Company Overview and History
Onto Innovation Inc. (ONTO) is a leading provider of process control solutions for the semiconductor industry, playing a pivotal role in enabling the continued advancements that power the digital age. With a rich history spanning over eight decades, the company has established itself as a trusted partner to the world's top semiconductor manufacturers, supporting their pursuit of smaller, faster, and more efficient chip designs.
The company's origins trace back to 1940 when Rudolph Technologies was founded, while Nanometrics Incorporated was established in 1975. These two industry leaders merged in 2019 to form Onto Innovation Inc., combining Nanometrics' expertise in optical critical dimension metrology with Rudolph's strengths in macro-defect inspection, lithography systems, and process control software. This transformative merger created a comprehensive solutions provider capable of serving customers across the entire semiconductor manufacturing workflow.
Early Growth and Expansion
In the early years following the merger, Onto Innovation focused on integrating the two legacy companies and expanding its product portfolio. A significant milestone in this expansion was the acquisition of 4D Technology Corporation in 2021. This acquisition allowed Onto Innovation to broaden its offerings in high-precision surface metrology and inspection systems, extending its reach into advanced packaging, aerospace, and industrial markets beyond semiconductors.
Recent Challenges
However, the company has faced challenges in recent years. In 2022, new U.S. export control regulations on semiconductor technology sales to China impacted Onto Innovation's business in that region. The company worked diligently to obtain the necessary export licenses to continue serving its customers there, but the process resulted in temporary disruptions and revenue losses. Additionally, Onto Innovation had to navigate supply chain constraints and inflationary pressures that affected the broader semiconductor industry during this period.
Product Portfolio
Onto Innovation's portfolio of solutions spans critical areas such as macro-defect inspection, thin-film metrology, lithography systems, and advanced process control software. These products are essential for semiconductor manufacturers, helping them drive yield improvements, reduce time-to-market, and ensure the reliability of their devices.
The company's systems are used in both wafer processing facilities (front-end manufacturing) and device packaging and test facilities (back-end manufacturing). Onto Innovation's portfolio includes standalone systems for optical metrology, macro-defect inspection, packaging lithography, as well as transparent and opaque thin film measurements. Additionally, the company provides advanced process control software solutions for standalone tools, groups of tools, and factory-wide suites to enhance productivity and achieve cost savings for its customers.
Financials
The company's financial performance has been robust, with a strong track record of revenue growth and profitability. In the fiscal year 2024, Onto Innovation reported revenue of $987.3 million, a 21% increase from the previous year. The company's net income for the same period was $201.7 million, showcasing its ability to consistently deliver value to shareholders.
Gross profit as a percentage of revenue increased to 52.2% in fiscal 2024, up from 51.5% in the prior year, due to higher sales volume and favorable product mix, partially offset by write-downs related to the impairment and exit of certain lithography inventory.
Operating cash flow for 2024 was $245.7 million, while free cash flow reached $213.8 million. The company's research and development expenses amounted to $116.8 million, or 11.8% of revenue, reflecting its commitment to innovation. Sales and marketing expenses were $76.2 million (7.7% of revenue), while general and administrative expenses were $85.8 million (8.7% of revenue).
Liquidity
Onto Innovation's balance sheet remains strong, with $852.3 million in cash, cash equivalents, and marketable securities as of the end of fiscal 2024. This represents an increase of $154.5 million from the prior year, primarily due to $245.7 million in cash generated from operating activities, partially offset by $31.9 million in capital expenditures, $26.8 million in acquisition-related payments, and $25.1 million in share repurchases.
The company's financial health is further demonstrated by its low debt-to-equity ratio of 0.008, current ratio of 8.69, and quick ratio of 7.00. Additionally, Onto Innovation has a $100 million variable-rate line of credit secured by its marketable securities, which was unused as of the latest reporting period.
Customer-Centric Approach
A key aspect of Onto Innovation's success has been its focus on addressing the evolving needs of its customers. The company has closely collaborated with leading semiconductor manufacturers to develop innovative solutions that cater to the industry's rapidly changing technology landscape. This customer-centric approach has allowed Onto Innovation to maintain a strong competitive position and secure a significant market share in its core segments.
Emerging Markets and Technologies
Notably, Onto Innovation has been at the forefront of the industry's shift towards advanced packaging and specialty devices. In 2024, the company's specialty devices and advanced packaging segment accounted for 64% of its total revenue, highlighting the growing importance of these emerging markets. The company's metrology and inspection solutions have been instrumental in enabling the development of cutting-edge packaging technologies, such as 2.5D and 3D integration, which are critical for the advancement of artificial intelligence, high-performance computing, and other data-intensive applications.
Geographic Markets
Geographically, Asia Pacific continues to be Onto Innovation's largest market, accounting for 83% of total revenue in fiscal 2024, as a substantial amount of global semiconductor manufacturing capacity expansion occurs in this region. Key customers in the region include Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics, and various semiconductor device manufacturers in Japan. The company also maintains a significant presence in the United States and Japan.
Future Outlook
Looking ahead, Onto Innovation's growth prospects remain promising. The company is well-positioned to capitalize on the continued demand for advanced semiconductor devices, driven by the proliferation of emerging technologies such as 5G, artificial intelligence, and the Internet of Things. Furthermore, the increasing complexity of semiconductor manufacturing processes is expected to drive the need for more sophisticated process control solutions, further enhancing Onto Innovation's addressable market.
For the first quarter of 2025, Onto Innovation expects revenue to be between $260 million and $274 million, with gross margins projected at 54% to 56%. Operating expenses are anticipated to be between $69 million and $72 million. Based on these assumptions, the company expects non-GAAP earnings to be between $1.40 and $1.54 per share for Q1 2025. The full-year 2025 effective tax rate is expected to be between 14% and 16%.
Challenges and Risks
However, the company is not without its challenges. The highly competitive nature of the semiconductor equipment industry, combined with the potential for geopolitical tensions and supply chain disruptions, could pose risks to Onto Innovation's future performance. Additionally, the company's reliance on a limited number of large customers, which is common in the industry, introduces concentration risk that must be carefully managed.
Competitive Advantages
Despite these challenges, Onto Innovation's strong technological capabilities, customer relationships, and financial discipline position it well to navigate the evolving semiconductor landscape. The company's commitment to innovation, coupled with its proven track record of execution, suggests that it is poised to continue playing a pivotal role in enabling the next generation of semiconductor advancements.
Conclusion
In conclusion, Onto Innovation Inc. (ONTO) is a leading player in the semiconductor equipment industry, with a robust portfolio of solutions and a steadfast focus on driving innovation. The company's financial performance, customer-centric approach, and strategic investments in research and development make it a compelling proposition for investors seeking exposure to the dynamic and high-growth semiconductor sector. With strong growth in revenue, operating income, and cash flow in 2024, and positive guidance for 2025, Onto Innovation is well-positioned to capitalize on the ongoing expansion and technological advancements in the semiconductor industry.