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Edited Transcript of ONTO.N earnings conference call or presentation 2-Nov-20 9:30pm GMT

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Q3 2020 Onto Innovation Inc Earnings Call MILPITAS Nov 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Onto Innovation Inc earnings conference call or presentation Monday, November 2, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael Sheaffer Onto Innovation Inc. - Senior Director of IR, Corporate Communications & Marketing Research * Michael P. Plisinski Onto Innovation Inc. - CEO & Director * Steven R. Roth Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary ================================================================================ Conference Call Participants ================================================================================ * Carlin Joseph Lynch B. Riley Securities, Inc., Research Division - Research Analyst * David Duley Steelhead Securities LLC - Managing Principal * J. Ho Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector * Mark S. Miller The Benchmark Company, LLC, Research Division - Senior Equity Analyst * Thomas Robert Diffely D.A. Davidson & Co., Research Division - MD & Senior Research Analyst * Yu Shi Needham & Company, LLC, Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everyone, and welcome to the Onto Innovation Third Quarter Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mike Sheaffer. Please go ahead. -------------------------------------------------------------------------------- Michael Sheaffer, Onto Innovation Inc. - Senior Director of IR, Corporate Communications & Marketing Research [2] -------------------------------------------------------------------------------- Thank you, Ann, and good afternoon, everyone. Onto Innovation issued its 2020 third quarter financial results this afternoon shortly after the market closed. If you have not received a copy of this release, please refer to the company's website at www.ontoinnovation.com, where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Steve Ross, Chief Financial Officer. As is always the case, I need to remind you of the safe harbor regulations. Any matters today that are not historical facts, particularly comments regarding the company's future plans, products, objectives, forecasts and expected performance, consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These estimates, whether expressed or implied, are being made based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that these statements are subject to a range of uncertainties that can cause the actual results to vary materially. Thus, the company cautions that these statements are no guarantees of future performance. Risk factors that may impact Onto Innovation's results are currently described in Onto Innovation's Form 10-K report for the year ended December 2019 as well as other filings with the Securities and Exchange Commission. Onto Innovation does not update forward-looking statements and expressly disclaims any obligation to do so. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. As a reminder, a 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 Mike Plisinski. Mike? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Good afternoon, and once again, thank you all for joining us today. We will begin with a review of the highlights from the third quarter followed by Steve's review of our financial results. Before opening the call for your questions, I'll provide our outlook for the fourth quarter. So let's begin with the specialty device and advanced packaging markets, which made up 50% of our revenue in the third quarter. Demand from these markets surged 44% in the quarter, and our inspection business grew by over 20% from the previous quarter, while we added 12 new customers for both front-end and back-end inspection applications. These customers spanned a variety of markets and geographies, but they shared the same need for higher fidelity solutions for both 2D inspection and 3D metrology applications. In fact, our 3D metrology business is up over 60% in the first 3 quarters of 2020 over the same period in 2019. The growing importance of interconnect technology is accelerating the progression of geometries used in advanced packaging. As an example, several years ago, our largest customer in Taiwan announced a strategic focus on advanced packaging. And at that time, RDL geometries were roughly 8 microns and bump pipes were 50 microns. Within a few years, that quickly dropped to 2-micron RDL geometries and bump pipes below 20 microns. We expect that, that will be reduced by another 50% in the not-too-distant future. The tools that were good enough for process control even 2 years ago are simply not any longer. We see this dynamic playing out across each of the top 5 semiconductor manufacturers within this group. And within this group, we estimate our leading share increased by another 20% over the last 2 years. Likewise, process control requirements are increasing for higher-end packages integrated into the latest mobile devices. Once again, we see that trend benefiting Onto Innovation. And in the third quarter, revenue for front-end RF process control systems more than doubled, and we expect it to double again in the fourth quarter. We believe data fidelity is also why a leading supplier of time-of-flight sensors for high-end mobile devices recently selected our inspection solutions for both front-end and back-end process control applications. The need for higher speed interconnects will continue to accelerate adoption of advanced packaging across a growing number of markets, and we are ready with the technology and scale to support our customers and achieve their challenging manufacturing initiatives. Now in advanced nodes, portion of -- in the advanced nodes portion of our business, our customers are challenged by shrinking geometries, new materials and complex 3D structures. Our new metrology suite, coupled with our machine learning and fab-wide data analysis software, uniquely delivers the sampling rates required to achieve higher yields in volume production. The reaction to our new metrology suite has been extremely positive. In the third quarter, we've already taken orders and delivered Atlas V systems to an advanced memory customer and expect continued shipments to the customer in the fourth quarter. In addition, early versions of our Atlas V have been used by logic customers for the development of node generation as small as 2 nanometers. Logic customers have the smallest design rules and most complex structures such as gate all around, so they make a very challenging proving ground for our technology. As a result of this early work, we expect to deliver additional Atlas V systems to larger customers in the fourth quarter. We also introduced an industry-first IRCD technology, which is integrated into our aspect system for measurement of high aspect ratio structures. In high stack 3D NAND, these structures can be 100 nanometers in diameter, but 80x that in depth, making this an 80:1 aspect ratio an extremely difficult to measure, yet precise control of these deep channel holes is critical to performance. The aspect metrology can accurately measure these channel holds in a few seconds compared to the best X-ray speed of about 5 minutes per site. Because of this tremendous performance advantage, our aspect system was recently transitioned from R&D to production at a major memory IDM for final qualification of the technology. Within this production environment, we will further enhance the value by leveraging our Onto metrology ecosystem, which includes Atlas metrology and AI defract machine learning software. This new software enables advanced modeling of system spectra data and the integration of multiple data streams to improve time to solution and process robustness. AI defract is backwards compatible with our legacy platforms and since its release several months ago, we've already installed it on systems at 3 of the top 5 semiconductor manufacturers. We are beginning to see opportunities to add compositional analysis to our ecosystem through the Element system. In the third quarter, our Element metrology system was selected by a top equipment manufacturer to help develop next-generation transistor technology since X-ray is not effective for light elements like hydrogen and it's destructive for films larger than 100 angstroms. We see this as a great opportunity to explore and develop additional applications and system capability for our customers in a truly cutting-edge R&D facility. Finally, our new integrated metrology module, the IMPULSE 5, completed qualification at 2 of the leading CMP equipment providers, where we demonstrated best-in-class speed as well as measurement sensitivity for thinner films down to 20 angstroms and thickness. We've demonstrated throughputs that are up to 30% faster than existing integrated metrology systems on the market and already meet our customers' next-generation requirements. So you can see that in our first year as Onto Innovation, we've deepened our customer engagements in the advanced nodes by aligning road maps with our customers' future manufacturing challenges. We are leveraging our broad portfolio of sensor technologies, powerful data analytics and a passionate team to provide a significantly more compelling value proposition to customers across the value chain, and this is setting us up well for growth in the fourth quarter and in 2021. Finally, our strong financial model is fueling the scope and scale necessary to keep pace with the demands of a consolidating customer base. And with that, I'll introduce Steve to discuss more about our financial highlights. -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [4] -------------------------------------------------------------------------------- Thanks, Mike, and good afternoon, everyone. In my remarks this afternoon, I'll provide some details behind our Q3 results. I will also provide some insight on what we're seeing for gross margin and operating expenses going forward and then discuss our guidance for the fourth quarter. Our third quarter revenue was $126.5 million, slightly below the midpoint of our guidance and a decrease from $134.9 million in the second quarter. Quarter-over-quarter, our Q3 results were impacted by lower metrology sales, offset by strength in our inspection and wafer business and a second consecutive record quarter for our service business in spite of travel restrictions due to COVID-19. Breaking the revenue down by market, 50% of our sales were in our specialty devices and advanced packaging market. Within that market, we saw strength in -- with RF, MEMS and power customers. In addition, we saw strength from our advanced packaging OSAT customers recovering from weakness we saw in Q2. Software and services represented 28% of revenue, helped by the record service revenues that I just mentioned. And advanced nodes decreased in the quarter and represented 22% of revenues. Within advanced nodes, we saw weakness in both memory and foundry. Turning to gross margin, we continue to see improving margins even with the decline in revenue with third quarter gross margins at 54%, above our guidance and driven by product mix. This compares to a gross margin of 53% reported in the second quarter. As we look forward to Q4, we expect increasing metrology sales and supply chain synergies to be impacting our product margins and currently anticipate margins to be in the range of 53% to 55%. Now to operating expenses. Third quarter operating expenses was $45.1 million, below the low end of our guidance and a decrease from $47.7 million in the second quarter of 2020. The decrease was primarily the result of an increase in paid time off as employees began taking vacations, which in previous quarters were low due to COVID-19. In addition, research and development expenses decreased in the quarter as the company completed an additional milestone in a contracted R&D project, which lowered expenses in the quarter. And finally, we continue to control our head count as we focus on additional -- identifying additional synergies from the merger. For the fourth quarter, we view certain of the third quarter reductions to be temporary in nature, and as such -- such as the vacation time and contracted R&D, and as such, expected increase in operating expenses in the fourth quarter. Based on that, we currently anticipate Q4 operating expenses to be in the range of $46 million to $47 million and well below the $52 million quarterly 2019 run rate of the combined companies prior to the merger. Net income increased in the third quarter and was $19.6 million or $0.40 per share at the high end -- and at the high end of our guidance and 47% below -- above the street estimate of $0.34. In the 2020 second quarter, we reported net income of $20.8 million or $0.42 per share. Higher gross margin and lower operating expenses contributed to the strong performance. Moving to the balance sheet, which is on a GAAP basis. We ended the quarter with a cash position of $340 million, up $28 million from Q2. Year-to-date, our free cash flow is 24% of revenue, excluding the cash -- excluding cash used for merger expenses. Accounts receivable declined in the quarter and ended at $131.4 million, and inventory increased in the quarter to $185 million for anticipated Q4 sales increases. Now turning to the fourth quarter. We expect revenue to be in the range of $150 million, plus or minus $5 million. In this revenue range, we expect earnings to be between $0.55 and $0.66 per share. At the midpoint of the revenue, gross margin and OpEx guidance that I provided, we expect our Q4 results to be within the long-term operating model that we established Onto when we announced the merger last year. With that, I'd like to turn the call back to Mike for additional insights into our Q4 guidance. Mike? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Steve. We've never been more confident in our team and in our future. This confidence stems from our achievements this year with merger integration, managing through a pandemic and the traction of our new products in the market. We've just begun to see the fruits of this labor in the fourth quarter revenue, which at the midpoint of guidance will increase roughly 19% over the third quarter and 15% over the fourth quarter of 2019. This expected upturn is driven by increases from our logic customers and a modest recovery in memory in Q4, which we expect to continue into early 2021. So as expected demand for our current products -- so as expected, demand for our current products are strong, and we have shown the traction in our new metrology suite that we believe will provide additional growth opportunities later in 2021. I'm also very excited to announce the availability of the Iris metrology platform for planar films applications. Through close collaboration with the top 3 semiconductor manufacturer we successfully demonstrated the required performance ahead of our original time line. This top manufacturer already placed an order for a tool to ship this quarter, and we expect to ship a second tool in the first quarter and volume orders through 2021. With the addition of this tool to our portfolio, we have expanded our SAM and now offer one of the most comprehensive optical process control ecosystems in the industry. This suite is positioned to serve all of the segments in the roughly $1 billion optical metrology market. By leveraging our Discover platform and AI defract software, we are able to aggregate our unique data streams to solve critical dimensional and material challenges at speeds volume production require. This is another great example of how Onto Innovation is leveraging the breadth of our technology and the strength of our team to deliver new and compelling solutions to our customers. Likewise, we see our specialty and advanced packaging customers contributing strongly to the fourth quarter. Traditionally, demand from these more volume-driven customers softens in the fourth quarter due to seasonality effects where holiday inventory is already in place. However, higher-than-expected orders for new Apple and Samsung 5G handsets are raising demand forecasts. This is especially exciting for Onto Innovation since the 5G-enabled smartphones contain higher and more complex RF content. Using a variety of sensors, including our exclusive Clearfind technology, our Dragonfly systems are able to detect and classify the submicron defects critical to these devices. This helped drive our Q3 RF revenue to more than double over the second quarter, and we expect revenue from our RF ecosystem to double again in the fourth quarter. We have seen incredible demand this year for our inspection solutions. We project to end the year with inspection growing 25% over 2019 by exceeding general market projections. We believe this reflects share gains across all of the most demanding applications in advanced packaging and the strength of our solutions across the 5G ecosystem. In 2021, we expect to continue to build on our entry into the CIS market with additional customers adopting our higher fidelity solutions for their leading-edge camera designs in both mobile and automotive applications. So in conclusion, it's an exciting time for the Onto Innovation team. Throughout this year, we have made incredible improvements to our operational model and efficiencies. We very quickly aligned road maps and accelerated key areas of development, so we could provide solutions customers did not imagine previously. We see the traction across the semiconductor value chain from all of our core product lines. As a result, we are well positioned across multiple secular growth markets, including high-performance compute, 5G and cloud computing, and we look forward to the growth in the fourth quarter and a stronger 2021. And with that, we'll open up for your questions. Ann? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll take our first question from Patrick Ho with Stifel. -------------------------------------------------------------------------------- J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [2] -------------------------------------------------------------------------------- Mike, first off, on the specialty semis and advanced packaging, and you gave a lot of great color in terms of some of the inspection opportunity, particularly for the mobile market. Can you discuss both the near-term opportunities as well as some of the longer-term opportunities as it relates to high-performance computing applications? Given that devices are changing, they're becoming more complicated to measure and analyze, can you discuss some of the opportunities there, both in the near term that you're seeing as well as longer term? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Sure. Thank you, Patrick. Yes, well, it's all around interconnect technology right now. So interconnect technology is continuing to shrink, which in and of itself makes for more complex systems and more complex metrology capabilities. So not just looking for defects, but also making critical measurements. In addition, the near-term opportunities are around the quality of the surfaces for interconnection to other die and other interfaces. So this is where the Clearfind technology is proving to be very valuable in detecting what typically can't be seen, which is resist residue on these interconnects. So right now, I think the market is continuing to expand its understanding of these defect failure modes and the opportunities our systems can provide. In addition, as we look forward, I think the heterogeneous die and the more complex packages that better interconnect technology helps bring forward will also provide new opportunities for growth, especially for Onto Innovation, where we're also providing the lithography systems on a panel format that seems to be the format of choice for system in packages or heterogeneous die, heterogeneous packages. And I think we're seeing that first in high-performance computing. There's a lot of demand for it there. But I believe that will migrate down into some of the other specialty devices. We're seeing it in RF front-end modules. I believe we'll see it in other modules as well, like camera technologies CMOS image sensors, where you may want some compute engines, especially as these cameras become more sophisticated and consumers demand higher amount of processing power close to the -- closer to the cameras for faster image acquisition processing and decisions, again, that becomes an integrated package. I think those are some of the things we're seeing. -------------------------------------------------------------------------------- J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [4] -------------------------------------------------------------------------------- Great. That's really helpful, Mike. And maybe as my follow-up question. On the front-end semi side, you mentioned some of the opportunities for your new products aside from the Atlas. Can you discuss -- I guess, excluding maybe the planar films, which you just introduced, can you discuss the increase in capital intensity that you're seeing on the metrology? And given some of the new products you introduced, some of the non-X-ray solutions that you talked about, how that's increasing capital intensity trends for the metrology portfolio that you have today? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Well, I think it will obviously create more demand for our -- and more opportunities for our portfolio and thereby Onto's opportunity for increased capital intensity within a line. On the area of Element, which is also gaining traction against some certain X-ray applications or the aspect, customers are -- because they've only been recently announced, customers are really finding all the applications and pushing forward to fully understand and characterize the capabilities that we're offering. So initial applications are going well, but they're also expanding applications beyond what we originally intended, which is the whole point of getting them into production and having our strong applications team help the customers adopt these more broadly. And then as we start to see that broader adoption, we'll have a better understanding of the size and the magnitude of the opportunities we have. What we do know and what we hear consistently is X-ray is interesting for R&D, but they're struggling -- customers are struggling to see how that's going to really run in high-volume production. And with us coming in with this suite of solutions, that's really geared towards high-volume production, they're very excited, and you can see that in the traction we just described in the third quarter. But we have some work to do to prove it all out, get them into production and start seeing the repeat business that will really quantify the magnitude of the opportunities. -------------------------------------------------------------------------------- J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [6] -------------------------------------------------------------------------------- Great. And final question for me for Steve. In terms of some of your process tool peers, they talked about building a little bit of inventory of supply and parts, just given the uncertainty that's out there in the marketplace today. Given your process control focus, you do have longer lead times or certain supply -- in certain supply. Is there any need on your end to build inventory given the improving demand environment as well as the uncertainties in the marketplace? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [7] -------------------------------------------------------------------------------- No, Patrick. I don't see that. I mean we've actually -- we've been ahead of that curveball really since the beginning of the year when we started talking about COVID. I think you saw our inventories jump up that time. And we've been -- I think, our whole supply chain organization has done a great job of kind of being ahead of the curve, especially working through the COVID and as well as the -- even the ramps you're starting to see with our sales in the fourth quarter. So I don't see that happening. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- We'll take our next question from Craig Ellis with B. Riley. -------------------------------------------------------------------------------- Carlin Joseph Lynch, B. Riley Securities, Inc., Research Division - Research Analyst [9] -------------------------------------------------------------------------------- This is Carlin Lynch on for Craig. I guess I'll start at a high level. Since you guys last reported, AMAT has come out with some front-end macro inspection new news, and KLA has some -- had talked about advanced packaging. I guess I'm just trying to understand from a share percentage where we were last quarter with your assumptions, kind of where we are now and looking forward, if you see any change, just kind of in the broader landscape, that would be super helpful. -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [10] -------------------------------------------------------------------------------- So KLA has always been in the advanced packaging market for 15, 20 years -- or maybe not quite that long, but for a significant amount of time. We've maintained the #1 share in that market for that entire time. So I don't think that's anything new. I didn't hear the other company. Did you say AMAC or AMAT? -------------------------------------------------------------------------------- Carlin Joseph Lynch, B. Riley Securities, Inc., Research Division - Research Analyst [11] -------------------------------------------------------------------------------- AMAT, sorry. -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [12] -------------------------------------------------------------------------------- AMAT, no. I didn't hear that they announced any macro inspection system, so I'm not aware of progress there. We'll have to check on that. So yes, nobody in my team has heard of that. So right now, we're the leaders in this space. We've continued to grow the share. As I mentioned earlier, we have 25% growth this year in macro defect inspection, primarily from the advanced packaging markets. We talked about the top 5 IDMs. We think we grew our share about 20% over the last 2 years because of the shrinking geometries and the higher demands for the quality of the data streams. And so we're actually excited about continuing to gain share and grow our position in the market. -------------------------------------------------------------------------------- Carlin Joseph Lynch, B. Riley Securities, Inc., Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Got it. Okay. And then jumping down to the OpEx line. Obviously, it sounds like you had some kind of onetimers in the quarter with at the PTO. But last quarter, you mentioned that there was going to be continued opportunity for kind of synergy harvesting. I guess I'm trying to figure out where we are in that process. And then looking out to maybe Q1, not -- and understand you guys can't give any explicit guidance, but are there any kind of year-end charges that we would expect to kind of step up and any further synergy harvesting that may offset that? So last quarter, I think the guidance was for $47 million and now it's $46.5 million at the midpoint. Could we get down to $46 million or $45.5 million in a normalized environment? Or given COVID -- all these COVID charges, is that kind of fair to say? Or are we kind of bottoming out here at the $46.5 million? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [14] -------------------------------------------------------------------------------- Well, I wouldn't say we're bottoming out. I mean we're constantly -- and I mentioned in my prepared remarks, we're constantly looking for areas and new opportunities are going to come up every day as -- in our R&D programs and things like that. So I don't think there's any set fine line that, hey, we've hit the bottom with that. And some of the programs where you might get some synergies and R&D efforts are longer term in nature because they're development programs, and they're going to take a little more time to work out than on a kind of a quarter-over-quarter view. I think you're right, I mean there were a lot of kind of built up things on the COVID that helped drive down the Q3 numbers. But -- and we expect some of that to snap back, not all of it because we've got -- we'll have holiday season coming up, too. So I expect there'll be some sort of PTO levels in Q4. So I think -- I don't think there's anything unusual. You see it continue coming down from the $47 million, if you want to take the adjusted midpoint of $46.4 million and $46.5 million as a lower range. I think if you look forward, there's no specific onetime Q4 stuff that I would say is going to be built into that number. And if I look forward into Q1, I mean, typically, Q1 has a little bit of an increase in OpEx because payroll taxes and a lot of things reset for the year. But I'm not expecting that to be significant. I think we've done a very good job of driving that OpEx to these low levels. And I think there's probably some opportunities as we move forward into 2021, but I'm not going to be able to quantify them at this time. -------------------------------------------------------------------------------- Carlin Joseph Lynch, B. Riley Securities, Inc., Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Got it. Okay. That's super helpful. And then lastly, on the gross margin point. I'm curious it sounds like you guys have had a lot of strength regarding the new products. Last quarter, I think you had said kind of we would expect more of a mix contribution from that throughout 2021. Is that still kind of the right way to think about it? Just as these new products ramp in volume and we get some more traction with them, we would expect kind of a positive gross margin contribution through the year? Or are you starting to see maybe some -- maybe some first half pull in, in strength? Or just kind of any color you can give me there, that would also be great. -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [16] -------------------------------------------------------------------------------- Yes. I mean you can obviously -- if you look at the whole year, you can see we've elevated -- from the first half of the year, the second half of the year, the margin profile overall has come up. And again, that is -- some of that is obviously the new product coming into place as well as the supply chain synergies we've talked about for the year coming into place in Q4. So I do think we're -- as we get into this $150 million kind of revenue range, we should be in our -- we're going to be in our long-term model, which starts at $54 million. So I expect the 54% to 55% as you move through $150 million, I think that's a place that we will be. So if we're north of -- I think the model we have is north of $600 million, I think you're going to start seeing the low end of that, meaning that minimum, it's 54% gross margins, moving up above that into the 55s. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- We'll take our next question from Tom Diffely with D.A. Davidson. -------------------------------------------------------------------------------- Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [18] -------------------------------------------------------------------------------- First, Steve, following up on the operating question earlier. What do you think the net impact of COVID has been, either positive or negative, on the OpEx? And which of those pieces do you think are somewhat permanent going forward? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [19] -------------------------------------------------------------------------------- Permanent is a good question, Tom. I do think that -- I don't think they're that dramatic for us. I mean, obviously, the one that comes to mind is travel, right? I mean we've obviously curtailed our travel dramatically. And I think that's going to kind of start -- that's kind of driven to 2021 for sure to some point in time when maybe there's a vaccine and we get back to a little bit more normalcy. So I do think the first half of 2021 will continue kind of this COVID-related expense reductions in that area, probably loosen up a little bit. But -- so that's the biggest one for us that you can point to. And so it's not like we have a whole host of other things. Everyone is still working, everyone's manufacturing, they're still running. We're still doing our R&D programs. So I don't -- obviously, we're mostly -- a lot of it is the work-from-home environment, but I don't think there's been a large impact on us of COVID reduction other than the travel side of it that I could think of. I'm not sure whether that's baked in as permanent, though because actually, I think we'll get back to work. And so I think once everyone is back in the offices and people are traveling to all the different countries, I think we'll be back to -- but I don't think it's a material impact one way or the other. -------------------------------------------------------------------------------- Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [20] -------------------------------------------------------------------------------- Okay. No, that's helpful. And then, Mike, it sounds like some nice momentum with the Atlas V. I'm curious, so what drove the softness, the weakness in metrology in the quarter? And then when you look over the next year, for Atlas V specifically, is it the logic foundry guys, again, it's going to be the biggest driver? Or is it going to be a memory recovery do you think that's the biggest driver of the new platform? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [21] -------------------------------------------------------------------------------- So the new platform looks pretty broad-based. So we're seeing -- we've already shipped to -- with orders to memory customers, as I mentioned, and then we're shipping to multiple larger customers in the quarter. So the demand and the value proposition is fairly broad-based. As far as what drove the drop, I think we described it before as largely 2 customers who are pretty strong spenders in the first half of the year, had a pause, a digestion period, however you want to call it. And we're seeing that pick right back up in the -- as we expected, in the fourth quarter, a little bit stronger than we expected. And I would say, behind that is also some increasing optimism from memory manufacturers and additional expansions there, which we hope to see carrying forward into the early part of of 2021. -------------------------------------------------------------------------------- Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [22] -------------------------------------------------------------------------------- Okay. And I know that previously, on the OCD tool, you had penetration into virtually all of the top 10 customers out there. I'm curious have most of them now taken Atlas V? Or do you still have some penetration work to do? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [23] -------------------------------------------------------------------------------- We still have penetration left to do. So the Atlas V is just coming out -- well, released, what was it, 3, 4 months ago. So -- yes, so we're just in the early stages there of penetrating and transitioning customers from one generation to the next generation of Atlas. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- We'll go next to David Duley with Steelhead Securities. -------------------------------------------------------------------------------- David Duley, Steelhead Securities LLC - Managing Principal [25] -------------------------------------------------------------------------------- A couple of -- first one is, as far as your inspection business goes, you've shown obviously above-market growth and above-unit volume growth. And I'm kind of curious, I'm sure there's 3 or 4 reasons for this, but if you could just summarize why that business is growing so rapidly now, besides obviously a pretty strong unit recovery that we're currently seeing? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [26] -------------------------------------------------------------------------------- Yes. I think it's the stronger requirements or the tougher requirements for our customers for their process control. So as I mentioned, what was good enough before for the market, it really isn't any longer. They need higher-quality data, more repeatable, they need tool matching, they need all the sophisticated capabilities that we used to have from front-end macro defect inspection that we've built into the systems over years. Now the advanced packaging and specialty device manufacturers are seeing demand for that same kind of process control in their markets, and they're seeing it not only for their -- the performance of their devices, but also their end customer demands. So as these devices are becoming combined together and integrated it into other packages. End customers like, let's say, an Apple or a Qualcomm or somebody like this is concerned about stacking tolerances and errors for the whole package due to stacking tolerances. So they want to tighten up the process variation and tighten up the performance requirements as much as possible, and that means you need a better ruler, and we provide that better ruler. So I think that's where we're seeing the market really coming towards us. And what's exciting for us is it's not just the top 5 IDMs, which we have seen that and talked about that over the last couple of years. But also now, we're seeing it in the specialty devices and even -- which is primarily 5G right now, but as we mentioned last quarter, with the CMOS image sensor company, also had higher process control requirements that the incumbent technology couldn't meet. And that was one of the reasons we won that business. So the market is certainly coming towards us, and I'd say that's the biggest reason why we're seeing the increased demand. -------------------------------------------------------------------------------- David Duley, Steelhead Securities LLC - Managing Principal [27] -------------------------------------------------------------------------------- So similar to the test guys seeing significant increases in test time and test intensities, the inspection intensity is also growing fairly significantly with these new products and advanced packages. Do you have an idea? Is there -- is it 50% more inspection intensive now, let's say, with the -- in the current device -- maybe a 5G device versus a 4G device? Or do you have any metrics there? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [28] -------------------------------------------------------------------------------- I would say, it varies by customer. But overall, some of the more advanced customers, I'd say it's about a 2 to 3x increase in intensity, so the leading customers. Some of the trailing customers maybe aren't there yet, but I believe they will be as they try and push their devices up the value chain. -------------------------------------------------------------------------------- David Duley, Steelhead Securities LLC - Managing Principal [29] -------------------------------------------------------------------------------- Excellent. Now a final question for me, and I guess it's a little bit complex. But you've talked about a host of new products and upgrades to current products. If you could just review -- I think you have several brand-new products that address new markets. If you could just help -- just outline the couple of new products that you have? And what is the biggest addition to the TAM that those new products bring? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [30] -------------------------------------------------------------------------------- So the -- I think the biggest addition is the Iris platform, which will open up the planar films market, which is -- in its entirety is about a $400 million or so market, which neither Rudolph or Nanometrics really played in. It's really dominated by KLA-Tencor. Our initial release of the platform is for a certain segment of that market, call it about half, and we have the plans to continue to develop and build out the platform so that it will cover all of the market eventually, all of that planar films. So I think that's the largest on the expansion of the SAM or TAM. And then if you look at the other product lines, I would say the Element, the compositional analysis tool, which is primarily in the wafer manufacturing and has been dominating or rolled out across nearly all -- or all, actually all of the top wafer -- bare wafer manufacturers. We're starting to see a pull, especially for the higher-end devices and memory, and we believe there's opportunity in logic as well for that same compositional analysis at speed nondestructive in line in the fab. And that could increase our TAM fairly significantly as well, somewhere between $30 million and $50 million or so, might be a conservative estimate based on initial discussions. But again, that's a relatively newly developed market and customers are still learning, as I talked about last quarter. And the aspect is largely the same. As the 3D NAND market is moving to higher stacks and they were struggling with how to measure these channel holes, we're offering them the solution for high-volume production. I don't think that's a huge TAM expansion, but there are a number of other applications we're starting to find even in other markets that start to look like it could be interesting. And as we quantify those, we'll also share them. The Atlas V, I would say, is more of a share gain opportunity. With its sensitivity and capability beyond the 2-nanometer or even at 2-nanometer levels, we have a platform that can, today, have the throughput and sensitivity that volume manufacturing is going to require over the next 4 or 5 years. And so there's a compelling value proposition there as well. And I think that as long as that holds up, that could be the main game in town. So I'd say that's less of a share expansion, but more of -- sorry, less of a TAM expansion, more of a share gain opportunity. -------------------------------------------------------------------------------- David Duley, Steelhead Securities LLC - Managing Principal [31] -------------------------------------------------------------------------------- Okay. I have one more. With -- I think you have several lithography systems in backlog, which are expected to ship early next year. With that in mind, do you have -- can you make any commentary towards the March quarter and what you see seasonality-wise. -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [32] -------------------------------------------------------------------------------- We're very excited for the March quarter. Yes, we're -- as I mentioned, we see the memory expansion, which we're starting to see here in the fourth quarter, and we think that's going to continue into the first half, I think I said early 2021. So you take that, you take some of the shipments on lithography, and you start to get a little excitement building for the first quarter. And then the continued growth in 5G. I mean that's another area that you can tell from our numbers right now, we have a very strong demand for our inspection in that area. And with -- I believe, the latest forecast is the 5G handsets will double yet again in 2021, that demand is going to continue for our level of process control systems, inspection and metrology. So we're very excited about the first half of 2021. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- We'll take our next question from Mark Miller with The Benchmark Company. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [34] -------------------------------------------------------------------------------- Congratulations on your results. I just was wondering in terms of -- you're talking about memory starting to come back, do you think that will be more weighted towards DRAM than NAND? Or do you see both of these memory markets improving? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [35] -------------------------------------------------------------------------------- Right now, we're seeing both. I think the industry numbers we've seen suggest DRAM will recover a little stronger or grow a little faster. But from what we've seen, we think that, yes, both are going to be recovering for us and contributing to our growth. I think with NAND having so many more players in the market, it's a little bit harder to see who's going to -- where the pricing and overcapacity is going to be. But right now, we're seeing really growth from both DRAM and NAND. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [36] -------------------------------------------------------------------------------- You had a strong year for macro defect inspection. Do you feel you're picking up share there? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [37] -------------------------------------------------------------------------------- We do. Yes. And we think that we're picking up share on the specialty devices within the 5G ecosystem. We think we're picking up share on the really high-end IDMs. A number of these IDMs have transitioned and started to invest much more in their advanced packaging technologies. They've added -- I think I've mentioned Intel and TSMC and Hynix and Samsung have all talked -- even Micron have all talked about advanced packaging being a key enabler for their road maps moving forward in various flavors of it. And we believe those demanding customers are increasingly -- are more frequently choosing the Onto solutions. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [38] -------------------------------------------------------------------------------- How many 10% customers this quarter and what were their areas? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [39] -------------------------------------------------------------------------------- Yes. Mark, there was one 10% customer that was over 10%. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [40] -------------------------------------------------------------------------------- Was that memory, logic, foundry? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [41] -------------------------------------------------------------------------------- Foundry. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [42] -------------------------------------------------------------------------------- And finally, just a housekeeping issue. Cash from operations and CapEx? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [43] -------------------------------------------------------------------------------- CapEx, you're asking for the quarter? -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [44] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [45] -------------------------------------------------------------------------------- It was minimal. I'm looking at it. Year-to-date, we're only at $3.4 million. So it's been way below normal run rates. And that's again -- that's because of, I think, obviously, COVID slowed down that process of -- a lot of our stuff is internal tools, most of our CapEx tends to be internal tools. So there's a lot of people in the slowdown of working from home that less demand on having additional tools. There has been some increase of late because, obviously, with some of the new products that Mike mentioned. So we'll be developing training tools that we'll need for those. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [46] -------------------------------------------------------------------------------- And cash from operations? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [47] -------------------------------------------------------------------------------- Cash from operations is -- well, running that right now, we're running $60 million, $72 million cash from operations. It was like 22% of revenue for the quarter. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [48] -------------------------------------------------------------------------------- You said $72 million or $7.2 million? -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [49] -------------------------------------------------------------------------------- $72 million for year-to-date. -------------------------------------------------------------------------------- Mark S. Miller, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [50] -------------------------------------------------------------------------------- $72 year-to-date. -------------------------------------------------------------------------------- Steven R. Roth, Onto Innovation Inc. - Senior VP of Finance & Administration, CFO and Secretary [51] -------------------------------------------------------------------------------- Yes. I have to call up the difference for the -- but on the cash flow statement, you will see, it's $72 million for the year-to-date. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- (Operator Instructions) We'll go next to Charles Shi with Needham & Company. -------------------------------------------------------------------------------- Yu Shi, Needham & Company, LLC, Research Division - Associate [53] -------------------------------------------------------------------------------- I have a few. Maybe first off, let me ask about any SMIC exposure in the third quarter and whether you just wonder if you have adjusted down your fourth quarter guidance for any of the SMIC export license requirement. And if you can shed a little bit light into what's required for an export license for shipping to SMIC, that would be great. -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [54] -------------------------------------------------------------------------------- Well, right now, we're -- that's -- how do I answer that? What's required us to go ahead in the plato license, fill out the paperwork and within 60-something days, you hopefully get an answer back from the government. Right now -- and that applies for certain products and categorizations of products. Right now, the products we have going into SMIC are not all in that category where military end use is applying. So right now, our existing policies are still in place with SMIC, and we're operating and supporting them as we were several weeks, several months ago. -------------------------------------------------------------------------------- Yu Shi, Needham & Company, LLC, Research Division - Associate [55] -------------------------------------------------------------------------------- No. Got it. Got it. So maybe my first -- the second question is a little bit into the composition of your revenue mix for third quarter. Definitely the inspection business, strong specialty device, advanced packaging was surging and which offset by some of the temporary weakness in the metrology side of the business, definitely demonstrating the stability -- enhanced stability of the merged company for Nanometrics and Rudolph. So I just really want to ask, how much -- can you quantify how much of metrology revenue was pushed out third quarter and how much of that can be recognized in the fourth quarter? -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [56] -------------------------------------------------------------------------------- So it wasn't as much push-outs as it was a less demand. So we had strong demand in the first half and then a pause in demand and then now accelerating growth in the fourth quarter. So I think the -- if you look at it, inspection surged, grew by 44%. Metrology is slightly bigger, so it would be down 25% or 30%, something like this. From the second quarter and then, of course, growing fairly significantly in this fourth quarter. -------------------------------------------------------------------------------- Yu Shi, Needham & Company, LLC, Research Division - Associate [57] -------------------------------------------------------------------------------- Got it. Got it. So maybe my last question really is about the Aspect tool. Congratulations on having your tool transitioning to the high-volume production. Hopefully, that's very soon. Can you give us, I mean, a very high level outlook of when do you expect to recognize the first revenue and how the revenue ramp could be -- could look like in next year? If you can quantify that revenue run rate, that would be great. -------------------------------------------------------------------------------- Michael P. Plisinski, Onto Innovation Inc. - CEO & Director [58] -------------------------------------------------------------------------------- Yes. So the -- you're asking specifically about the Aspect tool. So that is I would say by first half -- sorry, by first quarter of next year, possibly sooner. But first quarter of next year, we would expect to be able to close out this current evaluation. We're shipping additional units, so to different customers. And those will all recognize within, I would say, 6 to 9 months between for evaluation then moving into qualification. And then the question is how quickly the customers ramp or do they ramp that product in parallel because it's so far proving to be a very stable platform that requires a lot less application support and the recipes tend to be more robust, et cetera. So I think the adoption will be faster than normal, much more complex Atlas platform. So if you're asking about Aspect, that's the answer there. I think the Atlas, which is we're seeing much faster, let's say, stronger adoption and stronger pull, I would say that will be contributing meaningfully in the second half of next year. So we'll continue to ship and deliver units this year, we're recognizing revenue on it already, and we'll see that ramping up, maybe 5% to 10% of revenue by second half of next year. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- And with no further questions in the queue. I would like to turn the call back over to Mark -- Mike Sheaffer with any additional or closing remarks. -------------------------------------------------------------------------------- Michael Sheaffer, Onto Innovation Inc. - Senior Director of IR, Corporate Communications & Marketing Research [60] -------------------------------------------------------------------------------- Thank you. We'd like to thank everyone for participating in the call today and for your continued interest in Onto Innovation. That concludes our remarks for the call, and please wrap it up. Thank you. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Again, this does conclude today's conference. We thank you for your participation. You may now disconnect.