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spk00: Good day, everyone, and welcome to the On2 Innovation second quarter earnings release conference. Today's call is being recorded. At this time, I'd like to turn the call over to Michael Schaefer. Please go ahead.
spk08: Thank you, April, and good afternoon, everyone. On2 Innovation issued its 2021 second quarter financial results this afternoon and shortly after the market closed. If you have not received a copy of the release, please refer to the company's website where a copy of the release is posted. Joining us on the call today are Michael Blazinski, Chief Executive Officer, and Stephen Ross, Chief Financial Officer. As always, I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts, especially comments regarding the company's future plans, products, objectives, forecasts, and expected performance, consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These estimates, whether expressed or implied, are 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 ON2 Innovation's results are currently described in ON2 Innovation's Form 10-K report for the year ended December 2020, as well as any other quarterly filings with the SEC. 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 Plosinski.
spk02: Mike? Thank you, Mike. Good afternoon and welcome to On2Innovation's second quarter conference call. Across the semiconductor value chain, from silicon wafers to wafer fabrication and advanced packaging, Onto Innovation's products are contributing to the faster ramps and higher yields necessary to support the unprecedented global demand for semiconductors. Onto Innovation is broadly participating in this growth, from logic at 7 nanometer down to the 3 nanometer design nodes, to the latest DRAM and 5G communication devices, and out to the rapidly evolving advanced packaging markets where accelerating design shrinks are creating strong demand for more sophisticated and versatile inspection solutions. As a result, in the second quarter, we reported record revenue of $193 million, well exceeding the high end of our guidance, and we continue to see a stronger second half of the year. So let's begin by looking at the highlights from the second quarter, starting with our largest segment, specialty devices and advanced packaging. End market demand for devices to support growing work from home and high performance compute applications propelled revenue in this segment to increase by 45% over the first quarter and more than double the second quarter of 2020. Leading this growth was demand for inspection technology, which increased 24% over the first quarter and 65% year-over-year. Our recently released Dragonfly G3 system's improved sensitivity, speed, and integrated clarifying technology is expanding our position in the most demanding and sophisticated packaging markets, while also opening new markets, such as high-definition image sensors, where our growth continues ahead of expectations. For example, in the second quarter, we received orders from a fourth new image sensor customer, while a top three image sensor customer doubled their existing install base to support the ramp of their latest sensor technology. Another segment we see expanding our served markets is panel-level packaging. We believe this market represents an important inflection point for the industry, particularly for high-performance compute engines and large heterogeneous packages. Our newest lithography tools deliver high resolution imaging across a very wide field of view, which is proving to be a key enabler for next generation packaging technology for larger advanced packages. We've started shipping our backlog and have received an additional four orders for shipment in first half of 2022. Our total lithography backlog is now over 30 million, and we expect to close 2021 with several more tool shipments and a fully booked production schedule for 2022. We're working closely with our customers and suppliers to determine additional capacity needs for 2023. Revenue to support both power and 5G applications increased to over 24 million in the second quarter. This included demand for our inspection systems, new overlay metrology from our acquisition of InSpectrology, and strong demand for metal film metrology. This also included the addition of four new RF and power customers which we expect will contribute to our projected stronger half of the year. Turning to the advanced nodes, in the second quarter, we set a quarterly revenue record for our flagship Atlas OCD metrology platform. This record demand was primarily in support of expansions for leading-edge DRAM and logic devices, where our greater sensitivity provides essential metrology for a growing number of critical dimensions at speeds required for volume manufacturing. We expect demand for our Atlas OCD to continue to strengthen in the second half of the year, both to support additional investments in advanced logic and DRAM and an increase in the number of applications on our tools in support of higher yields. Even as demand for our core products hit record levels to support overall market growth, we're enabling future growth by expanding our position in new markets such as planar films and high-aspect ratio metrology for 3D NAND. We're also seeing revenue synergies in specialty markets as we introduce our metrology suite to these customers. For example, in the second quarter, we received orders for our latest film system from six new customers in the specialty device markets. These orders will ship in the second half of 2021, and including projected repeat orders from our first customer, we expect second half growth of our planar films to be over 50% from the first half, providing nice momentum into 2022. And finally, I wanted to also highlight our ongoing commitment to raising our corporate and social responsibilities by becoming an affiliate member of the Responsible Business Alliance. We're already actively committed to responsible environmental and social policies, but our membership in the Responsible Business Alliance is another important step forward. By joining our fellow members of the RBA, we will serve as an example to our suppliers of how the RBA Code of Conduct can create a more successful industry climate and a better world. I will now turn the call over to Steve Roth, who will cover the second quarter financial highlights before I provide some color on our third quarter.
spk04: Steve? Thanks, Mike, and good afternoon, everyone. In my remarks this afternoon, I'll provide some details on our Q2 results, then follow that with what we're seeing for guidance for the third quarter. As Mike mentioned, our second quarter revenue was $193.4 million, up 43% over the same period last year, and up 14% over last quarter. During the quarter, we received approval from the U.S. government to ship certain systems that we had in backlog since the end of 2020 to a customer in China. Those shipments totaled $13.1 million in the quarter. Due to a delay in getting this approval, our customers' ramp plans and their customers' orders shifted downwards, and we agreed to cancel a portion of the original order, totaling about approximately $8 million, and redeploy those systems to other customers. We still have other systems awaiting government approval, which at the end of the second quarter totaled approximately $7.3 million. Breaking down the revenue by market, 48% of the sales were from our specialty device and advanced packaging market, with strength coming from RF and power markets, which combined were up 200% over the first quarter. The advanced node market represented 33% of sales in the quarter, down from Q1. While we did see growth in memory, both DRAM and NAND, those increases were offset by a temporary pause from Logic customers. Finally, software and services increased slightly in the quarter and represented 19% of revenue. Our gross margin continued its strong quarter-over-quarter performance, increasing to 55% compared to 54% in the first quarter. Higher revenues covering our fixed manufacturing costs and product mix help offset supply chain cost increases in the quarter and drive the gross margin improvement. Second quarter operating expenses were $55.8 million, an increase from $49.2 million in the first quarter of 2021. This unusual increase in operating expenses was mainly due to our variable compensation plans now forecasted to far exceed targets. as well as, and as such, we had to true up our accruals, including a catch-up of a Q1 shortfall. In addition, stock-based compensation expense was higher in the quarter due to annual employee grants, and headcount increased to support growth we are seeing now and in the future. Even with the increase in operating expenses, our strong financial model resulted in an increase in operating margin to 26%, up from 25% in the first quarter. In fact, Our operating margin has improved every full quarter since we completed the merger of Rudolph and Nanometrics, and we feel confident in achieving our long-term operating model, which at a revenue level of $800 million calls for gross margins of 55% to 56% and operating margins of 29% to 30%. Net income increased in the second quarter and was $45.9 million, or $0.92 per share, and above the high end of our guidance. In the 2021 first quarter, we reported net income of $36.3 million, or $0.73 per share. Moving to the balance sheet, we ended the quarter with a cash position of $411 million, up $18 million from Q1. Accounts receivable increased to $175 million in the quarter due to an increase in revenues and the linearity of our shipments, which were heavily weighted to the back half of the quarter. Our inventory turns improved in the quarter. However, overall inventory increased slightly and ended at $207 million. Now turning to third quarter guidance. We expect revenue to be in the range of $190 to $200 million. Earnings per share in this revenue range is anticipated to be between $0.85 and $0.99 per diluted share. We also expect our gross margins to be between 54% and 56%. For operating expenses, The compensation plan true-up I just discussed should have minimal impact on our quarterly operating expenses going forward, but we will continue to have active recruiting plans in place for the strong growth we are seeing. Therefore, we anticipate operating expenses to decline in the third quarter and be in a range of $52 to $54 million. With that, I'll turn the call back to Mike for additional insight into Q3 and the remainder of 2021. Mike? Thank you, Steve.
spk02: We enter the third quarter with strong momentum across all of our markets and strategic initiatives, which include continuing to increase operational efficiencies to further strengthen our foundation for sustainable growth. We have a record backlog and visibility out to early 2022, so even with our strong results for the second quarter, we remain confident in the expectations set last quarter for continued growth in the second half, with the fourth quarter stronger than the third. Specifically for the third quarter, we expect spending on logic to increase significantly in support of additional expansions by several logic suppliers in the second half of the year. We see continued strong demand from packaging and RF customers in the third quarter and expect a sharper increase in the fourth quarter as our expanding number of customers increase their investments in 5G to support new applications in infrastructure and transportation in addition to the current growth in mobile applications. We expect memory overall to decline in the third quarter, with DRAM spending to pick up significantly in the fourth quarter to support investments from leading suppliers. With the continued growth we see for the second half of the year, our supply chain team is increasing their focus on deliveries and supplier backlog from each of our supplier partners to minimize impact to our customers. As I mentioned earlier, our growth is not only driven by the surging demand for our products in existing markets, but also the progress we are making expanding into new markets, such as the image sensors, planar films, panel packaging, and high aspect ratio metrology. In total, these initiatives expand our served markets by over 350 million, creating additional revenue opportunities for 2022 and beyond. And with that, we'll open the line for questions from our covering analysts. April, please go ahead.
spk00: Thank you. If you'd like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time. And we'll hear from Patrick Ho of Stifel.
spk01: Thank you very much, and congratulations on the really nice quarter and outlook. Mike, maybe first in terms of the advanced packaging market, there's clearly a lot of growth opportunities, particularly at the most leading edge. You're seeing some of the top chip makers talk about their opportunities in advanced packaging. Can you give a little bit of a highlight of, one, those opportunities on a big-picture basis, And two, how they, I guess, come together in some of your volume purchase agreements that you've talked about in the past. Are you getting more of those because you're able to leverage kind of a one-stop... ...complex some of the AP processes are becoming?
spk02: Yeah. So Patrick, you broke up a little bit, but I think I understand the gist of your question. So from an AP, from a packaging perspective, the demands are increasing across a variety of different applications. And the leading manufacturers, the leading IDMs are certainly investing significantly more R&D dollars and capital capital capital dollars towards expanding advanced packaging technology and capacity. From a volume purchase agreement, you're right. These top IDMs, where we're also gaining traction with our metrology platforms on the front end, they're also seeing the opportunities on the back end, and we're able to leverage the increased volume, the Similar service organizations, you know, during COVID, we cross-trained a lot of our service and support organizations. So we now have significantly better coverage, you know, with a lot of overlap and capability. So they can see a benefit in service and uptime in the capabilities of buying from onto as a supplier. And that gives us some, you know, some benefit to offer customers as we look and negotiate volume purchase agreements going into 2022. For sure, that's the case.
spk01: Great. That's helpful. And maybe as my follow-up question for Steve, first off, Steve, given your recent announcement, I want to, again, wish you the best of luck. It's been a pleasure all these years working with you. And I think going forward, I'll be one less person to harass you. So thank you again.
spk04: Thanks, Patrick. Thanks for the words.
spk01: Going to the near-term environment, given your results and outlook, you obviously manage the supply chain very well. The entire industry is going through constraints right now to varying degrees. Given your results and outlook, what have you been able to do differently from other equipment companies? With the full understanding, each equipment company is very different. Their supply chain is are different, and the types of components that are in short supply are also different. So if you could just give a little bit of color on what efforts you've done to mitigate the situation.
spk04: Yeah, that's a good question. I mean, I think a lot of congratulations goes to our supply chain team. They've been doing a great job of just keeping a finger on the pulse of where we are seeing some of the component and assembly delays, but we've been able to manage through them. for the most part. I think we're obviously seeing stuff on the logistics side and just getting material to us. So in some cases, I mentioned a little bit of offsetting pressure on our gross margin, but that was really to cover expedited charges and things that we've been paying a little, just to reduce transit time and make sure we get our stuff in on time. So doing that as well as obviously looking out a little further and making sure that we're making sure we have adequate stuff on the books for the growth that we're seeing. I think we've been doing a fairly good job of managing it. Not that we're not experiencing it, but I think we've been doing a good job of managing it overall.
spk03: Great. Thank you again.
spk00: Quinn Bolton of Needham & Company.
spk05: Hey, you guys. Congratulations on the nice results. And, Steve, I'll say the same congrats and best wishes to you. I wanted to start with just sort of the visibility that you have in the second half. Sounds like Q3 up over Q2, Q4 up again. If you look at WFE, I think many analysts predict WFE up 30-plus percent, maybe even into the mid-30s. And based on your visibility right now, wondering if you think overall product revenue at Onto will sort of keep pace or perhaps even outperform that WFE level in 2021.
spk02: Yeah, so Quinn, we believe that we'll be outpacing the WFE. If you look at the expanding capital intensity for our Atlas metrology platforms in the advanced nodes, and we look at the different applications we see happening on the advanced packaging front, and then combine that with the new market expansions that were only in the early stages of gaining traction, You know, we look at all that combination and, you know, some of the guidance we've given would indicate that we're fairly confident in outperforming a 30% kind of WFE number.
spk05: Great. And the second question, as you're going through the comments looking into Q3, Q4, it sounds like you saw memory picking up in the fourth quarter. It sounds like that's driven more by DRAM, but wondering if you had Any thoughts on the NAND outlook Q3, Q4?
spk02: For us, we see the NAND softening in the second half. So, you know, despite all the strength, that is probably the one market that we've seen that we see softening a bit going into the second half. And it's roughly equal from what we can tell. It comes down and then stays at that reduced level.
spk05: Sorry, for Steve, on the litho, the litho backlog up nicely again this quarter. As you start to ship those systems, I know that carries, those systems carry lower gross margins. You know, any concerns that that could pull you below the 55 to 56 level that it looks like you're going to be getting pretty close to on a quarterly basis to that $200 million level? quarterly run rate probably, you know, either at the high-ended guidance for Q3, but if not, then definitely Q4.
spk04: Yeah, so that's a good question. You know, for Q3, I'm not concerned. You know, we just started shipping systems, they're new systems, so we're going to have some RevRec things that are going to delay probably when those tools get recognized. I don't anticipate the tools being recognized in Q3. Q4, you know, we've got to see how the mix shapes up, but, you know, we could actually have a slot of tools if they actually all were to get recognized in Q4. It could have some pressure on the margin. The overall model anticipates litho with the lower margins built into it. So it just might be a question if they, you know, back up onto one quarter, that might have a one-quarter impact. But overall, the model does include litho with those lower than normal margins.
spk03: Got it. Great. Thank you very much. And next we'll hear from Craig Ellis of B. Reilly Securities.
spk09: Thanks for taking the questions, and guys, congratulations on the strong performance. Mike, I wanted to start off with you and go back to a point in the press release and from your script. I think the SAM expansion opportunity that you scoped was scoped at $350 million, but in my notes I had that at $260 million, so maybe my historic notes were incorrect, but But I think what's happening is that SAM expansion opportunity is growing, and that's really what the question centers on. As you are moving through calendar 21 and approaching calendar 22, do you actually see a larger SAM expansion opportunity in front of you than what you were seeing six to nine months ago?
spk02: We do. We do in panel-level packaging, which is one of the areas we do. We see a little bit more in the CMOS image sensor, but the biggest probably shift is also on the planar films. So that's another area where we're starting to see a little more demand, not just in the traditional markets, but also in the specialty device markets. We didn't appreciate just how much opportunity there was there, and as we started to leverage our broader channels, our broader sales channels. The opportunities have been very positive. The customers have been very receptive to the new products.
spk09: Got it. Got it. And then, Steve, I'll do a follow-up with you. So if I were to annualize the current quarter's revenue guidance, I'd get something that is close to 800 million, not quite there, but close. And the gross margin is very close to the target, but it looks like operating margin has a bigger gap to target. So I'm just wondering if you can walk through some of the things that will be needed to close the operating margin gap from where we are now to target levels at 29.5.
spk04: Yeah, so the thing that's throwing you off a little, Craig, is that the As I mentioned in my prepared remarks, the comp plans, the variable comp plans are running well above 100%, and the model assumes they're at 100%. So there's a lot of catch-up entry going on in the quarter that's throwing that off a little bit. So that's why I say I'm confident if you were to back out that run rate, out of the run rate, you'd actually be very close to the long-term model.
spk09: Great. And then lastly, and I'll keep it there, and before I ask the last question of you, Steve, I just want to join the group in echoing the thanks for all the help over the years. You've been tremendously valuable, not just with ON2, but with the broader industry, and I greatly appreciate that and wish you well. But as we look at the next milestone now that we're really at the midpoint gross margin target, looking up to the next level, which is 56.5%, Is it about an equal contribution between mix and volume that get us there, or what are the ingredients that take us to your 56.5% target from today's levels?
spk04: Yeah, it's just keeping the standard mix of metrology, inspection. Obviously, litho is built into that, too. So it's really just keeping a somewhat growth across all the segments, even that Mike talked about where you see a lot of the growth. You keep that proportionally up, you start leveraging up into those numbers that you see in the next level of our long-term operating model.
spk03: That's helpful. Thanks, guys, and good luck. Next, we'll hear from Tom Diffley of DA Davidson.
spk06: Yes, good afternoon, and thanks for the question. First, Steve, very sorry to see you go. You've been the one constant in the 20 years I've been in this business, and I'll miss our chats. So maybe starting with you, when you look at the supply challenges you've seen over the last few quarters, how would you characterize the transition of them or the move of them? Are they getting better? Are things getting resolved? Is it getting worse? How do you view the supply chain issues?
spk04: See, I'd say right now we're kind of, I don't see them getting worse right now. I think they've been on kind of a level. I think initially it was, you saw it in the extended kind of logistics side of the shop at first where you saw freight taking longer to get stuff here, especially we bring a lot of stuff in over through container ships. And so I think we initially saw that. I think it evolved a little bit. Obviously, if you hear it among other people, to a lot more on the components. component side, maybe assemblies, and even our supplier suppliers is where we're really seeing, you know, we're constantly with our suppliers trying to make sure they're testing where they're getting their stuff from because we're seeing a couple like I'll call it tier two issues that are causing our vendors to deliver to us on time. So I think that is probably what it's evolved to, but I would say it's kind of been, at least over the last month or two, it's kind of leveled out. I haven't seen it getting any dramatically worse.
spk06: Okay, that's quite helpful. And then, Mike, when you look at the long-term drivers in your market and your products serving those markets, what do you think the natural split between specialty and advanced nodes is for you?
spk02: Over time, I think we're going to continue to be, you know, right around that 50-50 mark. Right now we're, you know, 60-40 where specialty and AP is, is a bit stronger, but as the expansion of our new metrology suite continues, I'd expect that to balance out. So, you know, we'll alternate quarter to quarter, but I would say that, you know, when we look out four or five years and, you know, full adoption of these new products and additional new products, new markets and expansions, I would say, you know, I'd guess that we're going to maintain this 50-50 kind of split, maybe slightly tied to the advanced packaging specialty just because we have more products that play into that in a bigger way, and that's growing fairly aggressively.
spk06: Okay.
spk02: But right around that level.
spk06: Okay, that's helpful. So would you say over the next year that perhaps the biggest drivers, just all the products you have that serve this, you know, emerging foundry war that's going at the leading edge?
spk02: Not just that, but also the planar films and some of the new market opportunities we're seeing for the aspect or the IRCD metrology for 3D NAND, high aspect ratio metrology. I think we're opening up the doors to some markets we didn't participate in in advanced nodes in the past. So I think that's going to you know, drive some outsized growth for us in advanced nodes as well. At the same time, we have the growth on the advanced packaging and specialty.
spk06: All right. Thanks for your time.
spk02: Happy.
spk00: Once again, Star 1, if you would like to ask a question or make a comment. Next, we'll hear from David Dooley of StillHead Securities.
spk07: Thanks for taking my question. Congratulations on strong results. And Steve, congratulations on your retirement and good luck to you on everything. I guess my first question involves, can you just help me with what the TAM of the planar films business is of this new 350 that you're referring to? So it's about $200 million of that.
spk02: So it's about half of the overall planar films. Remember, we split it into the really critical films, some ultra-thin films, and then some more standard planar films. And right now, our products are better suited for the common films. There's about half of the overall planar films market.
spk07: Okay. And do you have a revenue target perhaps you could share with us for this product? either this year or next year, or help us frame, you know, how big of an opportunity it is for you in the near term.
spk03: Steve, how would you frame that?
spk02: So we've, I mean, we gave you some level of hints on momentum. So we talked about it growing about 50% in the second half. We said an achievable goal would be $50 million by the end of, I believe we said, 2022. So you can see that as kind of the momentum. If you're thinking about, you know, we started zero at the beginning of the year or maybe a couple million in the first quarter of the end of the last year, then you can see that trajectory can probably come up with a model.
spk07: So $50 million would be the total over 2022 and 2021, or that's what you might expect in 2022?
spk02: That's what we said we could achieve when I was pressed a couple quarters ago. That's what we could achieve as we look out one or two years. It was not cumulative. It was on an annual basis.
spk07: Okay. Great. And then as far as the advanced packaging inspection business, could you You gave us some great statistics about how much it was going to be up in the back half of the year. How much do you think it will – when you look at that prediction, what will be the growth rate for all of 2021 for that business?
spk02: We didn't break it out, but it would be – we grew, I believe, over 20% last year, and we'd be growing similar levels this year. Okay. Okay.
spk07: then final question for me has to do with the advanced packaging lithography business uh congratulations on um i think you mentioned you got four additional orders so uh you know the 30 million dollar backlog is a great achievement um you know can you you mentioned your slots are full through 2022 so you know if you're uh If your slots are full, then you kind of know if you execute what your revenue will be. Maybe you could share, do you think you can ship all of this $30 million backlog? Or how should we think about the revenue potential of this business over this year and next year?
spk02: Thanks. Yeah, we'll provide that guidance as we get closer to it. But I didn't say, just for a correction, I didn't say the slots were full. I said we expect to end the year. with full slots for 2022. So we're continuing to build the backlog. Now that backlog includes shipments we plan for this year, as well as shipments expected or slots available for next year. And we expect with the engagements we have to close out the open slots for 2022, you know, well ahead of the end of this year. So they're not closed yet. Okay.
spk07: And then, I guess, theoretically, if you do close all your slots, how should we think about the revenue potential for the lithography business, either this year or next year, or however you can help us frame it at this point?
spk02: Really good. I'd say, you know, it's... You can look at the $30 million and consider that a pretty decent bottom estimate, and then we should be above that if we do succeed in filling all of those slots.
spk07: And I guess the core reason that this business has all of a sudden taken off is you've got multiple customers that have moved into actual production with your tools.
spk02: Well, we just shipped the first one. We have multiple customers planning to move into production. Yes.
spk07: Thank you. And again, congratulations on nice results.
spk03: Thank you.
spk00: And there are no further questions at this time. I'll turn the call back over to Mike Schaefer for any additional or closing comments.
spk03: Thank you, April.
spk08: As a reminder, we will be participating in the B. Reilly Summer Summit on August 18th and the Needham Semicap and EDA Conference on August 24th. We'd like to thank everyone for participating in the call today and for your interest in On2Innovation. That concludes our remarks for the call, April. Please wrap up the call.
spk00: Again, that does conclude today's conference. Thank you all for your participation. You may now disconnect.
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