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    Onto Innovation Inc (ONTO)

    Q1 2024 Earnings Summary

    Reported on Feb 10, 2025 (After Market Close)
    Pre-Earnings Price$208.42Last close (May 9, 2024)
    Post-Earnings Price$227.16Open (May 10, 2024)
    Price Change
    $18.74(+8.99%)

    What went well

    • Onto Innovation is experiencing sustained strong demand for its Dragonfly systems supporting the AI chip ramp, with orders continuing to come in from all three high-bandwidth memory suppliers and AI packaging logic providers, indicating robust growth in the AI compute market. The company expects to maintain record levels of revenue from Dragonfly systems in the second quarter, with potentially only a low or muted digestion period thereafter.
    • The company has unique tools capable of measuring high-stack channel holes over 200 layers in advanced NAND technologies, which is critical for yield in high-density AI servers. This positions Onto Innovation to benefit from technology transitions in NAND demand driven by AI applications.
    • Onto Innovation expects a much stronger second half for power semiconductors, returning to near record levels set last year, indicating growth in another segment of their business and potential upside in revenue.

    What went wrong

    • The company acknowledges that most power semiconductor companies have reduced their CapEx this year, which could negatively impact Onto Innovation's growth in the power semiconductor segment despite management's confidence.
    • There is uncertainty about the timing and magnitude of Dragonfly system orders in the second half of the year, with potential for a slight dip due to digestion after strong first-half shipments. Management cannot provide specificity on Q3 and Q4 demand.
    • The CEO does not expect a significant ramp in NAND orders despite early signs of demand driven by AI servers, indicating limited growth opportunities in that segment in the near term.

    Q&A Summary

    1. Second Half Revenue Growth
      Q: What's the expected growth in the second half versus the first half?
      A: We anticipate single-digit growth in the second half over the first half, around 5% incremental increase.

    2. Potential Digestion Period
      Q: Is there a potential digestion period affecting second-half revenue?
      A: There may be a dip due to digestion in AI-related demand, specifically tied to the strong ramp in high-bandwidth memory, but this could change based on ongoing customer discussions.

    3. Dragonfly Revenue Sustainability
      Q: Will Dragonfly revenue run rate continue into the second half?
      A: We expect to maintain strong Dragonfly revenue levels into the second half, with orders continuing to come in from all three HBM suppliers and AI packaging providers, though there may be a slight dip but not significant.

    4. Margin Improvement Outlook
      Q: What are the expectations for margin improvements?
      A: We project quarter-over-quarter sequential gross margin improvement, aiming to exit 2024 at historical levels, driven by supply chain efficiencies and new product adoption.

    5. NAND Market Recovery
      Q: What's driving increased demand in NAND?
      A: We're seeing technology transition demand for high-stack devices in NAND, driven by AI servers requiring higher-performing SSDs, with repurposing and revamping of existing lines rather than capacity additions.

    6. Advanced Nodes Visibility
      Q: How is the visibility into advanced nodes demand in the back half?
      A: Visibility is good as customers open new factories and ramp lines; we expect sequential growth every quarter onwards in advanced nodes.

    7. Power Semiconductor Outlook
      Q: How does power semiconductor demand look for the year?
      A: We expect power semiconductors to be relatively flat to last year's record levels, possibly down single digits or slightly up, with a much stronger second half near peak levels.

    8. Advanced Packaging Demand in 2025
      Q: What are customers indicating about advanced packaging demand in 2025?
      A: We're already discussing 2025 with customers, especially in AI packaging; it's positive that they are seeing demand already and talking about next year, indicating optimism for "hitting on all cylinders" in 2025.

    9. Gate-All-Around Technology
      Q: Will gate-all-around be a larger part of future revenue?
      A: We expect gate-all-around to become a larger part of our revenue or backlog next year, particularly in the second half.

    10. HBM's Impact on Backlog
      Q: What percentage of backlog is related to high-bandwidth memory?
      A: While we don't have exact figures, a high percentage of our backlog is related to HBM for AI applications.

    11. Supply Chain Initiatives
      Q: Are supply chain initiatives contributing to margin improvement?
      A: Yes, along with new products, supply chain initiatives are driving improvements, helping us take control of our destiny.

    12. Adoption of Glass Substrates
      Q: How will glass substrates impact future technology adoption?
      A: Glass substrates enable higher-density interconnects for advanced packaging, potentially benefiting GPUs, but require volumes to justify moving from wafer to panel formats.

    13. Lead Times and Order Trends
      Q: Have lead times for Dragonfly products changed?
      A: Lead times remain at 3–6 months due to building to forecast, even as we ramp up production.

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