up again, but you all said this is just the beginning. So is this kind of a sustainable ramp? And how long do we kind of see this coming forward, and how sustainable is it?

We expect the capacities for AI compute engines to significantly increase, with the amount of high-bandwidth memory doubling. Even if AI demand remains steady, which is unlikely as it is projected to rise, the HBM aspect is already experiencing this doubling. Additionally, we anticipate ongoing AI demand through next year, supported by feedback from end-customers regarding their needs and our customers mentioning supply constraints. Many are planning to expand their facilities early next year to address these issues. This gives us confidence in our growth through 2025.

Thank you for your insight. I have another question related to that. Recently, we've noticed some significant signs of increased diversification, which seems to be a positive indicator for your business. Have you observed any improvement in pricing power or your ability to engage with various suppliers in HBM?

Well, we're already in all suppliers for HBM. So it's a matter of maintaining our position and providing value propositions that matter. And then generally, we negotiate our fair share of that value. I don't see that's changing in any way. I think if anything that's getting better as we continue to add new technologies and accelerate our pace of innovation and release new capabilities that they need, that's only helping them to ramp faster, helping them to provide higher yields and become more profitable or gain more share from their customers. So I think from that standpoint, it gives us a win-win scenario with our customers.

That's great to hear. I have one final question related to David's inquiry. We have encountered several challenges with CoWoS, particularly with CoWoS-L, including various thermal design issues. Given that this situation is proving to be more complex than some anticipated, do you think your products will provide greater value in meeting the demand for CoWoS?

I believe our products contribute to improving yields and identifying the root causes of various challenges. However, some of these issues are related to physics, which means our products cannot change those underlying principles. Customers need to utilize our tools to measure, identify, and adjust their processes to enhance yields. This is why we are witnessing a demand for new types of sensors and capabilities, and we respond swiftly to collaborate with our customers. A notable exception is in lithography, where we are actively defining a process. Our lab is working closely with several talented partners to address the challenges associated with adopting glass. We anticipate that resolving these challenges will lead our customers to adopt our solutions, helping to advance the chiplet and packaging roadmaps further.

Hey, yeah. Thank you so much for your answer.

And the next question will come from Charles Shi with Needham.

Hey guys, good evening, Mike, Mark. The question I want to ask is about China. I know you tend to do a little bit more business with the leading customers and the China exposure you had last year was kind of in the mid-teens, and the first quarter was actually fell to like single-digit percent of your total revenue. But I haven't seen your Q2 numbers, but I just want to get a sense from you because this year's WFE upside, a lot of that actually is coming from China based on the commentary from your large-cap peers. And are you capturing some of that upside? What's your expectation for China revenue contribution for the full year and any trend from first half to second half?

Yeah. I think, if I look at our numbers, we think second half China revenue will be up over the first half. But it's not massive, it's still in the teens level. So we're seeing growth. We saw growth from Q1 over into Q2 from China. That was a fairly significant growth, which you'll see. But, in general, I would say China for us is really about a lot of the specialty. We've talked a lot about power semiconductor markets. We are making progress in some of the metrology areas within China as well, but that's a little bit slower. And yeah, I mean, you know the challenges we have selling into China. So I don't think that's a surprise. I think it's good that we're able to achieve the growth rates we're projecting even without the tailwinds of China that some of our peers are enjoying.

Got it. The other question is about that $300 million VPA through 2025. When do you expect to ship that $300 million of VPA, when does that start? When does the shipments start, and when do you think we'll get to that peak shipment? If you can provide some color about that, that would be great. Thank you.

There'll be some initial shipments at the beginning in the second half, but most of the bulk of it is going through 2025.

And the next question will come from Mark Miller with The Benchmark Company.

Hi, congratulations on another good quarter. It seems like you're performing very well. Can you share some insights on where you believe you've gained the most market share and in what areas?

I think we've maintained a very high share in AI packaging. So in the HBM and the 2.5D logic, the CoWoS packaging, we've done well there. And then I think the gate-all-around we've certainly had some nice increases in adoption of our Iris planar films that I hope will translate into further growth into 2025 and 2026 as the gate-all-around node goes into full production. And we see the full benefits of the slots that we're winning. I think those are the two biggest areas. Of course, the panel packaging is a strong position for us as well. Still small and not a lot of, let's say, growth right now. There's a lot of overcapacity from a couple of years ago, but our position continues to strengthen. We continue to add new customers. And I believe this move to the glass and our wide field optics with high resolution is setting us apart from the competition and creating opportunities for meaningful share gains there as well.

You just briefly mentioned Atlas. And I'm just wondering what's going on with Atlas and OCD.

Now, that's going very well. The Atlas OCD tool is qualified in all of the gate-all-around applications or at least the three major players. We have talked about the increased capital intensity of OCD and gate-all-around, and our opportunities for share gains there continue to prove true. So that's definitely a positive factor for us. That's an older story, so I didn't mention it earlier, but thanks for reminding me to bring that up.

Let me just squeeze one in more. People are talking about Michael Dell, in particular, about AI chips into PCs. Do you see that as an opportunity? And if so, when do you think that starts to become an opportunity?

We've noticed that trend. That's why I mentioned that several new players are trying to enter this market. It really comes down to what a company means by AI chips. If it's merely repackaging or adding software to their existing architectures, it likely won't create significant changes unless it boosts adoption. However, if it involves packaging that brings memory and logic closer together, similar to what NVIDIA and others are doing, it could be very beneficial for us. This approach enhances the specialty advanced packaging that we excel at and opens up more opportunities for our Dragonfly tools and sales. Additionally, there's a significant opportunity emerging where smartphone manufacturers are discussing the integration of more AI capabilities into their devices. This could lead to a refresh of phones, which would significantly increase the demand for advanced packaging and help recover NAND memory, along with bolstering the advanced packaging OSAT business.

Thank you.

And the next question will come from Blayne Curtis with Jefferies.

Hey, thanks for taking my question and great results. I just kind of curious more color on the growth you've seen in advanced packaging or advanced nodes. I think it was like 50-50 logic memory. Can you just kind of talk about where you're seeing the strength in end markets? And there's also the question had been the pace of recovery there, but you also have new products with, like, planars. So just kind of curious how much of it is recovery versus new products as well.

I wouldn't characterize a lot of it as recovery. Regarding gate-all-around, that represents more of an investment in the future with new nodes and transitions. Most of the other aspects remain consistent. The NAND expansions we've observed have been driven by both new products, such as high stack 3D NAND, and some of our more traditional offerings to support high stack 3D NAND. These primarily reflect technical transitions or purchases rather than being indicators of market recovery. The encouraging sign is that these customers are experiencing increased utilization and reduced inventories. Therefore, they are preparing and investing in these transitions for the upcoming wave of orders and product launches.

Thanks. I wanted to ask about gross margin. I think your long-term model may be a bit outdated, but at a $1 billion run rate, which I understand you are guiding towards, it was 56% to 57%. I assume the mix has changed, but could you discuss the potential to return gross margins to the range of 56% to 58% and whether the mix you mentioned previously is different now, and if that still remains the appropriate range?

Thanks for the question. We're not ready to update the long-term model yet. As we've mentioned, we plan to return to the model and will consider updates at that time. For now, our goal this year is to achieve quarter-over-quarter gross margin improvement, aiming to reach a gross margin run rate of $250 million to $260 million per quarter and then look beyond that. The enhancements we've made in our manufacturing capabilities, along with continued leverage and a shift towards advanced nodes—which are our higher-margin products—will contribute positively.

Thanks a lot.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Sidney Ho for any additional or closing remarks.

Thanks, Justin. We will be participating in a number of investor conferences throughout the quarter. We look forward to seeing many of you at these conferences. A replay of the call today will be available on our website at approximately 7:30 Eastern Time this evening. We'd like to thank you for your continued interest in Onto Innovation. Justin, please conclude the call.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.