Onto Innovation Inc.

Good day, ladies and gentlemen, and welcome to the On2 Innovation second quarter earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Schiffer. Please go ahead, sir. Thank you, Kyle, and good afternoon, everyone.

On2 Innovation issued its 2022 second quarter financial results this afternoon shortly after the market closed. If you haven't 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 Mark Schleisser, Chief Financial Officer. As always, I'd like to remind you that the statements made by management on this call will contain forward-looking statements within the meaning of 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 SEC 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 Blazinski. Mike?

Thank you, Mike, and good afternoon, and welcome to Onto Innovation's second quarter earnings call. We have many exciting highlights to cover today, but before we do, I want to first welcome Mark Slicer to his first earnings call with On2Innovation. As many of you are aware, Mark joins us from Boston Scientific, where he was Senior Vice President of Global Financial Operations. In this role, he was responsible for the financial performance of the worldwide manufacturing and distribution network, having a production value of approximately $3 billion annually. Mark's experience driving global supply chain improvements, gross margin expansion, and M&A will be an asset to our team as we build the scale to support the growing demand for our connected solutions. In fact, we're on pace for systems revenue to grow 30% this year, following 48% growth in 2021. We believe this strong performance is a result of the compelling value of our connected solutions and a customer success team which has been realigned to support our customers' goals. We see this leading to deeper and earlier collaborations with strategic customers across the value chain, which in turn will help Onto Innovation sustain our strong performance in the years ahead. So let's begin with a look at the growth in the second quarter. Once again, the Onto Innovation team delivered another record-breaking quarter of $256 million of revenue, aided by customer acceptance of our JetStep X500 lithography systems. This is a significant milestone for the JetSTEP lithography program, which was designed to meet the growing demand for advanced substrates to support heterogeneous packages for high-performance compute applications. In addition to strong volume growth, we see an increase in the number of interconnect layers per panel, slowing future factory output. Considering these factors, we anticipate capacity constraints could continue through 2024. The acceleration of the multi-year program to meet this demand, compounded by the impacts of COVID, supply chains, rising logistics costs resulted in initial product margins well below our targets. Through each of these next six quarters, we are systematically improving manufacturing efficiencies, volume supply agreements, leveraging lead times to use more cost-effective logistics, and increasing the performance and productivity of the platform. With these efforts, and in spite of elevated supply chain costs, we expect our corporate gross margin for the second half of 2022 to return to recent norms of 54% to 55% for the remainder of the year, and that includes the projected shipment of two JetStep systems in the third quarter and three in the fourth quarter. Including contributions from the lithography business, our specialty and advanced packaging revenue increased 19% over the prior quarter. Another highlight from this market included the successful launch of our new EV40 module for the Dragonfly G3. This system provides the increased throughput and sensitivity required to monitor yield loss at the edge of wafers for advanced memory and logic devices. We enhanced this platform further by integrating our 280C software, which includes the machine learning classifications required to deliver process insights to our customers, not just defect counts from less sophisticated alternatives. This same value proposition was recently adopted by a Novus Edge customer in the wafer manufacturing and this differentiation partially contributed to ON2 securing more than 100 million of orders extending into 2025 to support the capacity expansion of bare silicon for EUV applications. Through the rapid demand for our EB40, A few of our new suppliers struggled to meet their delivery commitments in the quarter. This impacted inspection shipments in the second quarter by roughly $5 million. We expect improvements in the third quarter, but will still be constrained until the fourth quarter. Turning now to the advanced nodes market, revenue is down slightly over the first quarter, but up 47% year-over-year. Leading this growth was our Atlas OCD platform for measuring critical dimensions of 3D transistors at the nanometer scale. Last month, our Atlas V was honored by industry experts at Semi Americas and Semiconductor Digest with the Best of West Award at Semicon West Trade Show. This award recognizes innovative new products each year that are significantly advancing semiconductor manufacturing capabilities. Of course, one of the biggest advances in the industry is the transition from FinFET transistors to a higher performance but more complicated nanosheet transistor structure. Our Atlas 3D metrology has been qualified by several leading logic manufacturers for their critical nanosheet process control steps. We've received orders for both 3 and 2 nanometer nanosheet nodes. We believe this demonstrates the performance advantage of our patented optical sensors and advanced analytics over X-ray and other optical alternatives for volume production. Likewise, the expansion of our metrology technology into the planar films market is proving valuable to customers. The IRIS platform is currently delivering throughputs at twice the speed of alternative systems while maintaining comparable stability. In the second quarter, revenue from IRIS grew 49% over last year, and we are on track to meet or exceed our goal of achieving $50 million in revenue from this market segment by the end of the year. Over the last two years, we've seen revenue from Metapulse Acoustic Metrology double that of preceding years, addressing applications in 3D NAND power and MEM segments. Our new Echo Acoustic Metrology is positioned to extend that capability to newer, industry challenges. For example, in 3D NAND, as the tier stacks continue to grow, new opaque hard mask materials are being transitioned for critical channel hole formation. Echometrology is uniquely positioned to take advantage of these technology inflections and is already entering the market with an order backlog of 20 million. Now, I'll turn the call over to Mark for a review of the financial highlights in our third quarter outlook.