Earnings Call Transcript - ONTO Q3 2024

Operator, Operator

Ladies and gentlemen, good day, and welcome to the Onto Innovation Third 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, sir.

Sidney Ho, Moderator

Thank you, Lisa, and good afternoon, everyone. Onto Innovation issued its 2024 third quarter financial results this afternoon shortly after the market closed. If you did not receive a copy of the release, please refer to the company's website where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Mark Slicer, Chief Financial Officer. I'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 discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. Let me now turn the call over to our CEO, Michael Plisinski. Mike?

Michael Plisinski, CEO

Thank you, Sidney. Good afternoon, everyone, and thank you for joining us today. Overall, we executed well in the third quarter with revenue coming in at $252 million and setting a new quarterly record for inspection. In fact, we're on pace to nearly double our inspection revenue this calendar year. We also improved our gross margin to 54.5% and operating margin to 28%. This resulted in record cash generation from operations of $67 million. Mark will soon discuss these highlights and our outlook for Q4, which was negatively impacted by over $10 million in JetStep lithography pushouts due to customers' capacity needs. But first, we'll review the third quarter highlights, starting with our specialty device and advanced packaging markets, where AI packaging revenue led the inspection business with growth in high-bandwidth memory offsetting a little less than projected decline in 2.5D logic packaging. Looking ahead, we expect to see increases in volume for logic packaging as well as an increase in capital intensity for process control to address the growing complexity and need for higher process yields. This includes new demand for our front-end metrology systems, particularly for films and acoustic metrology. In fact, advanced packaging was one of the largest markets for our metrology business this quarter. Revenue from power devices was the second largest market and also set a quarterly record. Growth came from both metrology and inspection process control systems our power semiconductor customers continue to focus on driving yield improvements, especially with challenges associated with transitioning to larger wafer sizes, even as end demand remains temporarily muted. We expect this focus on yield to continue into next year and at least sustain this record level of revenue. Inspection has clearly been a strong driver for us, and we're expanding our core inspection technology with the tuck-in of Lumina instruments announced earlier today. Lumina is a small company with a very rich background in laser-based inspection technologies used in unpatterned wafer and emerging panel applications. Their patented technology will allow us to simultaneously scan top, bottom and subsurfaces, with sensitivities below 100 nanometers for silicon carbide and gallium nitride applications. We believe this technology will also be important for inspection of glass substrates and carriers used in 2.5D and 3D advanced packages where detecting surface defects, buried inclusion defects and residues on the silicon or glass core are important to yield. This new capability is complementary to our pattern inspection technologies with no overlapping capability. And as a result, we expect the new applications will expand our SAM by $250 million annually in the next three years. In addition to Lumina Instruments, we announced the acquisition of the lithography business from Kulicke and Soffa. With this tuck-in, we had an incredibly talented team with over 200 man-years of lithography experience, 24 issued patents and eight more pending. Based on Eindhoven, we believe this team and technology will contribute to the acceleration of our JetStep lithography road maps and extend our competitive differentiation. We expect the combination of these two small tuck-ins to be accretive to earnings within 12 months and generate up to $100 million in annual revenue in the next three years. For reference, revenue today is negligible. While we strengthen our opportunities in the specialty and advanced packaging markets, we also see a recovery from the advanced nodes. As expected, we saw growth in logic, DRAM and NAND in the quarter. In addition to our strong position in OCD metrology for these markets, we're seeing solid traction with our film metrology. This year, we're on pace to grow films metrology by over 50% versus 2023. Now I'll turn the call over to Mark to review our financial highlights and provide fourth quarter guidance.

Mark Slicer, CFO

Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we exceeded the midpoint of our revenue and EPS guidance, executing towards the high end of these ranges due to better-than-expected demand for advanced packaging for ad devices, gate all around investments in advanced nodes and stronger software services within the quarter. We achieved another record operating cash flow of $67 million for the second straight quarter. Operating cash flow yielded 27% and represents more than doubling of operating cash during the same period last year. Third quarter revenue of $252 million was up 4% versus the second quarter and up 22% versus the prior year. The third quarter EPS increased 2% sequentially to $1.34 and up 40% versus the prior year. Looking at the quarterly revenue by markets, our biggest market remains specialty devices and advanced packaging, which was down slightly from Q2 with quarterly revenue of $161 million and represents 64% of revenue. Our biggest sequential increase was advanced news, which had revenue of $42 million, increased 32% over Q2 and represents 17% of revenue. Software and services with revenue of $49 million increased 5% over Q2 and representing 19% of revenue. We achieved 55% gross margin for the third quarter at the high end of our guidance range of 53% to 55%, driving more than 100 basis point improvement over the second quarter and over 300 basis point improvement since the beginning of the year. Third quarter operating expenses were $67 million, exceeding the high end of our guidance range as we accelerated our ramp in R&D investments within the quarter, extending our product capabilities in integrated metrology and technology differentiation to expand our 3D metrology for advanced packaging applications. For operating income of $70 million was 28% of revenue for the third quarter compared to 27% from the second quarter. We achieved quarter-over-quarter operating margin improvement with three consecutive quarters totaling approximately a 300 basis point improvement since the start of the year. Our net income performance also 26% of revenue was supported by favorable investment income resulting from our increased cash balance. Now, turning to the balance sheet. We ended the second quarter, sorry, we ended the third quarter with cash and short-term investments of $855 million, achieving operating cash flow of $67 million and converting 100% of our operating income into cash. Inventory ended the quarter at $308 million, down $12 million versus Q2 and achieving five quarters of sequential decline. We expect further inventory reduction of another $8 million to $10 million for the fourth quarter as we experience technical difficulty.

Operator, Operator

This is the operator. Please stand by. We are experiencing technical difficulties. Please stand by. I will place you back on the music hold, while we reestablish the feed line. You are holding for the line to innovation. We are just experiencing a brief interruption in today's conference. Please continue to stand by, and the conference should resume momentarily. Thank you for your patience.

Michael Plisinski, CEO

Operator?

Sidney Ho, Moderator

You may continue the conference sir.

Michael Plisinski, CEO

Okay. Well, thank you very much. Hopefully, everybody is still on the line, and I will finish my prepared remarks, and we'll go to questions. So in summary, we're aligned to several diverse end market drivers. And we're well positioned to leverage our portfolio of inspection metrology and software to solve manufacturing customers' high-value problems. Through close customer collaborations, we have many exciting new product launches such as 3D bump metrology, which we recently delivered to a leading memory manufacturer, and void inspection for wafer bonding applications that we expect to ship this year. In addition to the organically developed technology, our recent tuck-ins further enhance our portfolio of synergistic technologies and the markets that we can pursue. Combining the outlook for the end markets we're serving with our new product opportunities, we expect another solid year of growth in 2025. And that concludes our prepared remarks. Lisa, please open the call for questions from our covering analysts.

Operator, Operator

Thank you, sir. Our first question comes from Brian Chin with Stifel.

Brian Chin, Analyst

Hi there. Thank you. I have to ask a few questions. This fiscal year, Mike, I think there may have been a gap between where you picked up and where Mark may have left off regarding some of that content. But does that make sense?

Michael Plisinski, CEO

Oh, anyways back on script here. The so TSMC effectively ran out of space to expand its COO's footprint this year, but the demand is very high. And so I was kind of curious, what do you currently see as timing for when that activity could pick up again? And when you combine that with the visibility you have on gate all around expansion, how confident are you that Onto revenue will show further improvement from existing levels moving into the first quarter or first half of next year? Good question. We're very confident that our revenues will continue to grow as we head into the first half of next year. This growth is driven not only by the overall gate expansion but also by the DRAM capacity increases we're seeing to support the enterprise server market, which is beginning to pick up, as well as the increased demand for HBM. We see both factors contributing to our outlook. Regarding TSMC, they have been quite aggressive in adding capacity. We mentioned earlier that we anticipate a significant increase in the fourth quarter, although the HBM segment may be somewhat subdued in terms of AI packaging during that time. They are already beginning to secure additional capacity, and we expect this strong trend to continue into the first half of next year.

Brian Chin, Analyst

Okay, got it. That's helpful. So it sounds like customer readiness to take equipment is a bit earlier than expected. Regarding the $10 million lithography delay, was it driven by the customer? Can you provide more details on that? When has that been rescheduled?

Michael Plisinski, CEO

We're not clear on the reschedule. So that's still being discussed. But yes, it was customer-driven based on their needs. The tools are ready to go.

Brian Chin, Analyst

Okay, I understand. I have one more question on a broader level. KLA mentioned during its earnings call that they are optimistic about the intensity of process control, especially at TSMC as that customer transitions from high-volume production. They also expressed confidence that due to the increased process control intensity, they would surpass WFE growth in 2025. Considering this high process control intensity for both gate-all-around expansions and advanced packaging, how confident are you that you'll again exceed WFE growth in 2025 as you did in 2024?

Michael Plisinski, CEO

Well, it depends on what you're expecting WFE to be. But if it's in this 5% to 10% range, which is where I think most of the consensus is landing, then we're highly confident in outperforming those numbers. For the same reasons, and I did talk about increased process control intensity, especially in the area 2.5D logic or AI packaging, based on the complexity of the process as well as the needs for much better yields. These are very expensive devices. And any yield issue across any of the products is going to drive a pretty expensive loss. So yes, there's a lot of process control intensity. And yes, we're seeing that as well. And they're still learning. So a lot of the capabilities of our Dragonfly with the many different sensors. We see the customers working with us to combine different sensors to find the solutions and metrologies that don't exist today and any other tool. So there's a lot of learning that's going on through our collaborations with the customers.

Brian Chin, Analyst

Thanks. I appreciate that. I requeue for any follow-ups. Thanks.

Operator, Operator

And our next question comes from Vedvati Shrotre. Please go ahead.

Vedvati Shrotre, Analyst

Hi. Thanks for taking my question. So the first thing I wanted to ask about is, last quarter, you had talked about volume purchase agreements for gate or around nodes. I think they were roughly $120 million. Can you give us an idea or a sense of how that splits out between customers given that some of the leading-edge customers are now facing issues with their gate or around transition. So has your visibility on those VPAs changed? Is there any conversation changes where you may not get that whole $120 million?

Michael Plisinski, CEO

Not any major degree. No. In fact, we continue to work off some of that VPA, there's still quite a bit left for 2025 and our backlog continues to strengthen and look relatively good across the board. So no, I would say that, yes, there's certainly some movement by some customers, but our position remains strong and strengthening, I should say.

Vedvati Shrotre, Analyst

Is it primarily because of the leading foundry customer being strong? Is that a way to think about it?

Michael Plisinski, CEO

Yes, that's one, but we did mention that the number we talked about were two customers, and both look still strong.

Vedvati Shrotre, Analyst

Okay. Understood. So, now maybe on changing tracks on the HBM kind of a ramp. What's the visibility you have on the HBM capacity additions? Like one of the things Teradyne pointed out on their call, they're seeing HBM capacity additions could be muted next year as the growth for Teradyne's HBM revenues could be muted next year. What is your sense or visibility into how that HBM piece of the business goes into the trajectory of that business into 2025?

Michael Plisinski, CEO

I mentioned that we are experiencing a significant increase in capacity, essentially doubling on the 2.5D Logic side. Last quarter, we discussed the growth of HBM, which would contribute to an expected rise in HBM. Additionally, there is a greater intensity and a higher number of HBM around each GPU for the newest devices. However, it's important to note that we have not yet seen any movement regarding HBM expansion. While I believe that some form of expansion will be necessary to support the new logic coming in, it remains unclear at this point. There may be some caution among the key players as they assess market dynamics, particularly in determining which companies will gain market share from major end customers, leading to a prudent approach in capacity expansions. This cautious behavior in the HBM market is evident right now.

Vedvati Shrotre, Analyst

Right. That's fair. And then the last one I had was on the power semiconductors, could you help us on sort of the size of that revenue opportunity for you given that you're seeing a big downturn in the auto market, but your inspection revenues continue to be strong on the power side, it would be great if you could provide what's the disparity there? What continues to drive your revenues versus we're seeing CapEx cuts across the board.

Michael Plisinski, CEO

Yes, I have mentioned in the last couple of quarters that the focus is on driving yields and achieving higher yields. There are some changes in wafer sizes, such as transitioning from 6-inch to 8-inch silicon carbide and from 8-inch to 12-inch GaN, which can affect yields and necessitate improved process control capabilities. We are observing some of these changes. Additionally, it is quite well known that overall yields are currently not very high. Therefore, customers looking to increase their output or prepare for higher output are more inclined to focus on improving yields rather than just adding capacity, which would lead to waste. This approach ultimately enhances their profitability when they do ramp up production.

Vedvati Shrotre, Analyst

So how should we think about the opportunity for you as in kind of the size of the business? Or any color there would be helpful.

Michael Plisinski, CEO

Well, we don't break it all down there, but it's becoming one of our top markets behind AI packaging in the specialty and advanced packaging market. So I think it is number two in that space.

Vedvati Shrotre, Analyst

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

Operator, Operator

And we'll move to our next question from Edward Yang with Oppenheimer.

Edward Yang, Analyst

Hi, Mark. Congrats on the impressive quarter. I wanted to delve a bit deeper into your outlook for 2025. You're anticipating continued growth there, outpacing WFE. This year, you're projecting revenue growth of around 20%, significantly higher than WFE's growth this year. Considering all the various factors involved, what gives you confidence or less confidence in this prediction? Also, can you provide insight on whether there are any reasons to expect a significant acceleration or deceleration in growth from your 2024 run rate?

Michael Plisinski, CEO

I believe there will be significant growth, particularly in advanced nodes. We've seen some stability and now have increased confidence in DRAM, which is contributing to our progress in advanced nodes. We expect this area to continue growing well. The AI packaging sector, along with advancements in process control intensity and volume, is creating new opportunities. We'll also monitor the situation with HBM to see if it remains flat; if it doesn't, we anticipate considerable growth. Additionally, regarding power semiconductor performance, we aim to maintain our record levels, which suggests we should exceed and set new records. This will act as a foundation for our growth as we approach 2025.

Edward Yang, Analyst

And just to clarify, when you say accelerate, I mean, do you mean accelerate off of a 20% revenue growth rate?

Michael Plisinski, CEO

Yes, that's a good point. I'm not suggesting that we would grow beyond 20%. I should clarify that we will not accelerate.

Edward Yang, Analyst

One of your larger foundry customers signed an advanced packaging deal with an OSAT in Arizona earlier this month. Does this have any relevance to your order book? Additionally, can you speak to the broader ability of your customers to place tools at this point? It seems like things are loosening up a little bit. Is space still a bottleneck?

Michael Plisinski, CEO

Things are loosening up, and new capacity is becoming available. However, even after signing that deal, there are timelines for transferring, qualifying, and bringing in tools, which are currently in process. There isn't an immediate launch. This is all part of addressing the current capacity bottlenecks. Additionally, there are actions being taken by that large customer, both internally and regarding discussions about the Intel purchase. In my prepared remarks, I mentioned that in Q4, we expect a significant increase for the 2.5D logic packaging, which we anticipate will remain strong in the first half.

Edward Yang, Analyst

And just a final question maybe for Mark. I saw the SG&A ticked up a little bit sequentially. And is that a good run rate going forward? Or was there any extra spending in there that impacted the quarter?

Mark Slicer, CFO

Yes. I believe our objective is to keep total operating expenses consistent with or better than Q3. I would suggest using the Q3 run rate for Q4 in my prepared remarks, which may not have covered everything. Our aim is to create offsets for the costs associated with the tuck-ins in Q4, so we want to maintain those levels or improve upon them in Q4.

Edward Yang, Analyst

Thank you.

Mark Slicer, CFO

Thanks.

Operator, Operator

And we'll move to our next question from Mayor Popuri from B. Riley Securities.

Unidentified Analyst, Analyst

Hi there. I'm actually on for Craig Ellis. But you mentioned packaging pickup in the fourth quarter. Is that kind of related to the increased complexity needs as we move into this RDL-based packaging, or is it more to do with just general volume increases? And if it's to do with this LDLRDL-based package increase, is that a trend that we can expect to continue as RDL picks up over the incumbent.

Michael Plisinski, CEO

I believe the increase in complexity comes from two main factors. Firstly, they are implementing some new processes that have been discussed. Secondly, there is potential for improvement in yields. They are also examining factors that might be affecting yield and how to measure them because you cannot address issues you cannot identify. Therefore, it’s about helping them understand what is influencing yields so they can make necessary adjustments. This aspect is also relevant. Additionally, I mentioned the extensive capabilities of the Dragonfly platform, which can utilize various types of sensors and inspection methods to integrate data and reveal insights that might not be visible with any single tool. This allows for new opportunities to enhance yields.

Unidentified Analyst, Analyst

Okay. Yeah, right. No, that's a great answer. So I have a question on the flies, the Dragonfly and Firefly. Obviously, they're really capable tools in 2D metrology. But you've also pointed out before how they're incredibly capable in the 3D inspection space. Do you see that kind of picking up share? I know you mentioned one memory customer who wanted it for these 3D inspection processes. Do you see that 3D inspection aspect to these tools picking up?

Michael Plisinski, CEO

There is localized 3D capability which is very powerful, and we use it for high aspect ratio, 3D, very high precision metrology. This is part of the 2D applications. What I was referring to was 3D bump metrology, which is still in its early stages. It is too early to predict how significant this could be, as it depends on the adoption rate and our production performance. The tool we shipped is an evaluation tool. Based on the data exchanges and the wafers we have processed for them, they are now looking to take the tool on-site to validate it in production, and hopefully, we can start to see revenue from it. This process could take three to nine months at most.

Unidentified Analyst, Analyst

All right. Got you. Yes, I hope that goes well. And then about those volumes.

Michael Plisinski, CEO

We expect to ship additional tools in the fourth quarter to more customers for evaluation.

Unidentified Analyst, Analyst

And that's the evaluation on 3D?

Michael Plisinski, CEO

Yes.

Unidentified Analyst, Analyst

Okay. Great. And again, about those volume purchase agreements, so we were talking about last quarter. I forgot exactly who asked this question, but there was some talk about how they might convert into kind of larger agreements in the future. Is there any progress there in terms of converting these initial agreements into perhaps larger partnerships going forward?

Michael Plisinski, CEO

I believe I mentioned that we anticipate additional revenue throughout the year. Currently, they are still engaged in this process. I expect they will have to navigate through these challenges, and we will see the outcomes in the latter half of the year. That remains my estimate. If I had to lean one way, I would suggest that they will likely require some extra resources in the second half rather than not.

Unidentified Analyst, Analyst

Okay. Thanks so much. Yeah. That’s all I have. Thanks for ...

Mark Slicer, CFO

My pleasure.

Operator, Operator

And our next question comes from Charles Shi with Needham.

Charles Shi, Analyst

Great. So you guys got a cut off on the big chunk of the prepared remarks. We actually didn't hear. So maybe, Mark, can you kind of repeat what the Q4 guidance line by line, what was inspection your prepared remarks because I think it's kind of important, if you can repeat for us, that would be great. Hopefully, this doesn't count as a question.

Mark Slicer, CFO

Thanks. To start, inventory ended the quarter at $308 million, down $12 million from Q2, marking five consecutive quarters of sequential decline. We anticipate further inventory reduction of $8 million to $10 million in the fourth quarter, aiming to finish below $300 million by the end of 2024, which represents a $50 million drop from our peak inventory levels in 2023. For the fourth quarter, we currently project revenue to be between $253 million and $267 million, with gross margins expected to fall between 54% and 55%. Our inventory remains above our target, which is hindering our efforts to reduce supply chain costs as we focus on decreasing existing component levels. Regarding operating expenses, we expect these to be around $66 million to $68 million as we aim to keep them flat or lower compared to Q3, optimizing R&D to limit the cost impact of the tuck-ins we previously announced. For the fourth quarter, we expect our effective tax rate to be between 15% and 16%, and we anticipate our diluted share count to be about 49.8 million shares. Based on these assumptions, we expect our non-GAAP earnings for the fourth quarter to be between $1.33 and $1.48 per share. Now, Charles, you can ask your real question.

Charles Shi, Analyst

Yes, thanks. I'm trying to connect the dots here, Mike. Over the last three months, two of your leading-edge customers have faced significant challenges, which have been highlighted in the news, and there's potential pressure on their capital expenditures. We know that this has negatively impacted your quarterly earnings over the past year and a half, and a lot of your sales are tied to these two customers. Am I understanding this correctly? It sounds like some delays are related to them. Is this connected to the capital expenditure costs that they might be experiencing?

Michael Plisinski, CEO

I’m not sure which two customers you’re referring to, and it’s not crucial. However, if you look at the substrate market related to lithography tools, there were significant bottlenecks that many enterprise server manufacturers publicly complained about due to a shortage of substrates. This led to a substantial expansion through 2022 and into early 2023. As we have seen, the markets have softened, particularly in enterprise high-performance computing. NVIDIA is currently a major player in AI, which impacts wafer capacity. That excess capacity is beginning to be utilized, and while we do see some improvement, it’s from a low starting point. This is reflected in my earlier comments about the strength in DRAM, which is being driven by some enterprise customers and hyperscalers as enterprise compute begins to recover. I’m not certain if this fully addresses your question, but I’m unsure what you’re looking to clarify.

Charles Shi, Analyst

Yes. Okay. Okay. So it sounds like you think the pushout is probably more of the cyclical factor at play rather than anything that's structural. I mean those two customers are probably having more of a structural problem than the cyclical problem. That was what I'm trying to figure out.

Michael Plisinski, CEO

Yes, I think that's correct. Please continue.

Charles Shi, Analyst

I want to discuss the AI packaging business. In the previous quarter, you mentioned that in the second half of this year, it would be approximately 10% lower than the first half, when considering both 2.5D and HBM. From what you've indicated, it seems that in Q3, HBM performed reasonably well, but 2.5D saw a decline. Looking ahead to Q4, while 2.5D is recovering, HBM remains somewhat subdued. Do you still consider the 10% decrease from half to half to be accurate, or do you anticipate any variations in that estimate based on your current observations?

Michael Plisinski, CEO

Yes, that's a good question. It was mentioned in my prepared remarks, which seemingly no one heard. I did say that it's been cut in half. If I had originally indicated a decline of 5% to 10%, it's now about half of that in terms of the decrease we projected.

Charles Shi, Analyst

It's roughly 5% lower compared to the first half level. As for the first half of 2025, you mentioned that you expect it to be higher than the second half of 2024 based on order intake and customer indications. Do you still believe that the first half of 2025 will be higher than the second half of 2024, while also waiting to see if it can surpass the first half of 2024?

Michael Plisinski, CEO

This is for AI packaging specifically?

Charles Shi, Analyst

AI packaging, yes.

Michael Plisinski, CEO

Yes. I think for logic, it's going to be relatively healthy. So maybe at the same level. I'd have to double check. But the real question mark is the HBM piece. As we mentioned, we see that muted right now though, when we look at the expansion on the 2.5D logic side, it's hard not to expect expansion on HBM to keep up.

Charles Shi, Analyst

Got it. Thanks, Mike.

Michael Plisinski, CEO

You’re welcome, Charles.

Operator, Operator

And we'll move to our next question from Mark Miller with the Benchmark Company.

Mark Miller, Analyst

Congrats on your another one quarter. I was just wondering if you give us a feeling for what you're expecting in China and Korea next year.

Michael Plisinski, CEO

In Korea, as I mentioned, the growth in DRAM suggests that Korea will be involved. Regarding China, we are already relatively derisked, so I anticipate being in the 10% to 15% range there as well, and I expect to remain in that range.

Mark Miller, Analyst

So 10% to 15% of sales from China next year?

Michael Plisinski, CEO

Yes.

Operator, Operator

And our next question comes from David Duley with Steelhead Securities.

David Duley, Analyst

Thank you for taking my question. My first question is about the NAND market. Your significant Korean HBM customer is also involved in that market, and I believe they are reporting a 20% increase in their SSD business sequentially and a 430% increase year-over-year. While there aren't new wafer starts being added, there is a significant upgrade cycle happening to increase the number of layers. I was curious about how you plan to participate in that.

Michael Plisinski, CEO

We expect NAND to grow for us in 2025, and while it will appear impressive on a percentage basis, it comes from a very small base. Therefore, we do not anticipate a recovery in NAND. As we've mentioned previously, the focus is on high level, high stack NAND for supporting AI devices and AI server farms with high-speed data. That's the main outlook we have. In terms of higher layers, it will require more of our process control, but not significantly so. Consequently, the capital intensity will involve a few extra steps, which is where aspect metrology becomes important. However, we do not foresee any substantial increases in our OCD metrology as a result.

David Duley, Analyst

Okay. My second question is about the high bandwidth memory market. I understand that your customers are not providing much visibility into when they might expand their capacity. However, I think you've pointed out that the number of chips per GPU is likely to double with Blackwell compared to Hopper. The stacking will increase from 8 to 12, and Micron is ramping up production. I also noticed that Samsung recently announced they are close to finalizing their agreement with NVIDIA. I'm curious why you aren't more optimistic about growth in that market, considering the increase in unit volume and the addition of more customers. Could you elaborate on this?

Michael Plisinski, CEO

Well, what makes me positive is orders. So I see all the activity and I like our position, and we're trying to expand our position with the work we're doing on the 3D metrology. So going after more, let's say, wallet share. But we're not seeing the orders yet. And as I mentioned, I think earlier, that there's some conservatism with these customers. If everyone is ramping and qualified, they may not know yet what share they're going to have and how much they want to expand in order to serve that share. I'm sure NVIDIA is working them all against each other. So I don't know if that's just a guess. But yeah, when I start seeing orders, I'll get a lot more confident. What we can do is look at the model and say, hey, the capacity we see is not matching the demand that 2.5D upgrade or expansion is going to need. So something has to give.

David Duley, Analyst

And you keep highlighting how all the CoWoS capacity expansion should mean that HBM capacity expands, I think I understand what you're saying, but could you just elaborate a little bit more on that?

Michael Plisinski, CEO

If the markets were perfectly balanced and we were to double the 2.5D Logic side, the amount of HBM surrounding it would increase, perhaps by a factor of two. This would imply a fourfold increase in HBM required, assuming everything is in balance. However, some additional capacity has already been added, and not everyone had early access to the NVIDIA supply chain. The question then becomes who will benefit from this and how much excess capacity exists. We attempt to model these situations, but it appears to us that some expansion of capacity will be necessary, regardless of our analysis.

David Duley, Analyst

Yes. Okay. And two final questions. What are your lead times for your HBM inspection tools? And the second question is a lot of this CoWoS capacity that's going to come online is not necessarily going to come online at TSMC. If you listen to ASC, they're ramping up as fast as they can as TSMC's partner to expand CoWoS. There's another question earlier about Amkor, but that's a couple of years out, I would think. Do you benefit from capacity expansions at the Taiwanese OSATs to the same degree that you would benefit from capacity expansions at TSMC for 2.5D packaging?

Michael Plisinski, CEO

If they follow the same process, that remains to be seen. We are experiencing benefits, seeing engagement, and receiving orders. However, it's not currently at the same level as the competitor you mentioned. They are just starting to ramp up. I think the outcome is uncertain, but it's hard to believe anyone will achieve better yields or processes than TSMC. Therefore, I expect at least similar intensity in capital and process control.

David Duley, Analyst

Okay. Thank you. And the lead time?

Michael Plisinski, CEO

Lead time. Well, I was not going to answer that anyway. But I would say, we're looking at 3 months or so. It's definitely increasing. The volume has gone way up. But as we've always mentioned, we build to a forecast to the extent we have good forecast data, we can adjust lead times. But things are ticking out a little bit because of the such strong demand we have right now.

David Duley, Analyst

So with that kind of short lead time, obviously, if a customer came in and wanted a bunch of tools, you have the capacity to meet that order?

Michael Plisinski, CEO

Yes, we put in a lot of effort to ensure we can meet demand. No one anticipated that we would need to double the output capacity for Dragonflies this year, but that’s exactly what we have accomplished. Our teams are excellent at being innovative, shortening cycle times, collaborating with our supply chain partners, and ensuring we meet our customers' needs.

Mark Slicer, CFO

And as we've commented before, we have the capacity within our manufacturing to do that.

Operator, Operator

And we'll take our last question in queue from Brian Chin with Stifel.

Brian Chin, Analyst

Hi there. It wasn't really the question, but what I was going to suggest or maybe just put out there is that, I appreciate Mark repeating the complete fourth quarter guidance. And I was going to ask, Mike, if you had substantive commentary after Mark's guidance. I think we missed pretty much all that. So if there was something there, it might be worth repeating, if not, then no bother. But I just wanted to throw that out there.

Mark Slicer, CFO

Sure. Yes, Brian, we're just aligning to where Mark's prepared remarks were cut off. Give us a moment.

Michael Plisinski, CEO

Yes. So essentially, I had said that demand for process control and AI packaging gate all around power semiconductors remains quite strong. Specifically with AI Packaging, we see improvements over our prior second half 2024 projections, and this I've already mentioned. So that I'll skip. And I mentioned that the added growth in the AI packaging is offsetting the $10 million pushout that we had expected from the lithography. So in fact, we would have been a significant beat. And then I mentioned that the market leader in the AI logic packaging recently announced a doubling of 2.5D logic capacity for next year, though not yet certain, we would expect to see orders supporting HBM memory to also improve to support this growth in logic, again, something we discussed. I mentioned that the growth in high-bandwidth memory has taken a meaningful amount of capacity away from standard DRAM as HBM requires roughly three times more wafer capacity. And this, in turn, is contributing an expansion in advanced DRAM to support a recovery in enterprise servers and investments by hyperscale customers which we expect to see or benefit from more meaningfully in the first half of 2025.

Brian Chin, Analyst

Okay. Yes, yes, I think you were able to incorporate some of that. No, I appreciate that. Maybe just maybe one last question against that. I know you don't dictate your customers' intake and demand and shipment timing. But to the extent that you kind of can have some I guess, modulation here where kind of one customer is bigger, another customer maybe subsides for a quarter or two or whatever the case is. I guess that alleviates sort of your manufacturing upward pressure on your manufacturing footprint. To the extent you may have HBM stronger in the same period, the COOs is strong. Do you have that ability to flex upwards in terms of higher output in manufacturing?

Michael Plisinski, CEO

Yes, we absolutely do. We aren’t even operating at full second shifts, much less third shifts. Just that alone, without making any other improvements, would allow us to significantly increase capacity. We are also working on other strategies, such as collaborating with supply chain partners. We are transferring some of the less skilled subassemblies to partners, which helps us free up floor space and allows our highly trained technical staff to concentrate on more complex integrations. So yes, we definitely have the capacity to meet our customers' needs as they grow.

Brian Chin, Analyst

And maybe just to clarify one comment you made. I think you said backlog continues to strengthen. So it sounds like you're running a positive book-to-bill with orders ahead of revenue across the business.

Michael Plisinski, CEO

I don't have the exact figures in front of me, but I did mention that the backlog has strengthened. We don’t usually report on it, but I anticipated that people would have questions about the VPA and how we are managing it. Despite working through the VPA, we continue to grow our backlog, which indicates that we still see strong demand without much softening in the areas we are currently focusing on.

Brian Chin, Analyst

And I'm not even considering the fact that you have that VPA and HBM as part of that. I guess that does give you some reassurance that some of that activity is still expected next year?

Michael Plisinski, CEO

Yes, for sure. I didn't say it would go to zero. HBM is still going to be there. I just think it could be even stronger based on the demand supply models we have between the 2.5D Logic and the HBM. So hopefully, there's some upside we can talk about in future quarters, yes.

Operator, Operator

And ladies and gentlemen, this concludes today's Q&A session. I'd like now to turn the call back to Sidney Ho for any additional or closing remarks.

Sidney Ho, Moderator

Thank you. We will be participating in a number of investor conferences throughout this quarter. We look forward to seeing many of you there. 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. Lisa, please conclude the call.

Operator, Operator

And ladies and gentlemen, this concludes today's call. Thank you for your patience and your participation. You may now disconnect.