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ONTO INNOVATION INC. (ONTO)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 revenue and EPS exceeded the high end of guidance on stronger AI packaging and gate‑all‑around (GAA) demand; revenue was $242.3M, GAAP EPS $1.07, and non‑GAAP EPS $1.32, with 53% GAAP and non‑GAAP gross margin .
  • Specialty/advanced packaging set another record ($164M; 68% mix), while advanced nodes accelerated sequentially (up 21% q/q to $32M), and software/services rose to $46M (19% mix) .
  • Q3 guidance calls for revenue of $245–$255M, gross margin 53–55%, OpEx $64–$66M, GAAP EPS $0.98–$1.08 and non‑GAAP EPS $1.25–$1.35; management also disclosed >$300M in volume purchase agreements (VPAs) for AI packaging and GAA through 2025, bolstering 2025 visibility .
  • Stock reaction catalysts: continued sequential growth guide with margin expansion, record cash from operations ($65M, 27% of revenue), VPAs signaling multi‑quarter demand support, and advancing glass‑substrate panel lithography capabilities (JetStep X500) .

What Went Well and What Went Wrong

What Went Well

  • AI packaging momentum: “fourth consecutive quarterly revenue record” in specialty/advanced packaging; Dragonfly platform achieved another record and inspection business projected to grow >70% in 2024 .
  • Strategic wins and visibility: closed >$300M VPAs across two customers for AI advanced packaging and GAA through 2025, providing multi‑quarter demand clarity .
  • Financial execution: gross margin improved to 53% and record operating cash flow of $65M (27% of revenue); inventory reduced by $10M q/q with further reduction targeted .

What Went Wrong

  • AI packaging “pause” intra‑2H: management acknowledged an aggregate ~10% pause in AI packaging spending across four key customers due to supply constraints and timing of expansions, though overall advanced packaging remains strong .
  • China remains constrained: China revenue in 1H rose from Q1 to Q2 but stays mid‑teens of total, with local competitors gaining at the lower end and export restrictions limiting upside .
  • Margin still below long‑term model: while improving, gross margin has not yet reached the prior 56–58% model range at a ~$1B run‑rate; management is working supply‑chain and mix levers and expects sequential improvement, aided by higher‑margin advanced nodes .

Financial Results

MetricQ2 2023Q1 2024Q2 2024
Revenue ($M)$190.7 $228.8 $242.3
GAAP Gross Margin (%)53% 52% 53%
Non‑GAAP Gross Margin (%)53% 52% 53%
GAAP Operating Income ($M)$24.8 $42.7 $48.8
Non‑GAAP Operating Income ($M)$40.6 $57.3 $64.5
GAAP Net Income ($M)$25.9 $46.9 $52.9
Non‑GAAP Net Income ($M)$38.8 $58.5 $65.4
GAAP Diluted EPS ($)$0.53 $0.94 $1.07
Non‑GAAP Diluted EPS ($)$0.79 $1.18 $1.32
Cash from Operations ($M)—$57.0 $65.0

Segment mix and revenue

SegmentQ4 2023 Revenue ($M)Q1 2024 Revenue ($M)Q2 2024 Revenue ($M)
Specialty & Advanced Packaging$158 (72%) $158 (69%) $164 (68%)
Advanced Nodes$18 (8%) $27 (12%) $32 (13%)
Software & Services$42 (20%) $44 (19%) $46 (19%)

Balance sheet and operating KPIs

KPIQ4 2023Q1 2024Q2 2024
Cash & Marketable Securities ($M)$697.8 $740.9 $786.0
Inventory ($M)$327.8 $329.5 $319.7
Non‑GAAP Operating Margin (%)26% 25% 27%

Note on estimates: S&P Global consensus EPS and revenue for Q2 2024 were unavailable at query time; comparison to Street estimates not shown (SPGI data unavailable).

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ2 2024$230–$240M ——
GAAP Diluted EPSQ2 2024$0.88–$1.00 ——
Non‑GAAP Diluted EPSQ2 2024$1.14–$1.26 ——
Gross MarginQ2 202452%–54% ——
OpExQ2 2024$62–$64M ——
RevenueQ3 2024—$245–$255M Raised vs Q2 actuals
GAAP Diluted EPSQ3 2024—$0.98–$1.08 —
Non‑GAAP Diluted EPSQ3 2024—$1.25–$1.35 —
Gross MarginQ3 2024—53%–55% Improving seq.
OpExQ3 2024—$64–$66M Slightly up q/q
Effective Tax RateQ3 2024—15%–16%; FY 13%–14% New disclosure
Diluted SharesQ3 2024—~49.7M New disclosure

Earnings Call Themes & Trends

TopicQ4 2023 (Q-2)Q1 2024 (Q-1)Q2 2024 (Current)Trend
AI packaging demandDragonfly surge; record specialty/AP revenue; inspection 3x Y/Y run-rate Third consecutive record; Dragonfly +30% q/q; sub‑surface defect sensor introduced Fourth consecutive record; inspection business projected >70% growth Strong, sustained; minor 2H pause mix
GAA (advanced nodes)Early GAA pilot orders; 2025 ramp likely Incremental improvement; Atlas OCD & Iris films adoption Acceleration; multi‑customer adoption, below‑2nm quals; 60%+ share at 2 of top 4 via agreements Improving into 2H24/2025
Panel/glass substratesFirefly G3 introduced; X500 order for glass First JetStep glass panel tool shipping in summer Delivered industry‑first JetStep X500 for glass; glass suite highlighted Strategic optionality building
Gross margin trajectoryIntent to return to model; cost actions underway 52% in Q1; plan for sequential improvement 53% in Q2; guide 53%–55% for Q3 Improving sequentially
China exposurePower and specialty breadth; no big tailwind —Teens %; growth but constrained; local low‑end rivals Limited tailwind
VPAs/visibility——>$300M VPAs through 2025 for AI/AP & GAA Visibility strengthened

Management Commentary

  • “Our second quarter revenue exceeded the high end of our guidance range, driven by better‑than‑expected demand of Dragonfly systems supporting advanced packaging for AI devices, and Atlas and Iris systems for gate‑all‑around investments in the advanced nodes.”
  • “Based on our current visibility, we project our inspection business will grow by over 70% this year.”
  • “Closed over $300 million of volume purchase agreements issued by two customers for their AI advanced packaging and gate‑all‑around investments through 2025.”
  • “We achieved 53% gross margin for the second quarter… we expect gross margins will be 53% to 55% [in Q3].”
  • “We expect continued strength in advanced packaging and the adoption of gate‑all‑around transistor architecture at several customers to lead our revenue growth in 2025.”

Q&A Highlights

  • AI packaging digestion vs. overall growth: Management clarified the “pause” pertains to a subset of four AI packaging customers amid supply constraints; overall advanced packaging remains strong with some customers doubling, others trimming; aggregate ~10% pause in 2H .
  • $300M VPAs: Rough split approximates ~60% packaging / ~40% GAA; bulk of shipments through 2025 .
  • Advanced nodes and potential logic CapEx cuts: Despite announcements, Onto remains constructive; seeing continued product adoption and expects logic revenue growth into Q4 .
  • Gross margin drivers: Improvements from manufacturing/supply chain efficiency plus mix shift toward advanced nodes over 2H .
  • Glass panels and lithography: JetStep X500 targets RDL on large glass panels with sub‑1.5µm capability; panel shift can ease CoWoS bottlenecks and improve economies of scale .

Estimates Context

  • S&P Global consensus for Q2 2024 EPS and revenue was unavailable at query time; comparison to Street estimates is not shown (SPGI data unavailable).
  • Management indicated both GAAP and non‑GAAP EPS were above guidance ranges, and revenue exceeded the high end of guidance; Q3 guidance implies sequential growth and margin expansion .

Key Takeaways for Investors

  • AI packaging remains the primary growth engine near term; advanced nodes (GAA) is accelerating and should add mix‑benefit into 2H24/2025 .
  • The >$300M VPAs provide tangible multi‑quarter demand visibility across AI packaging and GAA, de‑risking 2025 revenue ramps .
  • Margin improvement is tracking to plan with Q3 guided higher; further mix shift toward advanced nodes should support sustained gross‑margin gains .
  • Cash generation is robust (Q2 record $65M, 27% of revenue) and inventory is normalizing, enhancing balance‑sheet optionality for investment and/or capital returns .
  • Strategic positioning in glass‑substrate panel lithography and Firefly/Dragonfly metrology extends Onto’s TAM as packaging scales to finer RDL and larger formats .
  • Watch for OSAT and HBM capacity additions and the pace of GAA adoption; near‑term “pause” in a subset of AI packaging customers appears manageable amid broader strength .
  • China remains a modest contributor; core growth vectors are ex‑China, led by AI‑related packaging and advanced logic/memory transitions .

Other Relevant Q2 2024 Press Releases

  • Glass substrate suite for panel‑level packaging (JetStep X500 lithography; Firefly G3 inspection/metrology) aimed at sub‑3µm RDL, with single‑shot exposure up to 250mm x 250mm .
  • Board addition: Dr. Stephen Schwartz joined Onto’s board, bringing deep semiconductor automation leadership experience .
  • SEMICON West participation and demos highlighting AI process control portfolio .