Executive Summary / Key Takeaways

• ONTO Innovation is a critical enabler of advanced microelectronics manufacturing through its differentiated process control solutions, particularly in metrology and inspection, positioned to capitalize on secular growth drivers like AI, advanced nodes (GAA, HBM, 3D NAND), and power semiconductors.
• The company delivered record Q1 2025 revenue of $267 million, driven by strong performance in Advanced Nodes (up ~94% sequentially, ~258% YoY) and continued strength in Specialty Devices & Advanced Packaging, demonstrating execution despite short-term market choppiness.
• ONTO's technological edge, including its highly versatile Dragonfly platform, new 3Di bump metrology, unique EchoScan void detection, and high-resolution JetStep lithography optics, provides quantifiable performance and yield benefits essential for complex, next-generation devices, strengthening its competitive moat against larger rivals.
• While Q2 2025 guidance anticipates a moderate sequential decline in revenue ($240M-$260M) due to customer timing and product mix shifts, management expects growth to resume in Q4 2025, with confidence in outperforming expected WFE growth in 2025, supported by a strong backlog and recent volume purchasing agreements.
• Key risks include the cyclical nature of the semiconductor industry, geopolitical factors impacting supply chains and export controls (driving strategic manufacturing shifts to Asia), and intense competition from larger players, necessitating continuous innovation and operational efficiency.

The Unseen Enabler: ONTO Innovation's Role in the Microelectronics Revolution

In the intricate world of microelectronics manufacturing, where the smallest defect can render a chip useless and the slightest variation can impact performance, process control is paramount. ONTO Innovation Inc. ($ONTO) operates at this critical juncture, providing the high-performance metrology, inspection, lithography, and software systems that manufacturers rely on to ensure yield, optimize processes, and accelerate time to market for the world's most advanced devices. With a history dating back to 1940, ONTO has evolved through strategic development and acquisitions to become a key player, particularly as the industry pushes the boundaries of complexity in areas like artificial intelligence (AI) compute, advanced logic, and next-generation packaging.

ONTO's strategy is centered on deep customer collaboration, anticipating market trends, and delivering innovative solutions that address the most challenging yield-enhancing requirements. This involves continuous investment in research and development, leveraging its diverse portfolio, and strategically expanding its capabilities through targeted acquisitions. The company's position is not merely as a supplier of tools, but as a partner enabling the fundamental shifts occurring across the microelectronics landscape.

Technological Edge: The Foundation of ONTO's Moat

ONTO's competitive strength is fundamentally rooted in its differentiated technology, which provides tangible, often quantifiable, benefits to its customers compared to alternative solutions offered by competitors.

At the core of its offering are its optical metrology systems. The Atlas OCD Metrology tool, a long-standing leader, continues to be qualified in critical applications like gate-all-around (GAA) logic nodes, where its performance is essential for measuring complex 3D structures. The Iris films Metrology system has seen significant traction, on pace to grow over 50% in 2023 and expected to grow further in 2025, demonstrating successful adoption for planar films in memory, logic, and packaging applications. The IMPULSE 5 Integrated Metrology platform, designed for speed and stability, achieved a record quarter in Q1 2025 and has secured volume agreements with leading manufacturers, highlighting its value proposition for high-volume production lines, particularly in GAA below 2nm.

In defect inspection, the Dragonfly platform is a highly versatile tool that achieved a revenue record in Q2 2024, driven by demand in advanced packaging for AI devices. Its integrated multi-sensor technology allows customers to combine different sensors to find solutions and metrologies that don't exist on any single tool, providing new insights into yield opportunities. A new sensor for detecting subsurface defects in ultra-thin wafers is expected to be delivered on over 80 systems through the end of 2025, addressing a critical yield loss source in 2.5D and hybrid bonding.

Pushing into emerging 3D packaging challenges, ONTO is developing the 3Di bump metrology technology, which uses proprietary methods to address the need for bump height measurements of denser interconnects at higher throughputs than alternatives. Initial customer feedback has been positive, with evaluation units shipped to leading memory manufacturers in Q1 2025. For void detection in hybrid bonding, the EchoScan System is a unique technology capable of detecting voids as small as 1µm without liquid immersion, a capability management believes is critical for yield control in high-volume manufacturing of hybrid bonding devices and currently unmatched by other technologies at this resolution.

In lithography, the JetStep X500 is positioned for the growing panel packaging market, particularly for glass substrates. Leveraging its background from flat panel displays, ONTO's tools can handle significantly larger panel sizes than currently discussed in the market. The key differentiator is the high-resolution wide-field optics, enabling printing of large package sizes without stitching, which is critical for chiplet architectures and larger package sizes.

These technological advancements are not merely incremental improvements; they represent strategic investments in capabilities that directly address the increasing complexity and yield challenges faced by microelectronics manufacturers. They contribute to ONTO's competitive moat by offering performance, sensitivity, throughput, and unique measurement capabilities that are essential for next-generation devices, enabling higher ASPs and strengthening customer relationships.

Navigating the Competitive Currents

The semiconductor equipment market is intensely competitive, with ONTO facing off against larger, more diversified players like KLA Corporation (KLAC), Applied Materials (AMAT), ASML Holding (ASML), and Lam Research (LRCX), as well as specialized competitors like Nova (NVMI), Camtek (CAMT), Ushio, Canon (CAJ), GigaVis, and PDF Solutions (PDFS).

Compared to KLA, the dominant player in process control, ONTO often competes in more specialized niches within metrology and inspection, offering solutions tailored for specific applications like DRAM and advanced packaging. While KLA benefits from scale and broader integrated solutions, ONTO differentiates through its software-driven analytics and specialized hardware like the Dragonfly's multi-sensor capability and the unique EchoScan. ONTO's gross margins (TTM 51.49%) are competitive but generally trail KLA's (TTM ~60%), reflecting the scale advantages of the larger competitor.

Against Applied Materials, which offers a wide range of equipment including metrology, ONTO's strength lies in its deep specialization and software integration for yield management. While AMAT's scale may offer cost advantages in some areas, ONTO's focus allows for potentially faster innovation in metrology-specific R&D. AMAT's gross margins (TTM ~47%) are slightly lower than ONTO's, suggesting ONTO's niche focus can support better profitability in its specific segments.

ASML dominates lithography, but ONTO's JetStep focuses on the emerging panel packaging segment, offering unique capabilities for large substrates. ONTO's metrology tools also complement ASML's systems by providing critical process control data. ASML's gross margins (TTM ~51%) are comparable to ONTO's, reflecting the high-value nature of lithography.

Lam Research, strong in etch and deposition, also competes in related process control areas. ONTO's specialized metrology and software integration offer differentiation, though LRCX benefits from integrated solutions within its broader process steps. LRCX's gross margins (TTM ~47%) are similar to AMAT's.

ONTO's competitive positioning is strongest in areas where its specialized technology provides a clear performance or capability advantage essential for complex, high-value processes like advanced packaging and leading-edge nodes. The high cost of switching equipment vendors acts as a barrier to entry and helps ONTO retain customers once qualified, but also makes it challenging to displace incumbents. Geopolitical factors, such as U.S. export controls on technology to China, also impact the competitive landscape, potentially favoring non-U.S. competitors not subject to the same restrictions. In response, ONTO is accelerating its strategic initiative to establish manufacturing capability in Asia, expected to begin shipments in 2H 2025, to improve competitiveness and supply chain resiliency.

Financial Performance and Health

ONTO Innovation has demonstrated robust financial performance, particularly in recent periods, reflecting strong demand in its target markets and operational execution. The company achieved record revenue of $267 million in Q1 2025, marking its seventh consecutive quarter of growth. This represented a 1.0% sequential increase from Q4 2024 and a significant 16.5% increase year-over-year from Q1 2024 ($228.8 million).

The growth in Q1 2025 was primarily driven by a substantial increase in Advanced Nodes revenue, which surged ~94% sequentially and ~258% year-over-year, fueled by higher sales of metrology systems to DRAM and NAND customers and gate-all-around investments. This offset a sequential decline of ~24% in Specialty Devices and Advanced Packaging revenue from a record Q4 2024, although this segment still represented the largest portion of revenue at 48%. Software and Services revenue saw a slight sequential decrease but remained a steady contributor.

Profitability metrics reflect the improving performance and favorable mix. Gross profit in Q1 2025 was $143.2 million, resulting in a gross profit margin of 53.7%. This was an improvement from Q4 2024 (50%) due to increased volume, favorable product mix, and fewer inventory write-downs. Operating expenses totaled $80.1 million, decreasing sequentially due to a prior-quarter write-off. This resulted in operating income of $63.1 million (23.7% operating margin). Net income reached $64.1 million, or $1.30 per diluted share, a significant increase from $46.9 million ($0.94 per diluted share) in Q1 2024. The effective tax rate was 10.6% in Q1 2025, lower than the statutory rate due to R&D tax credits, FDII deductions, and equity compensation benefits.

ONTO maintains a strong balance sheet and robust liquidity. As of March 29, 2025, cash, cash equivalents, and marketable securities stood at $850.6 million. While slightly down sequentially due to share repurchases ($75 million in Q1 2025), capital expenditures ($8.2 million), and an $8 million investment in a non-marketable equity security, this was largely offset by strong operating cash flow. Net cash provided by operating activities was $92.0 million in Q1 2025, a substantial increase from $57.1 million in Q1 2024, driven by improved inventory management, higher cash collections, and increased investment income. The company's current ratio is healthy (TTM 8.42), and its debt-to-equity ratio is negligible (TTM 0.01), indicating a strong financial position. Inventory levels increased slightly to $292.7 million in Q1 2025 due to accelerated receipts to mitigate tariff impacts but are expected to remain relatively flat in Q2 2025, with a target of 1.6x-1.8x turns for the year. The company has a $100 million available line of credit, currently unutilized, providing additional financial flexibility.

Outlook and Forward Trajectory

Looking ahead, ONTO Innovation's guidance for Q2 2025 anticipates revenue between $240 million and $260 million. This represents a moderate sequential decline from Q1 2025, primarily attributed to the timing of gate-all-around investments, which are expected to resume in the second half of the year, and a slight decline in Specialty Device and Advanced Packaging revenue due to customer timing and tool slot allocations in AI packaging. NAND and DRAM spending are expected to remain steady in Q2.

Gross margins are guided at 54% to 56% for Q2 2025, including a potential headwind of up to 75 basis points from inbound tariffs if not offset. Operating expenses are projected between $72 million and $75 million, reflecting annual compensation elements. Based on these assumptions, non-GAAP earnings per share are guided between $1.21 and $1.35.

Management anticipates Q3 2025 will be a low point for total revenue, primarily due to a meaningful pause in memory spending after significant ramps. This period will be leveraged to focus on the strategic manufacturing ramp in Asia. Revenue growth is expected to resume in the fourth quarter of 2025.

For the full year 2025, ONTO expects its effective tax rate to be between 14% and 16%. While not providing specific full-year revenue guidance, management indicated they expect to be more like market perform relative to overall Wafer Fab Equipment (WFE) growth, depending on the final WFE figure. Given the current consensus for WFE growth around 5-10%, this implies ONTO expects growth in 2025, albeit potentially at a more moderate pace than its strong 2024 performance.

The outlook is supported by confidence in broad-based expansions in advanced nodes in the second half of 2025 and continued investments in GAA capacity. Announced capacity expansions from HBM and logic packaging manufacturers are expected to drive demand, with new HBM capacity anticipated to come online in 1H 2025 to support increasing HBM content per AI processor. Recent volume purchasing agreements totaling over $300 million, covering AI packaging and GAA investments through roughly 2025, provide a positive signal for future revenue.

New product innovations, such as the next-generation inspection platform, 3Di, and EchoScan, are expected to contribute incrementally to revenue in 2025 as evaluation units ship and qualifications progress, with more meaningful revenue contributions anticipated in 2026 as these products ramp into higher volume production. The recent tuck-in acquisitions of Lumina Instruments and the K&S Lithography business are also expected to be accretive to earnings within 12 months and contribute to revenue growth in the coming years.

Risks on the Horizon

Despite the positive outlook and strong positioning, ONTO faces several pertinent risks. The cyclical nature of the semiconductor industry remains a fundamental challenge, potentially leading to unpredictable fluctuations in customer demand and operating results. Dependence on a few large customers for a substantial portion of revenue creates concentration risk; a significant reduction in orders from any key customer could materially impact financial performance.

Geopolitical risks, particularly U.S. export controls and tariffs, continue to pose challenges, affecting sales into certain regions like China and impacting costs. While ONTO is implementing mitigation strategies like the Asia manufacturing ramp, the full extent and timing of the benefits, as well as potential retaliatory measures, remain uncertain. Supply chain disruptions, exacerbated by geopolitical events and dependence on limited-source suppliers, could delay shipments and impact revenue.

The success of new product introductions is not guaranteed; if new systems do not gain market acceptance, it could impact future revenue and necessitate inventory write-downs. Intense competition from larger, well-resourced players could pressure pricing and market share, requiring continuous investment in R&D to maintain a technological edge. Finally, the successful implementation of a new ERP system is critical for operational efficiency, and any delays or issues could disrupt business processes.

Conclusion

ONTO Innovation is strategically positioned at the nexus of several powerful secular growth trends in microelectronics, including the explosive demand for AI, the relentless pursuit of advanced logic and memory nodes, and the increasing importance of power semiconductors. The company's differentiated process control solutions, underpinned by a strong portfolio of metrology, inspection, lithography, and software technologies, are essential for enabling the complex manufacturing processes required for next-generation devices.

While the semiconductor industry's inherent cyclicality and geopolitical headwinds present challenges, ONTO's recent financial performance, robust cash flow generation, and strategic initiatives to enhance its technology portfolio and operational footprint demonstrate resilience and forward momentum. The near-term outlook includes some expected fluctuations related to customer investment timing, but the underlying demand drivers and recent volume purchasing agreements signal a positive trajectory for 2025 and beyond. For investors, ONTO represents an opportunity to gain exposure to the critical process control segment, betting on a company whose technological leadership and strategic focus are key enablers of the ongoing microelectronics revolution. The successful execution of new product ramps and the strategic manufacturing shift to Asia will be key factors to monitor as the company seeks to outperform the broader WFE market.