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    Onto Innovation Inc (ONTO)

    Q4 2023 Earnings Summary

    Reported on Feb 10, 2025 (After Market Close)
    Pre-Earnings Price$164.76Last close (Feb 8, 2024)
    Post-Earnings Price$171.01Open (Feb 9, 2024)
    Price Change
    $6.25(+3.79%)

    What went well

    • Strong growth in AI packaging driving revenue increases: Onto Innovation's inspection business in Q1 is expected to be 3× larger than Q1 last year due to demand for AI device production. Nearly all of the $10 million upside in Q4 was tied to AI packaging , and there is strong demand for Dragonfly inspection systems with backlog extending into the second half of the year.
    • Effective operational management meeting high demand: The company is effectively handling increased demand and operational challenges. The team has done an outstanding job managing manufacturing and supply chain constraints to meet the ramp-up. Gross margins are expected to improve due to cost reductions, even without volume or mix improvements.
    • Expansion into new customers and technologies: Onto Innovation has secured a new customer in glass substrates, with shipments expected in the summer. Additionally, the third HBM customer is now picking up and investing, which could lead to market share advantages. The company anticipates more new customers in 2025 as well as repeat business.

    What went wrong

    • The company expresses uncertainty about the second half of the year, as backlog for their Dragonfly systems is "not at the same level" compared to the first half, indicating potential slowing demand in their packaging segment.
    • Growth in the power semiconductor market is expected to be flat at record levels in 2024, signaling potential stagnation in a previously high-growth segment. The company is "more comfortable with kind of flat at this record level" for the power business.
    • The company relies heavily on repeat business from existing customers rather than expanding their customer base, which may limit future growth opportunities. In 2024, "the bulk... will be repeat business," with new customer acquisitions expected more in 2025.

    Q&A Summary

    1. AI Packaging Revenue Growth
      Q: What drove the significant packaging revenue increase?
      A: The company saw nearly all of its $10 million upside in the quarter tied to AI packaging revenues. Dragonfly system sales, used in advanced packaging for AI chips, grew 3x year-over-year. Demand is driven by the complexity of AI architectures, increasing capital intensity despite lower wafer volumes.

    2. Gross Margin Improvement
      Q: Can gross margins improve without higher volumes?
      A: Yes, gross margins are expected to improve through cost reductions and operational efficiencies, returning to the target model by year's end despite current volume levels.

    3. Gate-All-Around Technology Ramp
      Q: When will gate-all-around technology fully ramp?
      A: The ramp is expected in early 2025, but timing remains uncertain. The company is focused on strengthening its position to capitalize when it does ramp.

    4. Advanced Nodes Pickup
      Q: Which end-use areas are seeing advanced nodes pickup?
      A: Incremental improvements are observed mostly in logic, followed by DRAM, with potential volumes increasing in the second half or into early next year.

    5. HBM Customer Expansion
      Q: What's the status of HBM customer orders?
      A: The third HBM customer is now picking up, investing in capacity with unique technology, indicating broader market adoption.

    6. Lithography Customer Growth
      Q: Will lithography customer base expand?
      A: A new customer for glass substrates in logic applications has been acquired, with tool shipment expected in summer. Bulk of 2024 growth will come from repeat business, with more new customers anticipated in 2025.

    7. Power and Specialty Markets Outlook
      Q: How are power and specialty markets looking into 2024?
      A: The company expects the specialty device and packaging segment to continue very strong into 2024, with high double-digit growth, while the power segment is expected to be flat at record levels, with potential for growth.

    8. China vs Non-China Spending
      Q: Are China and non-China markets trending differently?
      A: No significant differences are observed; activity continues in Japan, Europe, U.S., and China, including discussions into 2024.

    9. Manufacturing and Fulfillment
      Q: Any capacity constraints with Dragonfly ramp-up?
      A: Lead times are around two quarters due to high demand. The company is overcoming challenges with suppliers and resources, and does not expect significant constraints.

    10. Second Half Expansion Plans
      Q: What are expectations for AI packaging capacity in H2 and 2025?
      A: Second half expansion remains uncertain as customers assess capacity needs, but there's stronger indication that 2025 will require additional capacity due to demand growth.

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