Onto Innovation Inc. (ONTO) Earnings

Management highlights

### Overall Business Momentum - The company delivered a strong start to 2026, with Q1 revenue exceeding original guidance driven by surging demand for AI compute-related process control across front-end and advanced packaging. - Strategic 27% minority investment and collaboration with Rigaku, a leading X-ray technology provider with 40% of its 2025 $600 million revenue coming from semiconductors, to develop hybrid optical-X-ray metrology solutions for next-generation 3D and exotic material process nodes. - The partnership will generate incremental near-term revenue from 100% margin AI Diffract software licensing for Rigaku X-ray systems, plus additional sales of Onto Innovation metrology tools and annual dividend income from the investment stake. ### Advanced Packaging Operational Updates - Dragonfly G5 inspection system achieved qualification at a leading 2.5D logic customer, with shipments ahead of plan; the new platform delivers higher sensitivity, higher throughput, multi-sensor flexibility, and resolution below 200nm (vs 800nm for prior generations), enabling new market expansion. - The Dragonfly G5 pipeline includes over 15 distinct applications across more than 10 customers, with strong pull-in demand for shipments accelerating through 2026. - Smaller, denser 3D interconnects (now below 6 microns in height) are driving demand for Onto Innovation's 3DI technology, resulting in over 10 additional orders in Q1 from new OSAT customers. - JetStep panel-level packaging technology was qualified at two packaging suppliers for AI device manufacturers, with production ramping expected in 2027. - Management expects full-year 2026 advanced packaging revenue to grow more than 50% year-over-year. ### Advanced Nodes Operational Updates - The Atlas G6 metrology platform is seeing expanding adoption after winning competitive head-to-head evaluations at multiple key next-generation logic node accounts. - DRAM customers are ramping development of next-generation devices, delivering solid traction for the company's memory offerings, with early signs of recovery in NAND demand. - A new TSV metrology application win for the Atlas system was secured, with initial shipments expected in H2 2026. - Management expects full-year 2026 advanced nodes revenue to grow ~25% year-over-year, outpacing average wafer fab equipment (WFE) growth expectations in the low 20% range. ### Financial Performance Highlights - Q1 non-GAAP gross margin improved 110 basis points sequentially to 55.7%, and non-GAAP operating margin increased 150 basis points to 26.7%, driven by operational efficiencies from the company's extended factory network. - Q1 non-GAAP earnings per share was $1.42, a 13% improvement over Q4 2025.

Guidance

- Second quarter 2026 revenue is guided to $320–$330 million, representing 28% year-over-year growth and a 10% increase to prior analyst expectations at the midpoint. - Second quarter 2026 non-GAAP gross margin is guided to 56%–56.5%, operating margin is guided to 28%–28.6%, and midpoint earnings per share is expected to be ~$1.69. - Full-year 2026 total revenue is expected to exceed $1.3 billion, representing more than 30% year-over-year revenue growth. - Revenue is expected to grow at least 15% sequentially in the second half of 2026 compared to the first half of 2026. - Management expects gross margins to expand by at least 50 basis points per quarter in Q3 and Q4 2026, with operating margin expected to exceed 30% by the end of Q4 2026. - The Rigaku 27% stake acquisition is expected to close in H2 2026, funded primarily with cash on hand.

Segment performance

First quarter 2026 total revenue was $292 million, a 10% sequential increase. - Specialty Device and Advanced Packaging (AP): $160 million (54.8% of total Q1 revenue). Two-thirds of this segment ($106.7 million) came from advanced packaging, $25 million from SemiLab, and the remainder from specialty devices including PowerSemi. - Advanced Nodes: $80 million (27.4% of total Q1 revenue). 60% of this segment ($48 million) came from memory (primarily DRAM), with the remaining 40% from logic. - Software and Services: The remaining 17.8% of total Q1 revenue ($52 million approximately).

Risks & headwinds

- Rising headwinds from increasing material input costs (including memory components), higher fuel prices, and elevated shipping charges are impacting the company's cost structure. - Minority investment in Rigaku exposes the company to quarterly unrealized gain/loss volatility from movements in Rigaku's stock price, which will be recorded in the company's income statement. - Supply chain constraints have slightly extended tool lead times, though management notes current issues are manageable and do not impact customer commitments.

Analyst Q&A

• Q: What visibility does Dragonfly G5 provide for growth in H2 2026 and 2027, and what end-use drivers are pushing 25% 2026 advanced nodes growth? /

  A: Shipments of Dragonfly G5 are being pulled in ahead of original plans, with steady growth in demand accelerating through each quarter of 2026. For 2027, existing customers show strong visible demand as production ramps, and the 15+ application pipeline across new and existing markets points to significant expansion. For advanced nodes, the core growth driver is the Atlas OCD metrology's new smaller spot size, which enables in-dye measurements that customers prefer over legacy test-area measurements. Strong growth also comes from expanding integrated metrology adoption at logic customers and growing demand for Iris film metrology tools. (521 characters)

• Q: Have large VPA customer orders been pulled forward from 2027 to 2026, and how will Dragonfly G5 impact gross margins over time? /

  A: Broad pull-in demand is occurring, but it is not reducing 2027 order volumes — it reflects broader industry demand growth tied to new fab construction, and 2027 demand currently looks stronger than 2026. Margin improvement from Dragonfly G5 will not be material in H1 2026 due to low initial volumes. The meaningful margin benefit will emerge in 2027, once G5 represents a larger share of total inspection revenue, though overall gross margins will still improve quarter-over-quarter throughout 2026. (487 characters)

• Q: Why did the 2.5D logic customer select Dragonfly G5 over competing offerings, and what is your top growth priority ranking for 2027? /

  A: The customer chose Dragonfly G5 for its improved resolution, new dye-to-dye variation correction algorithms, and packaging-specific design that handles common packaging challenges including wafer and die warp and rough metal surfaces. It is designed to support multiple process generations ahead, with better cost of ownership for valuable fab space, and the win will open opportunities for share gains and new application expansion. Management ranks Dragonfly G5 as the top growth opportunity, with potential to expand into nearly $1 billion in new markets, followed by Atlas G6 for gate-all-around nodes, surface charge metrology for chiplet packaging, and panel-level packaging tools. (578 characters)

• Q: What is the timeline for revenue ramp from the Rigaku collaboration, and when will the combined optical-X-ray hybrid tool launch? /

  A: Software licensing revenue for AI Diffract will grow gradually through 2026 and accelerate further in 2027, aligned with Rigaku's existing X-ray tool pipeline. Full combined hybrid metrology solutions for high-volume manufacturing are several years out, targeted at next-generation process nodes (N+2) that require deeper material penetration not currently needed for near-term production. The combined revenue and dividend from the stake is expected to offset foregone interest income from the cash used for the investment within 12 months of closing. (469 characters)