Onto Innovation Inc.

Good day, and welcome to the Onto Innovation Third Quarter Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Michael Schaefer, Investor Relations. Please go ahead, sir.

Thank you, David, and good afternoon, everyone. Onto Innovation issued its 2021 Third Quarter Financial Results this afternoon, 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 Plosinski, Chief Executive Officer, and Stephen Roth, 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 Onto Innovation's results are currently described in Onto Innovation's Form 10-K report for the year ended December 2020, as well as other quarterly filings within the FCC. ON2 Innovation does not update forward-looking statements and expressly disclaims any obligations to do so. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. And 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 Blazinski.

Mike? Thank you, Mike. Good afternoon, everyone, and thank you for joining On2Innovation's third quarter earnings call. The On2Innovation team delivered a strong quarter, exceeding the high end of our revenue guidance and improving both growth and operating margins. While supply chains continue to be challenging, we expect demand to increase in the fourth quarter, with revenue growing 5% to 10% over the third quarter. Let's begin with highlights from the third quarter, starting with the advanced nodes market, which grew by 10%, driven by a surge in logic spending in the quarter. Smaller geometries and new 3D transistor structures are creating an increase in capital intensity for high-sensitivity, high-speed optical metrology systems. As an example, metrology applications to support the next-generation FinFET structures could increase as much as 50% over prior structures. Customers indicate that our combination of greater sensitivity and AI-enhanced modeling software is proving to be a powerful differentiator in these applications. In the third quarter, more than half our revenue at Advanced Logic came in support of investments for pilot lines for transistor structures below 5 nanometer. Our strategy to grow, share, and integrate in metrology is also progressing well with another leading DRAM manufacturer, selecting onto integrated metrology to support their production ramp of next generation high bandwidth memory starting the first half of 2022. This year, we've already added six new customers for integrated metrology, and each are expected to move to volume production next year. In addition to being positioned for those future expansions, we've seen a strong increase in demand this year from existing customers. In the first nine months of the year, Integrated revenue increased 50% over the same period in 2020. The Impulse 5 technology further improves our value proposition as we believe it is the only system capable of speeds matching the latest CMP tools while maintaining required sensitivity below 30 angstroms. This capability allows customers to increase line productivity by reducing rework due to over polishing in CMP. Now, turning to our largest market, revenue from our specialty and advanced packaging customers was comparable to the second quarter and 43% greater than last year's third quarter. Within these markets, demand for our inspection technology continued to accelerate, and for the second straight quarter, our inspection revenue increased by over 20%. The strongest demand is coming from the top IDMs to support investments in new heterogeneous packaging micro-bump, and 3D TSV technologies. We uniquely meet these challenges by augmenting our inspection platforms with advanced analytics leveraging artificial intelligence to provide actionable information to our customers. For example, DRAM memory customers have been challenged by micro-cracks induced by stress in the sawing process. These cracks can become costly reliability issues especially when several dye are stacked into single HBM or high-bandwidth packages. Increasing sensitivity would find the cracks, but also thousands of nuisance defects resulting in overkill of good dye or shipping dye with potential reliability issues. By leveraging our proven machine learning algorithms, we're able to detect the critical defects of interest while eliminating the noise, which resulted in a more robust solution and improved yields. In addition to our tool-centric solutions, we see stronger demand for our enterprise software, particularly from the specialty device markets, including power and RF customers, which represented 50% of our enterprise sales in the quarter. The combination of enterprise-wide revenue and expanding tool-centric applications help set a new record for the business in the third quarter. We also see a new point of leverage for the software to enable enhanced productivity services to our fleet of installed equipment. Since the merger, we've been steadily transitioning our services business from a traditional break-fix model to a more customer-focused recurring revenue model with an emphasis on contracted services aligned with customer performance metrics. As a result of these efforts, contract revenue has increased each of the last eight quarters. Over the last several years, our software and services business has grown by about 30% and is roughly 20% of our revenue today. And we believe leveraging our software will provide additional future growth opportunities for this business. So it was certainly an exciting quarter across several areas of our portfolio. But perhaps most exciting is the progress being made on our latest JetStep lithography platform for advanced packaging. The first tool has been installed in the starting process qualification for panel-sized heterogeneous package technology. We shipped our second tool in the third quarter, and we received commitments for six additional manufacturing slots for delivery mostly in 2023. In order to support the commitments for 2023, we're expanding the manufacturing capacity at our Wilmington facility and with our key suppliers. Now, I'll turn over the call to Steve to discuss the financial highlights.