2023-08-23 16:52:39 ET
Summary
- Onto Innovation's Q2 2023 earnings missed expectations, with a Non-GAAP EPS of $0.79 and revenue of $190.66M.
- The stock is trading flat due to exaggerated hype around its AI efforts, which only make up less than 5% of total revenues.
- KLA remains Onto's main competitor in the semiconductor metrology/inspection sector, with significantly higher revenues and market dominance.
- Onto's AI products exhibited a 1H 2023 / 1H 2022 revenue change of -22.4%.
- Onto's metrology/inspection revenues exhibited a HoH change of -42.4% compared to +5.5% for KLA.
Onto Innovation ( ONTO ) announced on August 10 its Q2 2023 earnings to much fanfare. Its Q2 Non-GAAP EPS of $0.79 missed by $0.05. Revenue of $190.66M (-25.6% Y/Y) missed by $12.34M.
The stock is currently trading flat since the call because of hyperbole surrounding its AI (artificial intelligence) efforts, which makes up just less than 5% of total revenues and exhibited a 1H 2023/1H 2022 revenue change of -22.4%.
KLA ( KLAC ) is ONTO’s main competitor. The company announced its FY Q4 2022 earnings a week earlier, on July 27. FQ4 Non-GAAP EPS of $5.40 beat by $0.54. Revenue of $2.36B (-5.2% Y/Y) beat by $100M. The following day, the stock rose 6%.
Both companies sell semiconductor metrology/inspection equipment, which are different from “processing equipment” sold by Lam Research ( LRCX ) and Applied Materials ( AMAT ). I discussed these differences in my January 2, 2022 Seeking Alpha article entitled “ KLA My Top Semiconductor Equipment Pick: Comparison To Applied Materials And Lam Research .”
I previously detailed ONTO shortly before the merger of Nanometrics and Rudolph Technology, which formed ONTO, in a June 27, 2019, Seeking Alpha article entitled “ Nanometrics And Rudolph: A Merger For Survival .”
On June 24, 2019, Nanometrics (NANO) and Rudolph Technologies ( RTEC ) announced they will combine in an all-stock merger of equals transaction. The companies say the combination increases the SAM (served available market) opportunity to approximately $3 billion.
Clearly that merger of survival is not working, as I address in this article.
Metrology/Inspection Equipment Market Dominance
KLA dominates the semiconductor metrology/inspection sector with revenues 4X greater than its nearest competitors. This share has been consistent between 2010 and 2022. Chart 1 illustrates market shares for KLA and its top four competitors, according to our report entitled “ Metrology, Inspection, and Process Control in VLSI Manufacturing .”
Chart 1
Through 2Q CY2023, in a comparison with ONTO, KLAC’s dominance over ONTO is obvious and continues, as shown in Chart 2. These are equipment only revenues and do not include service or spare parts.
Chart 2
Chart 3 shows the continuous erosion of ONTO’s metrology/inspection revenues as a percentage of those of KLAC.
Chart 3
Chart 4 shows that ONTO’s HoH 2023/2022 metrology/inspection equipment revenue change was -42.4% in 1H 2023, as the company underperformed ASML ( ASML ), which exhibited a -17.6% HoH revenue change and Nova Measuring ( NVMI ) revenue change of -10.3%.
KLA’s metrology/inspection changed +5.5%, the only company with positive growth, illustrating further dominance of the company.
Chart 4
Investor Takeaway
Metrology/inspection equipment systems not only analyze defectivity and metrology issues at critical points in the wafer, reticle, and IC manufacturing processes, but also provide information to customers so they can identify and address the underlying process issues. The ability to locate the source of defects and resolve the underlying process issues enables customers to improve control over their manufacturing processes, increasing their yield of high-performance parts and delivering products to market faster, thus maximizing profits.
As I noted in my article referenced above, ONTO was a merger of two companies that were formed decades ago to address the metrology/inspection market. As noted in my charts above, even the combined revenues of the company have never reach even 6% of KLAC’s. Therefore, I reiterate the title of the article that it was a merger of survival for Nanometrics and Rudolph Technology.
I noted in previous articles that, because ONTO cannot compete with KLAC, it is morphing into a packaging company. As ONTO reported in its recent earnings call, specialty device and advanced packaging revenue of $112 million represented 69% of revenue. The transition is also a move to the “back-end” process control equipment market (after a chip process is completed), an area that KLAC does not compete and is dominate by Camtek ( CAMT ). ONTO also competes in the packaging lithography market against heavyweights Canon (CAJ), Veeco (VECO), and Kulicke and Soffa ( KLIC ) among others.
This move away from metrology/inspection has been the result of several acquisitions. And as ONTO notes in its Q2 2023 10-Q in its “Risks Related to Growth and Acquisitions”:
“We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner.”
This “risk” issue is never more important than this recent quarter, in which ONTO reported a revenue drop because of pushouts by just three packaging systems.
Of concern from the recent 10-Q is the statement that:
"We experienced supply chain constraints and inflationary pressures in 2022 and the first six months of 2023, and although there have been improvements in supply chain performance, we expect supply chain shortages as well as inflationary cost pressures to persist throughout fiscal 2023.”
That may sound plausible, although this “supply chain problem” is getting to be vastly overdone, but the China problem deserves further analysis. In Q2 2023, ONTO’s revenues from China were $42.0 million, down 38% YoY from revenues of $68.6 million. However, revenues from Taiwan dropped 36% YoY, from $48.5 million to $31.0 million, and there are NO sanctions against Taiwan.
Seeking Alpha's Quant analysis gives ONTO a Buy and KLAC a Hold rating, as shown in Chart 5. I disagree. I reiterate my Strong Sell for ONTO and a Buy for KLAC.
I’ve said this many times about ONTO. As it jumps from one application to another, despite using buzz terms like “HBM” and “CoWoS” packages, it runs into different competition from KLAC. According to my analysis, its AI efforts represent less than 5% of total revenues, and HoH revenue change was -22.4%.
In other words, it is drilling 12, 1-inch holes instead of 1 12-inch hole. As a result, a “push out” of just three lithography systems resulted in a poor quarter.
For further details see:
Onto Innovation: Plummeting Metrology/Inspection Sales As KLA Continues To Dominate