Onto Innovation Inc.

Good day and welcome to the Onto Innovation first quarter earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Schaefer, Investor Relations. Please go ahead, sir.

Thank you, Jenny, and good afternoon, everyone. Onto Innovation issues its 2022 first 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 Ross, Chief Financial Officer. As always, I'd like to remind you that the statements made by the management on this call will contain forward-looking statements within the meaning of the federal securities laws. Such statements are subject to a range of changes, risks, and uncertainties that can cause actual results to vary materially. For more information regarding the risk factors that may impact ON2 Innovation's results, I would encourage you to review our earnings release and our S&C filings. Onto Innovation does not undertake the obligation to update these forward-looking statements in light of new information or future events. 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 Klosinski. Mike?

Thanks, Mike. Good afternoon, everyone, and thank you for joining our first quarter earnings call. I'm pleased to report that the On2Innovation team delivered another record quarter of $241 million, exceeding the high end of our guidance. This represents a growth of 7% over the prior quarter and an impressive 43% over the first quarter of last year. Operating margins at 31% were in line with our long-term operating model, despite the ongoing supply chain challenges, which we'll discuss later in the call. Another highlight for the start of the year is the increase in magnitude of volume purchase agreements with several of our top semiconductor manufacturers. We've now closed agreements for 2022, valued at over $390 million for inspection metrology solutions across front and back-end applications. This represents an increase of approximately 40% over the prior year, exceeding estimates for wafer fab equipment growth by almost a factor of two. We appreciate these expanding partnerships and believe this growth reflects the value of our collaborations and unique combination of software and hardwares delivering to our customers. So let's begin with the review of the first quarter, starting with our Advanced Nodes customers. Revenue from this market grew 36% over the fourth quarter, resulting in an on-to record of $100 million in equipment sales. The strongest growth was from our Atlas metrology platform to support expansions in both DRAM and NAND, each growing by over 70% from the fourth quarter. This demand is a result of both customer expansions and an increasing number of critical layers being moved to the Atlas platform. Many of these new layers are referred to as advanced process controller APC layers, meaning our metrology is being used to directly impact the process and therefore requires higher sampling rates. For these layers, it's essential to have the throughput and the measurement robustness necessary to provide the critical data. The combination of our Atlas platform's industry-leading number of discrete channels and the AI diffract software's unique modeling capability is proving to be one of the best solutions for monitoring complex nanoscale 3D structures in high-volume production. In addition to metrology for 3D structures, The adoption of Iris Cleaner Film Metrology continues to build momentum, and in the quarter we saw Iris Metrology revenue increase with several orders from the new leading NAND customer we announced late in the fourth quarter. We expect additional customers to adopt Iris this year, further expanding our position in this new market segment. Revenue from Advanced Logic customers was down after a very strong fourth quarter and but still significant and roughly the same as our NAND revenue. We're encouraged by the fact that about 40% of the logic revenue was in support of 3-nanometer FinFET process control in R&D and pilot production. We view this as a good early indication for significant future demand when these customers move to higher volumes. Now, turning to the specialty and advanced packaging markets, Our Dragonfly G3 set another record for sales and was adopted by 12 customer sites where we were not previously the inspection process tool of record. These new opportunities spanning both front and back-end applications were opened up because of the high speed and sub-micron sensitivity of the Dragonfly G3 combined with exclusive features like our ClearFind and TrueIDC technology. Adding to that, an emerging need for defect control on both edge and backside surfaces is proving critical for advanced packaging of chiplets and HBM3 memory packages. Current solutions on the market are not meeting the customer's requirements, and to address this need, in close cooperation with the top three semiconductor manufacturer, we developed the EB40, a powerful new module for the Dragonfly G3. The new EB40 module provides high resolution, high speed inspection of these secondary wafer surfaces. The initial success has already led to a volume purchase agreement totaling over 70 million from this customer over the next six quarters. We expect several other customers to adopt this technology throughout the year. We also see investments in interconnect technology to enable panel level packaging for heterogeneous devices. The advantages for heterogeneous devices and system performance, power consumption, and form factor are well documented. However, the current cost and production constraints of legacy and sub-5 nanometer wafers provides another incentive for designers to leverage chiplet architectures to optimize circuitry for specific design nodes and create leading-edge and cost-optimized devices. So to enable this shift to heterogeneous devices, a significant increase in panel manufacturing is required. A JPMorgan Taiwan report estimates that from 2021 to 2025, manufacturing capacity for these finished panels will expand with a compounded annual growth rate of 20%. Processing these panels is complex, with a lot of inherent variation in the processed materials compounded by shrinking interconnects and increasing numbers of layers printed on both sides of the panel. The first two JetStep X500 lithography systems are making steady progress through our customers' product qualification stages, which include qualifying the process. This means that together with our customers, we're working to identify opportunities to improve both the tool and the process. Through this effort, we're also demonstrating ON2's strategic value by broadening the discussions to include process monitoring and control solutions to actively adjust equipment based on the advanced analytics we've developed. We've won two such engagements and expect a third panel yield engagement to be added in 2022. Now I'll turn it over to Steve for the Q1 financial highlights and the second quarter guidance. Steve?

Mike, good afternoon, everyone. I'll start by providing some details on our Q1 results and follow up with the second quarter guidance. As Mike mentioned, we had another record quarter with first quarter revenues of $241 million above the high end of guidance. You can't hear me?

You can't hear me? Please go ahead, sir. I was just reading that my audio is not coming through.

I can hear you at this time. This is the operator.

Okay. Can you hear me now?

Okay. Let me start over. As Mike mentioned, we had another record quarter with first quarter revenues of $241 million above the high-end guidance, which was achieved on demand of our process control business. We did not recognize any revenue from our initial jet depth photography systems in the quarter.

We also are pleased to have delivered our ninth consecutive quarter. Your line seems to be cutting out again, sir. Okay, I'm not sure why. Oh, now I can hear you. Okay. Hold on one second. Can you hear me now, operator? Yes, sir. You're coming through. I can hear you clearly. 100% of sales. And experience, no? Operator, I'm going to be cutting out on this call.

Okay. I can hear you at this time, but do you need to establish a different phone line perhaps?

Let me, can I, I don't know, I don't have a separate phone line to dial in on.

We can hear you clearly at this time, sir.

Okay.

Yeah, hold on one second. I'm going to, I'm going to move. Operator? Operator? Go ahead, sir. Can you hear me now? I can hear you at this time. Yes, sir. Okay.

I apologize, everyone. I'm having problems, obviously, with my phone service. So breaking down revenue by market, we saw a strength in the advanced mode market, as Mike mentioned, which represented 42% of sales. Our accessory device and advanced packaging market represented 41% of revenue and experienced a slowdown in a quarter, primarily from RF customers after a strong Q4. Finally, software and services decreased slightly from the prior quarter, though up 17% year-over-year and represented 17% of revenues. Gross margins were up from 53.8% in the same period a year ago and down from 54.9% in the fourth quarter. As has been widely publicized by others in the industry, we are experiencing multiple cost pressures from our supply chain that have impacted our gross margins. We have accelerated inventory deliveries to help mitigate unexpected supply chain disruptions that impacted production and customer commitments. We have also seen increases in commodity and chip pricing, difficulty in supply availability, and a significant increase in logistic costs due to high demand and China lockdowns. Where possible, we are working with suppliers to implement second sources and increase adoption of our newer, higher-value systems. First quarter operating expenses were $56.8 million, an increase of $1.9 from the fourth quarter. The increase was primarily due to higher corporate and federal taxes associated with variable stock-based compensation in the quarter, as well as higher office expenses as we began reopening our facilities. Even with these inflationary pressures that we talked about, we were able to tightly manage our discretionary expenses, which resulted in a 31% operating margin for the quarter. Net income increased in the first quarter and was $65.6 million, or $1.32 per share, and above the high end of our guidance. In the fourth quarter, we reported net income of $61.2 million, or $1.23 per share. In addition, we received additional tax benefits as a result of new tax rules regarding mandatory capitalization of research and development costs, which became effective at the beginning of this year. There have been discussions that the new rules may be repealed. However, if they do stay in effect, we currently expect our effective tax rate to be between 13% and 14%. Moving to the balance sheet, we ended the first quarter with a cash position of $542 million, up 31 million from Q4. Accounts receivable increased to $207 million in the quarter, and our data sales and standing increased to 78 days. Our inventory increased to $263 million in the quarter on higher planned sales for the second half of 2022 and continued acceleration of inventory delivery that I just discussed as a hedge against supply chain disruptions. Now turning to second quarter guidance. We currently expect revenue for the second quarter from our process control business to be between $234 and $248 million. Our guidance range excludes the potential revenue from lithography systems due to the uncertainty and timing of revenue recognition and the growing magnitude of the system's revenue, which could be as high as $20 million in Q2. Earnings per share in the revenue range is expected to be between $1.16 and $1.35 per share. We expect that our gross margins will hold steady at 54.5% plus or minus 1%, primarily accounting for the impact we see from the supply chain. And again, this guidance does not include lithography systems. Property expenses We are aggressively hired to support our growth, and we perform our annual compensation adjustments in the beginning of Q2. Therefore, we currently anticipate that our operating expenses will increase in the second quarter and be in the range of $57.5 to $60.5 million. With that, I'll turn the call back to Mike for additional insights on Q2 and the remainder of 2022. Mike?

Thank you, Steve. I'm glad your phone is working. Using the midpoint of guidance for the second quarter, we're projecting 33% growth for the first half of 2022 versus the prior year, which is well ahead of the current consensus for annual weight for fab equipment growth. As we discussed, our performance reflects not just the strong markets, but our growing position within these markets. And as Steve mentioned, this does not yet include any lithography systems. in the second quarter, and for the remainder of the year, we see 3D NAND investments being the largest contributor to growth. The current transition to high-stack 3D NAND is still in the early stages. We estimate that by the end of this year, only 10% of NAND will be greater than 176 layers. We expect that number could be as high as 80% of NAND by the end of 2025. In addition to leveraging our core Atlas OCD metrology, We've been closely collaborating with leaders in high-stack NAND to demonstrate the benefits of the Aspect metrology and Metapulse acoustic metrology for critical high-stack NAND applications. As a reminder, unique benefits of Aspect and Atlas metrology combine to provide fast and accurate channel hole metrology, which is critical to yields. We expect to add our second customer for Aspect metrology in this quarter and possibly a third by the year end. In addition, we've learned the control of the amorphous carbon film thickness is critically important for proper transistor formation in high-stack 3D NAND. As these films become thicker, the Metapulse's inherently non-destructive on-product measurement capability is proving to be the safest and most accurate source of this critical data. We expect this to be a significant new driver for the Metapulse technology, adding to the already strong demand from expanding RF and power customers. To support the growth in DRAM, NAND, and Logic, the generally conservative silicon wafer manufacturers are increasing capacity over the next year. This creates demand for our element material systems, where we are best in class for carbon and oxygen metrology, and our Novus Edge unpatterned macro inspection systems, where we are five times more sensitive at the wafer edge than our competition. Based on the backlog we have, we expect both products to increase in revenue in the second half of the year and continue to grow into 2023. So with end market demand expected to remain healthy through the year and the additional tailwinds from new applications such as panel lithography, 3D NAND, and expansions in silicon wafer manufacturing, we maintain our view that the second half of 2022 will be stronger for onto innovation than the first half. Of course, this assumes no unforeseen supply chain or geopolitical impacts, which is certainly a factor but remains very difficult to predict. And with that, we'll open the line for your questions. Operator?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're using a speaker or phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Craig Ellis of B. Reilly Securities.

Yeah, thanks for taking the questions and congratulations on the strong execution. Mike, I wanted to start with just a point or a question on one of the operating dynamics you talked about, the volume purchase agreement. So clearly very strong customer engagement with on to year to date with, I believe it was 390 million. The question is, is how should investors look at the potential for you to add any further volume of purchase agreements through the year? Do you typically do that mostly in the first quarter, or is that something that is built on over the course of the calendar year?

Generally, it's in the fourth quarter leading up, but we had a few of them through negotiations, and also they were still refining their own plans based on supply chain challenges they were having. So a couple of them drifted into the first quarter. But generally, they're all locked up in the fourth quarter.

Got it. And then clear message that 3D NAND is going to be an area of strength as we look at the second quarter and the back half of the year. But if you were to bin out some of the end-use areas and rank them below 3D NAND, how would that look for onto innovation this year?

Well, we still see a pretty strong demand from the packaging customers. I mentioned the work on the EB40 and the demands that I highlighted there. That's going to be a pretty strong contributor throughout the year. And then I'd say below that, DRAM remains pretty strong. I mean, there's a lot that will go on in the fourth quarter, we believe. There's a lot of factory expansions. Some have slipped from third quarter to fourth quarter, pretty well publicized. So, you know, part of that is DRAM. So I'd say that would be our third. And then, of course, lithography, which would fit into packaging, but the panel lithography is, you know, separated as we wait for the sign-offs to progress. Got it.

And then I'll just flip it over to Steve for one question. Hopefully the line's working on your end, Steve. On the tax item that you mentioned, what was the percent and earnings per share benefit in the quarter? And I think you said if this persists, it would mean a tax rate of 13% to 15%. Is that correct? Thank you.

Yeah, can you hear me correctly? It would probably be close to like 13% to 14%. tax rate if it persists. We had to put it in place because it went effective at the beginning of the year. And I'd say probably, again, our tax rate's typically in the 16% range, 16, 17%. So it added probably about five cents to the EPS in the quarter.

Got it. Thanks, guys. I'll hop back in the queue. Thanks, Craig. We'll go next to Quinn Bolton of Needham.

Thanks, guys. Let me just follow up on Craig's question there on the tax. What are the chances that it gets repealed or that you won't be able to continue to recognize that benefit? Do we need a change in tax law to go back to the 16% to 17% or is it more company specific?

Yeah, no, no. It's a change in the tax law. So this was put in back during the Trump administration and it kicked in starting this year. But, you know, obviously we've talked in the current administration has been, you know, tax changes and things like that. So that's where there's rumbling of it potentially going away, but it's not, it's not specifically to onto it. We all got this tax change at the beginning of the year.

Got it. Thank you for that clarification. Then wanted to ask on the litho, you know, I know you're, you're going through the qualification, but can you give us any sense, you know, how far through that qualification are you, how likely are, Is it that you think you might be able to recognize some of that $20 million figure that you mentioned in the second quarter?

I think there's a good chance. We've always said we think Q1 or Q2, but there's – because of the complexity that it's not just our tool, but also for instance, reticles, we've had to redo reticles several times as the customer debugs the reticles printing for the process. And with, you know, several layers on each side, that's quite a bit of, you know, quite a bit of extra work that is sort of happening in parallel to the qualification of our, of our stepper. So it's hard to predict, but you know, we've, We're hopeful or we're optimistic that the second quarter we can see that put behind us.

Great. And then, Mike, a follow-up on lithography. I know at the beginning of the year you put out the statement that your backlog for litho had at that point reached about 100 million. Can you help quantify for us in a high-volume panel manufacturing space, facility, how many steppers would you need in that facility? Is it one or two? Is it more than that? I'm just trying to get a sense, you know, as we see panel move into high volume production, you know, what's the unit opportunity for high volume factory?

So these are moving into high volume. So the way these lines run, they're set up as lines, almost like solar lines, where you kind of input raw material and output a finished panel, unlike a traditional wafer fab. So each line takes two steppers, one to print the front side, then it's flipped and printed on the back side, then it moves to the next step in the line. So I would say the... You know, what we're seeing for some of these larger fabs is they're being built to support up to, let's say, 10 lines, you know, maybe 6 to 10 lines. From what we know, I mean, I think that's changing and the market quickly evolving, but that's sort of where we're at now.

Great. That's very helpful. Thank you, Mike.

And we'll move to our next question from Tom Diffley with DA Davidson.

Yes, good afternoon. Thanks for the question. A couple more lithography questions for you, Mike. When you look at your backlog, is that mainly the 500, or is that composed of the 2300s and the 3500s as well?

Good question. It's primarily the X500s. So I'd say there's onesies, twosies. Of the others, I'm not even sure we included those in the $100 million. So I'd say it's primarily the X500. Okay.

And then do you have any... Go ahead.

Sorry, I said like 95% by primarily, you know, quite a bit.

Okay. All right. And then is there any update on your ability to ramp capacity over the next couple quarters?

Yeah, that's another good question. We're making steady progress. We've done a lot of hiring. We've brought in some really talented leadership, and they're having an outsized impact, I would say, on our progress. Teams are coming together. The talent is coming in, and I'm seeing every time I go downstairs, you know, steady progress, not just on the tool builds, but on how they're being built, the efficiencies in tracking and moving material and doing the sub-assemblies and quality control checks. There is quite a bit that is required and that we still have yet to do, but progress is really, really positive. I would say by the end of this year, we should be in fairly good shape, maybe a little bit into the new year, 2023. Okay.

And when you look at the orders that go into, I think, now 2024, are you the gating factor there, or is that just when those factories are planned to be built?

Oh, that's another good question. No, I would say we're the gating factor. Some of them, there are some factories where we're tied to new factory build-out. But if we could ship product earlier, they would take it earlier. So, yeah, we're a gating factor, and we're working hard to, you know, we've already talked about increasing the capacity for 2023. We're now looking at what it would take to increase capacity again for 2024. All right.

Good. And then final question on the IRIS issue. Why was NAND the first product or the first line that adopted IRIS, and is it applicable to the other DRAM and logic countries as well?

Well, for sure it wasn't the first. We've had probably over 12 or 15 customers in total across a wide range, and the first was a top three semiconductor manufacturer. That was from last year. What I mentioned was that this quarter we had another big uptick in the IRIS platform, and it was because of a new NAND customer that recently adopted, well, we talked about it in the fourth quarter with the press release, a fairly large, let's say, agreement or purchase agreement, volume purchase agreement, covering a wide range of our product lines, including the IRIS.

Okay. Thank you for your time.

You're welcome. Thanks, Tom. And we'll move on to our next question from Brian Chin of Stifel.

Hi there. Good afternoon. Thanks for letting us ask a few questions, and congratulations on the results. Maybe first question, more in the gross margin vein, so maybe for you, Steve, but can you quantify what sort of the incremental headwind was in terms of this inflationary cost environment in terms of Q1, whether you expect that to be similar or up in Q2? And also, if you get those rev recs in Q2 on the X500s, where do you think, let's assume that 20 million revenue, what do you think that does to gross margins in 2Q? And I have a follow-up.

Yeah. So let's talk about the first part, the supply chain side of it, Brian. I mean, we increased, saw a significant increase in, I think you said, logistics and freight costs. That probably cost us almost three-quarters of of a point on the margin. And then, obviously, we've had some, obviously, supply, you know, inventory, you know, supply parts increases, too. So, I'd say, I mean, normally we're at 55% in our core business. And, you know, I think that's where we would have been if it wasn't for these logistic costs, for sure. On the X500, I mean, that's a little tougher, right? You know, obviously, there's a big range in there, depending on the rev rec. And as we've said, you know, the initial systems are going to be very low margin, little margin to low margin systems, because they were done as we started to wrap manufacturing and engineering bills. So, you know, until we have an idea of what actually is going to get re-wrecked in the quarter, it's kind of hard to say how much that's going to impact the overall margins. But, you know, it's going to persist. I mean, obviously, as Mike talked about and mentioned ago, I think, or answered Craig's question, we are in a significant manufacturing ramp. So, you know, we do expect you know, that persists throughout the next several quarters as we continue to ramp up building more and more of these systems. So I think it's a little early to tell you exactly the impact on Q2 from those systems.

Got it, got it. And I imagine, you know, this is obviously a big step up in that revenue when it hits this year and then, you know, probably levels off as the other businesses that have higher margins and you make improvements, you converge with your target model again maybe next year. And also, I guess, Mike, in terms of – you made some reference to sort of your exposure to the bear or silicon wafer market. And clearly, there's clear messaging that there's not enough supply out there and for probably many years. And so it sounds like you're starting to see that capacity expansion hit you in a favorable way starting the second half of this year. Can you maybe help us size your exposure to that and kind of – Maybe anything else sort of unpacking that opportunity, you know, second half into next year?

Sure. So as I mentioned, it's two primary products. Both are for, you know, process control. So one is for inspection of the edge and backside, and the other is for elemental content. So I mentioned the oxygen and another material component. that are critical for us to measure and control for for the high-end applications of of the wafers so you know euv for instance uh both of those products if i combine them we've talked about i think in the past around 120 to 140 sam that's addressable you know worldwide And so based on the, let's say, the backlog that we have, which actually extends into 2023 for these product lines, I'd say where the opportunity is, you know, upwards of 50% of that, Sam?

Maybe more?

Yeah, that's really helpful. Maybe I can sneak one last one in. And, you know, some discussion of sort of backend inspection here, a contributor to the VPAs, I think that you referenced, Mike. I know a lot of focus in terms of heterogeneous integration and the compute market being a big adopter of that. But I think there's also a pretty good incremental adoption that can come out of smartphone chipsets moving to maybe two and a half D packaging in a couple of years ahead. And so I'm just curious if you, this might be difficult, but if you had to fan out like your SAM for backend inspection, over the next two to three years? What do you think that growth rate could look like? And I would imagine it's probably north of expectations for WFE.

Yeah, that's a good question because there's a lot going on in the world of advanced packaging. You've mentioned just two. There's also hybrid bonding that we've talked about, I think, last quarter or a quarter before. We're seeing a lot of investments there and focus there. And then this new EB40, which is also a wafer-level packaging technique. So as far as the growth rate, I would say I would expect it to be above WFE. I would say that the... Smartphones, from a panel perspective, are likely more geared towards the panel-level fan-out. At least that's what we've seen so far. We have seen some increased demand for panel-level fan-out, where that was really hot three, four years ago, kind of teetered out a little bit, and most manufacturers shifted back to copper pillar or decided on copper pillar for a couple generations. Now we're seeing that shift back to panel-level fan-out. So those would be the lower, kind of lower-end applications where high-performance compute would be in this more panel substrate-type application. And then the amount of, you know, so I didn't give you a direct answer to your question. The other reason is the growth in panel-level fan-out, there is not a lot of in-line inspection. Right now it's a lot of, you know, final inspection, and it's not very high resolution inspection. So as far as inspection and metrology to drive real process control and yield enhancements, this is some new focus for many of our customers. So that's why we talked about some of these engagements opening up the opportunities for us to co-learn and work together to drive improvements and margins for these lines and therefore hopefully drive a lot of potential inspection business for us from that perspective. And to give you an idea, you know, what we're hearing is yields for some of these lines are in that 30% to 80% range, which is a wide range, but even at 80%, it's not very high yields. Okay.

That's great, Keller. Thanks. And we'll go next to Dave Dooley of Steelhead.

Thank you for taking my question. I was just wondering, you've given us lots of data on multiple products that you talked about during your prepared remarks. As far as the three nanometer ramp up, when would you expect to start to see a more significant volumes for that?

I would say next year, maybe early. You know, we had originally hoped the end of this year and there was some, you know, some changes to our customers' plans. But I would hope that that's, you know, the demand is still high. We still see, as you saw, 40% of our logic revenue. The amount of pilot and R&D investments was so significant that it amounted to 40% of our logic revenue in the quarter. So I think there's There's a lot of activity, and I would call that in preparation for a ramp. So I'm optimistic that we'd see that in the first half next year. Okay.

And, you know, you've exceeded your revenue targets in the first quarter and talked about how the second half of the year is going to be bigger than the first half of the year. You know, I haven't done the math, and I was just kind of curious about you know, if wafer fab equipment grows in this, you know, let's say 15% to 20% range, where do you think onto will shake out?

Above that. Based on what I said, it would be north of 23%. I mean, I think flat. If we were quarter to quarter flat, that's around 23%. So since I said above, you'd have to guess at how much above. But it would be above 23%. So either way, even if we were flat, we would be ahead of the WFE as you described it. Excellent.

Now, I asked this question last quarter. I think you gave us some commentary in your prepared remarks, but as you ship out these lithography tools, where are you with providing a package of metrology and inspection and software to applications and tools along with them?

So for panel-level fan-out applications, actually we've got a significant traction there. We have several customers already adopting the StepFast, which is our branded solution, which integrates software, inspection, the Firefly, and our stepper, the JetStep 3500. That's a fully integrated turnkey solution, and so that's adopted. I think we now have For three or four customers, panel-level fan-out customers, most everyone who's ramping panel-level fan-out is adopting that solution. And we have a couple others interested in it, talking about, you know, for their new lines, looking at that same technology. Then moving to the X500 customers, as I mentioned, they're We're still in the learning phase with them, so there's applications we think that we can bring to bear, and there's a lot of willingness and openness to work with us. So we've been putting together a team, a cross-functional team, to work with select customers and drive some level of yield improvement by looking at fab-wide software opportunities, or the data that the FabWide software can provide, areas where we can then apply certain process control techniques to feed into the lithography, which is one of the biggest determining factors of the yields, in order to improve the overall line. So it's early stages for that second group.

Okay, thank you. You're welcome.

And as a reminder, it is star one if you have a question at this time. And we'll go to Mark Miller with the Benchmark Company. Congratulations on another record quarter.

I was just wondering, in terms of the backlog, the profile, the products in the backlog, is it similar to the margins you've recently been reporting, or is it above or below in terms of the margins of the equipment in the backlog, what you've recently reported?

So you're asking about our total backlog, Mark?

Right, right.

Yeah, so it would be close to, I mean, pretty much the normal corporate process control margins because it is obviously the same mix between metrology inspection kind of concomitant with the business. There's no uneven weighting in our backlog right now between metrology inspection. I mean, and then you obviously talked about the litho. It's got $100 million on top of that, but that's what you're asking.

Right. So I think to add a little color, if There's several of the VPAs include some of the new products, and so those will have certainly much higher margins than the previous products. They add more value and they provide more value. To sort of what might dampen that is then the amount of lithography that's in our backlog, and that, of course, has much lower margins. So Steve's answer that it's about, you know, around the corporate, that makes sense. But I just wanted to add a little color that for sure in our backlog, we're seeing a lot more adoption of the new products that do have higher margin with the exception of the lithography.

What was your cash flow from operations for the quarter? And CapEx?

So cash flow from operations is about $45 million. Apex is like $2.5 million, so about a 43% cash flow. Okay.

And then your anticipation of a stronger second half, is that confidence coming from the backlog or anticipation of just better business, especially from the membership people or both?

I mean, can you say that again, Mark? Yep.

Mark, can you repeat that question? Sure. Your anticipation of stronger results in the second half of the year compared to the first half of this year, is that from your visibility in the backlog or anticipation of better business, say, coming from NAN and DRAM customers?

I would say it's mostly the backlog, but also the discussions we're having with our customers about their Their ramp plans, they're still pulling on us very hard for equipment. You know, there's a little bit of movement, like I mentioned, with some of the customers' ramps. But overall, the demand environment is still very strong, and our backlog continues to grow. So I'd say that, yeah, it's a combination of both.

Thank you. You're welcome. Thank you, Mark.

And it appears there are no further questions at this time. I'd now like to turn the conference back to Michael Schaefer for any additional or closing remarks.

Thanks, Jenny. And we'd like to thank everybody for joining us today. A replay of the call is going to be available on our website by 7.30 Eastern time this evening. We'd like to thank you for your continued interest in On2Innovation, and everyone have a great day. Jenny, please conclude the call.

And this concludes today's call. Thank you for your participation. You may now disconnect.