Executive Summary / Key Takeaways

• Pivotal Role in AI Infrastructure: Onto Innovation is strategically positioned as a critical enabler of the burgeoning AI and high-performance compute markets, providing essential process control, metrology, and inspection solutions for advanced nodes and packaging.
• Differentiated Technology Driving Adoption: The company's innovative technologies, including the 3Di for 3D interconnects and the next-generation Dragonfly for high-resolution 2D and subsurface inspection, are achieving key qualifications and expanding into new, high-value applications like HBM4 and hybrid bonding.
• Operational Resilience and Margin Expansion: Strategic initiatives, such as the accelerated ramp of Asian manufacturing facilities, are enhancing competitive positioning, mitigating tariff impacts, and are expected to drive gross margin expansion in 2026.
• Robust Financial Performance and Growth Outlook: Despite some near-term market variability, Onto Innovation delivered strong Q3 2025 results, exceeding guidance, and projects significant revenue growth in Q4 2025, with sequential growth anticipated through 2026, bolstered by new product ramps and the accretive Semilab acquisition.
• Secular Tailwinds and Expanding Market Share: The long-term demand for AI, gate-all-around transistors, 3D NAND, and power semiconductors provides powerful secular tailwinds, allowing Onto Innovation to expand its wallet share with leading customers through its comprehensive optical metrology ecosystem.

Onto Innovation's Strategic Foundation in the AI Era

Onto Innovation Inc. (ONTO) stands as a worldwide leader in the design, development, manufacture, and support of high-performance process control tools for the microelectronics industry. Founded in 1940, the Wilmington, Massachusetts-based company has evolved to offer a comprehensive suite of optical metrology, defect inspection, lithography, and data analysis systems. These solutions are indispensable across the entire microelectronics value chain, from bare silicon wafer production and front-end manufacturing to advanced chip packaging and testing facilities. The company's core value proposition lies in providing critical yield-enhancing and actionable information, enabling microelectronic device manufacturers to improve yield and accelerate time-to-market for next-generation devices.

The semiconductor industry is characterized by relentless technological innovation, with current trends pointing towards a future dominated by artificial intelligence (AI) and high-performance computing. This shift is driving demand for advanced packaging architectures, such as chiplets for logic and 3D stacking for memory, alongside nascent co-packaged optics, all aimed at boosting device performance while reducing power consumption. NVIDIA (NVDA) projects global AI infrastructure investments could reach $3 trillion to $4 trillion by the end of the decade, fundamentally reshaping the semiconductor supply chain. Onto Innovation plays a pivotal role in this evolution, collaborating closely with customers to develop and deliver the process control solutions essential for the AI era.

In this dynamic landscape, Onto Innovation competes with industry giants like KLA Corporation (KLAC), Applied Materials (AMAT), ASML Holding (ASML), and Lam Research (LRCX). While these competitors possess greater scale and broader portfolios, Onto Innovation carves out a competitive niche through its specialized metrology and inspection tools, coupled with superior software integration. The company's agility in software innovation and its focus on comprehensive process control across diverse applications, including specialty devices, differentiate it from more hardware-centric or lithography-focused rivals. For instance, Onto Innovation's software offers enhanced data analytics for yield management, providing greater operational efficiency and scalability for customers compared to some competitors. However, its smaller operational scale can lead to higher costs and potentially lower margins compared to larger players, and it faces vulnerabilities related to supply chain dependencies.

Technological Edge: Precision, Performance, and New Frontiers

Onto Innovation's investment thesis is deeply rooted in its differentiated technology, which provides tangible benefits and expands its market opportunities. The company's R&D initiatives are directly aligned with the evolving requirements of advanced semiconductor manufacturing.

A cornerstone of Onto Innovation's portfolio is its 3Di technology, which utilizes laser-based coherent light. This unique approach allows for precise focusing between dense, smaller 3D interconnects, a critical capability for next-generation High-Bandwidth Memory (HBM) devices, including HBM3, HBM4E, and beyond. This technology offers superior performance in throughput and precision, enabling new applications such as pre-reflow bump metrology. This new metrology step allows customers to detect and potentially rework issues before final reflow, significantly improving yield, a capability previous technologies struggled with due to light scattering. Additionally, 3Di is opening opportunities in die warpage metrology and specialized 2.5D packaging metrology. The 3Di technology has successfully completed full qualification at two HBM customers, and an order from a leading OSAT for 2.5D AI packaging further underscores its market acceptance.

Complementing 3Di is the next-generation Dragonfly system, designed for advanced 2D inspection. This platform offers significantly better sensitivity and higher performance, addressing rapidly evolving customer requirements in 2.5D packaging where existing tools fell short. The Dragonfly system is progressing well, with initial shipments expected in the coming weeks to a 2.5D logic packaging customer, followed by additional systems to memory customers in December. Successful in-house wafer studies for HBM and hybrid bonding applications have led to several more evaluation shipments to customers in the first quarter of next year, with preliminary discussions already underway for volume needs in 2026. This new platform is also anticipated to open up opportunities in the front-end macro inspection market, a segment where Onto Innovation has not historically competed.

The company is also making significant strides in films metrology with its Iris G2 platform, specifically designed for the estimated $500 million critical films market. This technology, alongside the IMPULSE 5 Integrated Metrology and Atlas OCD Metrology, is contributing to record quarters and expanding Onto Innovation's "wallet share" in advanced nodes. Furthermore, the EchoScan System represents a unique technological advantage for void detection in hybrid bonding applications. This system can detect yield-killing voids in bonding interconnects without the need for liquid immersion, a critical capability for yield control and high-volume manufacturing of hybrid bonding devices where no other technology currently offers comparable resolution.

The pending acquisition of product lines from Semilab will further enhance Onto Innovation's technological portfolio by adding electrical surface metrology, surface charge metrology, and materials analysis technology. These additions are crucial for addressing new challenges in advanced nodes and packaging, such as measuring unwanted residual charge on chiplet circuitry and gaining early insights into gate performance for new gate designs. The acquired product lines have demonstrated approximately 20% annual growth over the last five years, outperforming the broader Wafer Fab Equipment (WFE) market during that period.

For investors, these technological differentiators translate into a robust competitive moat. The precision and unique capabilities of 3Di and EchoScan enable higher average selling prices (ASPs) and secure critical tool-of-record positions for future ramps. The expanded applications of Dragonfly and Iris G2 drive increased market share and revenue growth by solving complex yield issues for customers. Onto Innovation's continuous R&D investment ensures it remains at the forefront of process control, directly contributing to its long-term growth strategy and strengthening its market positioning against competitors.

Financial Performance: A Story of Resilience and Strategic Growth

Onto Innovation's recent financial performance reflects its strategic focus and operational effectiveness amidst a dynamic market. For the third quarter ended September 27, 2025, the company reported revenue of $218.2 million, exceeding the midpoint of its guidance range. This represented a 14% decrease compared to the third quarter of 2024, primarily due to lower sales to DRAM and NAND customers in advanced nodes, and reduced sales to DRAM and foundry customers in the specialty devices and advanced packaging markets.

Despite the revenue decline, gross profit for Q3 2025 was $110.6 million, representing a gross margin of 50.7%. This was an increase from the 48% gross profit as a percentage of revenue in the second quarter of 2025, primarily due to the write-down of excess and obsolete inventory recorded in the June 2025 quarter. Operating expenses decreased by 3% sequentially to $86.9 million, mainly driven by lower restructuring expenses, research and development project costs, and compensation costs. Operating income stood at $23.7 million, with an operating margin of 10.8%. Net income for the quarter was $28.2 million, resulting in diluted earnings per share of $0.57.

Looking at the nine months ended September 27, 2025, total revenue was $738.4 million, a modest 2% increase from $723.4 million in the same period of 2024. Net income for the nine-month period was $126.2 million, down from $152.9 million in the prior year, with diluted EPS of $2.57 compared to $3.08.

A disaggregation of revenue by market for Q3 2025 shows Advanced Nodes contributing $54 million (25% of total revenue), Specialty Devices and Advanced Packaging $113 million (52%), and Software and Services $51 million (23%). The decrease in systems and software revenue for the three and nine months ended September 27, 2025, was mainly attributable to lower sales to DRAM, foundry, and power customers in the specialty device and advanced packaging market, partially offset by increased sales to OSAT and foundry/DRAM customers in the advanced node market. Conversely, parts and services revenue increased due to higher parts sales and service contract revenue.

Onto Innovation's liquidity remains robust. Cash, cash equivalents, and marketable securities increased to $983.9 million at September 27, 2025, up from $852.3 million at December 28, 2024. This increase was primarily driven by $233.3 million in cash generated from operating activities and $9.7 million from the issuance of shares through share-based compensation plans. These inflows were partially offset by $75 million used for common stock repurchases, $23.4 million for capital expenditures, $12.6 million for tax payments related to share-based compensation, and $8 million for non-marketable equity securities. The company also maintains a $100 million unused line of credit, providing additional financial flexibility.

These financial figures underscore Onto Innovation's ability to generate strong cash flows and maintain a healthy balance sheet, even during periods of market adjustment. The sequential improvement in gross margin and disciplined operating expense management demonstrate operational effectiveness. The growth in parts and services revenue highlights the recurring and sticky nature of its customer relationships, providing a stable revenue base.

Strategic Initiatives and Competitive Positioning

Onto Innovation is actively pursuing several strategic initiatives to solidify its market leadership and enhance its competitive standing. A key focus is the aggressive ramp-up of its extended manufacturing facilities in Asia. By the third quarter of 2025, over 30% of tools were shipped from these Asian factories, with a target to reach over 60% of production demand from international locations by the end of the first quarter of 2026. This initiative is designed to enhance competitive positioning, mitigate the impact of tariffs (which currently represent about a 1 percentage point headwind to gross margin), provide greater manufacturing flexibility, and expand gross margins in 2026.

The pending acquisition of product lines from Semilab is another significant strategic move. Initially announced on June 27, 2025, the agreement was amended on October 9, 2025, to exclude a small product line in response to regulatory scrutiny. The revised purchase price is $432.3 million in cash and 641,771 shares of common stock, valuing the transaction at approximately $495 million. This acquisition is expected to close in 2025 and be accretive to both revenue and earnings in 2026. It strategically expands Onto Innovation's portfolio with electrical surface metrology, surface charge metrology, and materials analysis technology, addressing new challenges in advanced nodes and packaging.

In the competitive landscape, Onto Innovation leverages its technological differentiation to gain market share. Its 3Di technology is demonstrating unique capabilities for next-generation devices, particularly in HBM4, where it is currently not aware of any other qualified solutions. This positions Onto Innovation as a potential "first choice" in critical, high-growth applications. The company's ability to open new applications with 3Di, such as pre-reflow metrology, further strengthens its competitive moat against established incumbents in 3D bump metrology.

The next-generation Dragonfly system is designed to compare very favorably against competitors in 2.5D inspection, even against very large competitors with extensive inspection technology. Onto Innovation aims to close gaps in 2D inspection while leveraging its platform and understanding of the packaging market's cost and performance sensitivities. This new platform is significantly more capable than previous macro inspection platforms, offering submicron capabilities that open opportunities in the front-end inspection markets, effectively expanding its addressable market.

Onto Innovation's strategy of expanding its "wallet share" in advanced nodes is also a key competitive advantage. By adding Iris films and integrated metrology alongside its traditional Atlas OCD tools, the company captures a larger portion of customer spending as factories expand. This comprehensive optical metrology ecosystem allows Onto Innovation to offer integrated solutions, which can be more attractive to customers seeking holistic process control.

Outlook and Guidance: Building Momentum for 2026

Onto Innovation's management provides a clear and confident outlook, anticipating a strong finish to 2025 and sustained growth into 2026. For the fourth quarter of 2025, revenue is expected to be in the range of $250 million to $265 million, representing 15% to 21% sequential growth. This growth is primarily driven by a significant rebound in demand from 2.5D packaging customers, with revenue expected to nearly double from the third quarter, fueled by strong Dragonfly system demand. Advanced nodes revenue is also projected to improve, with increased spending in DRAM and logic.

Gross margin for Q4 2025 is expected to see approximately 50 basis points of sequential improvement, reaching a range of 54% to 56%, even with an anticipated 1 percentage point impact from tariffs. Operating margins are expected to rebound to a range of 24% to 26% on operating expenses of approximately $77 million, which includes an additional $3 million in incremental operating expenses due to a 14th week in the fiscal quarter. Diluted earnings per share for Q4 2025 are guided to be between $1.18 and $1.33, assuming an estimated tax rate of 13% to 15% and approximately 49.4 million shares outstanding. This guidance does not include any anticipated impacts from the pending Semilab transaction.

For the full year 2025, advanced nodes revenue is expected to double to approximately $300 million, compared to $148.5 million in 2024. Specialty devices and advanced packaging revenue is projected to finish slightly higher than $500 million for the full year.

Looking into 2026, management anticipates sequential growth in the first half of the year, with more meaningful growth expected in the second half. This trajectory is driven by several factors:

• Customer Expansions: Packaging customers are indicating a potential need for as much as 20% more tools to support expansions and new applications for 2D subsurface and 3Di inspection technologies.
• New Product Ramps: Increased contributions from new products like the 3Di and the next-generation Dragonfly system are expected as they move into volume adoption and production.
• Semilab Acquisition: The acquisition is expected to be accretive to both revenue and earnings in 2026.
• Asia Manufacturing: The ramp-up of Asian manufacturing facilities is expected to enhance gross margins in 2026.

The underlying assumptions for this positive outlook are rooted in strong and sustained demand for AI and high-performance compute, the transition to HBM4, the continued adoption of gate-all-around transistors, and the growth of high-stack 3D NAND. The "electrification of everything" also presents a secular driver, increasing demand for power semiconductors and process control solutions to reduce power consumption in AI infrastructure.

Risks and Challenges

Despite the compelling growth narrative, several risks and challenges warrant investor attention. Global trade policies, particularly U.S. government export regulations and tariffs, continue to pose a significant risk. The company's U.S.-based manufacturing makes it uniquely susceptible to these policies, impacting incoming costs and export expenses. While the ramp-up of Asian manufacturing aims to mitigate these impacts, the full extent of future tariff effects remains uncertain.

Customer capital spending fluctuations are an inherent risk in the semiconductor equipment industry. While current discussions indicate strong demand, any shifts in customer investment plans could impact revenue linearity and overall growth. The rapid evolution of customer requirements, as seen with the 2.5D packaging inspection tools, necessitates continuous and accelerated R&D, which carries execution risk. Supply chain delays or shortages could also impact the company's ability to meet customer demand. Furthermore, the company carries a partial valuation allowance against certain deferred tax assets, which could impact future tax provisions.

Conclusion

Onto Innovation stands at a pivotal juncture, poised to capitalize on the transformative growth in AI and advanced microelectronics. Its deep technological expertise, particularly in 3Di and the next-generation Dragonfly platforms, positions it as an indispensable partner for customers pushing the boundaries of HBM, 2.5D packaging, and hybrid bonding. These innovations are not merely incremental improvements but represent significant advancements that unlock new applications and expand market opportunities.

The company's strategic initiatives, including the accelerated build-out of its Asian manufacturing footprint and the accretive Semilab acquisition, are designed to bolster operational resilience, enhance competitive strength, and drive margin expansion. With a robust balance sheet and strong cash flow generation, Onto Innovation possesses the financial flexibility to fund its growth initiatives. While the semiconductor industry is inherently cyclical and subject to geopolitical uncertainties, management's clear guidance for strong Q4 2025 performance and sequential growth into 2026, driven by secular tailwinds and new product adoption, paints a compelling picture. For discerning investors, Onto Innovation represents a compelling opportunity to invest in a technologically differentiated leader at the heart of the AI revolution, poised for sustained growth by enabling the next generation of microelectronic devices.