Onto Innovation Inc.

RCC 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 we specify otherwise. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. I'll now go ahead and turn the call over to our CEO, Mike Pleszinski. Mike?

Thank you, Mike. Good afternoon, everyone, and thank you for joining our call today. I'll begin with the shift in timing of shipments for three lithography tools, which impacted our second quarter results and third quarter guidance. All three tools were for a specific customer and scheduled to ship near the end of the second quarter. During the quarter, we accepted a customer request for a specific enhancement package to be added to the tools and manufacturing. We estimated this could be installed and tested in the quarter, but ultimately the full verification took longer than planned. The customer has since approved this new functionality and the tools are included in our outlook for the third quarter. In aggregate, the second quarter revenue and third quarter outlook remains consistent with our prior guidance of just over $400 million for the sum of those two quarters. This reflects the weak demand from our advanced nodes customers being offset by strong power semiconductor revenue, and the more recently surging demand for our Dragonfly inspection systems to support heterogeneous packaging and high bandwidth memory customers. In fact, we expect this specific demand to drive more than $90 million in revenue over the next three quarters. I'll provide additional details about our outlook in a few minutes, but first let's dig a little deeper into the second quarter. We'll start with our specialty and advanced packaging customers, where revenue from this customer group grew by over 20% from the prior quarter. Revenue from our power device customers grew over 35% and included our product portfolio of inspection, metrology, and software solutions. This was our largest market in the quarter, and in fact, revenue exceeded total power device revenue in all of 2021. Building on this demand, in the quarter, we announced the intent to expand our metrology portfolio with the release of LMNS material metrology, and Atlas S OCD metrology, each specifically designed to address challenges in the compound semiconductor manufacturing. We've already secured orders for these tools and shipments will begin in the fourth quarter. With these additional products, we believe we are positioned to address an estimated 80% of process control steps in this high growth market, which is estimated to require 10 times the current volume of wafers by 2030. In advanced packaging, we delivered over 20 million of inspection systems to customers ramping heterogeneous packaging lines to support growing end market demand for high-performance compute. The flexibility of our Dragonfly systems, which integrate submicron 2D defect detection, 3D metrology, and our unique clarifying capability into a single system is proving to be a powerful tool for the heterogeneous packaging applications used in high-performance compute. For example, ClearFind technology is able to detect residue on dye-to-dye or dye-to-substrate interconnects and ensures good dye bonding, while our 3D metrology sensors provide critical stack height information and coplanarity data for the package. This metrology is proving essential to controlling yields and is leading to higher attach rates. In sharp contrast, revenue from our advanced nodes customers declined 43% in the quarter, However, even as capacity buys wane, R&D investments have continued, and in the second quarter, we were pleased to see further proliferation of Iris films when it was successfully qualified by a top 3D RAM manufacturer in the quarter. In addition, we delivered several Atlas OCD systems to two customers for gate all-around applications. We believe the declines in advanced nodes will reach a bottom in the third quarter, with strong demand in specialty and advanced packaging continuing in the second half of the year. Before moving to our outlook for the third quarter, Mark will now cover the financial results for the second quarter.

Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we closed the second quarter with revenue of $191 million, down 26% over the same period last year, and below the second quarter guidance range of $195 to $203 million, due to the shift in timing of the three JetSTEP systems Mike commented on. Despite the lower revenue, we did achieve an EPS of $0.79 for the second quarter, within our EPS guidance range of $0.75 to $0.90. The revenue declined from the same period last year is primarily due to the decline in our advanced nodes business, which had revenue of $38 million and represents 20% of revenue. Specialty device and advanced packaging revenue of $112 million represents 59% of revenue, and software and services had revenue of $41 million, which represents 21% of revenue. We achieved 53% gross margin for the second quarter, exceeding our guidance range of 50% to 52%, driven by the favorable mix, shipping fewer JetStep systems and seeing an initial favorability due to our supply chain optimization efforts. Second quarter operating expenses were $59.9 million, within our guidance range of $58 to $60 million. We are still executing to our cost reduction activities. However, we have continued to maintain a slightly higher level of investment in R&D initiatives, as Mike mentioned, aligning to R&D engagements and planar films and power semiconductor applications. Our operating income of $41 million was 21% of revenue for the second quarter, compared to 29% from the prior year. Our net income in the second quarter was $39 million, or 79 cents per share. Now moving to the balance sheet. We ended the second quarter with cash and short-term investments of $610 million, an increase of $62 million from the start of the year, with operating cash flow of $31 million within the quarter, representing 17% of revenue for Q2. Inventory ended the quarter at $352 million, an increase of $14 million. We continue to actively manage down our inventory levels across the network. However, we had increases in lithography and services inventory within the quarter. We are projecting a decline in Q3 and are now targeting to be between $275 and $300 million by the end of the year. Accounts receivable decreased $22 million to $188 million in the quarter, and our day sales outstanding decreased six days to 90 days. With our inventory reduction goals and focus on cash collections, we expect to return cash flow to consistent performance of over 20%. During the quarter, we did not execute any share repurchases. We have $32 million remaining under our existing $100 million authorization. Now turning to our outlook for Q3. We currently expect revenue for the third quarter to be between $205 million and $225 million. We expect gross margins will be between 50% to 51%, primarily due to the lower advanced nodes revenue, which typically carries higher margins above our corporate average, as well as a shift of the jet step systems built in Q2, now shipping in Q3. For operating expenses, we expect to be between $57 million to $59 million. For the full year 23, we expect our effective tax rate to be between 14% to 16%. We expect our diluted share count for Q3 to be approximately 49.4 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings to be between $0.85 per share to $1.05 per share. We are making progress towards reducing our fixed cost structure by optimizing our supply chain and manufacturing sites while maintaining our strategic priorities in several R&D programs and ensuring our ability to deliver financial performance in line with our long-term operating model. The team has made significant progress to date, expanding our second shift to drive higher absorption of fixed costs while improving cycle times and outsourcing several non-core subassemblies to global supply chain partners. We have set aggressive but achievable targets with our global partners, consolidating our supplier base by greater than 50% over the next two years while also simplifying our key components such as moving to a common automation system, which will drive a 25% cost reduction and is part of our identified savings for 24 and 25, as highlighted during our recent analyst day. And with that, I will turn it back to Mike for additional insights into Q3 and the remainder of 2023. Mike? Thank you, Mark.