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Why Is Onto Innovation (ONTO) Up 29.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Onto Innovation (ONTO - Free Report) . Shares have added about 29.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Onto Innovation due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Onto Innovation Beats Earnings Estimates in Q3

Onto Innovation reported solid third-quarter 2020 results, with the top and bottom line increasing on a year-over-year basis. Despite COVID-19 uncertainties, strong momentum in 5G and advanced packaging markets with breakthrough offerings on the back of dynamic fundamentals drove the performance.

Bottom Line

On a GAAP basis, net income in the September quarter came in at $8.1 million or 16 cents per share compared with $6.6 million or 26 cents per share in the prior-year quarter. The year-over-year improvement in net income was primarily driven by more than two-fold rise in revenues.

On an adjusted basis, quarterly net income was $19.6 million or 40 cents per share compared with $8.3 million or 33 cents per share in the year-ago quarter. The bottom line beat the consensus estimate by 7 cents.

Revenues

Quarterly revenues aggregated $126.5 million compared with $62.9 million in the year-ago quarter. The year-over-year improvement was mainly driven by strong momentum in advanced packaging markets and 5G ecosystem, supported by a resilient business model. However, revenues fell 6.3% sequentially due to lower metrology sales, partly offset by strength in inspection, wafer and service business despite travel restrictions driven by the COVID-19 pandemic. The top line lagged the consensus estimate of $128 million.

On the basis of market segmentation, 50% of the revenues were derived from specialty device and advanced packaging markets, 28% from software and services and 22% from advanced nodes market. Revenues from specialty device and advanced packaging markets surged 44% in the reported quarter driven by robust demand for high-power computing, process control and Radio Frequency modules. Also, Inspection revenues increased 21% sequentially with strength in 2D and 3D systems.

The company witnessed solid traction for IMPULSE V system and Atlas V system coupled with broader adoption of Element system among memory manufacturers associated with incoming bulk silicon and dielectric monitoring. Onto Innovations added 12 new customers for both frontend and backend inspection applications in the reported quarter. These positive endeavors helped the company to not only expand its product portfolio but also broaden growth opportunities across the semiconductor value chain globally.

Other Details

Total operating expenses were $59.6 million compared with $26.2 million in the prior-year quarter, primarily due to higher amortization, sales and marketing, and research and development expenses. Non-GAAP gross profit in the quarter was $68.9 million compared with $31.5 million with respective margins of 54% and 50%. The year-over-year increase was driven by a favorable product mix on the back of higher revenues. Non-GAAP operating income was $23.8 million, up 193.4% from $8.1 million in the year-ago quarter.

Cash Flow & Liquidity

In the first nine months of 2020, Onto Innovation generated $72.9 million of net cash from operating activities compared with $24.9 million in the year-ago quarter. As of Sep 26, 2020, the company had $101.6 million in cash and cash equivalents with $97.2 million of total current liabilities. On the back of a robust liquidity position, the company’s working capital came in at $579.5 million at the end of the quarter. Notably, decline in cash receivables helped generate sufficient cash. However, it was partially offset by an increase in inventories.

Q4 Guidance

Onto Innovation provided guidance for fourth-quarter 2020. The company expects revenues in the range of $145-$155 million. Adjusted earnings per share (EPS) are estimated in the band of 55-66 cents, while GAAP EPS is expected to be in the range of 35-49 cents. This guidance has been specifically provided keeping in mind the ongoing COVID-19 turmoil across various end markets. With global customer support, the company is committed to abiding by the safety protocols while serving the requirements of customers amid this hour of crisis.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 30.43% due to these changes.

VGM Scores

At this time, Onto Innovation has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Onto Innovation has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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