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    Onto Innovation Inc (ONTO)

    Q2 2024 Earnings Summary

    Reported on Feb 10, 2025 (After Market Close)
    Pre-Earnings Price$177.81Last close (Aug 8, 2024)
    Post-Earnings Price$190.00Open (Aug 9, 2024)
    Price Change
    $12.19(+6.86%)

    What went well

    • Strong growth prospects in advanced packaging driven by AI demand and increasing HBM content, with expectations of continued growth through 2025. The company sees capacities for AI compute engines increasing, with HBM content doubling. Customers are expanding factories into next year to alleviate supply constraints, making the company bullish about growth through 2025.
    • Gross margin improvements expected due to favorable product mix and improved manufacturing capabilities, returning to previous high levels as advanced nodes business increases. The company aims for quarter-over-quarter gross margin improvement, getting back to model gross margins at a $250 million to $260 million quarterly revenue run rate. Improvements in manufacturing and supply chain, along with a shift towards higher-margin advanced nodes products, will help achieve this.
    • Market share gains in key growth areas like AI packaging, gate-all-around nodes, and panel packaging, positioning the company favorably for future growth. The company maintains a high share in AI packaging for HBM and 2.5D logic (CoWoS) and has seen increased adoption of its Iris planar films in gate-all-around applications, which may translate into further growth into 2025 and 2026. In panel packaging, it continues to strengthen its position by adding new customers and offering differentiated capabilities.

    What went wrong

    • Increasing competition in China may affect Onto Innovation's market share and revenues in the region. The CEO mentioned that local competitors in China are getting stronger and starting to take share at the lower end, which could pose challenges for Onto Innovation's growth in China.
    • Potential slowdown in AI packaging revenues due to fluctuations among customers. The company expects an aggregate decline of around 10% in AI packaging revenues between the first and second half of the year, with some customers cutting back, which may impact overall growth.
    • Customer CapEx cuts could negatively impact future revenues. An IDM customer has announced CapEx reductions for 2025, and while the CEO hopes for positive outcomes, there is uncertainty regarding how these cuts may affect Onto Innovation's business with that customer.

    Q&A Summary

    1. Gross Margin Outlook
      Q: Is gross margin improvement driven by advanced nodes?
      A: Not entirely. While the shift towards advanced nodes will accelerate gross margin improvement in the second half, ongoing enhancements in manufacturing and supply chain are also contributing to the 100 basis points increase quarter-over-quarter.

    2. Sustainability of Advanced Packaging Ramp
      Q: Is the advanced packaging ramp sustainable?
      A: Yes, we are bullish about growth through 2025. Even if AI demand remains flat (which is not projected), the amount of HBM is essentially doubling in AI compute engines. Additionally, customers are expanding factories into early next year to alleviate supply constraints, indicating continued demand.

    3. $300 Million VPA Breakdown
      Q: How is the $300 million VPA split and timed?
      A: Approximately 60% is for advanced packaging and 40% for gate-all-around. The bulk of shipments will occur in 2025, with some initial shipments starting in the second half of this year.

    4. Impact of IDM CapEx Cuts
      Q: How do IDM customer's CapEx cuts affect you?
      A: We may not see a negative impact. Although the customer is reducing overall CapEx, they are prioritizing leading-edge nodes to ramp their latest generation processing by 2026. Our expectation is that their spend will focus on leading-edge areas where we are positioned.

    5. China Revenue and Outlook
      Q: Are you capturing China WFE upside?
      A: Our China revenue is expected to grow in the second half but remains in the teens percentage of total revenue. We are focusing on higher-end applications where we add the most value, despite local competition and challenges selling into China.

    6. Growth Drivers in Advanced Nodes
      Q: What's driving growth in advanced nodes?
      A: Growth is driven by technical transitions and investments in future nodes like gate-all-around, rather than market recovery. Customers are preparing for the next wave of orders, with utilizations rising and inventories declining.

    7. AI Packaging Revenue Decline
      Q: How much is AI packaging revenue declining?
      A: In aggregate, AI packaging revenue is staying steady with around a 10% decline from first half to second half. Individual customer performance varies, with some doubling and others cutting back.

    8. Market Share Gains
      Q: Where are you gaining market share?
      A: We maintain a very high share in AI packaging, particularly in HBM and 2.5D logic. Adoption of our Iris planar films in gate-all-around applications is increasing, which should drive further growth as the node enters full production.

    9. Impact of Glass Substrates
      Q: How would adoption of glass substrates impact Onto?
      A: It presents opportunities across our product lines, including process control technologies like Dragonfly and Firefly tools, and especially in lithography for printing RDL lines. Customers moving to glass panels could benefit from our high-resolution, wide-field optics capabilities.

    10. Value in Overcoming CoWoS Challenges
      Q: Can your products help with CoWoS challenges?
      A: Yes, our tools help customers identify root causes and adjust processes to improve yields, though they can't change physics. Our lithography solutions are aiding in defining processes, particularly in adopting glass substrates to advance chiplet and packaging roadmaps.

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