Summary
- KLA maintains a dominant market share in the semiconductor metrology/inspection equipment market with more than 55% share.
- Onto faces headwinds from China sanctions, with its NAND memory customer YMTC sanction by the U.S.
- With just a 5% market share in the metrology/inspection business, Onto’s greatest growth is now in the advanced packaging and display lithography sector.
Onto Innovation (ONTO) reported Q4 EPS of $1.57, $0.25 better than consensus estimates of $1.32. Revenue for the quarter came in at $253 million versus the consensus estimate of $250.8 million.
The stock price dropped 3% on terrible guidance for Q1 2023 EPS of $0.80-$0.95, versus the consensus of $1.07 and down from $1.57 in Q4. EPS is down 44.3% QoQ from the midpoint.
ONTO sees Q1 2023 revenue of $200 million, versus the consensus of $221.06 million. The $200 million is down 20.9% from the $253 million in Q4.
In a comparison with KLA (KLAC), the dominant process control (metrology/inspection) company and ONTO's chief rival, KLAC reported $2,984 million in revenues for the recent fiscal 2Q23. The company guided Q3 revenues of $2,200 million to $2,500 million. That's down 21.2% at the midpoint from 2Q.
Process Control Revenue Comparison
In Chart 1, I compare KLAC and ONTO estimated Process Control revenues between CY Q1 2021 and through CY Q1 2023 based on guidance. In this Chart, we see the significant dominance of KLAC.
Chart 1
In fact, Chart 2 shows ONTO's revenue as a percentage of KLAC's share for the same period. While there are quarterly variations, the trendline shows that in the 3-year period of this chart, ONTO's percentage of KLAC's revenues dropped from above 5% to below 4%.
Chart 2
KLAC's dominance in the process control sector extends to other competitors, as shown in Chart 3, according to our report entitled Metrology, Inspection, and Process Control in VLSI Manufacturing . Market share is a percentage of the overall global process control market.
Data show dominant market share for KLAC compared to Applied Materials ( AMAT ), ASML ( ASML ), Hitachi High Tech (HHT), Nova Measuring ( NVMI ), and Camtek ( CAMT ). Between 2013 and 2021, no competitor garnered more than 15% in a given year.
Chart 3
Investor Takeaway
Headwinds for ONTO
KLAC expects CYQ1 2023 revenues to drop 21.1% while ONTO expects advanced nodes revenue to decline by an estimated 30%, primarily due to sharp reductions in memory spending and restrictions in China, according to its recent earnings call.
Table 1 shows percentage of sales by region for the latest quarter for both companies. ONTO generated 31% of revenues from China compared to only 23% for KLAC. With China under U.S. sanctions, this high exposure is concerning.
The U.S. government added Chinese memory chipmaker Yangtze Memory Technologies (YMTC) on December 16, 2022, to its trade blacklist over fears of diverting American technology to previously blacklisted Chinese tech giants Huawei Technologies Co Ltd and Hikvision. In recent months, YMTC has slashed up to 70% of its orders from Naura Technology Group, a leading Chinese maker of etching, cleaning and chemical vapor deposition tools for wafer fabs.
As shown in Table 2, in the nine months ending October 1, 2022, ONTO generated 11% of its revenues from YMTC, up from just 3% in 2021.
ONTO expects advanced nodes revenue to decline by an estimated 30%, primarily due to sharp reductions in memory spending and restrictions in China, according to its recent earnings call.
Financial Metrics
Chart 4 shows % the change in share price of ONTO and KLAC over the 1-year period. KLA's growth is +7% compared to -8% for ONTO.
YCharts
Chart 4
Chart 5 shows that KLAC's gross profit margin of 60.7% is 7% higher than that of ONTO.
YCharts
Chart 5
ONTO was formed by the merger of Nanometrics and Rudolph Technologies. Both companies started in the semiconductor industry as Process Control companies. While Nanometrics stayed exclusively in process control, Rudolph entered the Advanced Packaging Lithography business, generating $7.3 million in sales in 2013. In 2016, through acquisitions, ONTO entered the Flat Panel Display Lithography business, generating revenues of $7.6 million, but sold no systems in 2017. Through more acquisitions, ONTO now markets Panel Level Lithography, Software, and Probe Card Testers.
As it moved away from its core business because the company cannot compete against KLAC, it has morphed into a packaging company.
ONTO noted in the earnings call that it added over 15 new Dragonfly customers in 2022. But this system is for back-end packaging and for its specialty items such as image sensors and MEMs. Its front end, the Atlas OCD, platform has been qualified at all three FinFET manufacturers for next-gen gate-all-around nanosheet structures. But in this segment, ONTO had an 11.9% share in 2021 compared to 20.0% for NVMI and 54.5% for KLAC. In fact, in the 15 sectors analyzed in our report "Metrology, Inspection, and Process Control in VLSI Manufacturing," ONTO is not the sector leader in any.
ONTO has diversified into a company that now drills 12, 1-inch holes instead of 1, 12-inch hole. Through acquisitions, revenue is so dispersed that at the <10nm node where inspection and metrology are critical for a customer, is has a small market share compared to KLAC.
Its packaging lithography business competes against numerous companies, including Ushio, Canon ( CAJ ), Veeco ( VECO ), EV Group, and Suss MicroTec.
I rate this company a Sell. KLAC is a better choice offering share dominance in a focused, core sector, and better financials. KLAC's share growth against ONTO indicates that ONTO does not have "best-of-breed" systems, and market share against KLAC will continue to erode.
For further details see:
KLAC Maintains Domination: An Updated Comparison With Onto Innovation