Onto Innovation Inc. 2026 Q2 Earnings Call

Please go ahead. Thank you, Rachel, good afternoon, everyone.

Onto Innovation issued its 2026 second 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. Before we begin, I have a calendar announcement. On December 17th, we plan to host an analyst meeting at the New York Stock Exchange to discuss our market strategies and updated financial model. We hope you'll save the date. Let me now turn the call over to our CEO, Michael Plisinski.

Mike? Thank you, Sidney. Good afternoon, everyone, thank you for joining us on our call today.

The Onto Innovation team delivered an outstanding quarter with revenue, gross margin, operating margin, and earnings per share all exceeding the high end of our guidance range. We set new quarterly revenue records with advanced nodes growing 50% quarter-over-quarter, and our inspection business, dominated by Dragonfly systems, growing by 30% on strong execution across both 2.5D logic and HBM applications. Our outlook is equally exciting as increasing levels of visibility from our customers is driving a record backlog surpassing $1.1 billion. With this favorable backdrop, we're raising our second half revenue growth outlook to 25% or more over the first half, up from our previous expectation of 15%, with Q4 revenue expected to be higher than the Q3 revenue.

Looking deeper into our advanced packaging and specialty device markets, the quarter highlighted several important trends from which we benefit. First, the recognition of advanced packaging as a technology enabler continues to grow and is contributing to significant advances in AI and enterprise server performance. This, in turn, affords our customers greater visibility into the market than what has traditionally been seen from consumer-driven end market demand. With the successful launch of the Dragonfly G5, we are experiencing unprecedented demand across an expanding set of customers, leading to an increase in our full-year outlook for advanced packaging growth to approximately 80%, up significantly from the 50% growth we projected last quarter. The increase in demand is strongest from HBM manufacturers and OSATs supporting heterogeneous packaging primarily for AI applications.

For example, in the quarter, we were pleased to have won orders totaling over $200 million for Dragonfly technology from a single OSAT partner. The majority of these orders will be delivered in 2027, underscoring both the magnitude of the demand and customer confidence extending into the new year. A second example is the adoption of silicon photonics in new device designs. These new designs are expected to improve device performance while reducing environmental concerns such as heat generation and power consumption, which impacts both data center operations and the communities hosting them. Although a nascent market, we have received over $50 million in orders to support this inflection, with roughly two-thirds to be delivered in 2027. We estimate our served addressable market in silicon photonics will grow to over $500 million by 2030. The opportunity spans several critical manufacturing applications across light guides, light generation, and detection.

The trends above intersect to fuel growth in panel-level packaging. As the adoption of heterogeneous packaging increases and includes more die such as silicon photonics, package sizes are getting larger. In this dynamic, panel-level packaging delivers advantageous processing scale, especially for larger package sizes. Our combination of JetStep lithography, Firefly process control, and Discover Software provide compelling value to our customers. With markets strengthening, we expect our panel-level packaging revenue to more than double year-over-year, with further growth in 2027. Of course, innovation in the advanced nodes, particularly new and smaller transistor geometries, is also increasing demand for new process control solutions from the Onto Innovation team. As I mentioned, revenue from advanced nodes customers grew 50% sequentially, surpassing the record previously set in 2022.

We are seeing broad-based strengthening across memory and logic segments, including expanded adoption of our Atlas G6 platform, which is being used for transistor metrology at several nodes below 2 nm where smaller spot sizes and increased precision is difficult to achieve, but vital to ensure high yield. In addition to the logic customers we discussed last quarter, we expect to ship multiple systems to a major DRAM customer in the second half of the year to support their next-generation memory devices. Rounding out our optical portfolio, both Iris films and integrated metrology product lines are also on track to achieve record revenue levels in 2026. Complementing our optical metrology, we see new applications for our FAST technology to help predict device performance earlier in the fabrication process, thereby saving production costs.

Taken together, we're confident that advanced nodes revenue will grow more than 35% in 2026, continuing to outpace the latest WFE growth expectations. Lastly, we're looking forward to expanding on our successful collaboration with Rigaku to deliver powerful new process control solutions for our customers. Customer response to our partnership has been very positive. We're confident that together we will provide compelling value to our customers. Estimates of the size of the market today for X-ray technology used in semiconductor applications is approximately $1 billion. We expect the growing adoption of more complex 3D transistor and packaging technology over the next several years will result in accelerated adoption of this X-ray technology and above-average market growth in the years ahead. With that, let me now turn the call to Brian to review our financial highlights and provide third-quarter guidance.

Brian? Thanks, Mike. Good afternoon, everyone.

As Mike noted, the Onto Innovation team delivered an impressive second quarter, exceeding our previous guidance across key financial metrics. These results reflect our strong positioning with customers across both front-end and advanced packaging in support of the surge of AI demand and other applications. Revenue of $343 million increased 18% sequentially and 35% year-over-year. Our advanced nodes business increased by 50% from Q1 to approximately $120 million. Memory, which comprises about 60% of the total, grew at a sequential rate of approximately 60%. Logic also was strong in the quarter with more than 40% sequential growth. Advanced packaging and specialty device comprised nearly half of the revenue in Q2. As Mike noted, inspection highlighted by the Dragonfly product family was strong with 30% quarter-over-quarter growth driven by 2.5D and HBM.

Other packaging and specialty device, including power and SiC, declined sequentially as expected, but will rebound back to Q1 levels next quarter. Software and services comprise the remaining second quarter revenue. We have consistently discussed our push towards improved profitability this year through our move to extended factories, our focus on driving operational productivity, and our improved forecasting capabilities. The results of these efforts to date are evidenced in the second quarter, as we achieved a gross margin of 57%, representing an increase of 250 basis points from Q4 2025 and 130 basis points from the first quarter. This is a level of performance that has already surpassed our initial expectation for 200 basis points of gross margin expansion in 2026.