Onto Innovation Inc. (NYSE:ONTO) Q1 2025 Earnings Call Transcript

Onto Innovation Inc. (NYSE: ONTO ) Q1 2025 Earnings Call Transcript May 8, 2025

Onto Innovation Inc. beats earnings expectations. Reported EPS is $1.51, expectations were $1.47.

Operator: Good day. And welcome to the Onto Innovation First Quarter Earnings Release Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sidney Ho. Please go ahead.

Sidney Ho: Thank you, Rachel, and good afternoon, everyone. Onto Innovation issued its 2025 first quarter financial results this afternoon shortly after the market closed. If you did not receive a copy of the release, please refer to the company’s website where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Mark Slicer, Chief Financial Officer. I’d like to remind you that the statements made by management on this call will contain forward-looking statements within the meaning of federal securities law. 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 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 turn the call over to our CEO, Mike Plisinski. Mike?

Michael Plisinski: Thank you, Sydney. Good afternoon, everyone, and thank you for joining us on our call today. Onto Innovation set another revenue record for the quarter, delivering $267 million in revenue. This growth was driven by expansions in both the advanced nodes and packaging to support growth of AI compute engines and increasing investments in cloud and enterprise servers, both seemingly undampened by market concerns over tariffs. However, the announced tariffs by the Trump administration are impacting Onto Innovation somewhat uniquely because nearly all of our products are manufactured in the United States. Naturally, this negatively impacts our incoming costs due to the Trump administration’s tariff policies, as well as the cost to export our tools from the potential of retaliatory tariffs imposed by other countries.

In response, we’re accelerating existing strategic programs to improve business continuity and resiliency by installing manufacturing capability in Asia. Due to the incredible cooperation between our team and Asian manufacturing partners, we expect shipments to begin in the second half of 2025 and to have roughly half our product volume capable of being shipped out of these new facilities by early 2026. We expect to realize margin improvements from this effort in the second half of 2026. Once completed, we’ll be significantly more competitive while providing greater levels of certainty to our global customers. Now, let’s review our first quarter business highlights, starting with the advanced nodes. Our metrology business is benefiting from increased process control capital intensity of data all around and memory, as well as the performance and cost of ownership advantages that our optical metrology suite is delivering to our customers.

This has led to record quarters for our newest products, Iris films Metrology and IMPULSE 5 Integrated Metrology, while Atlas OCD Metrology nearly surpassed the quarterly record set in Q1 of 2022 before we were impacted by U.S. trade policy with China. As we anticipated, revenue from our specialty device and advanced packaging markets declined from the record fourth quarter. Recently, a leader in 2.5D packaging for AI commented that the long-term outlook of AI has improved as new AI models are expected to lower barriers to entry and drive greater adoption of compute engines. Similarly, HBM device makers are preparing for higher memory content, as well as the transition to HBM4 next year. These expanding markets are also driving new tool requirements, including greater precision, sensitivity and throughput, in order to produce devices with higher yields and lower costs.

In response to these new requirements, during the last two quarters, we doubled the performance of our inspection tools, but this did not address 100% of the new needs. So together with our customer, we began accelerating an existing program for a new inspection platform capable of providing significantly better sensitivity and higher performance. Wafer demos will start this quarter and we expect to ship evaluation units later this year. Though disappointing in the short-term, in the long-term, we believe this new technology may also open up opportunities in the front-end macro inspection market where we have not previously competed. Now, turning from 2D interconnects to 3D interconnects, we’re making steady progress moving through the rigorous process qualification of our 3Di technology.

In the first quarter, 3Di bump metrology was selected by two more OSATs for applications where better throughput and repeatability was required. We also shipped additional evaluation units to two leading memory manufacturers in the quarter. Besides bump metrology, the other challenge in future 3D packaging is void detection for hybrid bonding applications. Our EchoScan System, which is a unique technology being developed for detection of yield-killing voids and bonding interconnects without the need to immerse samples in liquid, has demonstrated capability at a Tier 1 customer site on R&D test samples. We are now starting tests on production test samples where variation materials and multiple layers will further stress the technology. Currently, no other technology can find voids in these structures at this resolution, which we believe will be critical for yield control and HVM of hybrid bonding devices.

Further along the adoption curve, we have delivered many of our subsurface defect inspection tools to reduce sources of yield loss from cracks and voids in packaging for 2.5D and emerging hybrid bonding applications. We’re also adding customers outside of packaging to support similar needs in MEMS and power applications. And now I’ll turn the call over to Mark to review our financial highlights and provide second quarter guidance.

Mark Slicer: Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we had another record performance by the Onto team kicking off the year with $267 million in revenue, achieving the midpoint for revenue and at the high end of our EPS guidance range for Q1. First quarter revenue increased 17% versus the prior year, with first quarter EPS increasing 28% versus the prior year. We achieved a record operating cash flow of $92 million due to the continued discipline in all elements of working capital management. Looking at the quarterly revenue by markets, advanced nodes, which had revenue of $93 million, increased 96% over Q4 and represents 35% of revenue. Specialty devices and advanced packaging decreased 24% from Q4 with quarterly revenue of $129 million and represents 48% of revenue.

Software and services with revenue of $44 million decreased 5% compared to Q4, representing 17% of revenue. We achieved 55% gross margin for the first quarter in line with our guidance range of 54% to 56%, while improving slightly above 50 basis points over Q4. First quarter operating expenses were $70 million, just below the midpoint of our Q1 guidance range of $69 million to $72 million. Our operating income of $76 million was 29% of revenue for the first quarter. Now moving to the balance sheet, we ended the first quarter with cash and short-term investments of $851 million. Cash remained relatively flat to Q4 as we executed $75 million of shared buybacks within the quarter under our existing $200 million authorization. We achieved operating cash flow of $92 million, or 35% of revenue, and free cash flow of $84 million, or 31% of revenue, converting 100% of our operating income into cash.

Inventory ended the quarter at $293 million, up $6 million versus Q4. This increase was primarily due to accelerating targeted inventory receipts within the quarter to minimize potential impact -- tariff impacts. We continue to expect inventory to stay relatively flat for the second quarter and expect to maintain inventory levels at 1.6 turns to 1.8 turns for 2025. Now turning to our outlook for the second quarter, we currently expect our revenue for the second quarter to be between $240 million and $260 million. We expect gross margins will be 54% to 56%, which includes our current assessment of up to 75 basis points of headwind due to inbound tariffs if we are unable to offset within the quarter. We are actively working to mitigate the tariffs through our supply chain activity or optimization of our strategy to locate manufacturing close to our customers.

If successful, we will execute to the high end of our guidance range for gross margin in line with our stated objective of 50-basis-point improvement quarter-over-quarter. For operating expenses, we expect to be between $72 million to $75 million as our annual compensation elements occur within the second quarter each year. For the full year, we expect our effective tax rate to be between 14% to 16%. We expect our diluted share count for the second quarter to be approximately 49.3 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings for the second quarter to be between $1.21 per share to $1.35 per share. And with that, I will turn it back to Mike for additional insights into Q2 and further commentary on 2025. Mike?

Michael Plisinski: Thank you, Mark. For the second quarter, we anticipate revenue from the advanced node customers to decline moderately due to customers’ timing of gate-all-around investments, which we expect to resume in the second half of the year. We expect NAND and DRAM spending to remain steady. This reflects our strong market position not only in OCD but also in films and integrated metrology. In fact, by the second quarter -- by the end of the second quarter, we expect revenue from each of these product families will have already exceeded the full year revenue from 2024. In the specialty device and advanced packaging markets, we believe revenue will decline slightly. And as we discussed earlier in AI packaging, our customers are under tremendous pressure to improve factory yield and cycle times, necessitating higher throughputs and more sensitive 2D inspections.

We’ve significantly improved the productivity of our tools, but despite these improvements, some applications were not addressed by our platform. However, they will be targeted by our next generation platform, which as mentioned has the added benefit of potentially opening new opportunities in the front end. As our customers’ expansion plans and tool allocations have become clearer in the last quarter, we have some clarity into the second half of the year, which we lacked previously. For advanced nodes, we remain confident in broad-based expansions, although we anticipate a meaningful pause in Q3 from memory, making Q3 a low point for the year. We will take full advantage of this pause to allow our team to focus on the successful manufacturing ramp in Asia as previously described.

We expect revenue growth to resume in the fourth quarter. Now looking beyond 2025, advances in AI and AI applications at the edge through lighter advanced models could lead to an entirely new wave of smarter, more integrated mobile devices and cloud applications, fundamentally changing how we interface with our environment. Investments in AI servers and cloud infrastructure, including new memory and gate-all-around transistors, will play a crucial role in this transformation. We expect our new product innovations for 2D inspection, 3D metrology and optical metrology will be critical to enabling these new devices. And that concludes our prepared remarks. Rachel, please open the call for questions from our covering analysts.

Operator: Thank you. [Operator Instructions] And we will take our first question from Craig Ellis with B. Riley Securities.

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