Onto Innovation Inc. (ONTO) Q3 2025 Earnings Call Transcript
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Overview
The earnings call summary indicates strong potential for revenue growth driven by AI packaging and advanced nodes, especially in Q4 2025. The acquisition of Semilab is expected to boost earnings and margins, while the region-for-region strategy aims to reduce costs. Although there are temporary margin pressures, guidance suggests recovery and growth. The Q&A section confirms positive trends in AI packaging and advanced nodes, with expected revenue contributions from new technologies. Overall, the positive guidance and strategic initiatives suggest a positive stock price movement.
Key Financial Performance
Revenue for Q3 2025 $218.2 million, slightly ahead of the midpoint of the previous guidance range.
Gross Margin for Q3 2025 54%, includes approximately a 1 percentage point impact related to tariffs.
Operating Margins for Q3 2025 21.1%, exceeded the top end of the guidance range due to focus on variable cost control.
Adjusted Earnings Per Share for Q3 2025 $0.92, towards the high end of the guidance range.
Advanced Nodes Revenue for Q3 2025 $54 million, 25% of total revenue. Expected to double to approximately $300 million for the full year 2025 compared to $148.5 million in 2024.
Specialty Devices and Advanced Packaging Revenue for Q3 2025 $113 million, 52% of total revenue. Expected to rebound to approximately $150 million in Q4 and finish slightly higher than $500 million for the full year.
Software and Services Revenue for Q3 2025 $51 million, 23% of total revenue.
Cash from Operations for Q3 2025 $83 million, increased sequentially from $58 million in Q2, representing cash conversion of approximately 185% of non-GAAP net income.
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Operating Highlights
3Di technology: Successfully completed qualification at two high-bandwidth memory customers, demonstrating superior performance on smaller, denser 3D interconnects. Discussions for volume orders are underway.
Dragonfly system: Next-generation system launch progressing well, with first shipment expected in weeks and additional systems in December. Successful in-house wafer studies have led to customer evaluations and discussions for 2026 volume needs.
Advanced packaging: Market growth expected in 2026 due to AI compute demand. Revenue from 2.5D packaging customers expected to nearly double in Q4.
Advanced nodes: On track for record revenue outside China in 2025, driven by adoption of Iris films and integrated metrology platforms. Revenue expected to double to $300 million in 2025 compared to 2024.
Offshoring activities: Successfully shipped over 30% of Q3 tools from extended factories in Asia. On track to ship over 60% of production demand from international locations by Q1 2026, enhancing competitive position and gross margins.
Cash generation: Cash from operations increased to $83 million in Q3, representing 185% cash conversion of non-GAAP net income.
Semilab acquisition: Amended transaction to exclude a small product line. Expected to close in weeks, with a total value of $495 million. Anticipated to be accretive to revenue and earnings in 2026.
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Risk or Challenges
Regulatory Hurdles: The pending acquisition of Semilab faced a second request letter from the Department of Justice, leading to amendments in the transaction to exclude a product line. This regulatory scrutiny could delay or complicate future acquisitions.
Tariff Impacts: Tariffs have impacted gross margins, with a 1 percentage point reduction in Q3 and an anticipated similar impact in Q4, primarily due to inbound tariffs on raw material imports.
Supply Chain Disruptions: Efforts to ramp up production in international factories aim to mitigate supply chain risks, but the transition to shipping 60% of production demand from these locations by Q1 2026 could pose operational challenges.
Economic Uncertainties: The company’s financial performance is tied to global AI infrastructure investments, which are subject to economic fluctuations and uncertainties.
Strategic Execution Risks: The integration of the Semilab acquisition and the ramp-up of new product lines like the Dragonfly system and 3Di technology require precise execution to meet growth expectations for 2026.
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Guidance & Outlook
Revenue Growth: Revenue is expected in the range of $250 million to $265 million for Q4, representing 15% to 21% sequential growth. Advanced packaging is expected to be the primary driver of this growth, with modest improvements in advanced nodes, particularly DRAM and logic.
Gross Margin: Gross margin is expected to improve by approximately 50 basis points sequentially in Q4, despite a 1 percentage point impact from tariffs.
Operating Margins: Operating margins for Q4 are projected to rebound to a range of 24% to 26%, with operating expenses of approximately $77 million.
Earnings Per Share: Earnings per share for Q4 is expected to range between $1.18 and $1.33, assuming a tax rate of 13% to 15% and 49.4 million shares outstanding.
Advanced Packaging and Nodes: Advanced packaging revenue is expected to nearly double in Q4 compared to Q3, driven by strong demand for Dragonfly systems. Advanced nodes revenue is also expected to improve due to increased DRAM and logic spending.
2026 Growth Expectations: Sequential growth is expected in the first half of 2026, with more meaningful growth in the second half, driven by new products and potential capacity expansions. Packaging customers indicate a potential need for 20% more tools to support expansions and new applications.
Factory Expansion: By the end of Q1 2026, over 60% of production demand is expected to be shipped from international locations, enhancing competitive position, mitigating tariff impacts, and expanding gross margins.
Semilab Acquisition: The acquisition of Semilab's complementary product lines is expected to close in the coming weeks and be accretive to revenue and earnings in 2026.
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Shareholder Return Plan
Dividends: Given the pending acquisition of Semilab, we did not repurchase shares in the third quarter. Once the acquisition closes, which is expected in the coming weeks, we will pay Semilab $432.3 million in cash and issue 641,771 shares of our common stock. The value of the total transaction based upon Onto's closing price as of June 27, 2025, is approximately $495 million, a decrease of about $50 million from the original terms of the deal.
Share Repurchase: Given the pending acquisition of Semilab, we did not repurchase shares in the third quarter.
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Key Q&A
Q:Can you comment on what you'd expect for your two big segments, advanced packaging and advanced nodes, and any color on the linearity with those businesses for 2026?
A:The first half of 2026 is expected to be sequentially better than the second half of 2025, with more significant growth in the second half of 2026. This growth will be driven by customer expansions and the adoption of new products like the 3Di and Dragonfly systems.
Q:Can you help us with some of the gives and takes for gross margins next year, including the impact of tariffs?
A:The tariff impact is expected to start mitigating next quarter as offshore extended factories ramp up. Gross margin expansion is anticipated to become more meaningful by mid to late 2026.
Q:Once Semilab closes, do you plan to host another conference call or provide updates?
A:The company plans to provide updates as part of the next earnings call rather than hosting a separate conference call immediately after the close.
Q:You mentioned sequential growth into March for 2.5D packaging. Was that comment specific to 2.5D packaging?
A:The sequential growth mentioned was half-over-half for the entire business, not specific to 2.5D packaging. Growth is primarily driven by AI packaging and strong demand for Dragonfly systems.
Q:Can you talk about the ecosystem and timing of revenue from the new Dragonfly system?
A:Revenue from the new Dragonfly system is expected in the first half of 2026, but in small quantities. More meaningful revenue is anticipated in the second half of 2026 as shipments increase.
Q:Regarding the qualification of the 3Di tool at two HBM customers for bump inspection, is that tied to the ramp of HBM4? Are you the first or second source?
A:The qualification is tied to the ramp of HBM4. The company believes it is the first source, as no other tools have been qualified through stringent tests yet.
Q:Can you clarify your comments about the Dragonfly system and its shipments?
A:The Dragonfly system will be shipped to a 2.5D logic packaging customer in the coming weeks, with additional shipments to memory customers in December. More Dragonfly systems are planned for shipment in Q1 2026 to multiple customers.
Q:Will your core inspection business with HBM be a growth factor in 2026?
A:Customers are still determining their allocations and process control spending. Growth is expected as next-generation devices ramp up in the second half of 2026, positively impacting the business.
Q:What milestones should we look for after the initial evaluation tools for Dragonfly are shipped?
A:More meaningful revenue from Dragonfly is expected in the second half of 2026 as customers ramp up adoption and cut the technology into production.
Q:What drove the wins for the 3Di tool, and how will it impact the P&L?
A:The 3Di tool's laser-based coherent light technology allows precise measurements, meeting stringent customer requirements. Incremental revenue in 2026 is expected to be in the tens of millions of dollars, with a bigger impact in 2027.
Q:Is the 3Di tool's pre-reflow bump metrology step a new metrology step for adopters?
A:Yes, it is a new metrology step, as previous technologies couldn't reliably measure at the pre-reflow step. This step eliminates the need for post-reflow metrology and allows for rework.
Q:How do you view advanced WFE markets and advanced packaging trends for the first half of 2026?
A:The first half of 2026 is expected to show sequential growth, with variability quarter-to-quarter. Advanced packaging and specialty devices are expected to show strength, while advanced nodes may see stronger growth in the second half.
Q:What is the expected revenue impact of the 3Di tool in 2026?
A:The 3Di tool is expected to contribute tens of millions of dollars in incremental revenue in 2026.
Q:What is the status of VPAs for DRAM and memory markets in 2026?
A:Existing VPAs for 2023 have been worked through, and discussions for new VPAs for 2026 and beyond are ongoing.
Q:What is the updated confidence in Semilab approval and its timing?
A:The company worked cooperatively with Semilab and regulators to find a reasonable solution, but no specific timing for approval was provided.
Q:Where do you have the most confidence in sequential growth for the first half of 2026: advanced nodes or packaging?
A:Advanced packaging and specialty devices are expected to show more strength in the first half of 2026, while advanced nodes are likely to see stronger growth in the second half.
Q:Has visibility on HBM progression improved compared to last quarter?
A:Visibility has improved in discussions with suppliers, but clarity on qualifications and allocations remains limited.
Q:Are you seeing strong quarter-on-quarter growth in HBM and DRAM in Q4 2023?
A:Yes, there is strength in memory, particularly DRAM, and strong growth in AI packaging, including HBM, in Q4 2023.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on customer spend plans, the exact timing of advanced node and packaging growth, and the precise impact of new technologies like 3Di and Dragonfly on revenue. They also did not clarify the visibility on HBM qualifications and allocations or provide a clear timeline for Semilab approval.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI compute
AI era
Asia tool
China adoption
DRAM logic
Department Justice
Di order
Dragonfly discussion
Dragonfly system
Justice transaction
Market investment
NAND node
OSAT application
Onto
Semilab transaction
acquisition
basis point
capacity
copy release
demand AI
discussion volume
effort position
expectation
factory
node DRAM
percentage point
point margin
point tariff
product line
qualification
supply chain
track record
value
week
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The earnings call indicates strong revenue growth driven by advanced packaging and nodes, with positive impacts from the Semilab acquisition. Despite some supply chain challenges, the company is set up for significant growth, particularly in advanced packaging. The Q&A highlights a positive outlook for advanced packaging and AI demand, although management was vague on certain details. Overall, the strong financial performance and optimistic guidance suggest a positive stock price movement in the short term.
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Onto Innovation Inc. (ONTO) Q3 2025 Earnings Call Transcript
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The earnings call summary indicates strong potential for revenue growth driven by AI packaging and advanced nodes, especially in Q4 2025. The acquisition of Semilab is expected to boost earnings and margins, while the region-for-region strategy aims to reduce costs. Although there are temporary margin pressures, guidance suggests recovery and growth. The Q&A section confirms positive trends in AI packaging and advanced nodes, with expected revenue contributions from new technologies. Overall, the positive guidance and strategic initiatives suggest a positive stock price movement.
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ONTO Report
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