Earnings Call Transcript - ONTO Q4 2025

Operator, Operator

Good day, and welcome to the Onto Innovation Fourth 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.

Shek Ho, Moderator

Thank you, Lisa, and good afternoon, everyone. Onto Innovation issued its 2025 fourth quarter financial results this afternoon shortly after the market closed. If you did not receive a copy of the release, please refer to the company's website where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Brian Roberts, Chief Financial Officer. I'd 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?

Michael Plisinski, CEO

Thank you, Sidney. Good afternoon, everyone, and thank you for joining us on our call today. We ended 2025 on a high note with orders from 2.5D packaging for AI devices more than doubling in the quarter, contributing to a record revenue of $267 million. Financially, gross and operating margins both improved sequentially, and we set a record for cash generation of $95 million in the quarter. Overall, great momentum as we look ahead to the new year, where across the industry, the surge in AI investments is projected to drive a powerful upcycle in semiconductor capital equipment spending. For example, NVIDIA forecasts that global AI infrastructure will grow at a 40% CAGR over the next 5 years, while capital expenditures from hyperscalers are forecasted to exceed $600 billion in 2026. To meet this demand, industry leaders such as TSMC have signaled a multiyear expansion in CapEx with 2026 spending increasing by more than 30%, mostly to support the addition of new factories. As a result, analysts project strong WFE growth in the range of 10% to 20% in 2026, with the pace hinging on how quickly new cleanroom space becomes available. For Onto Innovation, these dynamics are incredibly positive. Recent discussions with customers are increasingly more constructive and include views into longer-term forecasts with several extending into 2027. In fact, we are quite happy to announce a volume purchase agreement from one of our HBM customers covering Dragonfly 2D and 3D bump metrology demand through 2027. This agreement is valued at over $240 million, including over $60 million in systems for 3D bump metrology. This is an example of where our expanding portfolio of technology is positioning us to increase the value we deliver to our customers, serving the seemingly insatiable demand for AI. So let's continue with a deeper look into our advanced packaging business, which grew over 25% sequentially, driven by demand for Dragonfly inspection and Iris films metrology and established 2.5D applications. For new and emerging applications, we're supporting 4 separate customer evaluations of our next-generation inspection systems at the customer facilities. While still early, preliminary feedback on system performance has been positive, with customers acknowledging significant improvement in optical performance and higher throughput. The qualification efforts are in preparation to support our customers in 2.5D packaging and high-bandwidth memory, including next-generation hybrid bonding applications where our current generation tools are already being adopted for process control and R&D. In addition to 2D inspection, 3D metrology is becoming more crucial as smaller, denser interconnects used in die stacking and fan-out packaging applications require more precision to ensure coplanarity across die and wafer. Our pipeline for 3Di metrology is expanding beyond HBM. In the quarter, we received additional purchase orders from multiple advanced packaging customers, including an OEM requiring precise metrology for new panel-level process development. In fact, we see investment in panel-level packaging growing as enterprise server and AI device designers look for packaging solutions with greater economies of scale through large-format panels. Our JetStep systems are well positioned for the transition to panels, delivering the ability to print large packages without stitching at throughputs that customers need for reliable and repeatable high-volume applications. Customers are also adopting Firefly process control for applications in glass and panel fan-out where yields can be improved by feeding process metrology into the stepper for shot-by-shot adjustments. As a proof point, we are proud to have been awarded orders for JetStep and 8 Firefly systems in the quarter to support an exciting new large panel packaging facility. These orders represent the first of several potential phases of expansion to support planned demand. Finally, as large-format heterogeneous packaging becomes more prevalent, concerns continue to increase about residual charge on die causing yield issues when connected to another die. The surface charge metrology technology acquired from Semilab is a powerful solution to this emerging challenge, and we are pleased to have received our first orders for this evolving market need. With this positive momentum across a broad range of our products in support of AI device fabrication, we estimate advanced packaging revenue to grow over 30% in 2026, resulting in a new revenue record for this market. Rounding out our specialty devices and advanced packaging markets, power semiconductor revenue was strong in the fourth quarter but is expected to decline seasonally in the first quarter. For 2026, we expect power semi revenue to decline around 10% based on weakening demand for EVs and slowing infrastructure spending. Semilab will likely experience a similar decrease from our original planning as we work to pivot from opportunistic sales to longer-term market opportunities across our broader customer base. Now turning to advanced nodes. Our revenue in 2025 more than doubled from a year ago. With less than 3% of revenue coming from China, this growth was driven by our strong position in OCD at leading global manufacturers in both logic and memory. Expanding on this position, our recently announced Atlas G6 is being adopted for new critical applications in both gate-all-around and HBM4 DRAM, which we expect will add to growth in 2026. Complementing our OCD technology, our films metrology and integrated metrology both achieved record revenue in 2025. Adding to this momentum in integrated metrology, we are expanding beyond the strong position in memory to now include 2 logic customers to support leading-edge processes expected to ramp in 2026. To summarize, with both advanced packaging and our advanced nodes businesses strengthening, revenue for the first quarter is now expected to be in the range of $275 million to $285 million. We expect demand to continue to increase in the second quarter with revenue exceeding $300 million. This represents a further acceleration in the core business for the first half of 2026 to 12% to 14% as compared to the second half of 2025. Our backlog has nearly doubled over the last 3 months to a new record level of approximately 2 quarters, adding support for this strong growth. We expect continued growth in the second half, and we are working closely with both customers and suppliers to manage tightening capacity and the gradual extension of lead times.

Brian Roberts, CFO

Thanks, Mike. Good afternoon, everyone. We delivered a strong fourth quarter as revenue, gross margin, and operating margin all met or exceeded expectations. We reported record revenue of $267 million, representing a 22% increase from Q3. For the full year, revenue finished at $1.005 billion, also a record for Onto Innovation. Gross margin for Q4 improved by about 50 basis points to 54.6% from Q3. Operating margins improved to 25.2% in the fourth quarter, an increase of 410 basis points from the third quarter. Adjusted diluted earnings per share in Q4 were $1.26. Overall, the team is executing well as we delivered more than 50% of our tools in Q4 from our extended factories, completed the acquisition of Semilab in mid-November, and implemented a more robust forecasting and spending control process as part of our annual planning exercises. Let me dive a little deeper into Q4 and full-year 2025 revenue. Advanced packaging and specialty devices in the fourth quarter of approximately $145 million represented slightly more than half of our revenue as sales from our 2.5D packaging business doubled compared to Q3. Additionally, approximately $9 million of revenue related to the Semilab acquisition is included in this category. For the full year, advanced packaging and specialty devices together totaled $504 million of revenue. Advanced nodes more than doubled in 2025 to $308 million, driven by growth in both DRAM and logic, which together represent about 75% of the total. Advanced nodes revenue grew sequentially by slightly over 30% to $72 million in Q4, primarily due to pilot line sales related to a new gate-all-around customer. We generated a record level of $95 million of cash in the quarter for a cash conversion of approximately 150% of non-GAAP net income. In the fourth quarter, we adopted the One Big Beautiful Bill Tax Act, which allowed us to accelerate the expensing of certain R&D costs from a tax perspective. The adoption of the new Tax Act results in cash tax savings of $19 million in 2025 and an additional estimated $14 million in cash savings in 2026. Finally, upon the close of Semilab on November 17, we paid $445 million in cash and issued 641,771 shares of our common stock. Now turning to our outlook for the first quarter. We currently expect revenue of $275 million to $285 million as demand continues to strengthen across advanced packaging and advanced nodes. As Mike noted, revenue in Q2 is expected to surpass $300 million, which will result in 12% to 14% core growth in the first half of 2026 compared to the second half of 2025. While too early to provide more specific numbers, our current levels of backlog, continued customer confidence, and the recently signed VPA lead us to expect higher revenue in the second half of '26 over the first half of this year. We remain focused on converting higher levels of revenue and a meaningful improvement in both our gross and operating margins in 2026 with an expectation for continued margin expansion each quarter this year. At the Q1 revenue midpoint, we would expect approximately 50 basis points of gross margin improvement from Q4 levels as we mitigate tariffs and incrementally ship more from our extended factories. Operating expenses in Q1 should approximate $80 million as we realize a full quarter of Semilab costs. Operating margins are expected to improve to approximately 25.5% to 26.5% in the first quarter. Earnings per share for the quarter is expected to be in the range of $1.26 to $1.36 per share, assuming an estimated tax rate of approximately 16% and about 49.9 million shares outstanding. And as a reminder, beginning here in Q1, we are moving to a calendar quarter and fiscal year-end of March 31, June 30, September 30, and December 31. And with that, let me turn it back to Mike for some closing thoughts before we take your questions.

Michael Plisinski, CEO

Thank you, Brian. In summary, this quarter underscores the strength and breadth of our execution across the company. We delivered record quarterly revenue, advanced our product roadmaps and expanded our position in both advanced nodes and advanced packaging. At the same time, our operational discipline is creating meaningful shareholder value from accelerated offshoring activities that improve scalability and profitability, the smooth integration of Semilab and more disciplined forecasting and spending controls, which together will provide consistent gross and operating margin expansion through 2026. As evidenced by our backlog doubling over the last 3 months, visibility for 2026 has dramatically improved as customers plan for sustained investments in advanced nodes and advanced packaging capacity to support the rapid expansion of AI. Our team is playing a pivotal role across this ecosystem as we work to scale and bring new innovative solutions to help our customers solve their greatest challenges. Our multiple new product platforms highlighted by our next-generation inspection tools, which we believe will set the bar around combined high-resolution optics and faster throughput are examples of how we are setting the pace of innovation for this rapidly evolving and scaling industry. This gives me great confidence that Onto Innovation is well positioned to outperform in 2026 and beyond. And now, Lisa, let's open the call for questions from our covering analysts.

Operator, Operator

We'll take our first question from Blayne Curtis with Jefferies.

Ezra Weener, Analyst

Ezra Weener on for Blayne. Just the first, can you talk a little bit about what you see for the market outlook for the year? You've had some peers talk about packaging up to 40% growth, but there's been a pretty large range. Can you talk about what you're seeing for the year?

Michael Plisinski, CEO

We mentioned we would expect to see our advanced packaging grow over 30% this year.

Ezra Weener, Analyst

And then for WFE as well, sorry.

Michael Plisinski, CEO

WFE is harder to track because first, advanced packaging is only now just starting to be added to some WFE numbers, some not. And then you have all the construction costs also in there. So I think we're seeing certainly broad-based demand, broad-based expansions across both IDMs, the large device manufacturers as well as OSATs as well as other smaller players looking to provide new innovative solutions such as the customer we mentioned in panel that are providing alternatives to some of the more traditional advanced packaging solutions being used today. So given all this growth, I think the end customers, the AMDs, etc., are looking for alternatives as well to make sure they can scale and grow.

Ezra Weener, Analyst

Got it. And then in terms of follow-up, you talked about expanding lead times and increasing visibility. Can you talk a little bit about what that backlog looks like? And in the best-case scenario, what your capacity is in terms of growth?

Michael Plisinski, CEO

So we've said historically, our capacity, we're set up to be able to serve a $2 billion run rate. That's only improved as we bring up the extended factories. That was with our existing factories, which are, of course, still here. So I think when you look at multiple shifts, the extended factories, $2 billion number is certainly no issue for us right now. We are in the middle of ramping up the extended factories. So of course, there's a transition period that we're working through over the next couple of quarters. But I don't see capacity being a big issue for us. It's more on the supply chain side. The rapid development, the rapid increase in orders, the customers wanting to pull things in, that's putting a strain on some of our suppliers, especially in the area of precision optics and things like this, where lead times are relatively fixed. So we're working very closely with our supply chains and our customers to make sure we're getting the forecasted demand they require and we're working with our suppliers to make sure we can deliver.

Operator, Operator

We'll go next to Craig Ellis with B. Riley Securities.

Craig Ellis, Analyst

Mike, congratulations on the good execution in the quarter. I wanted to follow up on the view for 30% year-on-year advanced packaging growth. Can you just talk about some of the expectations you have around the contour of that growth through the year? And then in addition to that, just some of the more notable programmatic wins that may be included or that would be additive to that if they were secured later this year.

Michael Plisinski, CEO

Good question, Craig. We anticipate our advanced packaging revenue to remain relatively stable throughout the year, particularly between the first and second halves. Demand is strong and does shift among different customers, but overall, it remains steady. You also inquired about potential factors that could influence this, such as the adoption of G5. The strength of that adoption rate could lead to even greater upside in the second half, possibly altering our outlook. However, we are not expecting a significant surge in G5 adoption, which is why we projected over 30% growth for the year in advanced packaging.

Craig Ellis, Analyst

And then the follow-up question is related to advanced nodes. So we're being specific with upside on advanced packaging. We're not being specific yet on advanced nodes. Can you talk about from a nice $300 million second quarter number, what visibility you do have in the back half of the year in advanced nodes? And what are you expecting to kind of affirm over the next couple of quarters to lock in advanced nodes this year? And it sounds like good gate-all-around in memory growth, but I'll let you fill that in.

Michael Plisinski, CEO

Thank you. Overall, we see an expansion in advanced nodes, and there are positive discussions with customers regarding our ability to support their ramp-up and meet demand. However, timing remains a bit uncertain, and we are taking precautions. Several factories are set to open soon, and we are receiving some orders that will drive our business in the first quarter. Regarding DRAM in the second half, our customer discussions are currently focused on BPAs, which will provide better insight into the expected growth in advanced nodes as they become more finalized. I anticipate that our performance will be within the 10% to 20% range, specifically about 15% for advanced nodes, and as we secure more BPAs, we hope to refine that estimate.

Operator, Operator

We'll take our next question from Edward Yang with Oppenheimer.

Edward Yang, Analyst

I would like to discuss the $240 million VPA you mentioned for HBM. I'm somewhat surprised, in a positive way. To properly understand this, it seems like a significant amount because your total AI packaging revenue for 2025 is about $240 million, which includes the three HBM customers and major foundry customers as well. Is it correct to think that one customer is contributing as much as what you earned from four customers in 2025, and how will you recognize that VPA over time? Do you anticipate additional VPAs from your other customers?

Michael Plisinski, CEO

For sure, we expect additional VPAs. So we are in discussions with other customers. That particular customer, remember, it's a 2-year agreement, so it's extending into 2 years. It was more 2027 weighted, so maybe 2/3, 1/3. However, we see some acceleration of the demand. So we're starting to see this move towards this 50-50 kind of a range.

Edward Yang, Analyst

Okay. And you touched on this a little bit, but G5, your new high-resolution Dragonfly platform, can you discuss or update us on the tone of the conversations that you're having with that big foundry customer, the qualification discussions, better sense on timing, pricing, etc.? Any color?

Michael Plisinski, CEO

Yes, I won't mention any specific customer, but overall, the feedback from many customers has been positive. While I won't go into details, I can say that things are either progressing faster or on schedule with our expectations. There have been no changes to the timelines we've shared before, where we anticipate the accelerated evaluations to conclude in the first half of the year, with plans to begin ramping up in the second half.

Operator, Operator

And we'll go next to Charles Shi with Needham.

Yu Shi, Analyst

Mike, earlier you focused on a specific area of your packaging business related to AI, which represents a 20% growth opportunity in 2026 compared to 2025. Now, you're discussing overall packaging being 30% higher than last year. Could you provide some insights on the AI packaging segment? What are the expected figures for this year? I have a follow-up question as well.

Michael Plisinski, CEO

It's becoming increasingly challenging to maintain clear separations as the market grows and the number of customers catering to AI device manufacturers rises. For example, I've mentioned that one of our panel customers is now involved in AI applications, which historically wouldn't have been categorized under what we consider AI packaging. As a result, we are seeing numerous OSATs and various other specialty packaging customers entering this supply chain, making it difficult to keep the categories distinct. Most of the 30% growth we are observing is largely associated with meeting the strong demand in AI.

Yu Shi, Analyst

It has been some time since panel discussions have come up in earnings calls, so it's nice to hear that mentioned and I hope to hear more about it moving forward. It seems like the litho business might have made some progress. Could you provide some details about the current situation? Is there any competitive displacement occurring? Many of us have been projecting zero litho revenue for quite a while, so what are the expectations for this year?

Michael Plisinski, CEO

Fair question. I don't think we will break out the litho business at this time. We might do so later in the year as we gain more insights. There’s a lot happening in litho and the panel market right now. Over the past year, we’ve mentioned the increased engagement with our PACE lab and the number of customers testing samples with us. The industry had been dealing with substantial overcapacity, but we are starting to see utilization rates improve. We believe this trend will continue, as we are beginning to see customers resume orders. We anticipate this will increase into 2027, and the data we have suggests that by 2027, the supply-demand situation will indicate insufficient supply to meet demand, which is encouraging.

Operator, Operator

We'll go to our next question from David Duley with Steelhead Securities.

David Duley, Analyst

I was wondering, when you look at your CoWoS inspection business and your HBM inspection business, maybe you could help us understand what your relative guess is for the growth rates of the 2 segments are in 2026?

Michael Plisinski, CEO

I would say no, they're relatively similar to be honest. When I looked at the data regarding the amount of added capacity, it's quite comparable. The complexities of CoWoS are higher, leading to greater capital intensity. However, we also need to consider the potential applications we might gain with the Dragonfly G5, which we didn't factor in heavily in our calculations. We took a conservative approach there. This could create some upside and shift the balance toward the CoWoS side. But for now, I'd say they're relatively similar. You can see with the large VPA we just announced that memory is definitely expanding, and we have a solid position in memory.

David Duley, Analyst

Okay. Just to clarify, I believe Charles was referring to his earlier question about the advanced packaging business being $504 million for the year. Is that the starting point you anticipate will grow by 30% or more in 2026, or is that just a portion of that figure? I would appreciate some clarification on this.

Brian Roberts, CFO

It's part of that number. To be clear, the advanced packaging and specialty devices was the $500 million for 2025.

David Duley, Analyst

So it's just the CoWoS and HBM inspection business that you expect to grow more than 30% in 2026?

Michael Plisinski, CEO

It's OSATs, it's panel. It's all of advanced packaging. We expect to grow greater than 30% for the year.

Operator, Operator

And we'll go next to Vedvati Shrotre from Evercore ISI.

Vedvati Shrotre, Analyst

The first one I had was, could you remind us where the Semilab contributions come in for 2026, like what your expectations are for revenue there? And then excluding that contribution, do you expect to outperform that WFE growth of 20%?

Brian Roberts, CFO

Yes. I'll take the first part. For Semilab, we've talked about since the close, they did about $9 million of revenue contribution in Q4 after the close in mid-November. For 2026, as Mike noted, we've initially said somewhere low $100 million to $110 million was kind of the revenue. We do expect that power semi, which is a significant portion of their business, may, given the market cycle, be a little bit more challenged in '26 than we originally thought. But certainly have high expectations for that business.

Vedvati Shrotre, Analyst

And then for the growth rate maybe without Semilab, do you think you outperform the WFE growth of 20% for 2026 as total revenues without Semilab contributions?

Brian Roberts, CFO

Yes. I mean in Mike's prepared remarks, we talked about WFE and the 10% to 20%. Certainly, there's a lot of different estimates that are out there. I think we'll go back to the comments we made around, as we said, advanced packaging, looking at 30% plus growth. And as Mike said, advanced nodes, probably somewhere in the mid-teens as those orders kind of firm up over the course of time and let you guys kind of do the rest of the math.

Operator, Operator

And we'll go next to Brian Chin with Stifel.

Brian Chin, Analyst

Maybe circling back to the VPA that you announced. I guess is there a reason, maybe it's just a timing thing in terms of the timing of back-end versus front-end investments, but is there a reason it doesn't include both front and back end? And maybe what kind of toggle or optionality exists within the VPA to ship Gen 5 as opposed to Gen 3? Or is the expectation that most of this will be Gen 3?

Michael Plisinski, CEO

You're talking about Dragonfly. I was thinking HBM. Yes, sorry, I was getting confused. There's a lot of options built into the VPA. It's Dragonfly inspection for sure, we're ramping now. So it's G3s now. There could be some upgrade options that the customer may choose to take or may not. They're being offered. But it's primarily the current products that have been qualified now for their aggressive ramp.

Brian Chin, Analyst

Got it. And then Mike, maybe I didn't hear a lot of discussion of some of the new products and applications, 3DI, critical films. Those are probably also tailwinds for you in advanced nodes and maybe elsewhere. But maybe ballpark, how much do you see that contributing to the growth rates on an annual basis this year?

Michael Plisinski, CEO

For this year, the new products as far as their contribution to growth rate this year? Yes. So I think you asked in total. So I would say we've got the HSIR. We've got some of the Atlas G6 that's coming in. I'd say on a relative basis, these are early penetrations. So you're talking maybe 10% of the business, maybe a little less, but certainly growing into 2027. So when you look at just the adoption cycle, we're going to get insertions. We're going to get some initial ramps this year and which we're already seeing. You can see that with the 3D business. And then as the customers continue to expand, that gets much bigger in 2027. Many of these are opening up new applications for us. So they're actually expanding our SAM and expanding our growth opportunities into 2027 as well.

Brian Chin, Analyst

Got it. Maybe to sneak in just one quick last one. There's been discussion that there's a fair bit of FinFET spending mixing in with kind of gate-all-around this year, maybe off of more than one customer. Just how are you thinking about that in terms of your revenue this year versus last year in advanced nodes, foundry logic? And do you view maybe more gate-all-around spending in '27 as kind of more of a tailwind for your business?

Michael Plisinski, CEO

I believe our business thrives on the most challenging issues, particularly in gate-all-around nodes, where we are experiencing the highest demand. In contrast, for 5-nanometer and larger nodes, the adoption rate for OCD was significantly lower. We may have only recently introduced films at that point, so the focus is squarely on gate-all-around technology.

Operator, Operator

And there are no further questions in queue at this time. I'll turn the conference back to the speakers for any closing or additional comments.

Shek Ho, Moderator

Thanks, Lisa. We will be participating in a number of investor conferences throughout this 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. Lisa, please conclude the call.

Operator, Operator

And ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.