Good day, and welcome to the Onto Innovation Second Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sidney Ho. Please go ahead.

Thank you, Justin, and good afternoon, everyone. Onto Innovation issued its 2025 second quarter financial results this afternoon after the market closed. Our service provider business has technical issues disseminating the release, but you can find it on the SEC website at sec.gov or on our company's website in the investors' section. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Brian Roberts, Chief Financial Officer. I would like to remind you that the statements made by management on this call will contain forward-looking statements within the meaning of the federal securities laws. Those statements are subject to a range of changes, risks and uncertainties that can cause actual results to vary materially. For more information regarding the risk factors that may impact Onto Innovation's results, I would encourage you to review our earnings release and our SEC filings. Onto Innovation does not undertake the obligation to update these forward-looking statements in light of new information or future events. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. Let me now turn the call over to our CEO, Mike Plisinski. Mike?

Thank you, Sidney. Good afternoon, everyone, and thank you for joining us on our call today. Onto Innovation delivered a strong second quarter with revenue and operating margin both exceeding the midpoint of our guidance range. More importantly, we made excellent progress in new product adoption and announced a strategic agreement to acquire several synergistic product lines from Semilab International, a deal we expect to close in the coming months pending standard U.S. and Hungarian regulatory approvals. This transaction with Semilab expands our portfolio of inspection and metrology systems by adding electrical surface metrology, surface charge metrology, and materials analysis technology. These additions will allow us to address new challenges facing our advanced nodes and advanced packaging customers as they adopt more exotic materials for use in 3D architectures. For example, the growing demand and complexity for disaggregated devices is creating a need to measure unwanted residual charge on chiplet circuitry. These charges, if not detected, can impact yield when chiplets from different sources are placed on substrates and packaged. Likewise, for new gate designs in both logic and memory, electrical metrology may provide critical insights into gate performance far earlier in the process. The importance of these technologies is reflected in the portfolio's approximately 20% annual growth over the last 5 years, a growth that outperformed WFE during that period. The acquired product lines are projected to add over $130 million in annual revenue, be immediately accretive to both gross and operating margin, and increase first-year earnings per share by more than 10% with an implied price-to-EBITDA ratio of 10x. It is clear that this transaction will enhance shareholder value. Now let's turn to our quarterly highlights and our thoughts about the back half of the year. As we discussed on our call in May, following 10% year-over-year growth for the first half of 2025, we're preparing for a third quarter revenue to represent a low watermark for the business. However, our discussions with customers continue to support a revenue rebound in the fourth quarter, consistent with revenue levels we reported in the first two quarters of this year. So let's begin with specialty devices and advanced packaging markets. AI packaging remains a key driver for us with innovations in architecture, substrates, and interconnect shrinks creating new opportunities for Dragonfly systems in both 3D and 2D applications. We'll start with the need for high-resolution inspection, where our next-generation Dragonfly platform achieved a significant milestone in the quarter when we successfully validated the platform's optical performance and scan time against our key customers' comprehensive new requirements for 2.5D logic packaging. Our Dragonfly platform performed exceptionally well, passing all tests, and customer pull remains strong. In fact, we are seeing pull from several additional customers exploring the need for more advanced inspection while maintaining the flexibility to serve other applications through other sensors. As a result, we now expect to ship next-gen Dragonfly systems to several customers in the second half of the year. Demand is also growing for our subsurface inspection for use in die stacking process control and die crack inspection for memory and logic applications, as well as wafer bonding applications for void and delamination detection. We expect demand to nearly double in the second half over the first half of the year, with most shipments expected in the fourth quarter. Likewise, demand for 3Di technology is increasing with tools shipped to more than 10 different customers across an expanding list of applications, including memory logic, OSATs, and specialty devices. The precision and speed of the 3Di is showing advantages not only in traditional applications but also in solving new challenges. For example, in 2.5D logic packaging, the control of chip pipe and flatness is critical to downstream processes. Our 3Di, in conjunction with other Dragonfly sensors, will provide critical data used to control this step in next-generation AI packaging architectures. Also in the quarter, the performance of 3Di expanded our 2D position in co-packaged optics with a win over alternative technologies to measure multiple high parameters critical to the production of these devices. Though nascent today, the benefit in power savings and performance, particularly for hyperscalers, is expected to drive a 30% CAGR over the next 5 years. In summary, we expect a sharp acceleration in AI logic packaging revenue in the fourth quarter, with revenue increasing at least 50% quarter-over-quarter. This improved expectation has reduced the anticipated decline in this area by half from what we had initially projected in May. Together, with an expected recovery in power revenue, specialty device and advanced packaging revenue in the fourth quarter will likely approach peak levels seen in 2024. Now turning to the advanced node market. Second quarter revenue from memory markets remained strong, led by increased investments in NAND, while DRAM remained near record levels. Gate-all-around revenue, which has grown by more than 50% year-over-year, did slow in the second quarter as expected. However, we are quite pleased to expand our position in this market by recently winning both Atlas OCD and Iris films orders totaling over $20 million from a new customer moving aggressively to release gate all-around technology. We expect much of this revenue in the fourth quarter. The continued expansion of our common films business is creating a nice backdrop for the adoption of our new Iris G2 platform, specifically designed to serve the estimated $500 million critical films market. As previously discussed, advanced node spending is expected to pause in the third quarter. However, customers continue to indicate a meaningful uptick in the fourth quarter across memory and logic. For the full year, we expect advanced nodes revenue to nearly double compared to 2024. And as we think about fourth quarter revenue, we are confident that we will see a rebound to levels more consistent with what we reported in the first and second quarters of this year. This is based upon constructive discussions with customers, meaningful acceleration in AI packaging spend, and an uptick in advanced nodes from what's expected in the third quarter. So before we move into the financials, I want to take a moment to welcome our new CFO, Brian Roberts. Brian brings over two decades of experience as a public company CFO with a track record of driving financial performance and creating value for stakeholders. His operational rigor and depth of experience are important assets to the team as we build a far more resilient and flexible global operations, while at the same time, strengthening our overall financial foundation. With that, let me turn the call to Brian to review our financial highlights and provide third quarter guidance. Brian?

Thanks, Mike. Good afternoon, everyone. I'm excited to be here as part of the Onto Innovation team and look forward to meeting or renewing acquaintances with many of you over the coming quarters. As Mike highlighted, we delivered a solid second quarter with revenue of $253.6 million, an increase of about 5% year-over-year. Gross margin for the second quarter was 54.5%. Excluding approximately $1.1 million of expense incurred in the quarter due to tariffs, gross margin would have been approximately 55%. Operating margin of 25.9% was near the high end of our expected range and was a result of productivity gains in R&D and operations. Finally, earnings per share for the quarter was $1.25, reflecting approximately $0.01 of impact due to unfavorable foreign exchange loss and a $0.02 impact caused by an increase in the effective tax rate to 16%. At a market level for the second quarter, we recorded advanced nodes revenue of $89 million or 35% of Q2's revenue. Specialty devices and advanced packaging revenue was $117 million, which represents 46% of revenue, and software and services revenue was $48 million or 19% of revenue. Cash from operations was $58 million, representing cash conversion of 95% of our non-GAAP net income in the quarter. We ended the quarter with approximately $895 million of cash and investments, representing an increase of $44 million from Q1. Given the pending acquisition of certain product lines from Semilab, we did not repurchase shares in the second quarter. Once the acquisition closes, which is expected to happen in the coming months, we will pay Semilab $475 million in cash and issued 706,215 shares of our common stock. The value of the total transaction based upon Onto's closing price as of June 27, 2025, was approximately $545 million. Now turning to our outlook for the third quarter. Revenue for the third quarter is expected to be in the range of $210 million to $225 million. This reflects the anticipated slowdown in advanced node spending that has been previously communicated. As Mike detailed, we are expecting a sharp acceleration in AI packaging spend in the fourth quarter, which gives us confidence that Q4 revenue will return to a level more consistent with what we reported in the first and second quarters of 2025. Gross margin in the third quarter is expected to be in the range of 53% to 55%, which includes an anticipated 1 percentage point impact due to tariffs. Excluding tariffs, gross margin for the third quarter is expected to remain flat with Q2 levels. With tariffs still at the forefront of today's news, let me take a minute to provide a brief overview of our tariff exposure. Today, we incurred tariffs primarily in two buckets: inbound tariffs on components we source into the United States, which accounts for about 90% of our cost, and outbound tariffs primarily on parts sold into other markets within our services business. We are not currently exposed to tariffs on the sale of our tooling equipment to our customers due to executive orders signed back in April. We expect to incur tariff expense of approximately $2 million to $3 million in each of the third and fourth quarters, primarily due to inbound tariffs. To further mitigate remaining tariff exposure, we are aggressively installing manufacturing capability alongside partners into several Asian markets to build out our region-for-region strategy. The team has done a tremendous job and expects to begin shipments of tools from these new facilities in the third quarter, with roughly half of our product volume shipped internationally by the first half of 2026. This move to better serve our international customers with a regional-based manufacturing approach, continued sourcing improvements, and applying for duty drawback approvals will result in expected 2026 tariff exposure to be negligible. The one caveat, of course, is that it is based upon the various orders and regulations in effect as of today. We will continue to monitor closely the tariff environment and adjust as necessary. Turning to operating margins. Given the lower revenue expected in the third quarter, we will likely experience a temporary decrease in operating margin to a range of 18% to 21%. While the team has put short-term controls in place to reduce discretionary spend in Q3, we are taking a prudent approach to not significantly impact the operating cost structure, especially in R&D, which could impact our ability to meet customer needs in Q4 and in 2026. With the anticipated rebound in revenue in the fourth quarter, we would expect operating margins to also return to a range consistent with the first two quarters of 2025. Earnings per share for Q3 is expected in the range of $0.75 to $0.95. This assumes an estimated tax rate of approximately 15% and about 49 million shares outstanding. This guidance does not include any anticipated impacts from the pending Semilab acquisition. And with that, let me turn it back to Mike for some closing thoughts before we take your questions.

Thank you, Brian. In summary, let me leave you with what I believe are the key takeaways from our performance to date and what we expect over the remainder of the year. First, we're quite pleased with the progress we are making across our portfolio, particularly in submicron 2D inspection, where we can now meet or exceed our customers' performance requirements. We're also encouraged by the growing opportunities in 3D interconnect and gate metrology as well as in common and critical films. Second, we are looking forward to the addition of new surface charge metrology and materials characterization technologies to our portfolio and the potential for new value creation for our customers. The acquisition is expected to be immediately accretive to both our margins and EPS, and that's not including synergies that we will discuss after the deal closes. Third, and as Brian noted, the ramp-up of our region-for-region strategy will allow us to better serve our global customer base while also improving our operational resilience, mitigating tariff-related exposure, and providing meaningful improvements to our financial performance in 2026. Finally, an acceleration in AI packaging spend will drive fourth quarter revenue back to a level consistent with the first and second quarter of this year. With the many advancements we are making to our portfolio organically and through strategic acquisitions, we believe we are well positioned to delight our customers and expand our overall share, setting the table for a stronger 2026. And now, Justin, let's open the call for questions from our covering analysts.

The first question today comes from Craig Ellis with B. Riley Securities.

Brian, welcome aboard. I look forward to meeting you and interacting. Mike, I wanted to start by following up on the encouraging comments you had about next gen Dragonfly in two areas. One, you talked about significant milestones being attained with a key customer. I was hoping for a little bit more color there and just what some of the next steps are with that customer? And then secondly, you talked about new customer revenue opportunities with this product later this year. I was hoping you could elaborate there too.

Sure, Craig. Starting with the first customer, the milestone was significant because we previously indicated that we were beginning to run samples. This effort proved to be successful. We conducted rigorous and controlled tests for the customers, which showcased not only the resolution and optical performance in terms of detection but also in throughput. These requirements extend beyond current production, anticipating future needs. Achieving these milestones was crucial. As for the next steps, we are still refining the system to ensure it performs consistently over months of reliability testing. This will enable us to deliver a high-quality product to the customer on schedule. Regarding other opportunities, we mentioned that this product was designed for front-end applications to penetrate the front-end macro market. However, we are also seeing interest from customers in memory and other sectors looking for high-resolution inspection solutions to address various yield challenges. Applications differ from customer to customer, but the performance of the Dragonfly and our demonstrations has been extremely strong. Consequently, we have seen positive results and increased demand for the tools we aim to ship this year. We have begun to stock inventory and adjust our production plans to deliver more tools this year than we initially projected for the first customer.

That's great to hear. Congratulations on the progress. It’s also encouraging to see the business recovering in the fourth quarter and the confidence the company has. I would like to understand what factors would lead to reaching the lower end of the projected range of $250 million to $267 million versus the higher end. Are there any specific programs you believe are essential for achieving that rebound?

Thank you, Craig. I believe the range is influenced more by customer demands than by the programs themselves. We've experienced various changes, including some customers pulling orders in and others publicly announcing delays. As I noted in my prepared remarks, there has been an uptick in demand for our AI packaging tools. This industry is difficult to forecast, so I anticipate that Q4 will provide more clarity, with the main factor being customer demand. We are not depending on current programs to drive Q4 revenue. The new releases, like the Iris films and Dragonfly next generation, are part of our outlook for 2026. Q4 will primarily reflect the strong demand for our existing products and the healthy backlog we have.

And our next question will come from Matthew Prisco with Cantor.

I want to hit on this next-gen Dragonfly as well. It sounds like making great progress there. So just for clarification, do you still expect the evaluation tool to be in customers' hands by year-end? And do you still think that decision comes in the first half of '26? And then given the progress you've made, how are you thinking about the potential to regain share there as we move through 2026 and this to move into production?

Yes. We are definitely planning to ship tools this year, and we are on track for that. And as I mentioned, we're actually increasing the number of tools we expect to ship this year based on the strong demand drivers we see. I mentioned in the last call, because this customer is well familiar with our tools, the cut-in period will not be as long as it typically would be for a brand-new tool. So in the discussions we've had with the customers, there are various areas of performance they want to verify in production. And after that happens, they've indicated they would be willing to move this into volume orders. So I think the guidance we've given has been conservative so far.

Great. And then you mentioned '26 quickly at the end of your prepared remarks. So just looking into next year, how are you thinking about Onto's growth potential maybe relative to the market? And how do you rank order the top growth drivers into next year and maybe some areas that could be expected headwinds?

We believe that the next-generation Dragonfly will be a significant growth driver, and we are discovering a variety of applications that generate interest. We've highlighted several, including high-resolution inspection and subsurface inspection, specifically the 3Di. The expanding needs for the Dragonfly promise to be impactful. Additionally, we are quite encouraged by the advancements in the films market, particularly the adoption of our Iris technology for common films used in both the front end and packaging. There is increasing demand on the packaging side, and we are also making strides with the launch of our second-generation Iris tailored for critical films. We anticipate shipping a tool to a top three manufacturer in the coming months for that application.

And our next question will come from Brian Chin with Stifel.

Brian, welcome to the call. Maybe to follow up on some of the prior questions. It sounds like Dragonfly for subsurface defect inspection is a pretty big factor in terms of that Q4 rise in revenue. Is that mainly to one customer? Is it like a new application on that customer's roadmap? If you could just provide some clarity.

No, it's actually not one customer. It's several customers. And as we mentioned, we've been expanding the applications. So I think I talked about die stacking process control. So you can imagine memory is die stacking. There are other die stacking applications, 2.5D Logic has also got some alignment challenges with die and substrate and multiple substrates. So we've got basically the AI packaging type applications, but we also have applications that we're seeing in the specialty devices, particularly in power, that is taking advantage of the subsurface defect inspection. And we also mentioned early adopters of wafer bonding or some of the pilot lines focused on wafer bonding applications. We're also seeing demand for the level of sensitivity and throughput we can offer with our subsurface inspection. So it's quite a variety, and that's good, and we continue to find new applications.

Okay. Great. And then relating to the next generation Dragonfly, and it's a good announcement that you're shipping to multiple customers or planning to later in the second half. Just curious, Mike, how important do you think this platform is to defending your existing position in HBM inspection?

I think it's quite important. The platform is likely the most significant inspection platform we've released, including the transition from the old AXi NSX, the strobing based platform to the TDI technology, which initiated the super flies, Dragonfly and Firefly. I would say this represents an even more significant transition than that. The advancements in the optical systems, illumination, cameras, and algorithms have all improved, marking a substantial progress as it was designed. I mentioned during the call that we began this effort several years ago, around three years ago, and now it is gaining momentum and coming to fruition. We are very pleased with the results from the demos we've conducted.

Great. If I could ask one last quick question about the Q4 demand packaging up significantly. What are your thoughts on whether advanced nodes might be showing a stronger rebound in Q4? If you had to specify, do you believe it's more related to DRAM digestion, foundry logic, or something else?

Well, I think it's a couple of factors. And one of them ties to just our expanded position or wallet share in each of these markets. So as a customer, let's say, adds only 5,000 or 10,000 wafer starts, we might have had a handful of OCD tools. And now we're getting a handful of OCD tools, some film tools and integrated metrology as well. So our wallet share has been increasing as we demonstrate the value of that optical metrology ecosystem. So that's one thing. In addition, the win at the gate all-around customer, which concluded both the OCD and the films metrology, that's a significant increase for the fourth quarter, mostly in the fourth quarter.

And we will take a question from Blayne Curtis with Jefferies.

Actually, I wanted to go back to the AI packaging. I was wondering if you can give us some color. If you look at the overall segment, $117 million is down 9%. Maybe you could just give us a little color as to between those two pieces within that, AI packaging and the specialty, how that trend versus overall. And then I really want to know in the acceleration of this logic packaging. Is it the existing main customer? Or are you seeing strength from additional OSAT customers?

Good question. Most of it is the existing main customer. But we are seeing orders from OSATs in support of essentially that customer or in support of the 2.5D Logic packaging. So it's both, but I would say mostly it's from the existing customer, and it's a lot of these new applications. And also, as we mentioned before, the Dragonfly does a lot of different serves a lot of different application segments within that customer.

Yes, got you. And then I'm just curious, you talked about your new Dragonfly meeting the specs of the customer. I mean, I guess I was a little bit surprised when your existing tool couldn't meet the specs of CoWoS cells. So when you look at the roadmap, I mean, how much visibility do you have for the CoWoS roadmap over the next several years beyond the current iteration? And will that tool also be able to solve the same amount of steps?

Yes. It's certainly designed for several generations ahead, and the customer input has been confirming that. So we've been working very, very closely with the customers on the development on the specifications on the requirements for this tool. But again, this tool was designed to go after front-end applications, so much more advanced than where the packaging area was and still is, frankly. So I think we've got plenty of runway with the existing technology as we're designing and releasing it, but also the roadmaps extend that even further. And there are several aspects to those roadmaps as peers go by, and we're continuing to innovate and develop that we'll be able to continue to maintain that position.

And moving on to David Duley with Steelhead Securities.

I was wondering if you might be able to elaborate a little bit more on Semilab, and it was great that you gave us some ideas of what the products and applications might be. But I think I seem to remember in the press release that you're trying to target the products at advanced nodes. So that kind of indicates, I think, that there are more trailing edge nodes or specialty nodes. Could you just elaborate on kind of what you think your roadmap will be as far as targeting advanced nodes? And what sort of sales synergies that you might have with your own tools?

We provided some initial insights in the prepared remarks regarding the opportunities in metrologies for more advanced gate structures. This involves examining the electrical characteristics of residual charges in the gate and potentially integrating that with our acoustic metrology to predict gate performance before final testing or during the process. This is one area of focus on the advanced node side, alongside applications in advanced packaging. The materials characterization aspect is something we will explore as we engage with our market channels. We may uncover new opportunities not only in power semiconductors and specialty devices but also in advanced node applications. The use of exotic and complex materials and the interaction between layered materials are important concerns for our customers. If we can enhance our sensor capabilities with our AI diffractive modeling technology, we can provide significant value to our customers. This is why we mentioned that we'll discuss synergies post-closing when we can collaborate with the engineering teams to examine in detail what we can accomplish. Even now, our robust systems cater to a broad range of markets that overlap with ours, particularly in packaging and specialty power, creating immediate synergies.

Could you provide insights on the expected HBM spending for the second half of the year and in 2026? Additionally, I wanted to ask about panel lithography. It seems that Team Taiwan has reached an agreement on a substrate size, and there are more discussions about the transition to rectangular panels. Can you share your thoughts on this?

Yes. Thanks for asking. We're actually planning to ship two steppers this quarter. So it's good you asked. And hopefully, additional quarters for the end of the year. So that's on the litho side. From the substrate or the new panel size, yes, it's clear the market is going to the square substrate. Obviously, our stepper was designed for large panels, so 500 x 500, 650 x 650 even larger, and we are getting customer interest and even larger. From a positioning in the Team Taiwan opportunity, that's going to be tougher, given the cost structure and the performance of the system. So that's not really the focus of our stepper; it's the much larger sizes as well. I think what it does though is demonstrate the importance of moving to square processing, especially as the chiplet architectures become more widely adopted. So I think that's positive. And when we look at the rest of our process control equipment, we are very aggressively preparing for the new square substrate panel processing. So I think we're quite excited about that and have nearly our entire suite of process control tools being geared up to support that process. And on HBM, we expect it to be roughly flat towards the first half. So relatively stable.

Do you think it grows next year?

I would have said yes, but with the announcement of 100% tariffs and the uncertainty about how that will impact markets and customer decisions, I think it's too early to provide much insight into 2026 right now.

And we'll take a question from Edward Yang with Oppenheimer.

Welcome aboard, Brian. Look forward to working with you. My question is also on Semilab, and that looked like a very attractive asset, and you picked it up at a very reasonable multiple. So just wanted to understand better why was it available? You mentioned it growing at a 20% CAGR. Is that the expected growth rate you expect for 2026 as well? And was it Onto or Semilab that wanted it to be more cash-heavy versus equity in terms of the price paid?

Obviously, these deals take a long time to come to fruition. So there's a lot of discussions going on. And as the stock adjusted, obviously, Onto's view of our stock was such that we wanted to shift this to much more cash. And the Semilab team agreed, and we struck the deal. Not 100% cash; they still wanted a portion of the upside that they thought they would capture from the Onto stock. And the other question?

The growth rate for 2026, do you expect that to be aligned with the 20% CAGR?

We anticipate providing more clarity as we approach next year and finalize the details. However, we do expect to see growth that is above average for us.

Got it. And my follow-up question, first of all, congrats on swinging the momentum on the market share side. It sounds like you're enjoying a lot of positive momentum. Just wanted to put your comments on 3Di metrology in the right context. So did you displace an incumbent there? And are these 10 customers that you gained in 3Di using your product in the typical high-performance computing applications that we associate in that segment?

So in most of the applications, and we didn't go into a lot of the traditional applications where we mentioned the memory logic and the OSATs, etc., that would be all displacing an incumbent. So that would be competitive wins. In the example of the co-packaged optics, I believe it was also a competitive win, so displacing an incumbent. In the case of the 2.5D logic, that unique application, the customer tried many different ways to solve that problem with many different customers. And it was a combination of our Dragonfly sensors that ultimately resulted in the right solution with the precision they required. So that was sort of a new application based on the capabilities we were able to deliver.

And that does conclude the question-and-answer session. I'll now hand the conference back over to you.

Thanks, Justin. We will be participating in a number of investor conferences throughout the quarter. We look forward to seeing many of you there. A replay of the call today will be available on our website at approximately 7:30 Eastern Time this evening. We'd like to thank you for your continued interest in Onto Innovation. Justin, please wrap up the call.

Well, thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.