Onto Innovation Inc. Q3 FY2025 earnings call

• The Onto Innovation team made progress on strategic initiatives like new product adoption, offshoring, and Semilab transaction integration.
• 3Di technology completed full qualification at 2 high-bandwidth memory customers and started volume order discussions for next-gen HBM devices. Also, an order from a leading OSAT for 2.5D applications for AI packaging was secured.
• The next-generation Dragonfly system launch is progressing, with first shipment in a few weeks and additional systems in December. Successful demos led to customer preliminary discussions for volume needs in 2026.
• Advanced nodes remain on track for a record year outside China, with growing adoption of Iris films and integrated metrology platforms.
• Q4 revenue is expected in the range of $250 million to $265 million, driven by advanced packaging and modest improvement in advanced nodes.
• Over 30% of Q3 tools were shipped from Asian factories, with pace to ship over 60% from international locations by Q1 2026.
• Pending Semilab acquisition expected to close in coming weeks, accretive to 2026 revenue and earnings.

In the third quarter of 2025, advanced nodes generated revenue of $54 million, which is 25% of total revenue. Specialty devices and advanced packaging revenue was $113 million, approximately 52% of revenue. Software and services revenue was $51 million, comprising 23% of Q3's results. For the full year 2025, advanced nodes revenue is expected to double to approximately $300 million from $148.5 million in 2024. Specialty devices and advanced packaging are expected to finish the full year slightly higher than $500 million, with Q4 expected to rebound to approximately $150 million.

• Q4 revenue expected $250M-$265M, 15%-21% sequential growth.
• Q4 gross margin expected ~50 basis points sequential improvement, tariff impact to mitigate next quarter.
• Q4 operating margin expected 24%-26%.
• 2026 outlook: Sequential growth in first half, more meaningful growth in second half, driven by new products and capacity expansions.

• Tariff impacts: Previously affected gross margin, but expected to mitigate as offshoring ramps up.
• Regulatory risks: Surprise from DOJ second request, but amended transaction to close soon with no major issues post-amendment.

Q: Congratulations on the good execution guys. I wanted to start, Mike, just by following up on your most recent comments regarding organic growth through the year. Can you comment on what you'd expect for your 2 big segments, advanced packaging and advanced nodes? And any color on the linearity with those businesses?

A: Yes. So I think it's a little early to provide especially linearity quarter-to-quarter kind of view. If we look at first half, second half, we think the first half is going to be sequentially better than the second half of 2025. So we do expect growth in the first half with more significant growth in the second half, driven by several different expansions that our customers are talking to us about as well as the impact from the new products coming online being more widely adopted, let's say, getting cut into volume production. So that would be the 3Di, and it would also include the Dragonfly -- the new Dragonfly system.

Q: Brian, as we look at gross margins next year, can you just help us with some of the gives and takes? Tariffs have been in gross margin, but when can that come out? And how should we look at some of the other gives and takes with that line item?

A: Sure. On the gross margin front, I mean, I think we'll start to see the tariff impact start to mitigate next quarter. Keep in mind, most of our tariffs are on inbound and so they sit in inventory for a quarter and then they start to come out. So as we continue to ramp up expansion of the offshore extended factories and more tools are going from there and supply chain is going right directly to those factories, we'll start to mitigate the tariff risk. I think as we go through the transition to extended factories, we'll see a little bit more meaningful gross margin expansion as we get towards mid and the latter part of 2026. But we're certainly poised to have a good solid year of gross margin expansion.

Q: First one would be about your commentary on 2.5D packaging. You talked about sequential growth into March. I just want to make sure I heard that correctly and you weren't talking about the entire business. And then the other sequential question would be, when you talk about sequential growth in the first half, is that half over half or quarterly sequential growth?

A: So when I mentioned sequential growth, it was half over half. So second half of '25. We would -- first half of '26 would be sequentially stronger than second half of '25. And I'm not sure the 2.5D question on -- what was your question there?

Q: You had talked about sequential growth immediately after 2.5D packaging. I was wondering if that comment had to do specifically with 2.5D packaging.

A: No. It was -- yes, mainly just, I think, AI packaging is primarily driven by our -- I think that was about Q3 to Q4 driving growth, and it's primarily due to the AI packaging and strong demand for Dragonfly systems.

Q: Regarding the qualification of the 3Di tool at 2 HBM customers for bump inspection, is that tied to the ramp of HBM4? And are you going to be the first source or the second source there?

A: Well, we're not aware of anyone else being qualified through the stringent tests yet. So our hope is first choice, however you worded that. But I think the -- it is tied to an HBM4. We've been working with customers on other ways to do even existing processes that would provide a better yield impact. So applying the 3Di technology that we supply in different process steps, which would allow for some level of rework, that would help the customers if they do detect any issues to rework it and then drive some higher yields. That's something that only our tools can do, but it's a very new capability. So customers are working on what's the true impact of that across their process, do they want to make the change now in existing processes or only in the forward-looking.

Q: So I guess, first, I'll stick on Dragonfly. It seems like making good progress in the quarter. So kind of after you shift these initial valuation tools, what milestone should we look to from here? And how should we think about the timing of customer adoption decisions both at TSM and all these ancillary opportunities? And then the transition from those adoption decisions to revenue, how quickly can those kind of start shipping for production?

A: So I think it would be reasonable to assume second half. In fact, we said that in the second half, we would expect to see more meaningful revenue from the new products that we're shipping. So as we're qualifying, and that's the good news about shipping to a variety of customers, we're getting those qualifications started such that they're also intending to try and ramp into the second half to cut these technologies into the second half. So as long as we continue to execute, as long as the tools perform as well as they're demonstrating now, yes, I would expect, like I mentioned earlier, incremental revenue in the first half, that means closing out some of these initial tools with more meaningful revenue in the second half tied to the volume adoption that cut into production.

Q: Maybe first, just to follow up on the 3D discussion. From the sounds of it, this sounds like it's the pre-reflow bump metrology step, Mike. Is that correct? And -- is this an additional or new metrology step for many of these adopters?

A: Correct. And it is a new metrology step because previous technologies couldn't reliably measure at that pre-reflow step. The light would scatter too much is what we're told.

Q: The first one I wanted to understand was the first half '26 sequential increase that you talked about, like where do you have the most confidence, advanced node versus packaging? Is one doing better than the other? If you could give any directional sense on that?

A: I think -- I actually don't have the numbers in front of me, but my impression is that it's probably advanced nodes in specialty devices continuing to show some strength. Advanced nodes also okay, but advanced nodes, many of those factories are second half. So I think that will be much stronger in the second half.

Q: The first one I wanted to understand was the first half '26 sequential increase that you talked about, like where do you have the most confidence, advanced node versus packaging? Is one doing better than the other? If you could give any directional sense on that?

A: I think -- I actually don't have the numbers in front of me, but my impression is that it's probably advanced nodes in specialty devices continuing to show some strength. Advanced nodes also okay, but advanced nodes, many of those factories are second half. So I think that will be much stronger in the second half.

Q: The first one I wanted to understand was the first half '26 sequential increase that you talked about, like where do you have the most confidence, advanced node versus packaging? Is one doing better than the other? If you could give any directional sense on that?

A: I think -- I actually don't have the numbers in front of me, but my impression is that it's probably advanced nodes in specialty devices continuing to show some strength. Advanced nodes also okay, but advanced nodes, many of those factories are second half. So I think that will be much stronger in the second half.

Q: The first one I wanted to understand was the first half '26 sequential increase that you talked about, like where do you have the most confidence, advanced node versus packaging? Is one doing better than the other? If you could give any directional sense on that?

A: I think -- I actually don't have the numbers in front of me, but my impression is that it's probably advanced nodes in specialty devices continuing to show some strength. Advanced nodes also okay, but advanced nodes, many of those factories are second half. So I think that will be much stronger in the second half.

Q: Just to clarify on a couple of numbers, the tens of millions of 3Di you're talking about, that's for 2026, correct? And I also heard you say something about shipping more tools. Was that related to AI packaging?

A: Correct. Yes. And it's based on initial discussions. So the early indications -- kind of going back to Brian Chin's question, we're getting early indications of a certain level of demand, but that can change. And we're still in the early stages of discussion. So it's really hard for us to provide any kind of real guidance on that. But the 3Di, correct, that was for 2026.

Q: And the 20% more tools comment you had in the script?

A: It's for primarily AI packaging. Correct.

Q: Okay. And that would account for the fact that you wouldn't be shipping or recognizing much revenue from your new high-res Dragonfly G5 tool until the second half of 2026, right?

A: Correct.

Q: Okay. Wonderful. And could you just comment or provide your thoughts on the tightness and the strong pricing your customers are enjoying in memory markets and how that might pertain to 2026? You had a $69 million DRAM VPA starting this year. Does that cover this current market strength that you're seeing in those memory markets? Or do you expect more orders coming down the pipe?

A: I believe the existing VPAs covered this year, and I believe we've worked through those. I don't think there's any -- we've had actually a pretty strong year in advanced nodes. So I believe most of that is already covered. And the discussions we have now are all new VPAs for next year and slightly beyond.

Q: The first one I wanted to understand was the first half '26 sequential increase that you talked about, like where do you have the most confidence, advanced node versus packaging? Is one doing better than the other? If you could give any directional sense on that?

A: I think -- I actually don't have the numbers in front of me, but my impression is that it's probably advanced nodes in specialty devices continuing to show some strength. Advanced nodes also okay, but advanced nodes, many of those factories are second half. So I think that will be much stronger in the second half.