Onto Innovation Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter ended September 30, 2023; nine-month results are compared with the period ended October 1, 2022. The filing is for 2023 Q3, notwithstanding the request metadata’s 2021 Q3 label. Amounts below are in millions of dollars unless stated otherwise.
Business context
Onto designs, manufactures and supports metrology, inspection, lithography and process-control software systems used by semiconductor and other microelectronics manufacturers. It reports one operating and reportable segment.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $207.2 | $254.3 | $597.0 | $751.9 |
| Gross profit | $106.9 | $138.8 | $312.3 | $402.0 |
| Gross margin | 51.6% | 54.6% | 52.3% | 53.5% |
| Operating income | $34.0 | $59.3 | $87.8 | $175.5 |
| Net income | $35.9 | $52.2 | $90.9 | $157.1 |
| Diluted EPS | $0.73 | $1.05 | $1.84 | $3.15 |
| Operating cash flow | — | $110.4 | $87.2 |
Net interest income was $5.7 million in Q3 and $13.9 million for the nine months, up from $1.5 million and $2.6 million, respectively, mainly reflecting higher cash balances and interest rates. Effective tax rates were 7% and 8% in the quarter and nine-month period, compared with 13% and 11% in the prior-year periods.
At September 30, cash and cash equivalents were $206.6 million and marketable securities were $423.1 million, totaling $629.7 million; working capital was $1,085.4 million. Total liabilities were $166.0 million. The filing reports an undrawn, securities-secured credit line with approximately $100 million available at a 7.0% rate; it does not present a separate borrowing balance. Nine-month capital expenditures were $20.1 million.
Material changes and operating performance
- Year-over-year revenue declined 18.5% in Q3 and 20.6% for the first nine months. Management attributed the decline primarily to weaker systems and software sales, especially metrology shipments for advanced-node applications, and lower parts demand associated with reduced customer factory utilization.
- Q3 revenue rose 9% from the prior quarter’s $190.7 million, with higher sales to memory customers in specialty-device and advanced-packaging applications, partly offset by lower foundry sales in advanced nodes. Q3 gross margin was 52%, versus 53% in Q2, primarily due to product mix.
- Year-over-year gross margin fell 3.0 percentage points in Q3, primarily from product mix and higher production costs. The nine-month margin decline reflected, among other factors, a $1.9 million increase in excess and obsolete inventory charges for older product lines.
- For the nine months, systems and software revenue fell to $495.5 million from $646.3 million. Parts revenue was $58.7 million versus $64.2 million; services revenue increased to $42.8 million from $41.5 million.
- Cash from operations increased year over year despite lower net income, as working-capital cash use improved to $38.8 million from $127.0 million. Inventory increased to $346.1 million from $324.3 million at year-end 2022.
- Cash, cash equivalents and marketable securities increased from $547.8 million at December 31, 2022. Investing activities used $66.3 million and financing activities used $9.1 million in the first nine months of 2023.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expects existing cash, marketable securities and credit-line availability to cover anticipated needs for at least the next 12 months.
- Management expects some supply shortages and inflationary cost pressures to continue through the remainder of fiscal 2023 and into fiscal 2024. It also cited continuing semiconductor-market uncertainty and customer demand variability.
- U.S. export controls have affected China sales; the company has applied for licenses and warns that delays, denials or additional restrictions could reduce sales. China revenue was $29.8 million in Q3 2023 versus $78.4 million a year earlier, and $108.3 million for the first nine months versus $215.6 million.
- Samsung Semiconductor represented 20% of nine-month revenue and TSMC 11%, highlighting customer concentration. The company also identifies semiconductor-industry cyclicality, supply-chain constraints, inventory forecasting, competition, geopolitical risks and foreign-exchange exposure as material risks.
- A 2023 restructuring plan to align costs with the business outlook generated $3.2 million of severance expense and $2.3 million of inventory write-downs in the nine-month period. Severance costs were paid; additional restructuring charges were anticipated in Q4 2023.
- In the Optical Solutions Inc. litigation, the court denied Onto’s summary-judgment motion in August 2023 and set trial for December 4, 2023. At filing, the company characterized the loss contingency as remote and did not expect a material financial impact. Customer intellectual-property indemnification obligations have no reasonably estimable maximum exposure; no amount was accrued.
- Management reported effective disclosure controls as of September 30, 2023 and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the durability of the Q3 sequential revenue improvement and the timing of recovery in advanced-node, memory and advanced-packaging demand.
- Track China export-license developments, related order restrictions and the potential effect on revenue and inventory.
- Assess inventory levels, customer demand forecasts, gross-margin trends and ongoing supply-chain and inflationary cost pressures.
- Monitor customer concentration, restructuring charges and the status and potential outcome of the Optical Solutions litigation.
- Verify the liquidity outlook and undrawn credit-line terms, including the 7.0% rate and securities collateral requirement.