Onto Innovation Inc.

Hi, everyone, and welcome to the On2 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 Schaefer. Please go ahead.

Thank you, Anne, and good afternoon, everyone. On2 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, forecast, 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 On2Innovation's Form 10-K report for the year ended December 2019, as well as other filings with the Securities and Exchange Commission. On2Innovation 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? Good afternoon, and once again, thank you all for joining us today. We'll begin with the 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. 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 three 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 heights were 50 microns. Within a few years, that quickly dropped to 2 micron RDL geometries and bump heights 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 two years ago are simply not any longer. We see this dynamic playing out across each of the top five semiconductor manufacturers, And within this group, we estimate our leading share increased by another 20% over the last two 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 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 have 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 generations 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 logic 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 80 times that in depth, making this an 80 to 1 aspect ratio and extremely difficult to measure. Yet precise control of these deep channel holes is critical to performance. The Aspect metrology can accurately measure these channel holes in a few seconds compared to the best X-ray speed of about five 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 diffract 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 Diffract is backwards compatible with our legacy platforms, and since its release several months ago, we've already installed it on systems at three of the top five 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 two 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 in 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 On2Innovation, we've deepened our customer engagements in the advanced nodes by aligning roadmaps with our customers' future manufacturing challenges. We are leveraging our broad portfolio, 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.