Onto Innovation Inc (ONTO) Q4 2020 Earnings Call Transcript

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Onto Innovation Inc (ONTO 2.50%)
Q4 2020 Earnings Call
Feb 4, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Onto Innovation Fourth Quarter earnings release. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Sheaffer with Investor Relations. Please go ahead, sir.

Michael Sheaffer -- Investor Relations

Thank you, Sarah, and good afternoon, everyone. Onto Innovation issued its 2020 fourth quarter and full year financial results this afternoon shortly after the market closed. If you have not received a copy of the release, please refer to the company's website at www.ontoinnovation.com, where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Steven Roth, Chief Financial Officer. As is always the case, I need to remind you of the safe harbor regulations. Any matters today that are not historical facts, especially comments regarding the company's future plans, products, objectives, forecasted and expected performance consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These estimates, whether expressed or implied are being made based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that these statements are subject to a range of certainties that can cause the actual results to vary materially. Thus, the company cautions that these statements are no guarantee of future performance. Risk factors that may impact Onto Innovation's results are currently described in Onto Innovation's Form 10-K report for the year ended December 2019 as well as other quarterly filings with the Securities and Exchange Commission. Onto Innovation does not update forward-looking statements and expressly disclaims any obligation to do so.

Today's discussion of our financial results will be presented on a non-financial basis unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. I will now go ahead and turn the call over to Mike Plisinski. Mike?

Michael P. Plisinski -- Chief Executive Officer

Thanks, Mike. Good afternoon, everyone, and a happy, healthy new year to each of you and your families. With 2020 successfully behind us, the Onto Innovation team is looking forward to a new year fueled by strong markets and our strengthening customer partnerships. We are proud to already have five of our six new products announced in 2020, accepted by top-tier semiconductor manufacturers, clearing the way for further adoption in 2021. In addition, we added new markets such as high-end image sensors, plainer film metrology and heterogeneous packaging. In total, we estimate that by the end of 2020, we expanded our available markets by over $500 million.

Our successful integration of Rudolph or Nanometrics, a strong financial foundation, already achieving the gross and operating margins outlined in our long-term operating model. This foundation enables growth from both organic and inorganic investments, such as our recent acquisition of Inspectrology, a leader in overlay metrology for the expanding compound semiconductor market. Now let's start with some highlights from the fourth quarter. Our growth in the fourth quarter exceeded the high end of guidance, increasing 23% over the prior quarter, while our operating income grew 58% over the same period. Revenue from customer expansions in advanced nodes doubled over the third quarter.

The strongest growth came from NAND customers, but we also saw double-digit growth from both DRAM and logic customers. In total, we delivered stand-alone systems to 10 customers to support these expansions. Building on the broad appeal of the current Atlas platform, we shipped our newest Atlas V systems to multiple larger customers for evaluations at five and 3-nanometer design rules as well as evaluations for leading DRAM devices for the 1Z and one alpha nodes. Complementing our Atlas platform, IMPULSE integrated metrology revenue increased significantly in the quarter, but more importantly, we added a new DRAM customer.

After an extensive evaluation, the customer selected IMPULSE for the most critical process steps in their next-generation memory product expected to ramp in 2021. We estimate these critical steps will represent over half of this customer's integrated metrology volume. We also recognized revenue on our industry-first Aspect IRCD technology, providing high aspect ratio channel hole measurements critical for 3D NAND with over 170 device layers. We have successfully demonstrated the capability to other NAND customers and expect to deliver several evaluation units in the first half of the year. Demand for element composition of metrology is expanding, driven by the impact of slight material variations on transistor performance at the most advanced nodes.

In the quarter, a second memory supplier selected the Element system for in-line composition metrology of incoming wafers. In addition, a leading supplier of material deposition equipment took shipment of an Element system for the characterization and development of next-generation dielectrics for advanced 3D NAND and logic devices. While we don't expect large volumes from this customer, we do anticipate additional orders. Now let's review our packaging and specialty device market, which resulted in our largest source of revenue for the second quarter in a row. Growth in the fourth quarter was up another 3%, following a 44% jump in the third quarter.

Revenue from our customers supporting 5G represented the strongest growth in the quarter, estimates for MediaTek and Qualcomm of another 500 million 5G-enabled phones in 2021, an increase of over 250% over 2020 suggests continued strong growth in the new year. To support rapidly shrinking interconnect geometries, customers are demanding more precise and repeatable measurements. This trend has contributed to revenue from our flagship Dragonfly platform doubling in 2020 over 2019. In collaboration with our leading customers, we recently released the third-generation Dragonfly system. This new system increases 2D sensitivity by 40% and throughput by 30%. Our 3D metrology throughput has increased by a very impressive 50%. We've shipped multiple third-generation Dragonfly systems to both OSATs and top five semiconductor manufacturers.

In addition, the Dragonfly G3 was selected by another top three manufacturer of image sensors for mobile devices. The Dragonfly platform was the only tool capable of detecting a critical yield defect at full production speed. We expect follow-on orders from this customer in the first half of 2021. To conclude the fourth quarter highlights, our new products are well positioned to support the transistor packaging architectures that are enabling new devices for AI and data center applications and the transition to 5G. The timing of these inflections are setting the stage for a strong 2021, which I'll discuss after Steve covers the fourth quarter financial highlights. Steve?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Thanks, Mike. And good afternoon, everyone. Before I begin my remarks, Mike mentioned that we recently closed the Inspectrology acquisition. That occurred at the end of December. However, after our close of our fiscal year, and therefore, that acquisition had no effect on the results that we will be discussing today. So let's begin. Our fourth quarter revenue was $155.1 million, slightly above the high end of our previous guidance and up 23% from the third quarter of $126.5 million.

As we discussed on our last conference call, we expected to see strong recovery in our advanced node business, which increased over 100% in the quarter, driven by memory and logic. Our fourth quarter revenue would have been approximately $4 million higher. However, a few tools that we had to ship to a Chinese customer were halted because the customers placed on the entity's list by the U.S. government in late December. We've applied for a license to ship those tools, and the high end of our Q1 guidance assumes that the licenses will be approved in time for shipping in the quarter. Breaking down revenue by market. 42% of sales were in our advanced packaging specialty device market with the strength related to the 5G RF market.

Advanced nodes was 37% of revenue in the quarter, and software and services represent the remaining 21%. Turning to gross margin. Our gross margin continued to stay strong at 54%, consistent with the third quarter. Fourth quarter margin was impacted by product mix, including sale of the lithography system, which typically has a lower margin profile. We expect to see continued improving margins as our new products provide enhanced value to our customers and our supply chain synergies continue to impact our product cost. As we look forward to Q1, we expect increasing revenues in our key markets and currently anticipate margins to be in the range of 54% to 55%. Moving to operating expenses. Fourth quarter operating expenses were $46.3 million, an increase from $45.1 million in the third quarter of 2020.

The change was primarily due to an increase in project expenses as a contracted R&D project that provides an R&D credit in the third -- the provided R&D credit in the third quarter was lower in Q4. In addition, less employees taking paid time loss in the fourth quarter also contributed to the increase. For the 2021 first quarter, we are seeing an increase in operating expenses as a result of the Inspectrology acquisition. As such, we expect Q1 operating expenses to be in the range of $47.5 million to $48.5 million, with the majority of the increase over the fourth quarter being from the acquisition. We've identified cost synergies totaling about 20% of the historical operating expenses of Inspectrology. However, we do not expect to see the realization of those synergies to start until the second half of 2021.

On our last call, I noted that at the midpoint of the revenue guidance we provided, we would be operating at quarterly revenue levels that would put us entering our long-term operating model, which we established for the Rudolph Nanometrics merger. As you can see from today's results, our gross margin was north of 54% and our operating margin north of 24%, both in line with that model. We expect those results to continue to strengthen as we drive to the upper end of our long-term model with operating margins of 32% to 33% and greater than $5 per share earnings power. Our effective tax rate for the fourth quarter was 5% and 12% for the full year 2020, which was below our normal rate of approximately 17%.

The lower rate was due to the conclusion of an IRS audit and a net operating loss carryback claim we filed in the fourth quarter, tax years with higher statutory rates. For 2021, we expect the tax rate to return to a normal level of between 16% and 17%. Net income increased in the fourth quarter and was $35.6 million or $0.72 per share and above the high end of our guidance. In the 2020 third quarter, we reported net income of $19.6 million or $0.40 per share. Higher revenues and the lower tax rate that I just discussed contributed to the stronger performance.

Moving to the balance sheet, which is on a GAAP basis, we ended the quarter with a cash position of $374 million, up $33 million from Q3, and our cash from operations was $105 million for the full year. Accounts receivable increased in the quarter to -- on higher revenues and ended at $149 million, and inventory increased in the quarter to $191 million on anticipated higher Q1 sales. Finally, turning to first quarter guidance. We expect revenues to be in the range of $155 million to $169 million. In this range, we expect earnings to be between $0.62 and $0.76 per share.

With that, I'll turn it back to Mike for additional insight into Q1 and 2021. Mike?

Michael P. Plisinski -- Chief Executive Officer

Thank you, Steve. We see several secular trends contributing to another year of strength for the semiconductor equipment industry. The continued proliferation of billions of connected devices and the massive amounts of data they send every second to the cloud is driving demand for the most advanced memory and logic devices to support new applications and artificial intelligence and high performance compute. The transition to 5G, which is only just beginning, will drive an estimated 250% growth in 5G-enabled handsets in 2021, further increasing demand for advanced logic memory in the numerous specialty devices that goes into those handsets.

Advanced packaging is playing a more pivotal role in the road maps of many device manufacturers as they drive smaller geometries and heterogeneous packaging to deliver products with higher performance and lower power consumption. We expect to play a prominent role in the transition to heterogeneous packaging by leveraging our JetStep lithography, Firefly inspection and Discover software suite to overcome challenges from shrinking geometries across larger packages. We expect to start shipping these new solutions to customers beginning in the second quarter.

Another important secular trend is the transition to electric vehicles, driven by consumers and supported by various government initiatives. The EU has announced a plan to ban new fossil fuel car sales by 2030. California, Japan and others have announced their plans to ban the sale of new combustion engine vehicles by 2035. This transition to electric vehicles is accelerating demand for power control, smart vehicle sensors and other systems to optimize drivetrains, battery life and charging. Many of these critical devices are produced using compound semiconductor processes such as gallium nitride and silicon carbide. Inspectrology is a leading supplier of overlay metrology specific to these unique processes.

By augmenting their overlay metrology with our discover run to run software, defect inspection and process analysis software, will provide a unique integrated solution to help customers meet aggressive ramp in yield targets. In addition to growth in the secular markets we serve, we are strengthening our customer relationships. For example, we recently completed two record level volume purchase agreements, each representing over $100 million in target revenue for 2021. These agreements cover the breadth of our product lines across both front- and back-end applications. Though not a guarantee of revenue, the agreements are a good indication of business health and are growing importance to these customers. Specific to the first quarter, the midpoint of the revenue guidance that Steve mentioned is up 4.4%.

We project revenue from advanced nodes increasing by double digits, led by logic customers investing in both 5-nanometer and 3-nanometer process technology. We also see modest growth in DRAM and a slight contraction in NAND after an incredibly strong fourth quarter. Packaging and specialty will remain essentially flat with the fourth quarter with strong investments in packaging technology by leading IDMs, offsetting the decline we typically see due to effects of seasonality. Considering the strength of our current backlog and the growing visibility we have into the second quarter, we expect the first half of 2021 will be over 20% stronger than the first half of 2020.

It's an exciting time for Onto Innovation, and we appreciate the continued support from our customers as we look at the many opportunities in front of us. I also want to acknowledge and thank our dedicated team at Onto Innovation. Thanks to their incredible teamwork and tireless commitment to our customers' success, we are positioned to have a more critical role in driving the future of our industry. With that, we'll open the call for your questions. Sarah?

Questions and Answers:

Operator

[Operator Instructions] And we'll go ahead and take our first question now from Craig Ellis with B. Riley.

Craig Ellis -- B. Riley -- Analyst

Question, and Mike and Steve, congratulations on the products and expansion successes and entering into the target financial model range. Mike, I wanted to start just by following up on a couple of the points you made. The first one is regarding the two $100 million volume purchase agreements. I don't remember you commenting on such an item before. So can you put some context around that? And you mentioned that those may or may not be for revenues in the current year. Any further color on their ability to either fall into this year or maybe spread over a multiyear period would be helpful.

Michael P. Plisinski -- Chief Executive Officer

Sure. So as we've grown as we merged and brought together the two companies, both companies were serving these large IDMs, and we had back end a lot of strength from the Rudolph side from the back end from the nanometrics side, some front end. When our customers are looking at the total spend together, they're looking at putting together a more comprehensive plan, so giving us more visibility, letting us understand where their expansion plans are coming across both the front end and back end and making sure that we have the visibility to ramp along with them.

So the volume purchase agreements are meant to give that indication. In some cases, they're more formal than others. All of it is meant to define a year. So this isn't over multiple years. I think that was part of your question. It's all for this year. So it's an indication of what they see, what they expect to spend this year across our products.

Craig Ellis -- B. Riley -- Analyst

And that sounds -- it's very constructive. And would you expect to enter into more of these types of agreements with other IDMs? Or is this really something that is unique to these two customers, and we wouldn't expect this to occur with others?

Michael P. Plisinski -- Chief Executive Officer

No. I think we would see this as we continue to grow our position and integrate more deeply into customers' road maps, I think this would be a more common occurrence.

Craig Ellis -- B. Riley -- Analyst

Okay. And then -- got it. And then the second question was related to the color on the first half of '21. So congratulations on on the 20% year-on-year growth that you see. The question is this, can you just comment on the visibility that you have as you look out across the full year, Mike? To what extent does that exist or might it be greater in some parts of the business than others? And we have had some companies indicate that they would expect industry spending to be a little bit more front half weighted than steady or back-end weighted linearity. Any sense from your end in terms of what that full year contra might look like for Onto?

Michael P. Plisinski -- Chief Executive Officer

I think some of our customers in the front end will be more more front end, first half weighted, although when I look through the list, there was a mix and a number of them are balanced. So I think there'll be maybe a slight bias to the first half. But remember, half our business is volume-driven business, which really sees the pickup in the Q2 and Q3 time frame. So -- and in addition to that, we see the new products that we've announced and gotten acceptance on, we would expect more of impact from that revenue in the second half. So all things considered, I would say that we would expect first half, second half to be relatively -- on the conservative basis, relatively the same for us. Given if there's a slight bias toward the first half spending from some of our customers, I think with the new products and the traction we're gaining in some other areas that we would offset that.

Craig Ellis -- B. Riley -- Analyst

Yes. Very helpful. And then finally, Steve, 54% gross margin, second consecutive quarter and first quarter guidance builds on that. So congratulations. Can you comment on the extent to which we have any lingering COVID costs or other costs that are in gross margins that you're working on? And then maybe related to COGS, just express your comfort with supply sufficiency for the type of demand environment. Mike's talked about and whether we should expect there would be any incremental costs down the road for expedites or other things that would be more common in a tight environment like we seem to be seeing out there?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Yes. I think we've talked about in the past. The COVID side, while there's some incremental cost for cleaning and stuff like that in the factory, I mean, they're just -- they're minimal comparatively. I mean, we're saving probably on the travel side, obviously, and we're turning some above this kind of the cleaning of our protocols that we're putting is like kind of seeing them somewhat of an offset. So I wouldn't -- I don't think there's anything you have to worry about from the COVID side impact. Supply chain, I think the -- always the risk is how does COVID affects some of our other Asian suppliers and things like that, if someone gets one of those factories, gets hit or something like that.

So far, we've been able to manage through that. We have had some impact at a supplier. I think we've talked about in the past, but we've been able to work through that. So it's something that's clearly on our radar screen, something that we're all still concerned about because that's where COVID effect could really hurt, not just us, but several of us in the industry depending on which vendor that is. But right now, we're able to manage through it.

Craig Ellis -- B. Riley -- Analyst

Guys, congratulations on the strong start to calendar '21.

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Thanks, Kurt.

Operator

We'll take our next question from Quinn Bolton with Needham & Company.

Quinn Bolton -- Needham & Company -- Analyst

Hey, guys. 'll also offer my congratulations on the nice finish to 2020 and the strong '21 outlook. I guess, maybe just starting with that '21 outlook, Mike, it looks like many in the industry are calling for WFE to be up about 15% this year. When I take your commentary about the first half of '21 for Onto growing 20% year-on-year, you'd get to about a $330 million first half and your comments about a balanced first half, second half could imply you're going to do about $660 million this year. And that says you're up maybe 19% year-on-year. So outperforming WFD pretty nicely. Is that mostly through share gains and some of the new products you talked about gaining customer adoption? Is that kind of a good way to be thinking about how you can outgrow WFD this year?

Michael P. Plisinski -- Chief Executive Officer

Yes. It's around the expansion within the markets we were serving, but also expanding our served markets. So we talked about heterogeneous packaging and the transition toward panel packaging that, that's going to drive. And of course, we would expect to be shipping steppers to support that in the second half. So that's an upside. And so there's a series of things. As you may have picked up, we've released a lot of new products. Those products are gaining traction. And some are gaining traction through share gains in the existing markets, others through opening up new applications and new markets.

Quinn Bolton -- Needham & Company -- Analyst

The sort of related question. You mentioned the IMPULSE win at a top three DRAM manufacturer for their next-generation node. Is there any way you can sort of quantify how big that opportunity is? I mean there's only three DRAM guys. They're all pretty large. So just trying to sort of think about what that could mean for Onto with that win.

Michael P. Plisinski -- Chief Executive Officer

Well, the way we quantified it was it's over half the share. So as -- it also depends on how big the customer's ramp is. But that's why I'm hesitating because they're still working on that ramp plan. But it's -- from an integrated perspective, it's very significant. Let's put it that way. So from a -- if that's an overall $100 million, $125 million, $150 million market, it's a meaningful move in share gain for us.

Quinn Bolton -- Needham & Company -- Analyst

Great. And then just for Steve. Given the outlook for panel lithography systems to start shipping in the second half of the calendar year, I know those systems carry lower gross margins. How much of a headwind would that be to gross margin in the second half? Or do you think some of the other -- the Iris, the aspect tools can offset some of the higher shipments of lithography in the second half?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Yes. I think that's a good way to look at it. I mean, lithography systems, obviously, high ASP and lower volumes. So it felt like we're seeing a ramp-up lots of units. But we are -- obviously, we've talked about the backlog we have in lithography for this year already for this year. So yes, again, I think having one or two lithography tools going the quarter can easily be offset by some of the newer products we've got. I've talked about the value-added of some of these new metrology products that we've added. So I don't think you're going to see a real big headwind. You won't see that headwind, I don't think, in the numbers.

Quinn Bolton -- Needham & Company -- Analyst

All right, thank you.

Operator

We'll take our next question from Patrick Ho, Stifel.

Patrick Ho -- Stifel -- Analyst

Thank you very much and belated Happy New Year and Congrats on the really nice finish to the year. Mike, maybe first off, a little more color on the DRAM metrology when you talked about it in the prepared remarks. One, can you give us what type of applications those wins were for? And secondly, we see the process control intensity increased for both NAND and logic over the last several years. Are you seeing that now more in OCD metrology for the DRAM side as well?

Michael P. Plisinski -- Chief Executive Officer

So on your first question, it's for integrated metrology applications, which are primarily CMP. But we're working with several customers to expand based on the stability and the speed at which we're making these measurements. They're looking at other process steps where integrated hasn't been traditionally used, but they see potential benefit based on the quality of the measurements we're able to provide. But for this win, it was CMP. To your second question, what was the second question? Sorry, I missed your second question.

Patrick Ho -- Stifel -- Analyst

Process control intensity in DRAM, do you see that emerging in OCD metrology and the impact for you?

Michael P. Plisinski -- Chief Executive Officer

Yes. We definitely see process control intensity increasing. First in logic. We mentioned that before, and we're seeing that consistently growing as the nodes are shrinking. In DRAM, I'd say it's a little bit less, certainly less ramping meaningless accelerating intensity increasing. But we do see as the customers are migrating down, that they are increasing the number of tools they need, but not at the same rate as the logic.

Patrick Ho -- Stifel -- Analyst

Right. Maybe as my follow-up question for Steve. In terms of working capital management, given that you're seeing more and more systems ship out, especially in the near term, you've worked the working capital front pretty well. One, what have you improved upon, particularly since the merger, given that they're diverse products in that combination? And secondly, from the inventory front, how are you managing that right now given some of the supply constraints in the whole ecosystem as well as your ability to meet increasing customer demand.

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Yes. So I think there's -- you probably hit on both areas -- the two areas that we obviously focused on a lot since the merger has been the AR and the inventory. And I think putting the company's got an integration and kind of coming with a common process for accelerating acceptances. Everyone else see ships and we get 80%, 90% upon shipment type of scenario, but there's always cleaning up those acceptances. And I think the team has done a very good job of doing that this year.

So I think our DSOs have been trailing down pretty much quarter-over-quarter, last couple of years -- or last couple of quarters. So that's been an improving area from a working capital perspective. On the inventory side, it's two stories, right? We've got -- obviously, the litho inventory we're purchasing for the -- some of the products we're putting in and coming out with it. But at the same time, you're right, as I mentioned to Craig a minute ago, we're obviously constantly looking at the supply chain, the impact of COVID that can have on the plant. And obviously, we're doing our forecasting where we think the -- based on the comments that Mike made about the first half of the year. So right now, we're obviously looking at it. We're making sure that we're ahead of the curve as fast as we can. And we haven't seen anything that really has impacted us yet.

Patrick Ho -- Stifel -- Analyst

Great, thank you very much.

Operator

We'll take our next question from Tom Diffely with D.A. Davidson.

Tom Diffely -- D.A. Davidson -- Analyst

Yes, good afternoon and thanks for the question. I guess I'll start with Steve. I guess, first, on the margin side, when you look at the new $100 million volume purchase agreements, do those include volume discounts that might impact the margin structure?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Yes. You could imagine if we're doing that, they're obviously a big a package deal, but because of the portfolio of products, Mike talked about. It's not just a one product $100 million, how do we do it. It's a mix of all of our products in a lot of these cases, both front end and back end. So overall, the margins are actually pretty strong. And yes, like I've mentioned, I don't anticipate you seeing any major impact on our margins this year as obviously revenue growth. I think we're going to continue, as I mentioned in my comments. As we continue to drive revenues, I think you're going to see continued improving gross margin. Obviously, they flow pretty strong down the operating model for us.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. And when you look at your long-term model, you're going from the $600 million to $800 million range, you have about a 500 basis point improvement in the operating margin, is most of that just driven by increased revenue? Or are there any programs or projects you have to do to achieve those new operating margins?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Well, I would say, too, I don't think there needs to be much to hit that model. I think as we drive the revenues, we'll get there. But I also don't want to say I'm complacent with the model we have because as we've talked -- well, from a synergy standpoint, putting the company together, there are some longer-term engineering programs that are 2, three years in the making is getting to common platforms, things like that. Those will work their way into that model or into our operating results as we proceed of that model revenue growth.

Tom Diffely -- D.A. Davidson -- Analyst

Okay. And then finally, for Mike, when you look at the potentially $70 billion of WFD spending this year and you look at the business you have in the second half on the lithography side, are you going to need another slug of tools in 2022 to handle the big waste equipment spending this year? Or is that kind of tiling up in correlation to or in conjunction with the spending this year.

Michael P. Plisinski -- Chief Executive Officer

Specific to the lithography you're asking?

Tom Diffely -- D.A. Davidson -- Analyst

Yes, just kind of the front end versus back end and the timing of the two segments.

Michael P. Plisinski -- Chief Executive Officer

Yes. No, we would expect several years of growth on the lithography side to keep up with the demand. Based on the multiyear range and multiyear discussions that we're having with our customers, this is a transition that's going to be happening for, well, like I said, for several years, and it's -- at least what they're sharing with us, the expectations are for fairly decent growth over those next several years.

Tom Diffely -- D.A. Davidson -- Analyst

Okay, that's great news. Thank you.

Operator

Welcome, we'll take our next question from David Duley with Steelhead Securities.

David Duley -- Steelhead Securities. -- Analyst

Yeah, thanks for taking my question. I have a couple. Could you just highlight, I think in your prepared remarks there, Mike, you're talking about the increase in TAM or SAM from your new tools? Could you just basically elaborate on that? Give us the total again and the -- how it breaks out among the four or five new tools?

Michael P. Plisinski -- Chief Executive Officer

So there's a slide in our investor deck that also will break this out. So it will be a little more clear there. But just just for a quick summary. The biggest piece is the opening of the optical -- the planar film metrology, which is roughly half the optical metrology market, $800 million to $900 million market. So roughly half of that is as planer films. And so the Iris platform opens that up. The aspect or the IMPULSE that was stick in the optical metrology market. The IMPULSE is really around share gains within the existing integrated metrology market, where we haven't really participated. We haven't had a new product in six years.

That's about $150 million market. And we like the traction that we're seeing, as I mentioned, pretty strong growth in the fourth quarter, driven by 3D NAND customers and then adding another DRAM customer. So that's nice growth there. Then on the -- continuing the SAM expansion as the heterogeneous or the panel level packaging, which, including the inspection, software and lithography, we estimate can be over $100 million annually. And then the aspect in the elements there on the compositional and 3D NAND side, there are more expansions within our existing OCD space. So we didn't count those into the expansion opportunity. And then I think that covered most of it from the new products perspective.

Of course, Inspectrology, we see that opening up with the electrification of vehicles, we see that opening up an area for compound semi where we play with just the inspection tools and some of the software today. But by pulling that all together through the CDD overlay metrology, which is quite unique and challenging for those compound semi devices. That's an estimated, I think we said $80 million expansion for the SAM there as well.

David Duley -- Steelhead Securities. -- Analyst

Great. And so it sounds like your front end business, will grow a little bit quicker than the overall wafer fab equipment business. I'm curious about the back end business. It's always a little bit harder to gauge. But as far as your inspection business goes, if we have, let's say, 7% to 8% unit volume growth this year in nonmemory units, what would you expect the inspection business growth rate to be?

Michael P. Plisinski -- Chief Executive Officer

We're still expecting inspection to be double-digit growth this year. So -- and another SAM expansion, I forgot to mention, which is an important one that we're excited about, not just for this year, but following years as CMOS image sensors. So we estimated that to be about an $80 million market, which we don't currently play in. But over the last two quarters, we've added two of the top three manufacturers of CMOS image sensors for their high-end front end applications, and we expect to expand to some of their simpler but higher volume applications as well.

David Duley -- Steelhead Securities. -- Analyst

And did disclose what the backlog was?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

We didn't disclose the backlog, but it's -- well, again, it's the first time first year out, the company is combined. So -- but it's over $100 million, Dave.

David Duley -- Steelhead Securities. -- Analyst

Okay. And just a little bit more elaboration on the thin tool. That's obviously being the biggest new TAM expansion. And I think you've already won some business and that might be wrapped up in a volume purchase agreement. But if you could elaborate on what you kind of would expect, let's say, in what I guess, this year, it's ramping up next year is the big volume here. What would be -- what would you target a successful kind of run rate for that business, let's say, in 2022?

Michael P. Plisinski -- Chief Executive Officer

I would say $80 million, and my team has probably fallen off their chairs. But no, that's only 20% of the market. And if we're successful in some of the penetrations that we're planning this year, some of the repeat business that we're delivering against already, yes, I don't think that that's an unreasonable expectation for 2022. And I also see the road maps and some of the additional work we're doing on the platform that will make it even more valuable to our customers.

Another unique capability we're providing the customers is the upgradeability. So these systems are part of a platform strategy that gives the customers the best price performance for the optical metrology needs. And that means these systems will be upgradable to follow CD, if -- as their needs expand and their needs change. So the capital usage of these tools is more flexible than competitive solutions. So I think that's going to have additional value as well and helps drive...

David Duley -- Steelhead Securities. -- Analyst

Thank you. very much.

Operator

[Operator Instructions] And we'll take our next question from Mark Miller with Benchmark Company.

Mark Miller -- Benchmark Company -- Analyst

Again, congratulations on your quarter. Happy New Year. Just was wondering, you had a large tax benefit last quarter. And in the 2021, you're going to be going to a tax expense. Is that correct for all the quarters?

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Yes. I mean we had -- I think I mentioned in my prepared remarks, we closed that an IRS audit that's been going on for a number of years as well as we did some carrybacks that drove down the principal driver of the rate down. Historically, kind of the rates would have been somewhere in that 17% range. So yes, I think for 2020, again, non-GAAP will be back into those -- that -- well GAAP and non-GAAP, will be in that 17% -- 16%, 17% range.

Mark Miller -- Benchmark Company -- Analyst

Can you kind of give us an estimate in terms of percent of business per chip, say, DRAM and logic? What your dominant -- or are they similar? Or is one more dominant than the other from in terms of the chip revenue related?

Michael P. Plisinski -- Chief Executive Officer

They're pretty balanced. If you look at memory and logic, they're pretty balanced between the two broad categories, breaking down DRAM and NAND, then it varies quarter-to-quarter. But in general, I would say the NAND is a little stronger than DRAM for us.

Mark Miller -- Benchmark Company -- Analyst

And that's going to be somewhat softer this quarter. Is that correct?

Michael P. Plisinski -- Chief Executive Officer

Yes. Somewhat softer this quarter, yes.

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Yes.

Mark Miller -- Benchmark Company -- Analyst

Yeah. Okay,

Michael P. Plisinski -- Chief Executive Officer

Thank you for other than the first quarter of 2020. So I will note.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

Michael P. Plisinski -- Chief Executive Officer

You're welcome, Mark.

Operator

There appears to be no further questions at this time.

Michael P. Plisinski -- Chief Executive Officer

Mike, you're on mute.

Michael Sheaffer -- Investor Relations

Thank you. We'd like to thank everyone for participating in the call today and for your interest in Onto Innovation. Everybody stay healthy and safe. That concludes our remarks for the call. Sarah, please wrap it up.

Operator

[Operator Closing Remarks].

Duration: 44 minutes

Call participants:

Michael Sheaffer -- Investor Relations

Michael P. Plisinski -- Chief Executive Officer

Steven R. Roth -- Senior Vice President and Chief Financial Officer

Craig Ellis -- B. Riley -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

Patrick Ho -- Stifel -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

David Duley -- Steelhead Securities. -- Analyst

Mark Miller -- Benchmark Company -- Analyst

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