Onto Innovation outlines 18% Q4 revenue growth target driven by AI packaging and advanced nodes expansion

Earnings Call Insights: Onto Innovation Inc. (ONTO) Q3 2025

MANAGEMENT VIEW

* CEO Michael Plisinski reported that financial results "came in ahead of the midpoint of our guidance ranges," highlighting progress in strategic initiatives such as new product adoption, offshoring activities, and preparations for the integration of the Semilab acquisition. He stated, "Our 3Di technology has successfully completed the full qualification process at not 1 but 2 high-bandwidth memory customers in the quarter." Plisinski also announced discussions for volume orders of 3Di and subsurface defect inspection for next-generation HBM devices and noted a major order from a leading OSAT to support 2.5D applications for AI packaging.
* The launch of the next-generation Dragonfly system is progressing, with the first shipment expected in a few weeks and additional systems in December. Plisinski added that several customers are "adding the new Dragonfly to preliminary discussions on volume needs for 2026."
* He emphasized that Onto Innovation is "on track to deliver a record year in advanced node revenue outside of China," driven by the adoption of Iris films and integrated metrology platforms.
* Plisinski highlighted the company's aggressive ramp of extended factories in Asia, reporting, "we successfully shipped over 30% of third quarter tools from these factories" and expect to ship over 60% from international locations by the end of Q1 2026, which is expected to "expand gross margins in 2026."
* Regarding the Semilab acquisition, Plisinski explained, "we amended the transaction to exclude a relatively small product line" and expect it to close in the coming weeks, being "accretive to both revenue and earnings in 2026."
* CFO Brian Roberts stated, "Third quarter performance met or exceeded expectations across key financial metrics as we work to improve our forecasting processes and implement more disciplined spending controls. Revenue for the quarter was slightly ahead of the midpoint of our previous guidance range at $218.2 million. Gross margin for Q3 2025 was 54% and includes approximately a 1 percentage point impact related to tariffs. Operating margins of 21.1% exceeded the top end of our guidance range as we maintained our focus on variable cost control in the quarter."

OUTLOOK

* For Q4 2025, revenue is expected in the range of $250 million to $265 million, representing 15% to 21% sequential growth. Plisinski described, "the greatest contributor to this growth is from 2.5D packaging customers, where we expect revenue to nearly double from the third quarter, driven by strong Dragonfly system demand."
* Roberts provided guidance that Q4 gross margins are expected to improve by approximately 50 basis points sequentially, with an anticipated $2.5 million cost impact from tariffs. Operating margins for Q4 are forecasted at 24% to 26% on operating expenses of approximately $77 million, with EPS expected in the range of $1.18 to $1.33 per share. The Q4 period includes an additional week, adding about $3 million in expenses.
* Management expects "sequential growth in the first half of next year with more meaningful growth expected in the second half of 2026, driven by increased contributions from new products and potential capacity expansions."

FINANCIAL RESULTS

* Onto Innovation reported Q3 2025 revenue of $218.2 million. Gross margin was 54%, with an approximately 1 percentage point tariff-related impact. Operating margin stood at 21.1%. Adjusted EPS was $0.92.
* Advanced nodes generated $54 million in revenue, specialty devices and advanced packaging $113 million, and software and services $51 million.
* Cash from operations was $83 million, with cash conversion at approximately 185% of non-GAAP net income. No share repurchases occurred due to the pending Semilab acquisition, which is valued at approximately $495 million based on June 27, 2025, closing prices.

Q&A

* Craig Ellis, B. Riley Securities: Asked about organic growth expectations for advanced packaging and advanced nodes in 2026. Plisinski responded that "first half is going to be sequentially better than the second half of 2025," with more significant growth in the second half driven by customer expansions and new product adoption.
* Ellis also questioned gross margin trends and tariff impacts. Roberts stated, "we'll start to see the tariff impact start to mitigate next quarter," with meaningful gross margin expansion as offshore factories come online.
* Ezra Weener, Jefferies: Asked for clarification on sequential growth in 2.5D packaging. Plisinski confirmed growth is driven primarily by AI packaging and Dragonfly demand. Weener also asked about Dragonfly revenue timing; Plisinski indicated "onesie, twosies until it starts shipping in volumes," with more meaningful revenue in the second half of 2026.
* David Duley, Steelhead Securities: Asked if 3Di qualification at HBM customers is tied to HBM4 and about Dragonfly shipments. Plisinski confirmed a tie to HBM4 and said Dragonfly shipments will go to multiple customers, with increased shipment plans based on successful demos.
* Matthew Prisco, Cantor Fitzgerald: Inquired about milestones for Dragonfly adoption. Plisinski expects more meaningful revenue from new products in the second half of 2026, with "tens of millions of dollars" from 3Di in 2026, driven by its differentiated technology and new applications.
* Brian Chin, Stifel: Asked if 3Di is a new metrology step. Plisinski confirmed and explained it enables rework and yield improvement. Chin also asked about revenue linearity; Plisinski said quarter-to-quarter variability is expected, driven by customer spend plans.
* Edward Yang, Oppenheimer: Confirmed 3Di revenue expectations for 2026 and asked about memory market dynamics and Semilab acquisition regulatory matters. Plisinski said early indications suggest demand for "20% more tools" for AI packaging and that discussions for new VPAs are underway for next year.
* Vedvati Shrotre, Evercore ISI: Queried about sequential growth drivers in H1 2026 and visibility on HBM supplier qualifications. Plisinski said advanced packaging and specialty devices are likely to show strength in H1 2026, with advanced nodes stronger in the second half.

SENTIMENT ANALYSIS

* Analysts adopted a probing but constructive tone, seeking clarification on sequential growth, timing of major revenue drivers, and competitive positioning in HBM and AI packaging. There was persistent focus on the translation of new product wins into revenue and on tariff-related gross margin impacts.
* Management maintained a confident yet measured tone, emphasizing growth opportunities, customer engagement, and operational execution. Plisinski frequently referenced ongoing customer discussions and product adoption milestones. Roberts expressed confidence about mitigating tariff impacts, stating, "we'll start to see the tariff impact start to mitigate next quarter."
* Compared to the previous quarter, analyst tone shifted from broad optimism about product adoption to more targeted inquiries about revenue timing, market share gains, and the sustainability of margin expansion. Management's responses remained consistent, with a slightly increased focus on execution and operational discipline.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter emphasized revenue acceleration in AI packaging and advanced nodes, with more specificity on product qualification wins (3Di, Dragonfly) and offshore manufacturing progress. In contrast, the previous quarter highlighted initial customer validations, strong backlog, and expectations of Q4 recovery but with less detail on volume shipment timing.
* Gross margin guidance included explicit commentary on the expected mitigation of tariff impacts, while previous commentary focused on the early stages of offshoring and tariff exposure.
* Management's outlook language shifted from general confidence in a second-half rebound to naming specific growth drivers, shipment milestones, and customer expansion discussions for 2026. Analysts increased their scrutiny of near-term revenue conversion and the impact of new product launches.

RISKS AND CONCERNS

* Management identified tariff impacts as an ongoing but diminishing risk, with mitigation expected through increased offshore manufacturing.
* There is some uncertainty around the timing and magnitude of customer spend, especially in advanced nodes and HBM, as customers finalize allocations and assess process control needs.
* The pending Semilab acquisition, while expected to close soon, faced regulatory review requiring transaction amendments.

FINAL TAKEAWAY

Onto Innovation management emphasized that progress in product adoption, successful customer qualifications for 3Di and Dragonfly, and the ramp-up of offshore manufacturing are positioning the company for significant sequential and long-term growth. The company expects robust Q4 revenue expansion, led by AI packaging and advanced nodes, with momentum building into 2026. Management highlighted that the Semilab acquisition and disciplined operational execution are set to further enhance competitiveness and margin expansion next year.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/onto/earnings/transcripts]

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