ONTO - NYSE

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.

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?

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 up cycle in the 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 had 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 putting us in a position 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 customers' 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. And 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. With that, now let me turn the call to Brian to review our financial highlights and provide first quarter guidance. Brian?

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 as 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 as 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. Mike?

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 road maps 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 Instructions] We'll take our first question from Blayne Curtis with Jefferies.

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?

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

And then for WFE as well, sorry.

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, et cetera, are looking for alternatives as well to make sure they can scale and grow.

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?

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

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.

Good question, Craig. In fact, we expect our advanced packaging revenue to be relatively stable throughout the -- between the first half, second half. So it's pretty strong. Demand is strong. It shifts from different customers, of course. But overall, it's relatively stable. Now you asked also about what kind of puts and takes or upside. I think the adoption of G5 and how strongly -- how strong that adoption is or the rate of adoption, that could certainly add even stronger upside for the second half, which might change some of that trajectory. But in the 30%, we're not expecting a tremendously large adoption of G5. We've taken a conservative approach there, which is why we said over 30% growth in the second -- for the year in advanced packaging.

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 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.

Yes. Thank you. So I think broad strokes, advanced nodes is expanding, and we can see customer discussions concerned with how quickly can you support our ramp and the demand and being able to meet that demand. So that's a positive sort of sentiment. Now the question becomes timing. So that's where we're having more of a little bit of uncertainty and where we're hedging ourselves a little bit. There are several factories that are expected to open up. Many we're getting some of the orders now in that helped drive some of our business that we're expecting for the first quarter. But overall, I would say -- and then there's the timing for DRAM in the second half. And several of the discussions we're having with customers are tied around BPAs right now, which will give us better insight as those get more solidified into what the magnitude of the advanced nodes growth will be. That said, I would expect us to at least perform in that range of the 10% to 20%, so 15% plus in that range for advanced nodes. And hopefully, as we close some of these additional VPAs, we'll be able to refine that number.

[Operator Instructions] We'll take our next question from Edward Yang with Oppenheimer.

I just want to focus on this $240 million VPA that you mentioned for HBM. I'm just a little shocked, I guess, in a good way. In order to just properly size this, again, it seems like a big number because from what I would gather, your total AI packaging revenue for 2025 is around that $240 million, but that includes the 3 HBM customers and the big foundry customers as well. So is that the right way to think about it in that you have one customer coming in with the equivalent of what you made from 4 customers in 2025 and the timing of -- and the cadence of how you would recognize that VPA? And would you expect additional VPAs from the other customers as well?

For sure, we expect additional VPAs. So we are in discussions with other customers. That particular customer, remember, it's a 2-year, 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. And so we're starting to see this move towards this 50-50 kind of a range.

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

Yes. I won't speak specifically to a specific customer, but generally, the tones have been -- the tone from many customers has been positive. Yes, I won't go into specifics. But I will say that things are progressing either ahead or according to what we expected. The changes or let's say, there is no change to the time lines we've provided in the past, where we expect these accelerated evaluations to end in the Q1, Q2, the first half of the year with hopefully starting to catch ramps in the second half of the year.

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

Mike, I think previously, when you talked about packaging, you're more talking -- I mean, on a more narrowly defined part of your packaging business being the AI packaging, 20% more opportunity in '26 versus '25. This time, you're talking about overall packaging 30% higher than last year. I wonder if you can give some color on the narrowly defined AI packaging. What's the expected number for this year? And I have maybe one more follow-up.

So it's getting very difficult to keep those separations as the market has expanded and the number of customers serving, let's say, the AI device manufacturers increasing. For instance, I believe I mentioned in my prepared remarks that the panel customer is serving AI applications. So traditionally, that wouldn't have been included in what we call AI packaging. So now we see many OSATs, several other specialty packaging customers all getting into this supply chain. So we're not -- we're no longer really separating it. It's quite difficult to do at this point. So the 30%, I would say the vast majority of that 30% growth is all tied to supporting the strong demand in AI.

Maybe the follow-up since you actually mentioned about panel. It has been a while since I think [indiscernible] being mentioned on earnings calls and glad to hear that and hope to hear that more often going forward. So it sounds like the litho business has -- maybe have turned the corner. It sounds like that's what's happening. And can you give a little bit of color what's happening right now? And is there some competitive displacement going on? Maybe if you will, because we -- I believe a lot of us have basically modeled 0 for your litho revenue for quite a while, but what's the expectation for this year?

Not 0. Fair question. I don't know that we're going to break out the litho business at this point. I think we can later as the year progresses and we get a little more color. There's a lot going on in litho right now or in the panel market. We've talked over the last, I don't know, year about the increased engagement with our PACE lab, the number of customers we're running samples through for our PACE lab and that the industry, which had a tremendous amount of overcapacity was starting to see utilizations pick up and that kind of thing. So we still think that's the case. That's the trend we're on. We're now starting to see proof of that with customers beginning to resume orders. We expect that's going to increase into 2027 and forecast starts to -- at least the data that we've seen suggests that 2027 will be in supply-demand where there's just not enough supply to meet the demand, which is a good thing.

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

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?

I would say no, they're relatively similar to be honest. When I looked at some of the data here, from amount of capacity being added, it's relatively similar. So I think that -- and the complexities, of course, of the CoWoS are higher, so the capital intensity is higher. But we have to also see how much more of the applications we gain with the Dragonfly G5, which is a variable that we didn't bake into much into our number. We took a conservative approach there. So that could drive some upside and swing the answer to be more on the CoWoS side. But right now, I'd say they're relatively similar. And you can tell with the large VPA we just announced. Memory is definitely expanding, and we have a good position in memory.

Okay. And then just as a clarification, I think Charles was referring to it on his previous question. The whole -- I think you mentioned the advanced packaging business was $504 million for the year. Is that the base level that you think is going to grow 30% or higher in 2026? Or is it just part of that number? I just wanted clarification.

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

Okay. So it's just -- it's the CoWoS and HBM inspection business that you expect to go greater than 30% in 2026?

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

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

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

Yes. I'll take the first part. And 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.

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

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 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.

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

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?

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 may not. They're being offered. But it's primarily the current products that have been qualified now for their aggressive ramp.

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?

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. And 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.

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?

Well, I think that our business is really driven by the hardest, most difficult challenges, and that will be in the gate-all-around nodes, and that's where we're seeing the strongest demand and nearly all the demand. So if you go 5-nanometer and above, the attach rate for OCD was much less. Films was -- we didn't -- I don't -- and we maybe we were just introducing films at that time. So no, it's really all around gate. It's really all driven by gate-all-around.

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.

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.